Senate Budget Committee Issues Testimony From Climate Forecast Applications Network President Curry
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I thank the Chairman, Ranking Member and the Committee for the opportunity to offer testimony today on "Risky Business: How Climate Change is Changing Insurance Markets." I am President of Climate Forecast Applications Network (CFAN) and
For the past 15 years, through my company CFAN, I have engaged with decision makers in both the private and public sectors on issues extreme weather and climate change. CFAN's primary objective is to translate cutting-edge weather and climate research into forecast products that support the mitigation of weather and climate risks. I have learned about the complexity of different decisions that depend, at least in part, on weather and climate information. I have learned the importance of careful determination and conveyance of the uncertainty associated with our scientific understanding and particularly for predictions. I have found that the worst outcome for decision makers is a scientific conclusion or forecast issued with a high level of confidence that turns out to be wrong.
Since 2017, CFAN has been engaging with clients in the insurance sector: insurance, reinsurance, and asset management companies with
With this perspective, my testimony focuses on the following issues of central relevance to climate change and insurance markets:
* The "climate crisis" isn't what it used to be
* Mischaracterization of climate risk
* The insurance sector and climate change
* Global warming and hurricanes
* Adaptation to extreme weather events
* Risks from a rapid transition of electric power systems
* Ways forward to manage climate-related insurance risk
The "climate crisis"
The insurance market is influenced by our perceptions of risk. Risk perception is our subjective judgment or appraisal of risk, which can involve social, cultural, political and psychological factors. Referring to climate change as a "crisis" is at odds with professional judgments of climate risk.1 The "climate crisis" isn't what it used to be. Circa 2013 with publication of the
Now, there is general acceptance that the RCP8.5 scenario is implausible.
An additional factor in reducing the magnitude of risk from human-caused warming is that our understanding of the sensitivity of the climate to atmospheric CO2 has increased. The IPCC Sixth Assessment Report (AR6) reduced the upper bound of the likely range of equilibrium climate sensitivity from 4.5 to 4.0oC.2 A recent paper challenged the main analysis used by the IPCC AR6 by identifying errors, outdated input values, and concerns about the statistical analysis method. This paper found that climate sensitivity is considerably more likely to be below 2oC than above 2.5oC.3 The IPCC AR6 recognized that a substantial number of climate models are running "too hot." Therefore, the AR6 adopted a new approach to make 21st century temperature projections that combined the climate model projections with observational constraints on simulated past warming and best estimates of the climate sensitivity.4 These constraints reduced the climate model projections of warming by up to 20% for the higher emissions scenarios. This new constrained procedure used by the AR6 is significant because it breaks the hegemony of the global climate models in dominating the IPCC's conclusions about twenty-first century climate change.
There are additional reasons to expect less warming than indicated by the
The IPCC AR6 Summary for Policy Makers highlights the following changes in extreme weather: increased intensity and frequency of heat waves plus reduced intensity and frequency of cold waves since 1950; increased frequency and intensity of heavy precipitation events since 1950; and a likely increase in the global proportion of major (Category 3-5) tropical cyclone (hurricane) occurrence over the last four decades.12 It is significant what is not mentioned in the Summary for Policy Makers. Chapters Eleven and Twelve in the IPCC AR6 identify the following event types for which there is either no change or low confidence in any change: meteorological and hydrological droughts; extratropical storms; total number of tropical cyclones; and tornadoes, hail, and lightning associated with severe convective storms.13,14 Examination of historical data records of extreme weather events in the
Despite the moderate and equivocal conclusions of the IPCC, every extreme weather event now gets associated in the media with human-caused global warming, distorting our perception of climate risk. Any change in the intensity or frequency of extreme weather events is incremental at most; even if a change in the event type has been detected, attributing any change to emissions-driven warming is not at all straightforward. Quantitative forward projection of any changes is highly uncertain.16 With regard to the perception that severe weather events seem more frequent and more severe over the past decade, there are several factors in play. The first factor is increasing vulnerability and exposure associated with increasing population and concentration of wealth in coastal and other disaster-prone regions. The second factor is natural climate variability. Many extreme weather events have documented relationships with natural climate variability. A recent analysis summarizing many studies finds no evidence to support claims that any part of the overall increase in global economic losses (when scaled by GDP) from weather and climate disasters can be attributed to global warming.17 And finally, it is difficult to overstate the importance of the shift in expectations for extreme weather events that is represented by the rejection of the RCP8.5 emissions scenario as implausible.18,19 The IPCC, the
Mischaracterization of climate risk
What has been cast as a global "crisis" is for the most part thousands of local vulnerability emergencies that are revealed by extreme weather events. The misidentification of climate change as a "crisis" and the ensuing precautionary mandate to urgently and rapidly eliminate the use of fossil fuels is creating new risks, while failing to address the current risks associated with extreme weather events.
Climate change risk includes elements of both incremental risk and emergency risk. Incremental risk displays creeping characteristics and the "fat tail" effect. Since changes take place slowly, the adverse consequences take a long time to emerge as impacts accumulate and worsen over time. The slow creep of sea level rise is an example of incremental climate risk. By contrast, emergency risks are associated with extreme weather events.
The rationale for the rapid transition away from fossil fuels conflates incremental and emergency risk. The proposed management strategy for both risk categories is to eliminate CO2 emissions. This strategy may have some incremental benefits in the 22nd century, but will not help with the emergency risks associated with extreme weather events in the 21st century. The urgency of addressing emergency risk is being used to motivate the urgency of reducing emissions. Ironically, costly and suboptimal attempts to rapidly reduce emissions are exacerbating energy unreliability, which is increasing emergency risk through increased vulnerability.
A key to securing meaningful action to reduce climate change risk is to clearly separate the incremental, emerging risks associated with long-term changes in average conditions from the emergency risks associated with extreme weather and climate events. Governance of climate risk needs to approach these two kinds of risk differently. Emergency risks need to be addressed in both the present and future climate.
One would logically think that if warming is less than we thought but impacts are worse, then the priorities would shift away from CO2 mitigation towards adaptation. However, that hasn't been the case. Once the incremental risks are separated from the emergency risks, the perception of urgency in reducing emissions is diminished. It becomes far more important to develop strategies for managing atmospheric greenhouse gases in ways that do not have an adverse impact on security, the economy, industry or agriculture. At this point, assessing the transition risks associated with rapidly eliminating fossil fuels is arguably more important than attempting to refine our assessments of the incremental risks associated with continuing fossil fuel emissions.
The insurance sector and climate change
My company CFAN has ten clients in the insurance sector, most of which are related to
There is a lot of discussion at insurance conferences and in newsletters about taking climate change into account in calculating insurance risk. Privately, insurance industry leaders state that climate change isn't taken into account since 90% of property and casualty policies last 12 months. Any change in climate related impacts can't be effectively measured on the time scale of a year. However, the industry is under pressure from investors that are reacting to an exaggerated public narrative surrounding climate change, as well as confusing weather with climate.
Catastrophe bonds, or "cat bonds," have been developed over the past 25 years as an alternative to property and casualty reinsurance. A cat bond is a contract to cover risk that provides payouts triggered by specific events. Losses due to
Climate change is viewed as stimulating the cat bond market as new investible risks become available.23 Some insurance thought leaders see climate change and its perceived threats as providing an opportunity to broaden the relevance of the insurance sector to risk mitigation. Efforts to move forward with climate adaptation are creating new opportunities to underwrite climate-exposed risk. Shifting business models could focus on preventing customers from incurring damage and having to make claims by better managing and avoiding risk. Insurers could also work with the public sector to improve building standards and land use policies.24 Global warming and hurricanes
Landfalling hurricanes incur the greatest property and casualty losses in the
The IPCC AR6 (Chapter Eleven) summarizes the expected impacts of future warming on global hurricane activity:
* "Peak wind speeds of the most intense tropical cyclones (hurricanes) are projected to increase at the global scale with increasing global warming (high confidence). The increase in global TC maximum surface wind speeds is about 5 percent for a 2 C global warming across a number of high-resolution multi-decadal studies"
* "It is very likely that heavy precipitation events will intensify and become more frequent in most regions with additional global warming. At the global scale, extreme daily precipitation events are projected to intensify by about 7 percent for each 1 C of global warming (high confidence)." Shortly before publication of the IPCC AR6, two assessment reports were published by a distinguished international group of scientists who serve on the
With regards to future changes, the WMO Report relied on model results and expert judgment for a 2oC warming:
1. For hurricane intensity (maximum wind speed), there is medium-to-high confidence that the global average will increase. The median projected increase in lifetime maximum surface wind speeds is about 5% (range 1-10%).
2. For the global proportion of hurricanes that reach Category 4-5 levels, there is at least medium-to-high confidence in an increase, with a median projected change of +13%.
Author opinion was more mixed and confidence levels lower for the following projections:
1. A decrease of global hurricane frequency, as projected in most modeling studies
2. An increase in the global number of very intense hurricanes (Category 4-5).
The insurance industry's perception of a substantial increase in damage from
* AIR Worldwide (2020): Quantifying the Impact from Climate Change on
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*
These three studies focusing on
"The growth in the number of stronger storms, and landfalling storms overall, increases modeled losses by approximately 20%, with slightly larger changes in areas such as the Gulf and Southeast coasts"30
My critique focuses solely on the hazard component of AIR's analysis:
1. The driver for AIR's assessment is warming associated with the emissions scenario RCP8.5, which AIR refers to as a "business as usual scenario." This scenario has been judged as implausible by energy economists and is no longer used in international policy making.
The projected incremental temperature change between 2020 and 2050 for the RCP4.6 scenario (as per the IPCC AR6, Table SPM.1) is 0.9oC (compared to 1.4oC for RCP8.5).31 I have argued previously in this Report that the IPCC temperature projections for 2050 may be too high, when plausible lower values of climate sensitivity and natural climate variability are considered.
2. Their assumed changes in the numbers of Category 3,4,5 hurricanes are inconsistent with recent IPCC and WMO assessment reports.
AIR assumes an increase by 2050 of the frequency increased frequency of Category 3, 4, and 5 storms of 15%, 25%, and 35%, respectively, with frequencies of Category 1,2 storms held at today's values. This implies an increase of >20% in the total number of hurricanes. By contrast, a decrease of global hurricane frequency is projected in most modelling studies (WMO Report)32, although there is relatively low confidence in these projections. The WMO Report cites low confidence in an increase in the global number of very intense hurricanes (Categories 4-5). The WMO Report also cites medium-to-high confidence in a median increase of +13% in the global proportion of hurricanes that reach Category 4-5 levels, reflecting a small shift in the distribution of hurricane intensities.
3. The AIR Report ignores the "elephant in the room" that is of relevance to their target period to 2050: the Atlantic Multi-decadal Oscillation (AMO). An expected shift to the cool phase of the AMO would arguably portend fewer major hurricanes striking the
Given the dominant influence on
The net impact of such Reports of implausibly high projections of
Adaptation to extreme weather
We are not passive victims in the face of climate variability and change. The success of human adaptation to weather and climate extremes is reflected by the fact that global deaths and economic damage from weather and climate disasters dropped 80-90 percent during the last four decades, when scaled for population and gross domestic product (GDP) changes.34 The extreme damages from recent hurricanes plus floods, droughts and wildfires emphasize that the
Disaster risk and impacts can be reduced by tackling fundamental issues that cause vulnerability, no matter what the evolution of the future weather and climate. Synergy among land use policies, technological innovation, infrastructure, and operational plans can reduce vulnerability to weather and climate extremes. Risk management, risk sharing, and warning strategies are also key for adapting to extreme weather events and climate change. To the extent that vulnerabilities can be reduced across regions in the
Microeconomics of adaptation
The microeconomic approach for climate change adaptation addresses the role of market mechanisms in increasing local resilience. Environmental economist
Banks and insurers can nudge real estate buyers to reduce their demand in risk-prone locations and increase their demand for housing and real estate in safer places. Changes to zoning codes to up-zone in safer places featuring less weather- and climate-related risk will result in increased housing supply in safer places. The end result is not to completely desert fire- and flood-prone areas, because these are often desirable and productive locations. Civil engineers can design productive real estate assets that are acclimated to the risks. An alternative approach to building resilient real estate is to build less durable structures that are meant to have a lifetime of less than 20 years. The owner of the property would have less capital at risk and holds an option to rebuild or not in the future.
Kahn argues that the key to this smooth adaptation dynamic is for government to retreat. Government is currently taxing people on higher ground to subsidize people taking risks on lower ground - politically, this may not be a sustainable situation. When the government subsidizes insurance in flood zones and fire zones, this creates a moral hazard effect of reducing the likelihood that owners of at-risk property take appropriate precautions. As the federal government crowds out private insurance sector investment in addressing climate-related risk, adaptation efforts may be slowed.
Planning to fail safely
Extreme weather events will continue to challenge the ability of infrastructure systems to supply critical services. Critical infrastructure systems include electric power systems, oil and gas networks, water networks, transportation networks, telecommunications and computer systems. These complex systems are increasingly interdependent on each other, at scales ranging from the local to global. For example, operation of water and telecommunications systems requires a steady supply of electricity. The generation and delivery of electric power requires the availability of fuel and water plus telecommunication and computer services. These interdependencies can turn a local disturbance in a single system into a large-scale systemic failure, with catastrophic impacts that include property loss and casualties.36 Power outages associated with extreme weather events are estimated to cost
An exemplary example of safe-to-fail is provided by the manner in which
Resilience traps
Resilience is the ability to bounce back in the face of unexpected events. Resilience carries a connotation of returning to the original state, or "bouncing back," as quickly as possible. To increase our resilience to extreme weather and climate events, we need to "bounce forward" by evolving our infrastructures, institutions and practices.
A substantial concern about adaptation is the potential for creating resilience traps. An overemphasis on recovery without transformation entrenches resilience traps if recovery acts to inhibit positive transformation and perpetuate maladaptive states. Distorted incentives and government policies can create resilience traps. Current federal government policies distort incentives in a way that increases vulnerability to extreme weather events, resulting in public investment that protects unwise private investments. These policies include subsidized flood insurance and federal funding for reconstruction after a disaster, which encourages people to build in areas known to be vulnerable. Providing aid to rebuild in the areas that were damaged reinforces the incentive to downplay risks.
The most politically important hurricane that you have probably never heard of is Hurricane Frederic, a Category 3 hurricane that struck
Risks from a rapid transition of electric power systems
When insurers refer to "climate transition risk," they are generally referring to risks from contracts with the fossil fuel industry associated with expected losses in asset values as government policies and private actions shift toward a low-carbon economy.
There is another critical element to transition risk that impacts the
Because of the role of electricity as the backbone of our economy and societal support systems, risks to the electric power system are systemic risks, with implications for property loss and casualties. Focusing on one set of risks--CO2 emissions--can create other, potentially more dangerous risks. If efforts to reduce CO2 emissions result in electric power that is less abundant, less reliable, and/or less secure, then the transition will make people worse off now and very possibly in the future. If people are worse off, vulnerability to extreme weather events and insurance losses will increase.
By relaxing the time horizon for the energy transition to be consistent with the incremental risk from climate change, the transition risk can be reduced while maintaining energy abundance, reliability, and security through the energy transition.
Ironically, Environmental, Social and Governance (ESG) objectives that are increasingly being met by divesting from fossil fuel companies may turn out to be counterproductive to a rapid and robust energy transition. The perceived urgency and priority of eliminating fossil fuels is having two adverse impacts on the transition:
* Strategies to reduce fossil fuel production and use in the near term are slowing down the transition, during a period when substantial additional energy is needed to implement new clean technologies, as well as to support the additional electricity required by growing numbers of electric vehicles and heat pumps.
* The perceived urgency demands that we use existing technologies, primarily wind and solar power. However, some of the technologies required to robustly integrate wind and solar power into the grid do not exist or are exceedingly expensive. Further, land use requirements for wind/solar farms and additional transmission lines are engendering conflicts with other desired uses of the land. The net result is to downplay the role of more advanced energy technologies that are under development.
In my own household, the amount of electricity used has more than doubled following installation of heat pump furnaces, electric water heaters, an induction stovetop and the purchase of an electric vehicle. Solar panels that were installed in 2020 to cover more than our annual electric power usage now cover significantly less than half of our electricity usage. While the transition of households to electric power is a step in the right direction as part of a learning curve, we need to acknowledge that substantially more electric power will be needed to fuel this particular element of the transition; in the near term, this is predominantly fossil fuels.
The transition is not just about replacing our current generating capacity with cleaner energy. We need to acknowledge that the world will need much more energy in the future than it is currently consuming. More electricity can help reduce our vulnerability to weather and climate extremes: air conditioners and cleaners, water desalination plants, irrigation, vertical farming operations, water pumps, and environmental monitoring systems. Further, abundant electricity is key to innovations that will support our future prosperity and wealth.
Countries that have achieved greater than 80% of their energy supplies from renewable energy rely on hydropower and geothermal energy, not solar and wind. These countries include
Stringent renewable energy standards are mandated in a number of states, focused on wind and solar energy. Unfortunately, insufficient attention is being paid to the perspectives of engineers that actually plan and operate electric power systems to insure a reliable and secure supply of power. At my blog Climate Etc. (judithcurry.com), I am providing a forum for power system engineers and operators to present their concerns about increasing penetration of wind and solar into the grid. They are providing assessments of proposed solutions from power systems around the world, including a recent series on
Variability of wind and solar power ranges from intermittency on time scales of minutes, to diurnal variations, variations from weather systems, seasonal cycles, interannual variability and even decadal-scale variability. Brownouts and electricity curtailments have become more frequent during both cold and heat extremes. The worst problems are associated with continental-scale high pressure systems during winter, which produce very cold temperatures and still winds--demand is exceptionally high and supply from renewables is very low. The duration of these extreme heat and cold events can extend to weeks. Apart from lack of generation by wind and solar, natural gas supplies can be compromised during extreme cold events. Now that many coal and nuclear power plants have shut down, a lack of onsite fuel storage contributed to the
Ways forward to manage climate-related insurance risk
The near-term risks from human-caused climate change have been exaggerated and confused by conflating the slow incremental risk from warming with emergency risk associated with extreme weather events that has little if anything to do with warming. The dominance of implausible emissions scenarios in climate assessment reports has misled our perceptions of climate risk and our policies. Of greatest relevance to the insurance sector, there is little justification to expect a noticeable change in
Climate change and its perceived threats provide opportunities to broaden the relevance of the insurance sector to risk mitigation. Climate adaptation provides new opportunities to underwrite climate-exposed risk. Insurance companies have the opportunity to expand their role by helping prevent customers from incurring damage and having to make claims and working with the public sector to improve building standards and land use policies. Both insurance companies and the government can work towards avoiding the moral hazards of resilience traps, by subsidizing risky behavior that reduces the likelihood that owners of at-risk property take appropriate precautions.
Climate variability and change, with the attendant extreme weather events, is best regarded as an ongoing predicament. Even if human-caused climate change is somehow eliminated, natural climate variability and inevitable surprises will provide ongoing challenges that require continuing adaptation by communities and mechanisms to transfer risk.
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Short Biography
Dr.
Financial declaration
Funding sources for Curry's research have included NSF, NASA,
Specifically with regards to CFAN's energy-related clients: CFAN has clients in the emergency preparedness division of several electric utilities, for which CFAN provides forecasts of hurricanes and severe convective weather to helps them anticipate and minimize the duration of power outages. CFAN also provides forecasts of temperature extremes and wind/solar power to energy trading companies, to support cost-effective backup of wind/solar power with natural gas. CFAN has provided climate-related analyses to energy companies related to: power plant siting and vulnerability to storm surge and sea level rise; future profitability of wind farms; and vulnerability of solar farms in the southeast
None of Curry's published research has been supported by funding from energy companies.
For more information:
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Footnotes:
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7 J.-
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9 Eleanor Frajka-Williams,
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16 "The Rising Costs of Extreme Weather Events," The
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24 "
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28 "Managing US Hurricane Landfall Risk in a Changing Climate," Twelve
29 "'Worsening Winds' Report Finding 13.4 Million Properties Will Be Newly Exposed to Hurricane Winds From Climate Change,"
30
31V. Masson-Delmotte et al., eds., "Summary for Policymakers."
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33
34
35
36
37
38 "Sandy and Its Impacts,"
39 "Insured Losses Resulting from the
40 "
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42 "Florida Power & Light Wins ReliabilityOne National Reliability Award for Fourth Time in Five Years," UtilityProducts,
43 "Hurricane Frederic," Wikipedia (
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URL: Climate Forecast Applications Network
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Original text here: https://www.budget.senate.gov/imo/media/doc/Dr.%20Judith%20Curry%20-%20Testimony%20-%20Senate%20Budget%20Committee.pdf
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