A new report on the financial implications of climate change notes that while natural catastrophes are estimated to cost Canadians $21-$43 billion per year by 2050, popular economic measures like GDP fail to capture the escalation, discouraging preventative investment.
The TD report follows a recent and alarming warning by the United Nations Intergovernmental Panel on Climate Change that governments are ill-prepared for a warming world. If action is not immediately taken, the UN report projected risks could become unmanageable.
Monday’s report detailed the Canadian perspective on increasingly frequent natural catastrophes — the average number per year has doubled over the past three decades — and how by 2020 they will sap an estimated $5 billion from the economy.
“The reality is that the frequency of weather events has increased,” said lead author and TD economist Craig Alexander. “Storms that used to occur every forty years are now occurring every six years. And because of the composition of Canadian economy and society, we’re ending up with more damaging events.”
Although increased frequency is one reason that natural disasters are leading to higher costs, Alexander explained that as Canada’s economy becomes more prosperous, and more and more people move to cities, there’s that much more to lose if a severe weather event strikes.
“If you are more prosperous, it means you have more assets that are valuable to lose, like more expensive cars or houses,” he said.
The changing face of Canadian industry is also partially responsible for rising costs, Alexander said, as with maturation the focus shifts to providing services and those tend to be concentrated in urban centres.
The location of increasingly dense Canadian municipalities also plays a role.
“Many Canadian cities are located in places that are vulnerable to severe weather events. So, for example, we have cities near river mouths and coasts, like Vancouver and Montreal,” said Alexander. “We saw a lot of damage to the city of Calgary due to flooding of the river that runs through Calgary. You also have cities in the prairies that are vulnerable to drought.”
In light of the exponential costs the Canadian economy could face, the TD report notes that financial indicators and markets may not accurately reflect the disruption caused by frequent disasters.
“In the case of Calgary in the floods they had, it was a negative to the Calgary economy when the flooding occurred, but TD economics ended up having to revise upwards its forecast for Alberta because (of) all the construction that was going to happen to repair after the floods,” said Alexander.
More specifically, although the flood caused approximately $500 million in lost labour hours, its net financial impact is forecasted in the report as adding +0.2 per cent to Alberta’s GDP in 2013, and +0.4 per cent to GDP in 2014.
Outside of a popular economic indicator like GDP, Alexander said financial markets also rarely take a big dive in light of severe weather events.
“Unless it’s of the magnitude that we saw in Japan with the tsunami and the nuclear disaster, if it’s something more like the floods we had in Alberta or Toronto, the financial markets don’t tend to react very negatively to it because at the end of the day they know it’s just a disruption to activity,” he said. “There’s going to be government assistance and you’re going to see insurance being paid out … as a consequence financial markets don’t tend to respond that much.”
If financial indicators fail to fully capture the negative consequences of climate change, Alexander continued, it’s possible businesses and governments will similarly fail to install preventative measures.
“Governments have very finite fiscal resources and there’s a lot of demands on the public purse, and if the high frequency economic and financial data doesn’t show the full costs associated with natural disasters … that could lead policy-makers to underinvest relative to perhaps what’s needed to mitigate the cost,” he said.
The TD report references estimates that every dollar invested in climate change prevention — severe weather resistant buildings, for example — will yield anywhere from $9-$38 worth of avoided costs in the future.
Canadian economy will lose billions to climate change: report