The huge strain caused by the climate crisis could cause an economic recession “the likes of which we’ve never seen before,” a US study has warned.

The increase in prevalence of extreme weather, bringing deadly heatwaves, more severe storms, and causing wildfires and floods, is insufficiently accounted for in financial markets, raising the possibility of a sudden correction when serious problems arise, according to new research from University of California.

“If the market doesn’t do a better job of accounting for climate, we could have a recession – the likes of which we’ve never seen before,” said Paul Griffin, an accounting professor at the UC Davis Graduate School of Management.

The research found there was an overabundance of “unpriced risk” in the energy market – representing a failure to take into account factors which could have significant impacts on the future value of a business.

In the US, this is because oil refining operations on the Gulf Coast are exposed to the threat of storms and sea-level rise, while other oil refineries in Northern California are exposed to coastal flooding.

Climate change: Decade's defining issue in pictures Show all 20 1 /20 Climate change: Decade's defining issue in pictures Climate change: Decade's defining issue in pictures California In this decade, humans have become ever more aware of climate change. Calls for leaders to act echo around the globe as the signs of a changing climate become ever more difficult to ignore Getty Climate change: Decade's defining issue in pictures Athens, Greece Fierce wildfires have flared up in numerous countries. The damage being caused is unprecedented: 103 people were killed in wildfires last year in California, one of the places best prepared, best equipped to fight such blazes in the world AFP/Getty Climate change: Decade's defining issue in pictures Redding, California Entire towns have been razed. The towns of Redding and Paradise in California were all but eliminated in the 2018 season AP Climate change: Decade's defining issue in pictures Athens, Greece While wildfires in Greece (pictured), Australia, Indonesia and many other countries have wrought chaos to infrastructure, economies and cost lives AFP/Getty Climate change: Decade's defining issue in pictures Carlisle, England In Britain, flooding has become commonplace. Extreme downpours in Carlisle in the winter of 2015 saw the previous record flood level being eclipsed by two feet AFP/Getty Climate change: Decade's defining issue in pictures Hebden Bridge, England Hebden Bridge in West Yorkshire has flooded repeatedly in the past decade, with the worst coming on Christmas Day 2015. Toby Smith of Climate Visuals, an organisation focused on improving how climate change is depicted in the media, says: "Extreme weather and flooding, has and will become more frequent due to climate change. An increase in the severity and distribution of press images, reports and media coverage across the nation has localised the issue. It has raised our emotions, perception and personalised the effects and hazards of climate change." Getty Climate change: Decade's defining issue in pictures Somerset, England Out west in Somerset, floods in 2013 led to entire villages being cut off and isolated for weeks Getty Climate change: Decade's defining issue in pictures Dumfries, Scotland "In summer 2012, intense rain flooded over 8000 properties. In 2013, storms and coastal surges combined catastrophically with elevated sea levels whilst December 2015, was the wettest month ever recorded. Major flooding events continued through the decade with the UK government declaring flooding as one of the nation's major threats in 2017," says Mr Smith of Climate Visuals Getty Climate change: Decade's defining issue in pictures London, England Weather has been more extreme in Britain in recent years. The 'Beast from the East' which arrived in February 2018 brought extraordinarily cold temperatures and high snowfall. Central London (pictured), where the city bustle tends to mean that snow doesn't even settle, was covered in inches of snow for day PA Climate change: Decade's defining issue in pictures London, England Months after the cold snap, a heatwave struck Britain, rendering the normally plush green of England's parks in Summer a parched brown for weeks AFP/Getty Climate change: Decade's defining issue in pictures New South Wales, Australia Worsening droughts in many countries have been disastrous for crop yields and have threatened livestock. In Australia, where a brutal drought persisted for months last year, farmers have suffered from mental health problems because of the threat to their livelihood Reuters Climate change: Decade's defining issue in pictures Tonle Sap, Cambodia Even dedicated climate skeptic Jeremy Clarkson has come to recognise the threat of climate change after visiting the Tonle Sap lake system in Cambodia. Over a million people rely on the water of Tonle Sap for work and sustinence but, as Mr Clarkson witnessed, a drought has severley depleted the water level Carlo Frem/Amazon Climate change: Decade's defining issue in pictures Addis Ababa, Ethiopia In reaction to these harbingers of climate obliteration, some humans have taken measures to counter the impending disaster. Ethiopia recently planted a reported 350 million trees in a single day AFP/Getty Climate change: Decade's defining issue in pictures Morocco Morocco has undertaken the most ambitious solar power scheme in the world, recently completing a solar plant the size of San Francisco AFP/Getty Climate change: Decade's defining issue in pictures London, England Electric cars are taking off as a viable alternative to fossil fuel burning vehicles and major cities across the world are adding charging points to accomodate AFP/Getty Climate change: Decade's defining issue in pictures Purmerend, The Netherlands Cities around the world are embracing cycling too, as a clean (and healthy) mode of transport. The Netherlands continues to lead the way with bikes far outnumbering people Jeroen Much/Andras Schuh Climate change: Decade's defining issue in pictures Xiamen, China Cycling infrastructure is taking over cities the world over, in the hope of reducing society's dependency on polluting vehicles Ma Weiwei Climate change: Decade's defining issue in pictures Chennai, India Despite positive steps being taken, humans continue to have a wildly adverse effect on the climate. There have been numerous major oil spills this decade, the most notable being the BP oil spill in the Gulf of Mexico in 2010 AFP/Getty Climate change: Decade's defining issue in pictures Amazon rainforest, Brazil More recently, large swathes of the Amazon rainforest were set alight by people to clear land for agriculture AFP/Getty Climate change: Decade's defining issue in pictures California This decade may have seen horrors but it has led to an understanding that the next decade must see change if human life is to continue Getty

Exposure to such risks can be reduced by taking out suitable insurance policies, but as the various hazards posed by climate breakdown are rapidly intensifying, it is not clear insurance companies will have the capacity to fill the gap, the research suggests.

“Unpriced risk was the main cause of the Great Recession in 2007-2008,” Professor Griffin said.

“Right now, energy companies shoulder much of that risk. The market needs to better assess risk, and factor a risk of extreme weather into securities prices,” he said.

The research linked the excessive high temperatures, like those experienced in the US and Europe in summer 2019, with a swathe of economic impacts.

Such heatwaves can be deadly, can disrupt agriculture, can harm human health and stunt economic growth.

They also can overwhelm and shut down vast parts of vital energy infrastructure. This was the case in northern California when Pacific Gas & Electric shut down delivery during fires and weather that could trigger fire.

Energy companies’ transmission infrastructure is often located in arid areas, increasing risk of damage, such as the destruction caused by wildfires in California.

Water delivery and transportation routes and services are also threatened by extreme weather, which then impact businesses, families, entire cities and regions – sometimes permanently, the study said. All of this strains local, and eventually, broader economies.

“Despite these obvious risks, investors and asset managers have been conspicuously slow to connect physical climate risk to company market valuations,” Professor Griffin said.

“Loss of property is what grabs all the headlines, but how are businesses coping? Threats to businesses could disrupt the entire economic system.”

In addition to the uncertainties over the level of cover insurers can offer, Professor Griffin said “litigation, sanctions and even loss of business from the property destroyed” should also be considered risks in relation to the changing climate.

“The climate litigation risk already priced into energy stocks would prove insufficient,” he said.

“While proprietary climate risk models may help some firms and organisations better understand future conditions attributable to climate change, extreme weather risk is still highly problematic from an estimation standpoint.

“This is because with climate change, the patterns of the past are no guide to the future, whether it be one year, five years or 20 years out. Investors may also normalise extreme weather impacts over time, discounting their future importance.”