U.S. choices on climate change could cost $14.5 trillion — or generate $3 trillion: Deloitte report

·Assistant Editor
·8 min read

Delaying the net-zero transition could cost the U.S. economy $14.5 trillion in the next 50 years, according to a recent report by Deloitte, while bold action on climate change could actually boost GDP and jobs.

The report gauged the macroeconomic consequences of two climate scenarios. In the first scenario, the U.S. takes no further steps to address climate change. In the second, the U.S. and other nations follow the pathways outlined in the Paris and Glasgow Agreements to draw down greenhouse gas emissions.

In that latter scenario of decarbonization, the U.S. economy could grow by $3 trillion over 50 years, according to the report. In the year 2070 alone, that amounts to an additional 2.5% increase of GDP.

The estimates demonstrate that “unchecked climate change, or insufficient action, that action in scenario A, is a costly choice for the U.S.," Deloitte Deputy CEO Alicia Rose said on Yahoo Finance Live (video above). "And our analysis shows that a rapid transition to net-zero could truly drive a new Industrial Revolution and jump-start growth in the U.S. economy in the long term.”

A transition to net-zero would be transformational, touching every sector and region in the United States. It would also require historic investment, with estimates ranging from about $5 trillion to $9.2 trillion globally every year until 2050.

Despite this hefty investment, the cost of climate-related losses still dwarfs the cost of the transition, according to Deloitte's model, which echoed similar findings from McKinsey and an Oxford Martin School working paper. Furthermore, that research has shown that a fast transition would be cheaper than a slower one.

“Economics is on the side of a low-emissions future,” the report's authors stated. “Opportunely, the U.S. has the technology, capital, infrastructure, and skilled labor needed not only to make this transition possible, but to do so at the lowest possible cost.”

A downside to this, however, is that investment in a low-carbon future is front-loaded. As the U.S. economy shifts away from fossil fuels, the costs mount in the near term while the benefits accumulate later on. Assuming the U.S. adopts immediate climate measures, it would take until 2048 for the benefits to GDP and job growth outweigh the costs, meaning the process would defy short-term horizons and be subject to political and economic pressures until then.

U.S. President Joe Biden attends a session during the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 2, 2021. Paul Ellis/Pool via REUTERS
U.S. President Joe Biden attends a session during the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 2, 2021. Paul Ellis/Pool via REUTERS

'Cascading effect' of climate-related costs

Climate change is already disrupting businesses across the country that have already been impacted by climate-related costs.

From Hurricane Ida in the South to a rash of wildfires in the West amid a historic drought, an alarming number of extreme weather events and disasters struck the United States in 2021.

The National Oceanic and Atmospheric Administration (NOAA) registered 20 billion-dollar disaster events last year, which was also the fourth-warmest year in the NOAA's 127-year record for the country. Scientists have linked each incremental degree of global warming to increases in the frequency and intensity of weather and climate events, resulting in new extremes.

“What we've continued to see over the course of years, decades at this point, is an acceleration of disaster losses from these larger-scale, more impactful events,” Steve Bowen, a meteorologist and head of Catastrophe Insights at Aon, said on Yahoo Finance Live. “And what we're really seeing from a business standpoint is that it's not just the physical location as to where events are occurring that's leading to disruption to businesses and their outputs. It's that it's having this sort of domino effect, this cascading effect around the world, where it's affecting supply chain, it's affecting any type of manufacturing deliverables.”

A view shows remains of a car damaged by wind-driven wildfires, a day after evacuation orders, in Superior, Colorado, U.S. December 31, 2021. REUTERS/Kevin Mohatt
A view shows remains of a car damaged by wind-driven wildfires, a day after evacuation orders, in Superior, Colorado, U.S. December 31, 2021. REUTERS/Kevin Mohatt

Physical damage has already made a major financial impact. The U.S. suffered an estimated $169 billion in economic losses in 2021 due to damages associated with climate change, according to a report from Aon, which was 93% above average since 2000, and $92 billion in insured loss, 105% above average since 2000.

"We have a lot of areas that are what we call repetitive loss locations," Bowen said. "So this is really causing a real reanalysis of the overall level of risk that companies are able to withstand, what they're comfortable facing."

Repetitive loss locations mean places with an increased prevalence of climate calamities. Those in the Northeast, for instance, face greater sea-level rise, whereas the energy sector concentrated in the Southeast and West would be particularly hard hit by extreme weather.

Moreover, impacts to business have been more far-reaching than isolated disaster incidents: Heat stress reduces productivity, sea-level rise sacrifices productive urban and agricultural land, damaged capital stalls productivity, overall health deteriorates under increased incidence of disease and mortality, tourism is disrupted, and agricultural yields can fall from changing climate patterns.

Businesses will need to navigate both kinds of risks and communicate their climate strategy to investors. And while climate risk disclosures are currently voluntary, pressure is mounting for federal regulatory bodies to require mandatory climate disclosures for U.S. companies.

As of now, most companies have not set needed climate targets, and those with targets have set weaker goals than are needed to reach net-zero.

Regional industry loss as a result of unmitigated climate change. (Deloitte)
Regional industry loss as a result of unmitigated climate change. (Deloitte)

"This is something that's not going to go away as we continue to see more of these regulatory bodies, not just internationally, but here as well in the United States, really force companies to put some type of mandate together to highlight what they're doing to diversify their portfolio, to wean off fossil fuels, or more importantly, just take climate change into account and have a plan," Bowen said. "I think we're going to see more and more of that in the future."

Another area of the economy particularly susceptible to both climate and transition risks is labor.

Without making significant changes, around 900,000 jobs will disappear annually due to climate change, according to Deloitte. (At the same time, the Biden administration and environmental justice advocates have emphasized the need for a just transition that includes workers of all industries, including high-emitting ones.)

Four phases of the green transition

In its ideal second scenario, Deloitte mapped out the green transition and its effects on the U.S. economy in four phases.

Phase one is marked by bold climate policy plays that create the foundation for future decarbonization. From 2021 to 2025, that would take the form of huge government investments in climate tech and renewable electricity infrastructure. The impact of these shifts results in an average annual GDP loss of just 0.5% during this period.

In phase two, from 2026 to 2040, clean energy would increasingly displace hydrocarbons resulting in more transition pain points for the industrials and energy sectors. During this phase, GDP would fall just 0.2% annually as a result. At the same time, the clean energy sector would become the fastest-growing sector, adding 320,000 jobs each year.

U.S. regional economic gains by 2070 under Scenario B, in which the U.S. responds forcefully to mitigate climate change. (Deloitte)
U.S. regional economic gains by 2070 under Scenario B, in which the U.S. responds forcefully to mitigate climate change. (Deloitte)

Between 2041 and 2050, phase three would bring about the turning point in which the U.S. climate policies begin to pay off in the form of an additional 0.2% annually in GDP. However, regions reliant on fossil fuel industries could have a longer and more costly transition. The West and Southwest regional economies may not reach their turning points until after 2050.

Phase four would commence by 2050 should the U.S. achieve net-zero emissions. The Southeast would experience the most net-positive economic outcomes due to avoided climate disasters while a transformed energy sector would remain robust in the Southwest and potentially even add $500 billion annually to GDP by 2070.

While this optimistic scenario illustrates the stark choice ahead of the U.S. and other nations, other less-optimistic scenarios also abound, especially when factoring in the geopolitics surrounding the unequal distribution of climate risks and resources.

For instance, insurance company Lloyd's and the Cambridge Centre for Risk Studies presented three alternative scenarios: green globalization (most similar to Deloitte's green transition scenario), climate anarchy, and a green cold war. In the latter two, the consequences for international markets include protectionist or polarized trade blocs.

Today, corporations do list obstacles to transitioning their business models, Rose explained. "Some of it is actually the difficulty in measuring the environmental impact of their own organizations," she said. "Some of it's the insufficient supply of sustainable and low emissions inputs in their own value chain."

"But listing those does not change the need to actually push forward in order to achieve really the turning point that we highlight in the report of 2048. We really need to take action and start now," she added.

As for economic risks and pressures, “we're going to have to manage both,” Rose continued. “And again, any delay really increases the overall cost of the transition and pushes out the timing of that turning point where the gains actually exceed the cost.”

Grace is an assistant editor for Yahoo Finance.

Read the latest news on the climate crisis from Yahoo Finance

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Instagram, YouTube, Facebook, Flipboard, and LinkedIn