The economic impacts of armed conflict can be enormous. Earlier this year the Institute for Economics and Peace released the 2016 Global Peace Index[28], providing an estimate of $742 billion as the value set for the global economic impact of armed conflicts in 2015.[29] Independent from conflict, climate change also has large economic impacts. In the 2006 Stern Report it was estimated that long-term costs of climate change will be equivalent to losing at least 5% of global GDP each year and, if a wider range of risks and impacts were taken into account, the estimates of damage will rise to 20% of GDP or more.[30] In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.[31]

Many links between climate change and conflict have economic elements: they impact conflict risk by affecting the distribution of resources. Here, the difference between three general routes of economic impacts of climate change contributing to conflict will be expanded on in the following section. In the first route, climate change has direct effects on the economy of countries by intensifying land, water and resource scarcities. In the second route, climate change has indirect impacts on the economies of countries by affecting international business and the financial sector. Finally, a third route consists of indirect effects on the economies of countries as a result of unintended outcomes of climate change and low-carbon policies.

Directly or indirectly, all three have an impact on conflict risk by increasing the vulnerabilities of nations as indicated in Figure 4, especially when this economic vulnerability is coupled with other conflict factors, such as those described under Figure 1. As a consequence, a notable increase in conflict risks is anticipated.

Figure 4
Economic effects of climate change in relation to conflict risk conduct by Clingendael
figure_4

Direct effects of climate change on countries

Direct climate change effects can increase the risk of conflict in a country. Factors include, for instance, those identified by Rüttinger et al. (2015). All of these factors have economic implications that contribute to increased vulnerability of nations, which in turn can lead to conflict (See Table 1).

Table 1
Economic implications of climate conflict factors based on Rüttinger et al. (2015)

Climate Conflict Factors

Economic implications

1. Local resource competition

Increased scarcity of land, water and other resources lead to higher market prices and unavailability of resources to certain groups.

2. Livelihood insecurity and migration

Higher population pressure (e.g. by migration to cities or to other countries) leads to increase scarcity of resources.

3. Extreme weather events and disasters

Destruction of infrastructure, facilities and homes will disrupt production and economic developments, with spill-over effects for local markets.

4. Volatile food prices and provision

Food riots will lead to disruption for the affected social capital and local businesses.

5. Transboundary water management

Mismatched interests in water management may severely affect water reliant sectors, and may further be a cause for unrest and tension.

6. Sea-level rise and coastal degradation

Costal businesses and industries may find key resources and infrastructures put under risk from environmental stress in their key areas.

Typically, the impacts of climate change will directly target three types of assets: physical, resource and social assets. Physical assets, such as factories, refineries or other corporate infrastructure investments, may be directly affected by extreme weather events. Access to resource assets, such as a new body of freshwater, might change due to engineered or climate related changes in domestic water levels. Finally, the unmet social needs of a domestic population due to, for example, high urban population pressure from migration, can easily cause large scale-economic disruption.[32]

Effects on business and the financial sector

Climate change can also have severe impacts on the stability of the global economic and financial system. Two main processes are apparent, one of which is related to the increased instability of the financial system that comes as a result of increased disaster risk. This instability might lead to severe financial losses across insurance and reinsurance companies, which could provoke bankruptcies and gravely affect the economic and financial system as a whole.[33]

The other process, also known as the ‘carbon bubble’, is the increased risk of investment in fossil fuel companies whose assets – in particular fossil fuel reserves – will depreciate substantially within a few decades as climate policies become stricter. The two processes combined result in the rise of several climate change risk factors to the business and financial world which, to a certain extent, can be attributed to individual countries. These risk factors include for instance total re-insurance capital, potential climate change affected re-insurance capital, imbalance in the size of the banking and financial sector compared to the overall economy and drastic changes in carbon assets in a country.

The risks of climate disasters to the insurance sector

The link between the frequency of natural disasters and climate change has received renewed focus in the scientific community; as a result, the increase in interest in the insurance and re-insurance sector has followed suit, given the situation poses an immense risk for the sector as a whole.

Guided by these interests, the insurance and re-insurance sector has gradually positioned itself as an innovator in the private sector. This is a role that enables it to influence vulnerable industries, including through the ability to charge higher insurance premiums on risk-prone industries, or through ongoing risk analytics which provide frameworks for addressing concerns over the explicit impact of the liability of policyholders. As such, proactive approaches to resilience building to off-set risks of, for example, coastal properties and disaster prone regions can be addressed; meanwhile, risk prone, yet proactive, policy holders can be rewarded by lowered insurance premiums. Such efforts were noticed in the flood-prone areas of Alberta and Southern Ontario in Canada, where pay-outs for ‘catastrophic loss’ claims exceeded three billion Canadian dollars in recent years[34].

Figure 5
Catastrophic loss claims, Insurance bureau of Canada (Nokes, 2015)
figure_5

The gradual rise in pay-outs and the increased frequency of extreme weather floods caused the industry to invest resources into providing updated flood maps, and more research into flood impacts for the regions. Increased pressure placed upon policymakers and stakeholders, such as the Canadian Government, to invest in resilience building efforts resulted in a number of technical adaptions to regional, municipal and household infrastructures and paved the way for a public-private partnership to mitigate risks for both types of stakeholders.[35] Risks such as these also align with the private sector’s interests in global mitigation efforts, given that investments into establishing low-carbon economies may halt the negative climate related developments and thus reduce the overall threat posed by climate change over time.

The Carbon Bubble as a risk factor for investments

With the publication of the 2011 report on ‘Unburnable Carbon’, a fierce debate started on the consequences of having to depreciate huge carbon assets worldwide that, as a result of climate policies, would become worthless.[36] The report stated that by 2011, the world had already used over a third of its 50-year carbon budget of 886 GtCO2, leaving a maximum of 565 GtCO2 to be burned in order to reach a 2-degree Celsius target. All of the reserves owned by private and public companies and governments were estimated to be equivalent to 2,795 GtCO2, meaning only 20% of the total reserves could be burned unabated; hence, 80% of assets would be technically ‘unburnable’ and therefore should be depreciated. This would leave the global financial sector with a huge ‘carbon bubble.’

The discussion on what exactly falls under the ‘burnable’ or ‘unburnable’ fossil fuel categories continues. It is for instance argued that fossil fuels should be used based on their carbon content. That means that the reserves of gas, as a fuel with the lowest carbon content of the three sources, could still be used within the carbon budget; even using oil reserves would still fit to a certain extent within the budget on the condition that coal would be rapidly phased out.[37] Many public and private investment funds, however, have already announced that they will no longer invest in fossil fuels. For example, in 2014, the Rockefeller Brothers Fund announced their intention to divest from investments in fossil fuels;[38] In 2015, Norway’s Pension Fund Global - the largest sovereign wealth fund worldwide ($850 bn.) - removed 114 coal companies from its portfolio[39]; And in 2016, Blackrock, the biggest private investment fund in the world ($4.9 trillion), announced that it considers climate change to be a source of portfolio risk which needs addressing. BlackRock will, therefore, “calculate greenhouse gas emissions as a percentage of a company’s sales, estimate firms’ exposures to income shocks from rising temperatures and calculate the sales a company generates with little physical waste.”[40]

Unintended effects of climate change policies

Not only can climate change itself lead to conflict, but policies that aspire to mitigate or adapt to climate change can also unintentionally increase conflict risks. Three possible risk areas stand out here, namely: conflict risks caused by depriving countries of fossil fuel rents; conflict risks caused by affecting other resource rents of countries (due to import/export relations); and conflict risks caused by creating new dependencies of countries.

Conflict risk caused by depriving countries of fossil fuel rents

New global instabilities and conflict potentials might be introduced as a consequence of certain countries – mainly those dependent on fossil fuel rents for their national economy – being deprived of their main source of income as a result of climate policies. Some of these countries have high GDPs and can afford to diversify their economy to non-fossil fuel sectors. From our monitor, examples of these countries include Australia and Saudi Arabia.

Many other countries dependent on fossil fuel rents, however, are less fortunate. Some countries already suffer from internal unrest and will therefore be more likely to encounter large problems in adaptation. This applies to Botswana, Syria and Venezuela. This might also cause a particularly unstable situation in countries in the Middle East, where fossil fuel dependency combines with ongoing armed conflict, high population growth and youth unemployment, as well as religious fundamentalism. In Latin America, internal crises due to lower fossil rents might also contribute to conflict.

Conflict risk caused by affecting other resource rents of countries

Climate policies can also introduce new conflict risks when they affect other resource rents of countries in an unintended way. This holds, for instance, for forest-rich countries, in which the exploitation of the mostly rich biotic resources is particularly sensitive to conflict. Illegal logging, slash and burn policies and access of the poor to forest resources are some of the issues that need to be tackled when introducing conflict-sensitive REDD policies. The same rationale applies to biofuels exploitation, where areas newly used for fuel crops might deprive parts of the population of fertile grounds needed for food production.

Conflict risk caused by new dependencies of countries

A third category of conflict risk might be induced by new country resource dependencies as a result of climate policies. This might apply for new dependencies on rare earth metals necessary for high-tech renewable energy applications in solar panels or rotors of wind turbines. Applicable risk factors could include the number of countries highly dependent on fossil fuel rents, the number of countries highly dependent on other resource rents, the number of countries with a high biodiversity and forest cover or the number of countries having access to scarce minerals.

(Institute for Economics & Peace, 2016)
(Institute for Economics & Peace, 2016)
Stern, N. (2006) Stern Review Report on the Economics of Climate Change. HM Treasury.
Stern, N. (2006) Stern Review Report on the Economics of Climate Change. HM Treasury.
(Avory, Cameron, Erickson, Fresia, & Davis, 2015) BSR suggests the following asset classifications. Physical Assets (infrastructure, equipment & vehicles), Natural Assets (biosphere, environment & resources), Governance Assets (political, legal and policy efforts), Technological Assets (information & communication), Knowledge Assets (know-how, skills development, expertise), Social Assets (social capital, civic networks) and Financial Assets (financial products, credit access, insurance).
(Mills, 2007), (Munich RE, 2016)
(Nokes, 2015)
(Nokes, 2015), (Team Green Analytics, 2015).
Carbon Tracker (2011) Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble, link.
Clingendael International Energy Programme (2014) Transition? What Transition? The Hague
Rockefeller Brothers Fund (2014) Divestment Statement, September 2014, link.
The Guardian (2015) World’s biggest sovereign wealth fund dumps dozens of coal companies, 5 February 2015
EnergyPostWeekly (2016) Blackrock rocks, 9 September 2016, link.