Markets can accelerate the transition to a low-carbon economy

The World Economic Forum’s Annual Meeting in Davos is changing. After the financial crisis in 2008, the event was dominated by the urgent need to stabilize the global economy, with a focus on the immediate future.

Things are different now. The challenges discussed in Davos have become more complicated because they are longer term. The climate emergency requires us to talk about the next 30 years.

We need to think in such a long timeframe because, even if we stopped emitting carbon today, thermal inertia means that temperatures will go on rising for years to come.

And rising temperatures are already changing our way of life. They are altering weather patterns and intensifying floods, storms and wildfires. They are depleting coral reefs and marine life. They are melting glaciers, altering water patterns and impacting where we can grow crops. As an insurer, we see these impacts first-hand every day.

Prices shape behaviour

But preparing today for changes whose full effects will only be felt in 30 years or more is a huge challenge. Experience tells us that warnings are not enough to inspire action, because people are averse to change.

One of the great strengths of market economies is the way in which prices shape the behaviours of individuals and companies alike. We should use this strength to accelerate the transition to a low-carbon economy and to build up the ability of our communities and businesses to withstand the effects of climate change.

Insurance incentives

Insurers have a long history of incentivizing good behavior, including the development of better safety standards in factories and vehicles. At Zurich, we are incentivizing our customers to tackle climate change and adapt to its impacts.

Among other measures, we are engaging with customers who have high-carbon activities about their plans to change their business mix. We will no longer insure them if their plans fall short of our commitment to combating global climate change.

Carbon taxes

Successfully combating climate change will take much more than the efforts of one company or even one industry. We need measures that impact prices across entire economies, and only governments are in a position to do that.

At the moment, the price of emitting carbon into the atmosphere doesn’t reflect the long-term consequences. By introducing carbon taxes, governments can set the balance right and influence behaviour. A price on carbon would encourage users to put less of it into the atmosphere.

An ideal outcome would be a global agreement. However, given the current geopolitical climate, a localized solution is more realistic. The EU’s recent work in this area shows there is potential if governments step up and work together on a regional basis.

Pricing climate risks

Similarly, a suitable pricing of climate-related risks is needed for them to be taken more seriously. Climate and environmental issues are the top risks facing the world over the next decade, according to the World Economic Forum’s Global Risks Report 2020, published earlier this month. But in a survey just a few months ago for the WEF’s Regional Risks of Doing Business Report, businesses didn’t even cite environmental risks among the top 10.

For a better pricing of climate risks, we need to agree on how to measure and report these risks, and encouraging progress was made on this front in Davos this week. Pricing climate risks would give businesses a powerful incentive to fund investments to prepare our economies for a warmer and potentially very different future, for example protecting coastal communities from rising sea levels.

The UN’s latest climate change report suggests $3.5 trillion of investments are needed globally each year until 2050, to meet the Paris Agreement targets. This level of investment cannot be achieved without also mobilizing governments, and they have a unique opportunity. With interest rates at record lows, governments can raise the money needed to fund the creation of a sustainable infrastructure at little or no cost.

Beyond polarization

The discussion on climate change at this year’s WEF meeting made headlines for the confrontations between believers and non-believers, optimists and pessimists. In reality, we have moved beyond such polarization. There is widespread recognition that climate change is real.

As Ursula von der Leyen, President of the European Commission, said in her keynote address in Davos: “The WEF’s Global Risks Report identifies that the top 5 risks for our economy are all climate related. There is still scope to address these risks but the window of opportunity is rapidly closing. We have to act now”. I fully agree with that view.

Most serious debate is now about how to fund a complex transition and manage multiple interconnected risks. Getting the incentives right will go a long way towards speeding up the behaviours and actions needed to ensure a sustainable and brighter future.