Regardless of how climate change advances over the coming years, it will require significant investment to address its causes and effects. Extreme weather, rising seas, and heavy floods will cause damage to infrastructure, property, and ecosystems. The solutions required to mitigate and adapt to climate change - transforming the grid to renewables, transitioning off of fossil fuels, protecting and restoring biodiversity, creating climate resilient communities – all come with a substantial upfront cost to create a long-term payoff.
Climate finance, paying for the costs associated with climate change, has been a priority at recent Conferences of the Parties (COP) to the UN Framework Convention on Climate Change (UNFCCC), and is one of the primary focuses of COP27 in Egypt. Globally, there is a needed reckoning with the sheer magnitude of the costs required to transition and to adapt.
Climate finance is typically dedicated to either climate change mitigation (reducing greenhouse gas emissions) or adaptation (protecting against the impacts of climate change). At COP15 in 2009, developed countries pledged to mobilize $100 billion annually by 2020 to support the implementation of action by developing countries, a commitment that was re-affirmed in Paris. But progress on achieving this target has fallen short, and the financing available for adaptation is particularly lacking in comparison to the needs of vulnerable countries like Least Developed Countries (LDCs) and Small Island States (SIDs).
How Do We Pay For Loss and Damage?
One component of the climate finance conversation that has yet to be determined is how to fund costs related to ‘loss and damage’. Loss and damage is a term used by the United Nations to describe: “…the harms inflicted by climate change that go beyond what people can adapt to. It can include lives lost; monetary costs from the destruction of infrastructure, buildings, crops and other property; and the loss of entire places or ways of life.”
Currently, there is no universal agreement on how these costs should be funded. At the closing of COP26 in Glasgow, developing countries suggested that a dedicated finance ‘facility’ would allow them to draw funds to pay for loss and damage. However, there was no agreement reached on how such a ‘facility’ could be funded, governed, or operated. There is also a lack of agreement on how to understand what costs would be directly related to climate impacts and how to address them, nor is there agreement to the notion that developing countries should be compensated for expected damages. Developed countries argue in response to the developing country request for loss and damage funding that investment in adaptation and resilience is the best way to address the challenge, in line with what the UNFCCC commits them to do.
There have been multiple studies examining the costs of climate change if action to address it remains insufficient, including:
From a Canadian perspective, a study by the Canadian Climate Institute found that: “…climate damages are already resulting in large national income losses over the very short term. In 2025, Canada will experience $25 billion in losses relative to a stable-climate scenario, which is equal to 50 per cent of projected 2025 GDP growth. The mounting costs compound quickly over the years and decades ahead, rising to $78 and $101 billion annually by mid-century for a low and high emissions scenario respectively, and $391 and $865 billion respectively by end of century.” In Ontario, a recent study published by the Financial Accountability Office of Ontario found that it will cost an extra $1.5 billion annually over the coming years just to maintain public transportation infrastructure.
When thinking of the costs of climate change, many think of the insured and uninsured losses associated with extreme weather events such as hurricanes, floods, and wildfires. These are visceral, tangible examples. Often underestimated are the profound costs that result from more gradual changes in our climate: the productivity losses from more high heat days, the costs of relocation from coastal areas impacted by sea level rise, the operations and maintenance costs due to faster degradation off assets such as buildings and bridges. Further, climate change impacts are complex and cascading, which means there are additional costs that are more indirect and challenging to track. For example, loss of productivity due to power outages caused by storms or wildfires, health-related costs due to the impact of wildfire smoke or vector-borne diseases, the unquantifiable cost of losing traditional and Indigenous ways of life, to name a few. There is high confidence that the direct and indirect, financial and non-financial, costs of climate change are going to become increasingly significant and profound.
How Are Stakeholders Responding?
Governments have been increasingly interested in costing the impacts of climate change to infrastructure, services, and operations – and also in understanding the broader macroeconomic risks to national economies.
Companies, like governments, are looking to understand the potential costs of climate change to their companies and communities. Many are following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in assessing the financial consequences of climate change under multiple climate scenarios. The TCFD recommendations are often adopted at the encouragement of investors, or in advance of regulatory obligations to assess, manage, and disclose the impacts of climate change.
According to the latest TCFD Status Report, while few companies are disclosing the potential financial impacts of climate change, those that conduct the analysis are using the results to inform adaptation and mitigation measures.
Financial regulators can play and are playing a significant role in facilitating climate finance, as innovative policy and regulatory approaches, e.g. increasing transparency of reporting, clearer taxonomies, prudential regulations adjusting can incentivize sustainable investments and combat greenwashing. These will encourage increased investment in adaptation and resilience by the private sector, allowing governments to focus their public dollars on the needs of disadvantaged and vulnerable groups, critical ecosystems, just transition for communities and sectors that will be impacted as we move away from fossil fuels, and public goods like more accurate climate information.
Public dollars should also, of course, support increases in international funding to address climate impacts in the developing world, in line with prior treaty commitments.
How Does WSP Assist Governments and Organizations to Cost and Address Potential Climate Impacts?
WSP Canada is playing a leading role in helping governments and companies understand the costs of climate change and address them. WSP has completed studies to estimate the costs of climate change impacts on public infrastructure in both Ontario and Quebec, as well as for the Canadian government.
We also support companies in understanding the potential impacts of climate change under multiple climate scenarios, in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). We have worked with leading companies globally on this topic, and have produced meaningful guidance to help companies through the complex process.
And based on this assessment, WSP can help identify solutions and implement them in the most technically sound and cost-effective way.