Basic Model Of Estimating Lost Costs For Cities Affected By Climate Change – Analysis

By Zhao Zhijiang

Pingjiang County in China’s Hunan Province has recently been struck by severe and persistent rainstorms, affecting over 340,000 residents. The disaster resulted in extensive damage, including the destruction of bridges, roads, and houses.

In extreme weather conditions, no one can remain unaffected.

A pressing concern for many is the extent of the impact caused by climate change. Are the economic losses attributable to climate change real? On this matter, opinions vary. According to the latest research from the World Economic Forum, climate change is causing global losses of up to USD 16 million per hour. Furthermore, a report published in April this year in Nature by researchers from the Potsdam-Institut für Klimafolgenforschung (PIK) indicates that climate change-induced disasters such as agricultural production reductions and prolonged heatwaves could lead to global economic losses of USD 38 trillion annually by 2049, resulting in a 19% reduction in global income. The study reportedly utilized data from over 1,600 regions globally over the past 40 years to assess the impact of future climate change on economic growth.

These figures related to climate change may seem remarkable, but their accuracy is subject to debate.

ANBOUND’s founder Kung Chan believes that determining losses involves many factors, and the key issue is filtering out irrelevant factors to focus solely on quantifiable losses caused by climate change. He further suggests that climate change has been a continuous process, and human society has partially adapted to its effects since the Industrial Revolution. The additional impacts brought by “abnormal” climate change are the difficult aspects to measure accurately but are often overlooked. Therefore, many calculations of losses attributed to climate change by various organizations and institutions are likely overestimations.

Kung Chan believes that within specific urban contexts, using a dedicated model to calculate the cost losses caused by climate change may be more helpful and even more accurate. To this end, he has developed the “Basic Model of Estimating Lost Costs for Cities Affected by Climate Change”. This model includes 12 factors:

1. Losses and transfer of insurance: Climate change affects nearly every aspect of the insurance industry, including property insurance for assets such as real estate and agriculture, as well as life and health insurance covering personal well-being. Each type of insurance faces unique challenges. Without proactive measures, these challenges could increase insurance costs for consumers and governments, potentially hindering the industry’s growth.

2. Construction quality and standards: Urban construction materials like cement and concrete contribute to environmental issues linked to climate change. Cities are increasingly adopting concepts such as sponge cities and green cities to enhance construction quality and standards. However, these improvements come with higher costs, viewed as additional expenses attributable to climate change. Research conducted in Japan indicates that achieving urban carbon emission control and enhancing energy efficiency in new buildings could raise construction material costs by 10% to 20%.

3. Losses in supply chains and logistics: Extreme weather and natural events can lead to widespread power outages, subsequently affecting the operations of suppliers’ logistics warehouses and production facilities. The buildings of relevant factories themselves may also suffer damage. For port cities, logistics hubs, and surrounding areas, a stable supply of products will incur additional cost losses, which is an extremely important factor to consider.

4. Rise in medical costs: Extreme weather events such as droughts and floods can lead to secondary disasters and food security issues, causing outbreaks of diseases. Malnutrition, malaria, diarrhea, heat stress, and epidemics can all become more frequent. According to the World Health Organization, direct medical costs due to climate change are estimated to range between USD 2 billion to USD 4 billion annually by 2030. Given the diversity of diseases prevalent in different cities, a more thorough study is needed on the rise in medical costs. It’s worth noting that the costs of treating psychological issues should also be factored in.

5. Pressure from migration: Rising sea levels, smog, land pollution, and other issues may exacerbate the increase in “climate migrants”, thereby altering the population structure of some cities. Cities will also face additional challenges such as how to accommodate and manage immigrants, and how to balance relationships between immigrants and local residents. All these require additional costs.

6. Increase in energy prices: Energy drives all activities, and under climate change, prices of energy sources like oil, coal, and natural gas are expected to surge. Simultaneously, some industries are beginning to shift towards renewable energy sources. However, this transition also brings higher cost implications that will be passed on to consumers and other groups.

7. Pressure of inflation: Influenced by climate change, issues like food insecurity and soaring prices can affect a city’s economic level and people’s living standards. This means there could be a significant increase in costs across different price levels and covers a wide range of aspects.

8. Fiscal strain and increased taxation: Some environmental researchers point out that global fiscal policies are being altered by climate warming. For many governments, achieving climate goals, fiscal sustainability, and policy feasibility seem to form an “impossible triangle”. For instance, emission reduction policies heavily reliant on public expenditure will incur significant fiscal costs. For fossil fuel-producing nations, transitioning globally to achieve net-zero emissions could pose major challenges to fiscal and economic diversification. This impacts not just countries but also brings additional costs to cities with specific resources and industries. Moreover, it raises important issues regarding public services and social welfare that cannot be overlooked.

9. Unemployment: Climate change affects fisheries, and tourism, thereby causing widespread unemployment on a broader scale. It will also inevitably lead to significant fluctuations in the labor market. For example, a city known for its water features may lose tourist interest due to drought, thereby affecting the tourism industry and resulting in mass unemployment. Additionally, in areas affected by extreme weather events, some businesses may choose to cease operations, discouraging new businesses from establishing themselves and leading to further job losses.

10. Poverty: Influenced by climate change, factors such as crop failures, economic shocks, and resource scarcity have heightened the vulnerability of some cities, pushing economically viable cities into unprecedented poverty.

11. Water resources: The impact of climate change on water resources is evident and is even referred to by the United Nations as central to the climate crisis. Besides drinking water security, the cost implications for businesses due to water scarcity also need consideration. For instance, AI data centers require substantial water for operations. Cities hosting such facilities may face additional costs to address operational issues during water scarcity. In the era of AI, technology cities will confront serious challenges.

12. Investment in technological equipment: Cities facing climate change require technological advancement and investments in new equipment. Whether it is green technology, renewable energy, smart city technologies, etc., these will all entail significant additional expenses.

The above model transcends mere broad discussions on the economic costs and losses caused by climate change to humanity, thereby enhancing the reference value of its results. These 12 factors are clearly interconnected; for instance, energy prices influence inflation, and there exists a close correlation between unemployment and poverty. Each city differs in geography, environment, history, industry, and politics, leading to varying levels of importance and sensitivity to changes in these indicators. They not only cover various aspects of modern cities but also provide possibilities to precisely determine specific additional costs for a city in research.

It is worth mentioning that the structural relationships shown by this model can directly define and calculate the economic losses caused by climate change to cities. Its applications are extensive and highly practical in areas such as urban disaster reduction and emergency response. The model also significantly impacts investments, as it can be used to assess risks and compared with other relevant models for reference, widely applicable in fields such as finance. It should be noted that there is potential for further updates to this model. For instance, it could be developed into a quantitative model, applicable even to specific city industries, where each industry can be treated as a sub-function in macroscopic analysis.

Final analysis conclusion:

Kung Chan’s “Basic Model of Estimating Lost Costs for Cities Affected by Climate Change” reflects the latest research findings of ANBOUND on the crucial issue of climate change. Utilizing this model, specific cities can more accurately calculate the additional cost losses caused by climate change through the study of 12 factors: insurance losses and transfer, changes in construction quality and standards, losses in supply chains and logistics, rise in medical costs, pressure from migration, increase in energy prices, inflationary pressure, fiscal strain and increased taxation, unemployment, poverty, water resources, and investment in technological equipment.