Climate change has shot up the agenda as a major risk to the UK's finances, and without action could inflict "sudden shocks and slower-building pressures" on the public purse, the Office for Budget Responsibility (OBR) warned today.
In its second Financial Risks Report released today the OBR warns that the UK economy could be badly hit by the impacts of runaway climate change, which are expected to include mass international migration and induced periods of conflict, as well as extreme weather events.
It marks a major leap in profile for climate change in the OBR's regular assessments. It's 2017 assessment - the first of its kind - climate change was briefly "noted" but not analysed in great depth, and the Treasury's response made no mention of the issue. In its subsequent assessment released today, however, the independent forecasting body now sees climate change as a potentially severe threat to the UK's prosperity.
In a chapter dedicated to the issue, the OBR warns that the scale of risks associated with climate change will depend hugely on how effective the world is at holding any global temperature rise to below 1.5C, stressing that if mitigation efforts fail the knock-on financial impact of catastrophic weather, conflict and mass migration could be "severe".
Climate change "has the potential to inflict both sudden shocks and slower-building pressures on the public finances," the OBR said in its summary of the paper. "Their nature and cost will of course depend hugely on how the climate itself evolves. If global mitigation efforts fail, the risks posed by conflict, mass migration and catastrophic weather events could be severe."
But it acknowledges that it has not yet completed quantifiable analysis to assess the specific scale of the financial threat, promising to work with the Bank of England over the coming year to adapt the Bank's financial stability stress tests to run a quantitative fiscal risk analysis for the UK.
"We should be wary of complacency, given that climate related risks to the economy and then to the public finances are not particularly well-modelled or well-understood," OBR chairman Robert Chote said at a press conference to launch the report this morning. "We hope to do more quantitative work in this area in future, drawing on work currently being undertaken by central banks on the implications of climate change for the financial system - where many of the same channels are relevant."
However, drawing heavily on analysis carried out over the last two years by the Bank of England of the risks climate change poses to the financial system, the OBR outlined the key risks climate change could pose to the UK's public finances.
It suggests physical climate impacts could deal a blow to tax receipts while increasing the UK's social security bill, and warns public spending may have to rise to repair public assets damaged by extreme weather. The government may even have to buy up private sector assets if critical infrastructure is affected, it states.
Earlier this month the government's climate watchdog, the Committee on Climate Change, warned the UK was taking a "ramshackle" approach to preparing for the coming impacts of climate change. Currently only around one tenth of climate-related spending by the government goes towards adaptation.
The OBR also cites a range of fiscal risks that could arise as the UK is forced to adapt to more extreme weather events and global instability. They include the diversion of resources from productive capital and innovation to adaptation capital - spending to cope with climate impacts - which could hit the UK's already sluggish productivity growth.
Risks also arise from the low-carbon transition, the OBR warns. But it explains much of the risk will depend on how well climate policy is managed, suggesting that "unexpected or inconsistent policy changes could have more severe consequences in terms of higher energy prices reducing economic activity or stranded assets depleting wealth and generating financial stability risks".
The OBR concludes with a warning that the physical risks of extreme weather could pose "sudden" and unforeseeable shocks to the UK's fiscal stability, while the fiscal consequences of adaptation costs and mitigation policies will bring slow-building pressure to bear on public finances.
Taken in isolation, the risks of lost productivity during a heatwave, or spending being redirected to fund adaptation, might not seem troublesome, the OBR acknowledged. But it said "this relatively sanguine conclusion might simply reflect the difficulty in seeing through to the full systemic consequences of significant global warming - where interconnections and associated amplifying mechanisms might be more important than is initially apparent."