Climate change is no longer just a distant threat; its economic consequences are being felt here and now, and as temperatures rise, the bill is steadily increasing. Our society and economy are fundamentally dependent on the Earth system., which provides basic needs such as food, water, energy and raw materials. These ecosystem services, including climate regulation, are irreplaceable. When they disappear, they cannot be replaced by technology, which means that societal development, well-being and economic health are interconnected and depend on the stability of the Earth system.

The stability of the Earth system is currently threatened by human-driven climate change and loss of nature. The impacts are already severe, with unprecedented wildfires, floods, heat waves, storms and droughts. These extreme events have direct economic consequences. In the US alone, extreme weather and its direct impacts, such as infrastructure damage, agricultural losses and injuries, cost an estimated $150 billion annually. The impacts spill over into many industries, from insurance to healthcare. For example, the increased frequency and severity of hurricanes and fires have led to higher insurance premiums for homeowners. Climate change is even driving up food prices as farmers struggle to grow crops in changing conditions. Longer-term risks, such as the spread of tick- and mosquito-borne diseases, are also leading to increased medical costs.

Estimates of the economic damage caused by climate change vary, but the warnings from economists and actuarial scientists are urgent. A report by the Institute and Faculty of Actuarial Mathematicians and the University of Exeter found that the global economy could face a loss of 50 trillion gross domestic product (GDP) between 2070 and 2090 based on current emissions trends. This concept extends to the idea of “planetary insolvency,” which occurs when ecosystems are so degraded that they can no longer support human society. Nature is the foundation of our economy, providing food, water, air and raw materials. Threats to this foundation are risks to future human prosperity.

Despite these rising costs and risks, there are policies that try to ignore the economic consequences. For example, former President Trump’s administration issued an order directing federal agencies to stop considering the economic damage caused by climate change in their rulemaking unless specifically required by law. It was argued that this approach prioritizes “real resilience and disaster mitigation” over “vague climate change goals.” This stance has been criticized by economists and environmental groups, who say it ignores the wealth of data confirming the economic damage caused by global warming.

A key metric in climate economics is the “social cost of carbon,” which quantifies the dollar cost of the damage caused by emitting one additional ton of carbon dioxide into the atmosphere. While the Obama administration used a value of around $40 per ton and the Biden administration raised it to $190 per ton, in the context that sources indicate, the guidance has been given to phase out this metric, citing uncertainties. Critics warn that ignoring the social cost of carbon in regulatory decisions could lead to a weakening of environmental regulations, allowing more pollution and, in turn, increasing the likelihood and severity of extreme weather events and their associated health and economic impacts.

Current climate risk assessment methods often significantly underestimate economic impacts by excluding many of the most serious expected risks, such as tipping points or cascading failures. These models can show continued economic growth even in a warming world, contradicting scientific predictions of significantly reduced habitability. They are “exactly wrong, rather than roughly right.” Traditional risk management often focuses on isolated risks, neglecting network effects and linkages, leading to an underestimation of cascading and compound risks.

The “Planetary Solvency” concept proposes a global risk management approach that adapts techniques used in insurance and finance to assess the Earth system’s ability to continue to support us, taking into account planetary boundaries and trigger points. The goal is to conduct human activity safely within tolerances. Sources indicate that while the current risk position for economic impacts is “GREEN” in 2024 with “Limited” impacts, the risk trajectory is “YELLOW”, heading towards “Possible”, “Decimatory” or “Catastrophic” economic impacts by 2050 due to uncertainty and associated risks. This trajectory is outside the “acceptable level of risk”.

Ignoring the economic consequences of climate change comes at a high cost and risk. The ever-increasing costs of extreme weather, disrupted industries, and the potential for massive future GDP losses, along with the risk of reaching “planetary insolvency,” require urgent policy action. Realistic risk management that takes into account the full scale and interconnectedness of threats is essential to change this risk trajectory and secure future prosperity. Spring

Recent news, compiled by risk management experts from the Institute and Faculty of Actuaries and the University of Exeter in England

Glossary of key terms

• Social costs of carbon: An estimate of the dollar costs associated with the damage caused by releasing one additional ton of carbon dioxide into the atmosphere.
• Planetary Solvency: A global risk management methodology that assesses the ongoing ability of the Earth system to support human society and the economy.
• Tipping points: Elements of the Earth system that may shift to a qualitatively different state (e.g., irreversible melting of ice sheets, conversion of forest to savanna), often with severe and cascading consequences.
• Planetary Insolvency: A state where the Earth's system is so degraded that it can no longer provide sufficient critical services needed to support society and the economy.
• RESILIENCE principles: A set of principles designed to support effective and realistic Planetary Solvency risk assessments (Risk-led methodology, Earth system primacy, Systemic risk assessment, Imaginative scenarios, Incentives to flag risks, Non-linearity and tipping points, Effective governance).
• Systemic risk assessment: An approach to risk assessment that takes into account the interconnectedness and interactions of complex systems, such as the Earth system, society and the economy, and the potential for cascading and cumulative risks.
• Tail risks: Risks with a low probability of occurrence but with potentially very serious or catastrophic consequences.
• Reverse stress testing: A process used in risk management in which, instead of estimating the probability and severity of risk events, scenarios that would lead to failure (e.g. insolvency) are identified in order to understand the conditions that need to be avoided.
• Precautionary principle: A principle that emphasizes caution when it is possible that a certain course of action could cause significant harm, especially when there is high uncertainty.
• Ecosystem services (Ecosystem services): The benefits that people derive from natural ecosystems (e.g., clean water, fertile soil, climate regulation).
• Planetary boundaries: Safe biophysical thresholds for the planet, exceeding which could lead to unacceptable environmental changes.
• Risk appetite: The level of risk that an organization or society is willing to accept in pursuit of its goals. In the context of Planetary Solvency, this would mean a very low aversion to risks that threaten ecosystem services and human prosperity.