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Delays In Addressing Global Warming And The Longer-Term Ratings Implications

S&P Global Ratings' look-back reviews published in 2017 and 2018 show that climate risk materially influenced less than 10% of our rating actions in recent years. Recent climate-related rating actions have typically stemmed from either physical risks, such as the 2018 wildfires in the case of Pacific Gas & Electric in the U.S. and Hurricanes Harvey, Irma, and Maria affecting reinsurers and local governments in 2017; or disruption to the operating environment in certain sectors. Current global warming trends suggest that the materiality of climate risk for ratings is only likely to increase in the future. The longer the delays in addressing current trends in climate change, the more likely we could see economic and social disruptions, due both to higher physical risks and the need to transition to a low-carbon economy at a faster pace.

In its latest Emission Gap Report released on Nov. 26, the UN Environment Programme (UNEP) warned that the current trajectory for greenhouse gas (GHG) emissions points to global warming of more than 4 degrees Celsius by the end of the century. This may fall to 3.2 degrees if governments meet all of their current public commitments. According to scientific consensus, scenarios factoring in a rise of 3 to 4 degrees would have devastating consequences. These include major climate events such as severe droughts and heatwaves, as well as rising sea levels, which could ultimately have severe social, political, and economic consequences in many parts of the world.

Despite growing awareness about climate change by business, policymakers, and civil society, the transition to a low-carbon economy has so far remained slow. In the absence of immediately available and low-cost technical solutions to reduce GHG emissions, they have continued to rise by an average annual 1.5% over the past 10 years, with no tangible sign of a reversal. Confronted with difficult and complex policy decisions, as well as sometimes popular reluctance to absorb the immediate costs of moving to a low-carbon economy, policymakers and economic leaders have managed to reduce the carbon intensity of world GDP growth, but have not taken sufficient actions to materially slow global warming trends. To keep global warming to 2 degrees, GHG emissions would have to start dropping by 2.7% a year starting in 2020, versus 1.5% in the past decade, and reach a 40% reduction by 2030.

To keep global warming below 1.5 degrees, the efforts would be more than twice important at 7.6% reduction per year for the next decade. Both the 1.5 degree and the 2 degree scenarios would require a profound change to our fossil fuel-dependent economic model as well as to our social habits. Such structural changes might be possible, but the faster the speed of change, the more likely we could see economic and social disruptions. The challenges faced by the European automotive sector to prepare for the rapid tightening of CO2 emission standards illustrates how disruption could play out in carbon-intensive sectors.

The more the delays in addressing the COP21 commitment to limit warming to well below 2 degrees, the greater the magnitude and speed future efforts would have to be to possibly reach this target. Our economic and social systems in the future could consequently be exposed to higher disruption risks and struggle to adapt quickly enough. A more gradual transition, resulting in later and lower reductions in GHG emissions, may be socially more acceptable and present lower short-term disruption risks, but the longer-term physical consequences of hotter global warming would be damaging.

This report does not constitute a rating action.

Primary Credit Analyst:Bernard De Longevialle, Paris (33) 1-4075-2517;
bernard.delongevialle@spglobal.com

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