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Climate change a threat to credit rating

Future speculation: Hurricane Joaquin was a Category 4 storm as it headed towards Bermuda in early October before weakening to a Cat 2. A speculative survey by Standard & Poor’s Rating Service has warned that the Island would be among countries and islands most impacted, in terms of lowered sovereign credit rating, if hit by a climate change-enhanced once-in-250-year natural catastrophe in 2050

Climate change could put Bermuda at risk of greater economic damage and dent its sovereign credit rating more than many countries and islands.

That is the finding of a speculative report by Standard & Poor’s Ratings Services.

Using direct damage data from Swiss Re, the agency estimated the possible adverse effect of climate change on 38 countries.

It based its measurements on the expectation of a once-in-250-year natural catastrophe event striking, and the impact being exacerbated a further 20 per cent to represent the magnified additional damage expected to be inflicted due to climate change.

Projected out 35 years to 2050, the report suggests the costs associated with a once-in-250-year hurricane would increase Bermuda Government’s debt by 16 per cent of gross domestic product. That assessment jumps a further 8 per cent once the additional damaging impact of climate change is factored in.

Bermuda’s sovereign credit rating would be negatively impacted by 1.48 notches by such a catastrophic hurricane, and by a further 0.79 as a result of the added impact from climate change.

That places Bermuda squarely among countries and islands most likely to feel significant pressure on their rating.

While the report is highly speculative in nature, and is the first such survey undertaken by S&P, its findings give an interesting overview of potential future scenarios.

“In terms of average impact of climate change by peril, our simulations show that tropical cyclones and associated storm surges will be more damaging than floods as the Earth’s temperature rises. Geographically, ratings of sovereigns in the Caribbean and Southeast Asia appear most at risk,” said Marko Mrsnik, a S&P credit analyst.

The report, named The heat is on: how climate change can impact sovereign ratings, notes that wealthier nations should withstand climate change impacts, something picked up by Robert Hartwig, chief economist at the New York-based Insurance Information Institute.

“There are going to be countries that will be more vulnerable than they are today because of climate change,” he said. “Poorer and smaller nations will be vulnerable. But while Bermuda is one of the top ten [most affected] listed the effect on it might have been exaggerated, because Bermuda is in a different economic class than the others.”

The Bahamas, Dominican Republic, and Jamaica are among other countries in the top ten list of those facing the greatest potential impact.

“Bermuda is easily the most affluent among the top ten and is probably in a better position to invest in ways to mitigate the worst effects,” said Dr Hartwig.

This point was also reflected in the thoughts of Grant Gibbons, Minister of Economic Development. He said: “Bermuda is likely to be less affected and more economically resilient to hurricanes than other Caribbean sovereigns who feature in the report.

“In fact, Bermuda’s damage ratio and vulnerability have generally been a fraction of other Caribbean islands that don’t build to our standards.

“In addition the report notes the mitigating impact of higher insurance coverage on the economic consequences of cyclones — and again, Bermuda, on average, has high insurance cover penetration both for Government and the private sector.”

Dr Hartwig warned the report should be taken with a pinch of salt as it focused on possible events 35 years into the future. Furthermore, he said geopolitical and economic situations, as opposed to natural disasters, were normally the primary agents of change regarding sovereign credit ratings.

Likewise, Dr Gibbons noted that S&P said its report was “merely partial analysis of how climate change would affect sovereign ratings”, was a simplified model and should not to be taken as the company’s definitive view on likely future ratings trajectories.

However, he also observed: “The general view among both the public and most climate scientists is that global warming will likely make hurricanes more severe and possibly more frequent, so there’s no doubt that Bermuda needs to be well prepared, given our historical exposure.”

<p>Bermuda is moving towards greener energy sources</p>

Bermuda can play a part in tackling climate change with a more progressive approach to energy generation and energy conversation.

This is likely to see a decreased dependence on fossil fuels for bulk electricity generation, and a boost in the use of renewable sources, such as solar power.

Grant Gibbons, Minister of Economic Development, introduced the New National Electricity Policy in June, and tabled the Electricity Act 2015 in the most recent parliamentary session.

He said the two initiatives “set out clearly the Government’s intentions for Bermuda to play its part in alleviating the causes of climate change by providing the legislative and regulatory framework that will facilitate the introduction of more sustainable, renewable energy sources, as well as energy conservation measures in our Island’s future energy mix”.

The Island has long been reliant on fossil fuels to generate electricity, but rising costs, greenhouse gas emissions and vulnerability to supply and price shocks has acted as a driving force to find alternatives for the Island.

Aims of the Electricity Act include promoting effective and sustainable competition among energy producers, and the adoption of renewable energy and greater energy efficiency.

Dr Gibbons said: “Competition will be introduced for utility-scale or ‘bulk’ generation.

“In addition to renewable energy technologies, independent power producers will be able to propose any means of generation that can yield high-quality, sustainable and affordable electric power.

“Independent power producers may also provide other services, such as storage, to the grid. Long-term power purchase contracts will be standard, which will give investors the confidence and regulatory certainty that will encourage capital investment, both local and foreign.”

Bringing in renewable forms of energy production will decrease the Island’s reliance on fossil fuels for its bulk electricity production. As a result, Bermuda will lower the amount of carbon emissions it produces. Carbon emissions are seen as a major contributing factor to climate change.

Dr Gibbons said an example of renewable bulk generation is the proposed “utility-scale photo voltaic generating facility planned for the 80-acre former munitions pier at the airport”.

A solar power farm on the strip of land, which is widely known as “The Finger”, at LF Wade International Airport, could produce a sizeable portion of the Island’s energy requirements.

“Although the exact amount of the energy to be supplied will not be known until we go out for competitive tender in 2016, estimates suggest that the area has the potential to supply roughly 20 to 30 megawatts — equivalent to roughly 25 per cent of Bermuda’s peak demand during daylight hours,” said Dr Gibbons.

“Issues relating to the design of the facility, the need for storage and interconnection to the grid will all need to be worked out in the RFP process.”