Climate change damage could cost Canada up to $5.5-trillion by the end of the century: New ISF report

• The Institute for Sustainable Finance’s latest study examines how much capital output Canada will lose due to physical damages under different warming scenarios by the end of the century
• Costs are estimated from $2.773-trillion under a 2°C warming scenario to almost double that amount at $5.520-trillion under a 5°C (“Business As Usual”) scenario.
• Study reveals the physical damages can cost Canada significantly more than the cost to invest in the transition to a low-carbon economy

When it comes to climate change, Canada is warming twice as fast as the global average. This swift acceleration risks a severe economic toll, resulting from the physical damages that global warming can unleash. A new report released today by the Institute for Sustainable Finance (ISF) reveals the full extent of the fiscal challenges that Canada will face due to the physical risks of climate change such as loss of biodiversity, rising sea-levels, and infrastructure damage caused by wildfires and floods.

The report, The Physical Costs of Climate Change: A Canadian Perspective, reveals that under multiple rising warming scenarios, the associated physical costs grow dramatically, with 2030, 2050, and 2070 being inflection points. Capital loss can range from $2.773-trillion under a 2°C warming scenario to almost double that amount at $5.520-trillion under a 5°C (“Business As Usual”) scenario.

This report, by ISF Chair Sean Cleary and Neal Willcott, PhD candidate at Smith School of Business, fills an important gap in previous financial forecasts that solely examined the transitional costs of achieving net-zero. Transitional costs are the risks to businesses and investors, including reputational, regulatory and policy, that are produced by efforts to transition to a low-carbon economy. Physical risks refer to the cost of physical damage caused by climate change. Assessing both costs is critical to capture the full picture of how climate change will impact the Canadian economy and Canadian businesses.

The study reveals that the associated costs of physical damage are larger than the investments required to reduce greenhouse gas emissions. In fact, in Present Value terms, the difference is up to $45.4 billion larger than the required investment, taken without considering the potential economic benefits of transitioning to a low-carbon economy. This analysis is informed by prior research conducted by ISF that found achieving a 30 percent reduction in emissions by 2030 requires an investment of $128 billion over 10 years.

“Our research underscores that addressing climate change now more than pays for itself over the long term when we consider the costs of physical damage alone,” said Sean Cleary. “These findings are important guidance for policymakers who need to consider that economic value is sacrificed every day that we don’t take action to mitigate climate change.”

Read the report and review past research projects from the Institute for Sustainable Finance.

Research Methodology

For this study, the authors adapted the Dynamic Integrated Climate and Economy (DICE) model created by 2018 Nobel Laureate William Nordhaus. Widely used in both the economic and environmental spheres, such as by the US Environmental Protection Agency, the DICE model quantifies economic costs caused by the physical impacts of climate change. In this study, the model projects economic loss for Canada under various warming scenarios by using Canadian-specific capital, productivity and population inputs. This then allows for the model to calculate climate damage projections for Canada.

About the Institute for Sustainable Finance

ISF was launched in 2019 as a Canadian-specific centre of expertise and collaboration for advancing sustainable finance. Housed at Smith School of Business at Queen’s University, ISF is independent and non-partisan. It focuses on developing research, education, and collaborations among academia, business and government that will improve Canada’s capacity for sustainable finance as the shift to a low-carbon economy occurs.

Sustainable finance is the integration of environmental, social and governance considerations into capital flows such as lending and investment, risk management, and financial processes including disclosure, valuations and oversight.

ISF’s work is generously supported by The Ivey Foundation (inaugural supporter), the McConnell Foundation, the McCall MacBain Foundation, the Chisholm Thomson Family Foundation, Smith School of Business, Queen’s University and Founding Contributors BMO, CIBC, RBC, Scotiabank and TD Bank Group.