The economic imperative to act on climate change

When COP26—the annual two-week conference of global leaders and stakeholders focused on addressing climate change— closed in Glasgow, Scotland, in November last year, it was met with mixed reactions. Some believed meaningful progress had been made to limit global warming, while others expressed concern that the commitments made during the conference were not enough to avert disaster, especially for the most at-risk nations.

The Philippines, in particular, has a lot riding on the concrete results of COP26, having been identified as one of nine countries with the highest risk of multiple climate hazards, according to the Global Peace Index 2019 published by the Institute for Economics & Peace. Our very own Department of Finance said that climate-induced hazards cost the country P463 billion in infrastructure alone from 2010 to 2019. In 2020, the damage was pegged at P113.4 billion.

Mostly everyone is in agreement that we need to take serious action now, but many hesitate over the cost of doing so. Also, given Asia-Pacific’s share of the global population and emissions, and its vulnerability to the impact of climate change, we at Deloitte believe the fight against climate change will be won or lost in this region. This is why our economists and specialists have worked to reframe the conversation around climate action—we want to show stakeholders that the cost of taking bold action now is a necessary investment for a better future.

Measuring the impact

Our team at the Deloitte Economics Institute, along with climate and sustainability specialists around the region, developed Deloitte’s uniquely calibrated Regional Computable General Equilibrium Climate Integrated Assessment Model, or what we call the D.CLIMATE model. Unlike dominant economic projections that do not account for the consequences of climate change, our model integrates the economic impact of physical climate change into a baseline economic trajectory. Using this model, our research team has made projections for various Asia-Pacific economies such as Japan and India, but I’d like to focus on the projections for Southeast Asia.

If no significant actions are taken to combat climate change and we continue to operate in an emissions-intensive global economy, then by Deloitte’s estimates, Southeast Asia will experience climate change-induced economic losses of approximately $28 trillion in present value terms by 2070. This is in a scenario where global average temperatures increase more than 3 degrees Celsius above preindustrial levels by the end of the century. At COP26, scientists revealed that the Earth is on track to warm about 2.5 C—a full degree above the world’s shared climate goal.

The economic losses projected by the D.CLIMATE model are linked to the following physical damage that will affect productivity and the stock of production factors: heat stress and human health damage to labor productivity; sea level rise damage to land and capital stock; capital damage; agricultural damage from changes in crop yields; and tourism damage to net inflow of foreign currency. The five most affected industries will be services, manufacturing, retail and tourism, construction, and mining and gas. In terms of economic activity, these industries comprise 83 percent of Southeast Asia’s current output over the modeled period.

Faced with this grim future, we can only look at any cost we incur now to avert the worst impact of an altered climate as a necessary investment. And we have to act with urgency even as the changes that need to be made are considerable. Throughout Southeast Asia, policy and investment decisions need to be made now to reorient economic structures toward a low-emission future.

Boldest of actions needed to curb global warming

On the opposite end of Deloitte’s modeling, our researchers found that rapid decarbonization that would limit global average warming to 1.5 degrees Celsius by 2050 could yield economic gains of approximately $12.5 trillion in present value terms for Southeast Asia’s economy by 2070. This would be equivalent to adding double the 2019 value of the Indonesian economy to Southeast Asia in 2070 alone.

What do we need to do to realize this future?

Deloitte drew up a four-phase approach, beginning with bold climate plays from 2021 to 2030. During this period, governments, regulators, businesses, industries, and consumers need to push even harder to create the market conditions that would pave the way for faster, greater decarbonization. We need to see transformations in supply chains and significant investments in sustainable technologies. These would lay the foundation for the bigger shifts that are needed to limit global average warming to 1.5 degrees Celsius, but immediately, the region’s industries would be better off.

From 2030 to 2040, there should be coordinated change among the stakeholders. This is when we will see the hardest shifts in industrial policy, energy systems and consumer behavior. At this point, businesses and economies will begin to see the consequences of their actions in the first phase. For the region, ongoing structural changes would deliver modest economic benefits compared to those experienced in the initial phase.

Potential dividends

This phase will be followed by the turning point, from 2040 to 2050, which would be the decade when we avoid a “locked in” higher-emission pathway and we realize the economic dividends of technological progress. By this period, the decarbonization of high-emitting industries should be nearly complete, and the cost of new low-emission technologies would be decreasing. The bold actions taken in the first two phases will now be realized as steadily rising economic gains throughout the region, as a result of direct economic benefits of decarbonization and the avoided costs of unchecked climate change.

Finally, after 2050, Southeast Asia should have a low-emission future. The region’s economy would be near net zero emissions and interconnected low-emission systems spanning energy, mobility, manufacturing and food and land use around the world would be keeping global average warming to around 1.5 degrees Celsius.

Getting to this future state is a formidable endeavor, but there are so many ways to do so, and there is an entire planet to mobilize. As a global network, we at Deloitte have committed to achieving net zero emissions by 2030, and at Deloitte Philippines, we have strengthened and expanded our climate and sustainability advisory capabilities so that we can better support other organizations in their efforts to be a part of the climate solution. The biggest challenge we face requires the boldest of actions now. Let’s start working.

The views and opinions expressed in this article are those of Fredieric B. Landicho, Managing Partner & CEO, Deloitte Philippines, and do not necessarily reflect Deloitte’s view.