IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group II: Impacts, Adaptation and Vulnerability

7.6.3 Services

Concerns about vulnerabilities and impacts for services are likewise concentrated on sectors especially sensitive to climate variation, such as recreation and tourism; and adaptations are also likely to be associated with changes in costs/prices, applications of technology, and attention to risk financing. For instance, wholesale and retail trades are likely to adapt by increasing or reducing space cooling and/or heating, by changing storage and distribution systems to reduce vulnerabilities, and by changing the consumer goods and services offered in particular locations. Some of these adaptations, although by no means all of them, could increase prices of goods and services to consumers.

Where climate change affects comparative advantages for regions in the global economy, trade patterns are likely to adapt largely through market mechanisms as the changes unfold rather than through strategies to reduce risk in anticipation of changes (Figure 7.2). In a general sense, there will be ‘winners’ and ‘losers’ as a result, potentially affecting economic growth and employment in both kinds of cases, which suggests the possible value of anticipatory planning and policy discourse. In many cases, building robust ties with the globalising economy could be a useful response to possible climate changes for places and societies built around small-scale social interactions and enterprises, because those ties could open up a wider range of possible alternatives for adaptation.

The short time-scales at which most commercial services operate allow great flexibility for adapting to climate change. Within the retail industry, it is likely that commerce will capitalise on long-term trends in consumer behaviour and lifestyle, relating to climate change through an expansion of markets for cooling equipment, and facilities and goods for outdoor recreation in temperate climates. Large injections of capital may be required to relocate commercial premises from low-lying areas vulnerable to flooding. In addition, technological investment will be required to reduce carbon emissions while maintaining competitive prowess in the global market. The most vulnerable are communities (particularly in developing countries) whose economy is based on the production and distribution of a restricted range of climate-sensitive commodities. For these communities, economic diversification should be a key response to reduce vulnerability.

The tourism sector may in some cases be able to adapt to long-term trends in climate change, such as increasing temperatures, at a cost, for instance by investing in snow-making equipment (see Chapter 14, Section 14.4.7), beach enhancement (see Chapter 6, Sections 6.5.2 and, or additional air-conditioning. The sustainability of some adaptation processes may be questionable: air-conditioning because of its energy use, snowmaking for its pressure on water resources or its costs (O’Brien et al., 2004). However, climate change is not likely to be linear, and the frequency and intensity of extreme climatic events, which affect not only the reality of risks, but also the subjective risk-perception of tourists, might become a far greater problem for the tourist industry. There are three categories of adaptation processes: technological, managerial and behavioural. While tourism providers tend to focus on the first two (preserving tourism assets, diversifying supply), tourists might rather change behaviour: they might visit new, suitable locations (for example snow-safe ski resorts at higher altitudes or in other regions) or they might travel during other periods of the year (for example, they might visit a site in spring instead of summer to avoid extreme temperatures). Awareness, adaptive capacities and strategies are likely to vary according to the wealth and the education of different categories of tourists and also among other stakeholders. For example, large tour operators should be able to adapt to changes in tourist destinations, as they are familiar with strategic planning, do not own the infrastructures and can, to some extent, shape demand through marketing.

Perhaps of even greater importance is the role of mobility in future tourism. Increasing prices for fuel and the need to reduce emissions might have substantial effects on transport availability and costs. For instance, the price of air transport, now the means of transport of 42% of all international tourists, is expected to rise in stabilisation scenarios (Gössling and Hall, 2005). This might call for adaptation in terms of leisure lifestyles, such as the substitution of long-distance travel by vacationing at home or nearby (Dubois and Ceron, 2005).

It also seems likely that tourism based on natural environments will see the most substantial changes due to climate change, including changes in economic costs (Gössling and Hall, 2005) and changes in travel flows. Tropical island nations and low-lying coastal areas may be especially vulnerable, as they might be affected by sea-level rise, changes in storm tracks and intensities (Chapter 16; Chapter 4, Section 4.2), changes in perceived climate-related risks, and changes in transport costs, all resulting in concomitant detrimental effects for their often tourism-based economies. In any of these cases, the implications are most notable for areas in which tourism represents a relatively large share of the local or regional economy, and these are areas where adaptation might represent a relatively significant need and a relatively significant cost.

The insurance sector has an important role to play in adaptation (Mills, 2004) as it is in the business of calculating risk costs and has begun to explore how risks can be expected to change into the future (Association of British Insurers, 2002). By communicating risk information to individual stakeholders, as through insurance pricing signals, insurers can help inform appropriate adaptive behaviours, although regulated markets or flat-rated insurance systems obstruct the transmission of the information required to motivate adaptation. Through reductions in premiums charged, insurance can also reward actions taken to reduce risk, such as by fitting hurricane shutters on a building or by the construction of local flood defences.

Where new risks are emerging, or known risks are increasing, new insurance coverages have been designed to help spread losses. Examples include the creation of weather derivatives, crop insurance and expanded property insurance coverage.

Generally, it is recognised that ‘ex-ante’ (before the fact) funding mechanisms in the form of insurance should be more beneficial for the affected community and the whole country’s economy than ex-post (after the fact) mechanisms by means of credit, government subsidies or private donations. Only the ex-ante approach offers the surety of payments as well as the potential to influence the level of risk, through linking insurance prices and conditions with government policy on hazard mitigation, implementation, and supervision of building codes etc., thus reducing a country’s financial vulnerability and giving improved prospects for investment and economic growth (Gurenko, 2004). However, in developing countries there are questions about the viability of such approaches, concerning who in a poor country is able to afford an ex-ante premium and how real reductions in risk can be achieved in a society with relatively low risk literacy (Linnerooth-Bayer et al., 2005). Other potential sources of developing country adaptation funding are discussed by Bouwer and Aerts (2006).

Besides incentivising adaptation, the insurance industry itself will need to adapt to stay financially healthy. The main threat is a combination of very high loss events in a short time period (as almost happened in September 2005 with Hurricane Rita heading for the city of Houston after Hurricane Katrina had hit New Orleans). Trends that contribute to increasing the robustness of the sector include better risk management, greater diversification, better risk and capital auditing, greater integration of insurance with other financial services, and improved tools to transfer risks out of the insurance market into the capital markets through catastrophe risk securitisations (European Environment Agency, 2004), which have seen significant increases in value issued since 2004.

The key vulnerability of the current system of risk-bearing concerns the non-availability or withdrawal of private insurance cover, in particular related to flood risk. However, the threat of withdrawal can itself be a spur for adaptation. Following the October-November 2000 floods in England and Wales, the Association of British Insurers negotiated an increased allocation of government expenditure on flood defences and a stakeholder role in decisions around future development in floodplains, by threatening to withdraw flood insurance from locations at greatest risk (Association of British Insurers, 2002). With expectations for rising levels of flood risk in developed countries, political pressures demand that if private insurance is withdrawn, state-backed alternatives should be created leading to increased liabilities for governments. Without such a backstop more significant adaptive measures may be triggered. In the northern Bahaman islands of Abaco and Grand Bahama (hit by three major hurricanes and their associated storm surges between 1999 and 2004), in 2005 flood insurance was withdrawn for some residential developments, ending the ability to raise a bank-loan mortgage. Without a state-backed alternative, houses became abandoned as their value collapsed (Woon and Rose, 2004). Meanwhile, builders have begun to construct new houses in the Bahamian coastal floodplain on concrete stilts, bringing some properties back into the domain of insurability. Similar adaptive outcomes can be expected in other coastal regions affected by increasing flood risk.