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Climate Change and Resource Depletion: the Challenges for Actuaries

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Climate Change and Resource Depletion: the Challenges for Actuaries CLIMATE CHANGE AND RESOURCE DEPLETION: THE CHALLENGES FOR ACTUARIES REVIEW OF LITERATURE 2011 BY I.ALLEN, N.G. ASPINALL, S.D. BAXTER, O.D. BETTIS, S.J.R. BRIMBLECOMBE, F. M. BROFMAN-EPELBAUM, C. FITZGERALD, DR. S. HARRISON, V.J. HODGE, C. C. JONES, B.P. MAHER, E.H. MCNEILL, P.G. MEINS, A. MOOKERJEE, G. MORRISON, N. NIAMI, N.G. SILVER AND T. ZALK EDITORS: N.G. ASPINALL AND E.H. MCNEILL ABSTRACT Energy is the key factor in industrial and agricultural productivity, transport and domestic existence. It is the basis of our current economic system. The predominant sources of energy for our modern society are fossil fuels and evidence indicates that the end of their unconstrained availability is imminent. In this review we examine current thinking on our dependence upon fossil fuels, including their potential impact on the economy and climate, and our lack of preparedness for a future where their availability becomes supply- constrained. The review highlights significant exposures to these risks which have not, as yet, been adequately addressed. Current evidence suggests that these issues should be more widely recognised as being among the dominant themes of the twenty-first century. They are fundamentally challenging to our current ways of thinking. KEYWORDS Climate, economics, insurance, resource depletion, risk, sustainability, peak oil, energy security CONTACT ADDRESS Institute and Faculty of Actuaries Staple Inn Hall High Holborn London WC1V 7QJ © Institute and Faculty of Actuaries 2011 Climate Change and Resource Depletion: The Challenges for Actuaries 2011 2 Review of Literature 1 CONTENTS 1 Contents ................................................................................................................................................ 2 2 Executive summary .............................................................................................................................. 2 3 Introduction .......................................................................................................................................... 4 4 Energy security and fossil fuels ............................................................................................................ 5 5 The Opportunities for Actuaries & Concluding Remarks .................................................................. 12 6 Papers Reviewed................................................................................................................................. 15 A. Concepts ................................................................................................................................................ 16 7 Paper 1 – Nuclear Energy & The Fossil Fuels (Peak Oil Theory) ..................................................... 16 8 Paper 2 – The Economics of Ecosystems & Biodiversity Synthesis Report ...................................... 17 9 Paper 3 – Money is Energy – An Exponential Economics Primer ..................................................... 20 10 Paper 4 – Searching for a Miracle: ―Net Energy‖ Limits and the Fate of Industrial Society ............. 22 B. Current status of resources .................................................................................................................. 24 11 Paper 5 – 2011 World Economic Outlook, Chapter 3: Oil Scarcity Growth ...................................... 24 12 Paper 6 – Annual Energy Outlook – US Energy Information Administration ................................... 28 13 Paper 7 – The Status of Conventional World Oil Reserves ................................................................ 30 14 Paper 8 – Special Report on Renewable Energy and Climate Change Mitigation ............................. 31 C. Current Status of Climate Science ...................................................................................................... 34 15 Paper 9 – Paleo-Climate Implications for Human-Made Climate Change ......................................... 34 16 Paper 10 – Climate Stabilisation Targets: Emissions, Concentrations & Impacts ............................. 36 D. Economic Responses ............................................................................................................................. 40 17 Paper 11 – Prosperity without Growth ............................................................................................... 40 18 Paper 12 – A Blueprint for a Safer Planet .......................................................................................... 46 19 Paper 13 – Towards Green Growth .................................................................................................... 48 20 Paper 14 – Decoupling Natural Resource Use & Environmental Impacts from Economic Growth .. 50 21 Paper 15 – A Policy Framework For Peak Oil & Climate Change .................................................... 51 22 Paper 16 – How Limited Oil Supply Can Lead to a Continuing Financial Crisis .............................. 54 23 Paper 17 – Global Energy Crunch: How Different Parts of the World Would React to A Peak Oil Scenario 56 E. Institutional Investment Issues ............................................................................................................ 58 24 Paper 18 – Adoption of Green Investing by Institutional Investors ................................................... 58 25 Paper 19 – Funding Climate Change: How Pension Fund Fiduciary Duty Masks Trustee Inertia & Short-termism ...... 60 F. Risk Management & Uncertainty ........................................................................................................ 62 26 Paper 20 – Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change ..................... 62 27 Paper 21 – Degrees of Risk: Defining a Risk Management Framework for Climate Security .......... 67 28 Acknowledgements ............................................................................................................................ 70 29 Appendix 1 – Further Reading ........................................................................................................... 71 30 Appendix 2 – Glossary of Terms ........................................................................................................ 74 2 EXECUTIVE SUMMARY © Institute and Faculty of Actuaries 2011 Climate Change and Resource Depletion: The Challenges for Actuaries 2011 3 Review of Literature 2.1 Executive summary 2.1.1 Energy is the key factor in industrial and agricultural productivity, transport and domestic existence. It is the basis of our current economic system. The predominant sources of energy for our modern society are fossil fuels and evidence indicates that the end of their relatively unconstrained availability is imminent. 2.1.2 In the opening sections of the review we examine the themes of climate change and resource depletion and consider the impacts these issues may have for actuaries. Some of the current thinking on our dependence upon fossil fuels, including their potential impact on the climate, highlights a lack of preparedness for a future where their availability becomes supply- constrained. 2.1.3 Subsequently we review 21 papers on a range of topics and have organised them into six subject areas: Concepts; Current Status of Resources; Current Status of Climate Science; Economic Responses; Institutional Investment Issues; and Risk Management and Uncertainty. Each review provides a summary of the paper, a critique and then some consideration of the actuarial implications and the importance of the paper. 2.1.4 The review highlights significant exposures to these risks which have not, as yet, been adequately addressed. This of course has profound implications for any long-term planning and allocation of resources. 2.1.5 Current evidence, particularly research into peak oil, (see section 4.3), suggests that these issues need to be more widely recognised now as likely to be one of the dominant themes of the twenty-first century. They are fundamentally challenging to our current ways of thinking. We suggest that actuaries must understand these issues in order to communicate the impact of these risks to their clients effectively, and for the profession to be serving the public good adequately. 2.1.6 We hope that this review will stimulate research and constructive debate in relation to these crucial topics. The Institute and Faculty of Actuaries has commissioned research to examine questions of resource and environmental limits to economic growth. We expect that the first findings from this research will be available in 2012. 2.1.7 As actuaries we are well placed to understand the risks posed by dwindling resources, climate change and degradation of our biosphere and we can communicate their impacts on the problems our clients ask us to solve. We should not present unbalanced information or unsubstantiated opinion, nor necessarily become vested in conclusions outside of our expertise. We only need to highlight the potential range of outcomes to these challenges, and realise that unacknowledged risks can carry the greatest threats. © Institute and Faculty of Actuaries 2011 Climate Change and Resource Depletion: The Challenges for Actuaries 2011 4 Review of Literature 3 INTRODUCTION 3.1 Introduction 3.1.1 Welcome to the 2011 edition of the Resource and Environment Group (REG) Literature Review: ―Climate Change & Resource Depletion: The Challenges for Actuaries‖. It is intended to build on the first edition in 20101 which provided a wider review of resource and environmental
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