What does your business need to know about the latest IPCC report?

Insights with Professor Andy Pitman and Energetics’ Sally Cook

Author Dr Peter Holt, Sally Cook

Date August 2021

When the United Nations Intergovernmental Panel on Climate Change (IPCC) released its 6th Assessment Report (AR6) on 9 August, 2021, it came with warnings that climate change was intensifying and its pace increasing. Australia, a continent that is already hot and dry, is one of the world's bellwethers. We need to understand not only how to drive deeper emissions reductions, but also how to adapt and build resilience in the face of more challenging conditions.  

In the first in a podcast series focused on the IPCC's report, Energetics' Dr Peter Holt, General Manager, Strategy leads a discussion with renown climate scientist, Professor Andy Pitman, and Sally Cook, Energetics' Head of Strategy. They consider the significance of AR6, the headline findings and what it means for Australian business.

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The following is based on the transcript of the podcast episode.

What is the main difference between this report and the previous IPCC assessment reports?

(Andy Pitman) With this report, we've got six or seven years more information, data and understanding than we had when the previous assessment report came out. A lot of statements can be made now with much higher confidence than they could have been in the past. One of those is the unambiguous emergence of extreme events that are occurring faster than climate scientists expected and with more frequency and more intensity. The report also has quite a significant narrative around tipping points and abrupt climate change, which in all cases are low probability but high impact events this century, but are now increasingly difficult to discount. Finally, the quality of the regional information provided in the report is significantly enhanced. Your listeners can go to atlases produced by the IPCC and see information at a regional scale of what we think will happen in terms of a whole range of climate variables.

Would it be fair to say that this report now has evidence where we can see the climate signal within historical information?

(Andy Pitman) The evidence that humans were changing the climate using only observational data was established in about 2005, arguably 2001. It's just that there's more evidence and it’s incontrovertible. In 2010 or 2005, we could say very clearly that temperatures were warming because of human activity. Whereas we probably couldn't say very much about average rainfall. Now we can say something about average rainfall. We can also say something about extreme rainfall. There is good evidence that the wettest day of the year is getting wetter, the hottest day of the year is getting hotter. There's good evidence around emergent signals in droughts, et cetera. But it's been some 25 years since the climate science community has told policy makers that it's definitive and unequivocal that humans are changing climate.

Sally, what were the key takeaways that you saw from the latest report?

(Sally Cook) I think one of the highlights that Andy has already mentioned is that climate change is already influencing all the regions of the earth. That's an important implication to take away. We think of climate change as having future impacts, but there are impacts now. I thought it was interesting that the report narrowed the uncertainty range of future temperature projections. The fifth assessment report had a best estimate range of between 1.5 and 4.5 degrees. Now that's 2.5 to 4 degrees with higher levels of confidence, which I think is really useful for policy makers in terms of understanding the way they frame policy in the context of longer term trends. It also provides some interesting, updated commentary on the current carbon budget, including points at which emissions need to abate, which is useful both for business’ understanding and for policymakers.

The headlines are that Australia has warmed by at least 1.4 degrees over land areas. Why are we warming faster than the average of the globe which has at about one degree?

(Andy Pitman) There's quite a lot of nuance in those numbers. The first is that the globe has warmed by about 1.1 degrees, but that's the ocean and the land. If you just take the global land warming, it's probably not very different to Australia’s land warming. I think Australia has warmed more than the global land average, but that's in part because the tropics tend not to warm as rapidly as the middle latitudes.

The other thing that the report talks about at length, are the changes in many of the extremes over Australia. There's unambiguous evidence of the increasing frequency, magnitude and duration of heat waves. There's unambiguous evidence of more intense rainfall in the tropical north, and that there's winter rainfall decline in southeast Australia and along many parts of Southern Australia. Southwest Western Australia is certainly drying.

There's a huge difference between identifying a trend and attributing that trend to human activity – and for the things I've just mentioned, you can attribute those changes to human activity. In other words, they would not have occurred, had not greenhouse gases increased. There are other changes. One of the critical ones for Australia is a lengthening of the fire season. There's also a greening trend over parts of Australia. That might sound lovely, but it generates additional fuel for fires. There's an amazing emergence of ocean heat waves, which have all kinds of implications for fisheries and blue carbon. And, as I've said publicly, if you haven't seen the reef yet, you better go quickly - those marine heat waves are emerging shockingly fast. There's lots of other impacts at the regional scale. But I don't know if we need to really list them all - because isn't that plenty?

How should businesses assess all the extremes that they could experience? What do they do with that knowledge?

(Andy Pitman) That's an interesting question and shouldn't be too hard to answer. It's clearly extraordinarily challenging for business to tease out something like the IPCC report - what is relevant to them and what isn't relevant to them. Even the summary for policymakers, which you have both looked at, the language is anything but plain English! You have to hold in your brain: certainty, ranges, probabilities, the nuancing of language, the physical climate science. It's really hard. It's not a summary for policymakers. It's a quick summary for people with PhDs in climate science and a few other really well-educated people.

What has to happen is there needs to be ‘go-betweens’ to help business understand how they're affected by the content in the IPCC report. There are implications in the IPCC report for business. In addition, there's a new IPCC report coming out middle of next year, which focuses on impacts and adaptation and a further one next year which focuses on mitigation, all of which have significant relevance to business.

Sally, if you were to take this information to a business, what would you be advising them to do?

(Sally Cook) I think the report has a number of uses for business. I think taking some of the really effective graphs and charts sets context for your boards and executives around the importance of climate action, but also illustrates and provides context to the global momentum that's occurring. I think you can use it to understand and frame the impacts on your business - both physical and transitional impacts. Particularly for those businesses which are exposed to international markets. It's useful to know the context within which international markets are acting when we are lagging by comparison. It provides good information around which to justify and substantiate ambitious emissions targets which have some of these longer term trajectories. And to make sure that you've got mid-term emissions targets on that path. It can also provide an input to understanding the financial impacts to your business associated with some of these physical climate risks. Engaging with the scientific literature, not just from the IPCC report, but actually looking at downscaled information to understand the physical impacts to the asset base that you have, the timing and scale of those impacts, and how resilient you are, informs how material the impacts could be for you. Then understanding your adaptation actions in the context of that risk, so your ability to act or not, and your risk tolerance in terms of how much risk you're prepared to assume.

Climate change is locked in and we are already experiencing it. What does it mean for Australian businesses?

(Andy Pitman) There's at least 20 years of embedded climate change in the system. It will take about 20 years before the climate has equilibrated to the levels of CO2 in the atmosphere. Now we're already seeing clearly in the observations, the emergence of a range of climate extremes. They will worsen for at least two decades. There's no doubt whatsoever that you have to be thinking about adaptation. The huge problem is, and Sally mentioned downscaling, you've got to be really careful with downscaling in terms of how it informs physical risk and the kinds of physical risks that are damaging to a business. Regional downscaling gets you to 20 by 20 kilometres if you are lucky. So physical downscaling gives you information that is maybe 10 by 10 or 20 by 20 kilometres. But it is not robust information unless the global model they're embedded in, is robust.

Neither global nor downscaled models do well on extreme extremes, not the once a year event nor the once every two year event. They really have a lack of skill in simulating the one in 20 year event or the one in 50 year event. If your business is vulnerable to the one in two year event, you've got a serious problem with your business. With regional downscaling, I'm not at all clear provides you more than some broad indicative guide at maybe a 20 by 20 or 30 by 30 kilometres scale for how things that are likely to place business at serious risk, would change.

We have a 20 year lag before we see the benefits of any mitigation. How do we balance short-term thinking versus long-term thinking across business?

(Andy Pitman) From my perspective, businesses are in a responsive mode where they're trying to do their best in a very challenging environment. You need the policy settings that guide business with some form of certainty and those governments around the world that have got those policy settings quite clear, I think, are seeing the benefits in how business responds.

Policy settings need to be in place in Australia to help provide a more stable environment

(Andy Pitman) It depends on the nature of the business. For big business that is multinational, they're already seeing how policies being put in place by the American, the European, the British governments are having an impact. Most of the big multinationals see the writing on the wall, and recognise that they have to be quite clear on their emissions strategies because there's nowhere to hide. If you're a small Australian company you might think that the current policy settings are going to be sustained, but I think that would be very naïve. I think Australia will go to net zero very soon.

What are the implications for insurance now that the world is equipped with the latest science?

(Andy Pitman) The risk of climate change to insurers is extremely complex. It all depends on the federal response to climate change. For instance, there's been a temptation to start building insurance pools, to cover Northern Australia. The Federal Government has been trying to build an insurance pool to help cover risk, because insurers didn't want to cover risk in Northern Australia. Insurers don't like insuring things they know will happen - that really changes the nature of the market. A lot of insurers were going to exit certain risks and governments don't like insurers exiting the risk and they don't want insurers pushing the premiums up to a level that no one can afford. So there's the beginnings of a market that's being interfered with by the Federal Government and has high risk of a moral hazard at the very least.

One of the really neat things in the new IPCC report is the discussion of compound events. Many of us think about an extreme event such as extreme rainfall, but actually extreme rainfall co-occurring with extreme wind can be much more damaging. The IPCCs starts to tease out some of those compound event issues. A good example is the recent heat waves that occurred in Canada were followed by heat waves in the Baltic states, followed by the extreme rainfall in Germany, and then extreme rainfall in China. They were all physically connected dynamically through the atmosphere. They will be one metrological event with a wide hemispheric footprint. Understanding how that changes the risk profile for insurance companies and how that feeds through the market and into the reinsurance market globally is a really fascinating topic that's just beginning to emerge.

Sally, how are some of your clients dealing with compound risks?

(Sally Cook) They are very complex. We're only just dipping our toe into the water in terms of understanding the nature of compound risks. I think they provide a useful stress test for your business to understand, particularly where you might be vulnerable to those coincident or compound impacts, such as in supply chains or other connected kinds of operations. You need to know how long you can sustain an outage and then look at thresholds in terms of what that means for climate related impacts. So if you get an impact in a distribution hub, a port, something similar, that's carrying vital goods for you, how long can you sustain an interruption? What kinds of events might cause that level of interruption to a supply chain and how might cascading events potentially impact different points of that process?

AR6 offers insights into climate tipping points. What are some examples?

(Andy Pitman) So this is a really good example of where climate scientists have traditionally been too conservative. I've never been a fan of tipping points because they're extremely rare. They exist, undoubtedly. You can see them in the geological record, but the risk of a significant tipping point occurring this century was assumed to be extremely low. Then observations were taken and it's emerged that things like the Gulf Stream is demonstratively weakening. The Gulf Stream warms the ocean and the atmosphere as it flows across the Atlantic, by about eight degrees. If any of you want to, you can go to your old high school atlas and look at the difference in temperature in London and the same latitude in Canada, and you get Labrador, and it's really cold there.

The Gulf Stream that makes that difference is weakening. This is a known tipping point. It weakened in the past and plunged Western Europe into a little ice age where temperatures dropped by 10 degrees in one to two decades, which is a bit scary if you think about it. There are other tipping points. The collapse of the west Antarctic ice sheet raises sea levels by some amount. Noting the amount is probably not important because it's eight to 15 metres and eight metres is plenty to cause a global catastrophe. There's collapse of major global ecosystems like the Amazon, which is a possible risk of drying and warming Brazil and parts of South America. There's ocean acidification, which has all kinds of implications for the base of food chains.

There's the Arctic Sea ice, which is clearly being lost. There's a collapse of the permafrost in the Northern Hemisphere, which contains large amounts of carbon and methane. There's lots of these tipping points.

I thought they were all virtually negligible risk. Unfortunately in the last 5 to 10 years, observations have indicated increasing instability in some of those tipping points. I cannot tell you what the risk is of each of those tipping points being executed this century. No one knows, but the consequences of any of those tipping points going is extraordinary and in any risk framework, number one is - don't let it happen! There's an easy solution to that, which is stop emitting CO2.

How are the financial and investor communities responding in the absence of any meaningful policy change here in Australia?

(Sally Cook) Firstly, there’s what this report tell can tell us about the carbon budget and the peak of emissions. There's an interesting graph that shows us that to meet low emissions pathways, emissions need to peak effectively immediately, and be halving for the lowest emissions pathway for about 2030 and reaching net zero just after, or on, 2050. I think investors are really driving companies, in the absence of policy action, to provide information about how they're planning for future decarbonisation, and how they might be moving towards net zero emissions in or around 2050. And then really looking to ensure that their investment decision making is aligned with that objective. We find a lot of our investor clients are more interested in understanding finance decisions, and the risks associated with the portfolios that they're already invested in - both from a transitional and physical risk perspective.

Are we moving fast enough?

(Andy Pitman) It just depends how lucky you feel. If you're happy with a 50/ 50 chance of avoiding two degrees of warming then yes, you've got maybe 30 years to get to net zero emissions, maybe 25. It just depends on how that emissions scenario plays out. But I'm not that keen on a 50/ 50 chance for the future of the planet. I'd like a hundred percent chance of not exceeding 2 degrees, which is what the Paris agreement asserts. Our calculations say that gives you 13 years to get to net zero emissions globally. You've got to get to net zero by 2035. 2050 is too late. If governments wake up to that reality, they are going to bring far more draconian emissions reductions to the table and companies are going to have to respond by moving their targets from net zero by 2050 to net zero by 2035.

Can businesses rise to that challenge?

(Sally Cook) It’s certainly easier in some industries than it is in others. The clients who are setting really ambitious decarbonisation targets now are clients who have a large component of their energy use associated with electricity use, which is easier to abate than most other sources. So I think those businesses can get there quickly. However they're not commonly the most material emitters. There's a swathe of very large emitters in the economy with significant, hard-to-abate emission sources and genuine challenges ahead of them in terms of abating those sources in that timeframe.