Risks on global financial stability induced by climate change: the case of flood risks

There is increasing concern among financial regulators that changes in the distribution and frequency of extreme weather events induced by climate change could pose a threat to global financial stability. We assess this risk, for the case of floods, by developing a simple model of the propagation of climate-induced shocks through financial networks. We show that the magnitude of global risks is determined by the interplay between the exposure of countries to climate-related natural hazards and their financial leverage. Climate change induces a shift in the distribution of impacts towards high-income countries and thus larger amplification of impacts as the financial sectors of high-income countries are more leveraged. Conversely, high-income countries are more exposed to financial shocks. In high-end climate scenarios, this could lead to the emergence of systemic risk as total impacts become commensurate with the capital of the banking sectors of countries that are hubs of the global financial network. Adaptation policy, or the lack thereof, appears to be one of the key risk drivers as it determines the future exposure of high-income countries. This implies in particular that the avoided costs in terms of financial stability should be weighted in as benefits of adaptation policy.

Mandel, A., Tiggeloven, T., Lincke, D. et al. Risks on global financial stability induced by climate change: the case of flood risks. Climatic Change 166, 4 (2021). https://doi.org/10.1007/s10584-021-03092-2

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Coastal protection can significantly reduce migration from sea-level rise

Protecting densely populated coastal areas, such as river deltas or megacities, from sea-level rise with dikes and seawalls will likely limit land loss and migration of people away from the coasts. But these protections are overlooked in most migration estimates. A new study predicts coastal protection could limit migration to 17 to 72 million people during the 21st century—less than half of some previous estimates.

The study, published in Earth’s Future, AGU’s journal for interdisciplinary research on the past, present and future of our planet and its inhabitants, is the first to look at the effects of coastal protection on migration rates on a global scale. The analysis takes into account a wide range of climate change and economic scenarios.

The authors find that, from a purely economic point of view, it makes sense to protect about 3% of the global coastline—mainly around densely populated cities and floodplains. However, for people living on less populated coastlines in poorer communities with fewer assets to protect, retreating would be a more affordable option for local governments than investing in protection.

“Nobody will give up New York City or the Netherlands, at least not in the 21st century, so we wanted to take this into account to get a more realistic picture of coastal migration due to sea-level rise,” said Daniel Lincke, a coastal researcher at the Global Climate Forum, an independent research institute focused on climate change research.

People have kept out the sea with dikes and other barriers for hundreds of years. The Netherlands, for example, began building dikes at least as far back as the 1200s. As sea levels continue to rise due to climate change, many countries will likely construct seawalls and other defenses to protect densely populated areas.

From a technical standpoint, Lincke expects that all coastal megacities potentially could be protected, at least up to the 2 meters (6.56 feet) of sea-level rise predicted by 2100 under the worst climate change scenarios. But building and maintaining coastal protection infrastructure comes at a high cost that could add up to several trillions (US$) globally through the 21st century.

Most studies have not considered coastal protection in their estimates of the impacts of sea-level rise, Lincke said, potentially leading scientists to overestimate the number of potential migrants from coastal areas.

“There have been global studies of cost-benefits of flood protection, and global studies on migration, but in this paper, they nicely combined them,” said Hans de Moel, a natural hazard risk researcher at Vrije Universiteit Amsterdam who was not involved in the study. “It’s important because you don’t want to look at adaptation measures in isolation.”

Lincke and his co-author Jochen Hinkel of the Global Climate Forum developed a model that splits the global coastline into about 12,000 pieces based on local elevation, population and socioeconomic data. For each piece of coastline, they used the model to estimate the local costs of constructing and maintaining protection, retreating from the land and losing its assets or repairing flood damage. They considered 250 potential future scenarios with differing amounts of sea-level rise and global wealth. Then they estimated the number of migrants, assuming that local governments would make protection decisions based purely on this cost-benefit analysis.

The researchers emphasize that their analysis focuses on economic factors, but that social and political factors also play powerful roles in how individuals and societies react to the threat of rising sea-levels.

For 3.4% of the world’s coastline, all of the scenarios agreed that coastal protection was a less costly option for the country than migration or repairing flood damage. These regions include coastal urban areas in China, Japan and Europe, and cities in the U.S., Australia, Indonesia and the Nile delta.

“You cannot protect everywhere—that will not be possible,” Lincke said. The analysis also takes into account the wealth level of each country and the local cost of constructing dikes. For regions with fewer people or less valuable property along the coasts, retreat and the likely migration of coastal residents is predicted to cost a country less than protection, which may guide decision-making. As a result, “it is very probable that the locations where people have to retreat are mainly in poor and developing countries,” Lincke said.

Densely populated countries in South Asia and Southeast Asia are predicted to have the highest numbers of migrants. Small island states, such as the Pitcairn Islands, the Marshall Islands and Kiribati, will also suffer high relative migration rates, with more than half the population of some islands likely being forced to move.

Depending on the scenario, sea-level rise is predicted to claim about 60,000 to 415,000 square kilometers (about 23,000 to 160,000 square miles) worldwide. The U.S., Russia and Canada are expected to lose the most land, as they have long and mainly sparsely populated coastlines.

de Moel suggests that the next step would be to look at models of how people decide when to migrate in the face of sea-level rise. These would include factors like a person’s risk perception, sense of place and the effects of previous extreme flooding events, like Hurricane Katrina in the U.S. and Cyclone Xynthia in France. He said that these events can trigger people to migrate well before their land becomes inundated. His group at Vrije Universiteit Amsterdam is working on such a model. “This is a very nice foundational piece on which we can move forward.”

Earth’s Future is an open access journal. The paper can be accessed under https://agupubs.onlinelibrary.wiley.com/doi/10.1029/2020EF001965