The costs of a hotter and more volatile climate are rising, and pose significant risks to economic and fiscal outcomes in the UK, according to the Office for Budget Responsibility (OBR).
As a result, sustainable investment professionals have issued fresh warnings to the UK government to rapidly accelerate its transition plans or face serious threats to the UK finances.
In its Fiscal Risks and Sustainability Report, noted the most recent global five-year average (2020-2024) surface temperature was the highest on record, estimated at 1.3 -1.4 degrees Celsius above pre-industrial temperatures. The World Meteorological Organisation estimates the five-year average from 2025 to 2029 will be greater than 1.5°C above pre-industrial levels, exceeding the Paris Agreement ambition of limiting warming to below 1.5°C.
Further to this, the costs of a hotter and more volatile climate are also rising, with estimated 10-year average economic and insured losses from extreme weather up by 29% and 38% respectively, on the previous 10-year average.
See also: London Climate Action Week: Are we still on track for net zero by 2050?
The OBR also said there have been several significant developments in the UK and the climate landscape that are cause for concern. For context, it breaks down climate change fiscal inplications into three channels; mitigation, adaptation and damage, and used a scenario of global temperatures of below 2 degrees and of below 3 degrees in its trajectory analysis.
“The most recent data and updated modelling suggest the damage to UK GDP from climate change is likely to be more severe than previously thought,” it said.
For example, the OBR has predicted a 3 degree temperature rise could as much as 74% of GDP to government debt by early 2070.
This “reveals the chilling threat unrestricted climate change poses to the UK’s finances”, according to James Alexander, CEO of UKSIF and PA Future Committee member.
In the 2 degree scenario, UK GDP is estimated to be 3.3% lower each year in the 2060s than in a scenario with no climate change. However, the difference could be as high as 6%, the OBR predicted.
Further, in the 3 degree scenario, GDP is estimated to be at least 7.8% lower in the 2070s, and up to 27% lower.
“The costs of climate change are highly uncertain, but represent a significant risk to the public finances in all the scenarios explored,” the report said. “These costs come from both transitioning the economy to net-zero emissions, and from damage to the economy caused by climate change. However, the latter is the more significant fiscal cost in the scenarios that we present.”
The report also warned there are a number of downside risks that are difficult to quantify and not yet captured in available data.
“Although it makes for sobering reading, the report provides another credible source of research to help make the case for early action on climate change,” reflected Ita McMahon, head of stewardship at Castlefield.
“It spells out very clearly that, across a range of scenarios – showing a variety of policy approaches and different levels of warming – the costs of climate change damage are far higher than the costs associated with investment in mitigation measures. This all helps to make the economic case for action here in the UK.
“In terms of UK finances, we need to think about displacement effects. The OBR estimates that public sector net debt will be significantly higher in the future due to the costs of climate change. That will have a big impact on the government’s ability to invest in other areas of public services.”
Meanwhile, Daisy Streatfeild, sustainability director at Ninety One, added: “We have known since the Stern Review was published back in 2006 that the costs of inaction on climate change will far outweigh the costs of action. And the OBR report simply reiterates a trend that is all too familiar: the costs are likely to be more severe than previously thought.”
However, the falling costs of renewables is a positive noted in the OBR report and therefore the costs of transitioning are falling if addressed now.
McMahon said: “The only positive note in an otherwise sobering report is that the OBR has reduced its estimates of the cost of the UK reaching net zero, in part due to the falling cost of renewables. The question is whether the government can take advantage of this lower cost base in the current economic environment.”
Alexander added: “Meanwhile, the OBR’s forecast that the net-zero transition will be ‘9% of GDP lower’ than it previously expected shows how its cost continues to tumble.
“The government has so far laid some very encouraging foundations on the path towards a more resilient and sustainable financial system. But it must continue to rapidly advance this evolution to both protect businesses and harness the enormous power of the green economy.”
Guilherme Pampolin, investment research associate at Square Mile Investment Consulting and Research, said the report highlights a “daunting challenge”.
“For those sceptical about climate change, the OBR’s estimates can provide mathematical and tangible projections of how the UK economy is likely to be affected. We cannot postpone this conversation any longer. Urgent public policies tackling climate-related damage, mitigation, and adaptation must be treated as a top priority by policymakers.
“This isn’t about a ‘green’ agenda; it is a critical issue for anyone serious about the UK’s public finances over the following decades, which are directly linked to the quality of life for its citizens.”