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Economic Research Risky business: the climate and the macroeconomy

January 14, 2020

J.P. Morgan Securities plc

David Mackie (44-20) 7134-8325 david.mackie@jpmorgan.com Jessica Murray (44-20) 7742 6325 essica.x.murray@jpmorgan.com

which create amplification in response to initial shocks. Due to this complexity, climate models, even if they are huge, don’t fully capt ure everything th at is going on. If we think of the climate as a probability distribution cover- ing weather and these other aspects, climate change refers to a shift in the moments of this probability distribution. And what matters is not simply the mean and variance, but also the skewness and kurtosis. Skewness and kurtosis determine the fatness of the tails—the likelihood of low-probability, extreme events. The Paris agreement on climate change, adopted in Decem- ber 2015, has a centr al objective of limiting the r ise in the global temperature “to wel l below 2°C above pre-indus trial times, and to pursue effort s to limit t he temperat ure increase even further to 1.5°C .” This objective i s to be met by the end of the century. G iven that the ri se in atmospheri c CO

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has already increased the gl obal temperature by around 1°C r ela- tive to pre-industrial times, and there is a l agged effect still to come, these P aris obj ectives look chall enging, especial ly with the US decisio n to leave the Paris Accord (Table 1, RCP8.5 is a BAU pathway). Global greenhouse gas (GHG)

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emissions in 2017 were around 52GtCO

2

eq (gigatonnes of CO

2

equivalent). If no new policies are ena cted relative t o what was legi slated as of t he end of 2017, emissions would rise to 60GtCO

2

eq by 2030 and 70GtCO

2

eq by the end of the century (Figure 4, Busi- ness-as-usual (BAU) scenario). This would likely mean a global temperature increase of around 3.5°C at the end of the century relative to pre-industrial times. To achieve the Paris objective of limiting the temperature increase to below 2°C (with a 67% likelihood), global GHG emissions would have to fall to 42GtCO

2

eq by 2030 and to minus 4GtCO

2

eq by the end of the century. To achieve the Paris objective of limiting the temperature increase to 1.5°C (with a 50% likelihood), global emissions would need to decline to 39GtCO

2

eq by 2030 and minus 10GtCO

2

eq by the end of the century

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.

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Analysis of climate change either focuses on all greenhouse gases (GHG) measured in CO

2

equivalents or just carbon dioxide. In this note we focus mainly on CO

2

. Other GHG include methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluo- ride.

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Keramida, K., Tchung-Ming, S., Diaz-Vazquez, A.R., Weitzel, M., Rey Los Santos, L., Wojtowicz, K., Schade, B., Saveyn, B., Soria-Ramirez, A., Global Energy and Climate Outlook 2018: Sec- toral mitigation options towards a low-emissions economy, Europe- an Commission, 2018

Table 1: IPCC Representative Concentration Pathways (RCPs)

CO

2

c on c e n t r a ti o n Te m p e r a t ur e S e a le v e l p p m ° C m

R C P 2 . 6 4 2 0 1 . 0 ( 0 . 3 - 1 . 7 ) 0 . 4 R C P 4 . 5 6 5 0 1 . 8 ( 1 . 1 - 2 . 6 ) 0 . 5 R C P 6 8 5 0 2 . 2 ( 1 . 4 - 3 . 1 ) 0 . 5 R C P 8 . 5 1 3 7 0 3 . 7 ( 2 . 6 - 4 . 8 ) 0 . 6

Source: IPCC

CO

2

emissions dominate overall GHG emissions, accounting for almost 70% of total emissions. CO

2

emissions— generated by power production, industry, transport, agricul- ture and deforestation—are currently on an unsustainable trajectory (Table 2). If no steps ar e taken to change the path of emissions, the global temperature will rise, rainfall pat- terns will change creating both droughts and floods, wildfires will become more frequent and more intense, sea levels will rise, heat-related morbidity and mortality will increase, oceans will become more acidic, and storms and cyclones will become more frequent and more intense (Figures 5

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and 6

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). And as these changes occur, life will become more diffi- cult for humans and other species on the planet.

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Siddall, M., Rohling, E.J., Almogi-Labin, a., Hemleben, C., Meischner, D., Schmelzer, I., Smeed, D.A., Sea-level fluctuations during the last glacial cycle, Nature, Vol. 423, pp. 853-858, 2003. Petit J.R., Jouzel J., Raynaud D., Barkov N.I., Delmotte M., Kotlya- kov V.M., Legrand M., Lipenkov V., Lorius C., Pépin L., Ritz C., Saltzman E., Stievenard M., Climate and Atmospheric History of the Past 420,000 years from the Vostok Ice Core, Antarctica, Na- ture, 399, pp.429-436, 1999.

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Extreme events include geophysical, meteorological, hydrological and climatological events that “have caused at least one fatality and/or produced normalised losses ≥US$ 110k, 300k, 1m or 3m (depending on the assigned World Bank income group of the affect- ed count ry),” Munich Re , 2019

-10 10 30 50 70 1 9 9 0 2 0 0 0 2 0 1 0 2 0 2 0 2 0 3 0 2 0 4 0 2 0 5 0 2 0 6 0 2 0 7 0 2 0 8 0 2 0 9 0 2 1 0 0

GtCO2-eq

Figure 4: Global greenhouse gas emissions

Source: See footnote 6, J.P. Morgan