Impact of Climate Change on Energy Consumption
Climate change unfolds with diverse impacts on global energy consumption, introducing uncertainties around our ability to meet the escalating demands for energy. Current research underscores the intricate relationship between extreme heat, socio-economic factors, and technological components, predicting a substantial transformation in urban energy use by 2050. This transformation is set to increase the electricity consumption allocated to cooling urban buildings per unit of floor area by at least 20% in certain regions¹ . This shift is attributed to the escalating necessity, rather than luxury, of air conditioning in the face of global warming².
As the discernible effects of climate change persist, the demand for energy to heat and cool buildings is changing. Employing proxies like heating and cooling degree days proves to be an effective means of quantifying this transition. This approach relies on an assumption that the average daily temperature effectively represents human thermal discomfort and, consequently, daily energy demand. Degree days are a measure derived from the variance between the outside daily temperature and the range of comfortable indoor temperatures, which serve as a simplified proxy for estimating energy demand associated with heating or cooling needs. Cooling degree days gauge the demand for cooling energy consumption during hot weather, while heating degree days perform the reverse, estimating heating demands during winter.
AlphaGeo, a company dedicated to detailed study of climate volatility, utilizes heating and cooling degree days to analyze the fluctuating global energy needs. The prevailing trend observed in degree days implies a significant evolution. Cooling degree days are projected to substantially increase, indicating a growing demand for space cooling solutions, while heating degree days are expected to shift towards negatives. This pattern holds true across different emission scenarios like Shared Socioeconomic Pathways (SSP245, SSP370, SSP585), aligning with evidence presented in other research³ ⁴. Particularly under the stringent SSP585 scenario, these shifts are most prominent, underscoring the urgency for proactive measures in addressing severe climate changes over time. (Image below)
The surge in temperatures, contributing to a heightened need for air conditioning, coincides with a reduction in the demand for heating. This intricate balance serves as a mitigating factor, offsetting the exponential increase in cooling requirements. This spatial heterogeneity introduces additional layers of complexity, as different areas face distinct challenges and opportunities based on their geographical properties, historical patterns in climate, topography, land use, and socio-economic factors. Regions with more pronounced warming trends may witness a sharper rise in cooling degree days, heightening the demand for air conditioning. Conversely, areas experiencing milder temperature increases may see a less pronounced impact on cooling needs, influencing the overall energy demand dynamics. This necessitates an offset computation measure.
In navigating the offset between the increasing demand for cooling and the decreasing need for heating, the company zero in on estimating the net change in degree days for both space cooling and heating collectively. This net change is a comprehensive indicator of how the demand for energy is being reshaped, holistically reflecting the collective influence of changing climate dynamics on the energy demands associated with both cooling and heating processes in buildings. Inherently, it provides a nuanced perspective on how the shift in temperature patterns shapes the overall energy landscape.
It is important to emphasize that this net change is a relative estimation, illustrating the temporal shift over time specific to each location. The significance of spatial heterogeneity in these changes cannot be overstated as regional differences in future warming can impact the net change estimation. This localized approach is essential in capturing the location-specific weather patterns, climate zones, previous conditions, and regional factors, offering a contextualized insight into the changing climate energy demands. The company capture the relative change for the three future time periods — 2035, 2050, and 2100 — to observe the change in energy demand over time. Delving into the analysis, the importance of computing this net change locally becomes apparent as smaller regions with distinct characteristics are not overlooked, that would otherwise occur with global data comparisons. The granularity and localization of data captures the nuances of locations, whether they be higher elevations, deserts, or other topographically specific areas, providing a comprehensive understanding of the impact at a localized level.
Regions at higher latitudes commonly exhibit higher numbers of heating degree days and lower numbers of cooling degree days, while equatorial regions demonstrate the opposite trend. Energy consumption is anticipated to rise over time, with tropical regions and certain areas in the Southern Hemisphere expected to face the strongest impacts. These regions, already characterized by elevated temperatures, will experience further extremes leading to a drastic increase in energy demand, particularly for cooling purposes. Unlike regions at higher altitudes, tropical areas do not require significant heating, resulting in an unbalanced energy use equation. The most significant impacts are projected for Latin America, Africa, Southeast Asia, and Northern Australia — all predominantly tropical regions. The consistently warm climate in tropical areas necessitates heightened efforts to regulate indoor temperatures, driving up reliance on energy-intensive cooling technologies.
The distribution of net change in degree days for SSP585 reveals a progressive impact on energy consumption, with the most significant changes occurring in the year 2100. While most net change values are positive, indicating an overall increase in energy consumption due to climate change, noteworthy negative values suggest regions or sectors where energy consumption decreases. Recognizing and understanding these negative values is crucial, as they indicate areas where the offset between increased cooling and decreased heating demands will notably impact consumption. An accurate analysis of energy consumption must consider both the increase and decrease in demand, particularly capturing the decrease in heating requirements.
Cities are voracious consumers of energy, relying on an uninterrupted supply to fuel their myriad activities. They account for a substantial 75% of the world’s primary energy consumption. In tandem with their high energy consumption, cities also contribute significantly to environmental challenges, responsible for 50 and 60% of the world’s total greenhouse gas emissions⁵.
The impact of climate change on energy consumption in major cities of the world is estimated by computing the percentage change in degree days (heating + cooling) for three different future time periods relative to a baseline (year 2025). A negative percentage indicates a decrease in energy consumption, while a positive percentage indicates an increase.
A decrease in energy consumption for cities in colder climates, such as Toronto, New York and London is likely due to milder and shorter winters over time caused by climate change, which reduces the need for heating thus balancing or even decreasing the overall energy demand. For cities in hotter climates like Riyadh, Abu Dhabi, and Mumbai, the net change in degree days is positive, indicating an increase in energy consumption. This is likely due to an increase in cooling demand during hotter summers caused by climate change.
The impact of climate change presents a contrasting scenario for cities in colder climates, offering certain benefits, while cities in hotter regions endure the brunt of the transition. Cold climate cities may experience shorter winters and less seasonal snowfalls, potentially reducing energy demands for heating. This could lead to decreased heating costs and improved livability. On the other side, cities in hotter regions face intensified challenges, grappling with rising temperatures, increased frequency of extreme weather events, and heightened demands for cooling solutions. The transition in climate thus unfolds as a two-sided coin, with its advantages favoring colder climates and its adversities disproportionately affecting cities in warmer regions.
Buildings in urban areas play a significant role in global energy consumption and CO2 emissions, contributing to approximately 30% of global final energy demand. Among building-related energy consumption, heating alone accounts for about half of these emissions. Despite space cooling being less prevalent than space heating, the combination of a warming climate, population growth concentrated in tropical areas, and increasing affluence is driving a rapid surge in the demand for space cooling. The use of air conditioners and electric fans already constitutes 10% of global electricity demand. Without substantial efforts to enhance the efficiency of cooling equipment, the energy demand for space cooling is projected to more than triple by the year 2050⁶.
For transition in energy use across scenarios and over time, the upward trajectory of degree days signals a corresponding increase in overall energy consumption, necessitating careful consideration and strategic planning. The image above illustrates the median change in degree days across three pivotal time periods: 2035, 2050, and 2100. Notably, as time progresses, the magnitude of this impact increases, reaching its zenith in 2100 for the scenario SSP585. This implies a substantial escalation in energy consumption due to increasing temperatures.
The dynamics of climate change and its varying impact on cities have profound implications for the real estate sector. In colder climates, where milder winters reduce the demand for heating, cities may experience a potential advantage for real estate development, with lower operational costs and increased attractiveness for investment. However, in hotter regions, the challenges are pronounced. Rising temperatures and more frequent extreme weather events place immense stress on infrastructure. This impact extends beyond buildings to affect roads, utilities, and transportation networks. As cities adapt to these challenges, the need for resilient and climate-adaptive real estate development becomes paramount. The evolving climate dynamics also reshape energy consumption patterns, particularly in the context of heating and cooling demands. The delicate balance between energy demand for heating and cooling, influenced by climate change, necessitates a nuanced approach to urban planning and infrastructure development, ensuring sustainability and adaptability in the face of a changing climate.
As the impacts of climate change become more evident, real estate professionals must navigate a changing landscape. Adapting to the specific challenges and opportunities presented by climate shifts will be integral to ensuring the sustainability and attractiveness of real estate investments. Incorporating climate-resilient features, energy-efficient designs, and sustainable technologies will not only mitigate risks but also position real estate developments as forward-thinking and responsive to the evolving needs of their respective climates. The intersection of climate change and real estate underscores the importance of considering environmental factors as integral components of urban development strategies.
The estimated net change in degree days holds significance in the pricing of weather derivatives. These weather derivatives serve as financial instruments, offering individuals or businesses a means to hedge against the financial risks associated with unfavorable weather conditions. A key component of a weather derivative contract is the settlement price, representing the price at which an asset closes. Specifically, for weather futures contracts, the settlement price is determined by estimating the CDD or HDD values for a month and then multiplying that by predetermined factor, i.e., tick value, often $20. The settlement price plays a pivotal role in the risk management strategies employed by market participants engaging in weather derivative contracts.
These findings underscore the transformative impact of climate change on global energy consumption. The shift towards increased demand for cooling, offset by decreasing heating needs, is observed for major cities of the world, considering spatial heterogeneity. Cities in colder climates may see opportunities for real estate development, while those in hotter regions face infrastructure challenges. The surge in energy demand, particularly for cooling, highlights the urgency for proactive urban planning. The intersection between climate change and real estate underscores the need for resilient designs. In the financial realm, the company’s estimated net change in degree days is crucial for weather derivatives, informing risk management strategies.
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