Soheir El Sherbini‏‏

As global temperatures continue to rise and extreme weather events become more common, perceptions of climate change are beginning to shift. Increasingly viewed not only as an environmental issue or long-term risk, climate change is now understood to be a source of economic disruption, affecting the macroeconomic performance of countries exposed to its effects. These consequences are felt across several channels, including reduced productivity, damage to infrastructure, rising healthcare and energy costs, and mounting pressure on public finances and financial markets. The downstream effects of climate change also extend to the global economy, as it disrupts international trade and supply chains, increases pressure on global food, water, and energy supplies, and contributes to rising geopolitical tensions.Economic ImplicationsClimate change has a range of sectoral economic implications, the most significant of which include the following:1. Direct Damage to Critical Infrastructure: Storms, floods, wildfires, hurricanes, and droughts could cause direct damage to critical infrastructure, while rising sea levels threaten ports, coastal roads, and <a href="https://www.rte.ie/news/business/2026/0810/1587219-europe-climate-economy/" rel="noopener noreferrer" target="_blank">power plants</a>. Europe provides a clear example of the economic costs associated with such climate-related disruptions. For example, lower water levels in the Rhine and Danube rivers have reduced navigability and disrupted transportation along these waterways. ING, a global financial institution with Dutch roots, estimates that a complete halt to transportation along the Rhine alone could reduce <a href="https://www.rte.ie/news/business/2026/0810/1587219-europe-climate-economy/" rel="noopener noreferrer" target="_blank">Germany’s</a> GDP by 0.3 percentage points. Meanwhile, in the energy sector, more than six nuclear power plants across Europe have been forced to suspend or reduce output because of difficulties in cooling their reactors.2. Declining Productivity in Sectors Most Exposed to Heat Stress: One of the most direct economic consequences of rising temperatures is lower productivity in sectors that rely heavily on outdoor work, such as agriculture, construction, and transportation. Heat stress slows the pace of work while increasing health risks and absenteeism in these sectors. Manufacturing and logistics also face higher operating costs, as they require greater use of cooling systems to maintain safe working environments. These effects could have a significant impact on the overall economy. Estimates suggest that by 2050, the global economy could incur annual losses of approximately <a href="https://www.bakertilly.global/insights/the-economic-consequences-of-climate-change" rel="noopener noreferrer" target="_blank">$38 trillion</a> as a result of climate-related damage across agriculture, infrastructure, and health.In the agricultural sector specifically, crop yield forecasts have been revised <a href="https://www.rte.ie/news/business/2026/0810/1587219-europe-climate-economy/" rel="noopener noreferrer" target="_blank">downward</a>, particularly for late-harvest crops such as corn and sunflower, following losses recorded in July 2026 that ranged between 6% and 7%.3. Rising Food Prices and Agricultural Production Costs: Heat waves and changing rainfall patterns due to climate change can lower crop yields, which in turn drive up food prices and reduce farmers’ incomes. At the same time, soil degradation and water scarcity raise the cost of irrigation, fertilizers, and land restoration, thereby translating climate shocks into additional pressures on agricultural production costs.One example is the growing pressure that climate change is placing on South Africa’s <a href="https://www.farmersweekly.co.za/agri-news/south-africa/agriculture-central-to-climate-change-resilience-and-response/" rel="noopener noreferrer" target="_blank">agricultural sector</a>. Damage to farms caused by severe flooding in the Western Cape highlights the scale of the challenges facing the sector. This is particularly significant given that agriculture contributes approximately <a href="https://theconversation.com/climate-shocks-are-hitting-south-africas-food-businesses-study-shows-what-they-need-to-adapt-285759" rel="noopener noreferrer" target="_blank">25%</a> of South Africa’s total manufacturing output nationwide and supports more than 300,000 direct jobs.4. Rising Healthcare Costs and Declining Economic Activity: The economic costs of climate change are not limited to physical damage but also extend to public health and changes in consumer behavior. Wildfires provide a clear example. When these produce heavy smoke, the resulting air pollution may cause people to remain indoors rather than shop, dine out, or participate in outdoor activities. This reduces customer traffic for local businesses and can lead to the cancellation of festivals, races, and sporting events.The effects of wildfire smoke extend to broader health and economic losses as well. A May 2025 study published in Nature Communications Earth &amp; Environment examined the health and economic effects of increased exposure to wildfire smoke in the United States as a result of climate change. The study found that climate change contributed to approximately <a href="https://hsph.harvard.edu/climate-health-c-change/news/wildfires-are-deadlier-and-costlier-due-to-climate-change/" rel="noopener noreferrer" target="_blank">15,000</a> deaths over a 15-year period and resulted in a cumulative economic burden of $160 billion due to exposure to fine particulate matter from wildfire smoke.5. Growing Pressure on Public Finances and the Insurance Sector: As declining output and economic activity reduce tax revenues, governments simultaneously face higher spending on emergency response, infrastructure repairs, and adaptation measures, placing additional pressure on public finances. For example, estimates suggest that annual tax revenues could decline by approximately <a href="https://www.rte.ie/news/business/2026/0810/1587219-europe-climate-economy/" rel="noopener noreferrer" target="_blank">1.8%</a> in France and 1.3% in both Italy and Spain as a result of reduced economic activity associated with climate change.The insurance sector is also facing mounting pressure. In Europe, <a href="https://www.eea.europa.eu/en/europe-environment-2025/thematic-briefings/climate-change/climate-risks-to-the-economy" rel="noopener noreferrer" target="_blank">extreme weather</a> events between 1980 and 2023 caused approximately €738 billion in economic losses, while less than one-third of non-human losses were insured. Limited insurance coverage means that a greater share of disaster-related costs is borne by individuals, businesses, and communities, making recovery more difficult.Global ImpactsIn addition to the current and potential macroeconomic consequences of climate change, several broader global impacts can be identified:1. Uneven Economic Losses and a Widening Gap Between Countries: Countries do not bear the economic costs of climate change equally, and available estimates illustrate the scale of these disparities. While global GDP per capita is projected to decline by between <a href="https://www.lse.ac.uk/granthaminstitute/publication/the-macroeconomic-case-for-investing-in-climate-adaptation/" rel="noopener noreferrer" target="_blank">3% and 15%</a> by 2050, estimated losses in low-income and lower-middle-income countries range from 8% to 18% and could exceed <a href="https://greencentralbanking.com/2026/07/08/uk-economy-climate-risk-from-climate-change/" rel="noopener noreferrer" target="_blank">20%</a> in some countries. Over the longer term, global warming could reduce per capita income by one-quarter by 2100, while losses in hotter and lower-income countries could exceed the global average by between <a href="https://greencentralbanking.com/2026/07/08/uk-economy-climate-risk-from-climate-change/" rel="noopener noreferrer" target="_blank">30% and 60%</a>.2. Disruptions to Global Trade and Supply Chains: Given the interconnected nature of the global economy, the effects of climate disasters can quickly spread from one country to another. Disruptions to a major port, road, or waterway do not remain confined to the immediate area but can also interrupt <a href="https://unctad.org/news/climate-change-impacts-seaports-growing-threat-sustainable-trade-and-development" rel="noopener noreferrer" target="_blank">exports and imports</a> in the affected country, delaying the delivery of raw materials, goods, and energy to other markets. This has been evident in the impact of lower water levels on navigation along the Rhine and Danube rivers and the resulting disruptions to the transportation of goods and energy.3. Growing Pressure on Food, Water, and Energy Supplies: Severe droughts and extreme weather events are reducing agricultural production across multiple regions. El Niño could further intensify these pressures by worsening drought and food shortages in the most vulnerable areas. The phenomenon could increase rainfall in parts of <a href="https://www.finance-watch.org/policy-portal/sustainable-finance/the-intensifying-impact-of-climate-change-on-the-financial-system/" rel="noopener noreferrer" target="_blank">South America</a>, the United States, and Central Asia, while intensifying drought conditions in Australia, East Africa, Indonesia, and parts of South Asia.Europe alone estimates the annual cost of droughts at approximately <a href="https://www.bakertilly.global/insights/the-economic-consequences-of-climate-change" rel="noopener noreferrer" target="_blank">€9 billion</a>. Meanwhile, the 2021 floods in Belgium, Germany, and the Netherlands caused more than €40 billion in damage, while the costs of Slovenia’s 2023 floods amounted to approximately 16% of the country’s GDP.4. Rising Social Tensions, Migration Pressures, and Geopolitical Risks: Resource scarcity could become a source of social and geopolitical tensions in poorer regions, with disputes potentially extending across national borders when <a href="https://economictimes.indiatimes.com/news/international/global-trends/the-next-wars-may-not-be-about-oil-or-borders-climate-change-is-turning-food-water-and-farmland-into-new-sources-of-conflict-across-the-world/articleshow/133894060.cms?from=mdr" rel="noopener noreferrer" target="_blank">shared resources</a>, such as rivers and transboundary water basins, are involved. The declining water level of Lake Chad and the associated tensions over irrigation and water distribution among neighboring countries provide one example. Moreover, disparities in the economic damage caused by climate change could exacerbate migration pressures, increase displacement, and increase demands for humanitarian assistance.5. Transmission of Climate Risks to Global Markets: Climate-related disruptions could trigger sudden market adjustments as investors reprice assets, particularly when climate events <a href="https://www.finance-watch.org/policy-portal/sustainable-finance/the-intensifying-impact-of-climate-change-on-the-financial-system/" rel="noopener noreferrer" target="_blank">expose</a> vulnerabilities that affect asset values and future cash flows. Since market prices depend on investors’ expectations of future asset values, risks associated with climate change and the transition toward a low-carbon economy—including the phaseout of fossil fuel activities—could affect current asset valuations and contribute to greater financial market volatility. For example, the 2015 Paris Agreement was associated with a decline of between <a href="https://www.finance-watch.org/policy-portal/sustainable-finance/the-intensifying-impact-of-climate-change-on-the-financial-system/" rel="noopener noreferrer" target="_blank">10% and 15%</a> in fossil fuel companies’ stock returns during the three-month negotiation period.In conclusion, although climate change could impose substantial economic losses on many countries, efforts to address it could also create new economic opportunities. The transition to renewable energy, the electrification of transportation, and improvements in energy efficiency could support the emergence of new industries, create jobs, and strengthen the economies of countries seeking to accelerate their energy transitions. International cooperation is therefore essential, particularly given the disparities in countries’ ability to finance the transition and adapt to climate-related damage. Financial support for developing countries, technology sharing, and coordination on carbon pricing could help narrow the gap between climate commitments and action on the ground while reducing the unequal impacts of climate change.

The Global Economic Impacts of Climate Change