Thursday 27th February 2014 FASS Talks Programme 2013/14 Sponsored by AEGON Limits to Growth Presentation to FASS Simon Jones 27 February 2014 Hymans Robertson LLP and Hymans Robertson Financial Services LLP are authorised and regulated by the Financial Conduct Authority 3 Objectives Take you through some of the interesting graphs and facts presented in the report from January 2013…. …and hopefully encourage you to read more about the subject! Discuss how actuaries could use this work and get involved. 4 Agenda Exponential Growth Opinions on Future Growth Resource Limits Actuarial Impact Resource Limits and Actuaries 5 6 Growth The population has been exhibiting exponential growth. Likewise the per capital GDP has been growing exponentially. Population, billions Exponential Growth 7 8000 6 7000 5 World Population 4 World per capita GDP 6000 The industrial revolution 3 5000 4000 3000 2 2000 1 1000 0 0 0 Per Capita GDP, 1990 $ World Population and Per Capita GDP, 1-2008 AD 200 400 600 800 100012001400160018002000 Year, A.D. Source: http://www.albartlett.org There is a great presentation about exponential growth at this web address. 7 Growth Exponential Growth World GDP, 1750-2008 AD 60 World GDP growth has been exponentially growing. • In real terms world GDP has grown at average rate of c.3% per year in recent decades = doubling time 23 years. • 2012 to 2100 is almost 4 doubling periods. • If 3% growth continues, world economy will be14 times as large in 2100 as it is now. GDP, 1990 $trillions 50 40 30 20 10 0 1750 1850 Year, A.D. 1950 8 Carbon Dioxide Not everything that grows exponentially is that great. Atmospheric CO2 concentration, parts per million Growth 400 380 CO2 360 340 320 300 280 260 240 220 200 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Year, A.D. Source: Scripps Institution of Oceanography (SIO) CO2 Program http://scrippsco2.ucsd.edu R. F. Keeling, S. C. Piper, A. F. Bollenbacher and S. J. Walker 9 Growth Moore’s Law The number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years. Utility Patents Granted in United States 1800-2010 250,000 200,000 150,000 100,000 Intellectual Property No. of patents granted illustrates the explosive growth in human knowledge. Patents Granted per Year 50,000 0 1800 1850 1900 1950 2000 10 Growth to Service Debt Since the 1970’s actuaries in the US have warned that given the ageing of the baby boomers, a fiscal crunch would occur in America sometime between 2010 and 2020s. From 1993 to 2001 America’s Debt:GDP ratio went from 49% to 33%. However by 2012 it reached 119% of GDP:” Institute of Actuaries Evidence Report, January 2013 11 Does Growth Make You Happy? Does growth make you happy? The graph % of people content versus GDP per person at PPP. Economic growth remains the dominant concern of politics even in rich countries yet beyond the levels achieved by countries like Ireland, South Korea or New Zealand the positive correlation between GDP / person and happiness breaks down. Evidence that inequality leads to a less contented society too (The Spirit Level Wilkinson) – and to less innovative economies! Source: Jackson, T. (2009) Prosperity without growth? Economics for a finite planet, . 12 Limits to Growth – Predictions Limits to Growth (30 Year Update) The green lines represent the “standard scenario” – which is a business as usual (growth agenda). The purple observations show the realised observations. Netherlands Environmental Assessment Agency / Turner (2008) 13 13 13 Agenda Exponential Growth Opinions on Future Growth Resource Limits Actuarial Impact Resource Limits and Actuaries 14 Future Growth? Growth is the Solution Green Growth GDP, 1990 $trillions 60 World GDP, 1750-2008 AD End of Growth 50 40 30 20 Beyond the Limits 10 0 1750 1850 Year, A.D. 1950 15 Opinions: Growth is the Solution Angus Maddison (Contours of the World Economy, 2007) argues that history is littered with warnings on natural limits from Malthus to Jevons to the Club of Rome “Technical progress, capital formation and international specialisation have enabled humanity to avoid the calamities portrayed.” Matt Ridley (The Rational Optimist, 2010) argues that the human race has become a collective problem-solving machine and therefore confronts problems, such as resource and ecological limits, through changing its ways by invention, usually driven by scarcity in the market 16 Opinions: Green Growth McKinsey Global Institute note that the next 20 years see an increase of 3bn more middle class consumers. Three scenarios offered to cope with this expansion Productivity static (supply expansion) Productivity response (most demand met by productivity) “Climate response case” – move to low carbon energy, reforestation, land restoration, carbon capture First two scenarios don’t avoid two degree warming. 17 Opinions: End of Growth Limits-to-Growth stressed (reiterated) that humanity is on course to overshoot. Profound change needed soon to avoid collapse. Richard Heinberg (End of Growth) states that the global economy is playing a zero sum game with an ever shrinking pot divided among the winners. 18 Opinion: Beyond Limits WWF 2010 Living Planet Report tells us tropical diversity has reduced by 60%. They find five threats to biodiversity which underpin human ecosystems (freshwater, carbon storage, agriculture): Habitat loss, fragmentation, alteration Over-exploitation of wild species (food, materials, medicine) Pollution (excessive fertiliser, pesticides) Climate change Invasive species Carbon Tracker Initiative (Unburnable Carbon) tell us we have used one third of our budget for carbon to 2050 in order to remain within 2 degrees of global warming Only 20% of global carbon reserves are burnable to stay within 2 degrees. What we use this budget for is a key question 19 Agenda Exponential Growth Opinions on Future Growth Resource Limits Actuarial Impact Resource Limits and Actuaries 20 20 Global challenges: Fuel, Metals, Minerals Oil 150 Tin Gas 100 50 Copper Coal 0 Zinc Uranium Indium Silver [1] Current global reserves divided by current annual consumption (assuming no growth in demand). [2] Data taken from BP Statistical Review 2012, http://bp.com/statisticalreview and David Cohen, 'Earth's natural wealth: an audit', New Scientist, Issue 2605 (23 May 2007) pp. 34-41 21 Oil This graph from the IEA (International Energy Agency) 2008 World Energy Outlook – shows significant dependence on fields yet to be developed. 22 Oil Data on reserves is disputed – this graph from University of Uppsala revised the contributions on non-conventional and yet to be found fields. 23 Local challenges: Degradation of soils 24 Local challenges: Water availability 25 Global challenges: Anthropogenic emissions 26 Global challenges: Environmental Loading Rockstrom et al, Nature 461, Sept 2009, Stockholm University Resilience Centre 27 Doughnut Economics Source:Oxfam, Kate Raworth 28 Agenda Exponential Growth Opinions on Future Growth Resource Limits Actuarial Impact Resource Limits and Actuaries 29 Actuarial Assumptions – Real Rates The paper provides historical evidence for the correlation / co-integration of real interest rates and GDP. Population / wealth changes impacts need consideration too. 30 Actuarial Assumptions – Inflation The paper makes a case for price inflation being linked to GDP growth – but highlights the disconnect with wage inflation that is possible - which is important for the DB schemes that there the focus of the actuarial analysis in the paper. Also to consider is the extent to which resource constraints on many fronts could remove the ability for substitutes to dampen cost-push inflation. 31 Actuarial Assumptions – Mortality The paper provides some historical evidence for the link between GDP and Mortality – using data from Russia post-communism and the US over 150 years. We need to bear in mind that the linkages may be more subtle in future and mortality / morbidity may be selective with insured populations in wealthy countries perhaps less affected. However increased connectivity with the globe could increase transmission of disease – for example. 32 Actuarial – Scenarios in the Paper Government NOT sensitive to long term projections. Government sensitive to long term projections. Markets sensitive to long term projections. Markets sensitive to long term projections. Government NOT sensitive to long term projections. Government sensitive to long term projections. Markets NOT sensitive to long term projections. Markets NOT sensitive to long term projections. 33 Agenda Exponential Growth Opinions on Future Growth Resource Limits Actuarial Impact Resource Limits and Actuaries 34 Why Can Actuaries Help? Global problems made worse by: Lack of understanding of risk and uncertainty Lack of understanding of exponential growth Disregard for science and data Actuaries’ core skills are in the following areas: Risk and uncertainty Exponential growth Actuarial science and data based decisions 35 Activity - Institute & Faculty Resource & Environment Board (REB) formed at end 2013 from Member Interest Group Past Activity Literature review in 2010 focusing on climate change Literature review in 2011 focusing on energy Research into the limits to growth published January 2013 Networking evenings during last three years 2012 thought leadership lecture on climate change by Professor Sir Brian Hoskins Current Activity Developing Board agenda 3rd Literature review due later in 2014, working with Professor Richard Werner, focusing on sustainability of the financial system Volunteers for the 3rd literature review are very welcome! 36 Any questions? Contact details: Simon Jones simon.jones@hymans.co.uk 0131 656 5141