Coming financial crisis from extreme heat

A recent study has modelled the economic risks of the major climate change scenarios up to 2060, concluding that the extreme heat would disrupt global supply chains and cause the worst financial crisis the world has ever seen. Severe heat waves have major health and economic impacts, with higher mortality rates, preventing people from working outside, destroying crops and disrupting industrial processes. These impacts in exporting countries at low latitudes will have severe financial impacts on importing countries in the global North. The spillover effects through supply chains will have consequences for global food security, energy supply, and sources of minerals.

Even the most optimistic scenario with the world shifting to a more sustainable path would see a 25% increase in heatwave days and 600,000 annual heatwave deaths, with a loss of 0.8% of GDP or $3.75 trillion by 2060. In the high growth scenario, losses increase by 500% to $25 trillion, one quarter of the total world GDP in 2023. Heatwave days would be 100% higher, causing over a million annual heat-induced deaths. Supply chain disruption would grow exponentially. Central and Southern Africa, Southeast Asia and Latin America have the most severe total losses. Through global value chains, USA, Brazil, China and Norway suffer substantial economic ripple losses, as will the European Union.

The study illustrates from a systems perspective how vulnerable the globalised economy is to disruption in global supply chains, whether from climate change or other perturbations, as the forces of disintegration accelerate.

A second study has estimated the cost of climate change impacts to mid-century, finding that average world incomes will drop by nearly a fifth by 2050, with the cost of environmental damage six times higher than the price of limiting global heating to 2°C. Rising temperatures, heavier rainfall and more frequent and intense extreme weather are projected to cause $38tn of destruction each year by mid-century, according to the research published in Nature on 17 April.

This is far higher than previous estimates, and is already locked into the world economy over the coming decades as a result of the enormous emissions from the burning of gas, oil, coal and trees. This will inflict crippling losses on almost every country, with a disproportionately severe impact on those least responsible for climate disruption, further worsening inequality. The permanent average loss of income worldwide will be 19% by 2049. In the United States and Europe the reduction will be about 11%, while in Africa and south Asia it will be 22%, with some individual countries much higher than this. In the second half of this century, where human actions now can still make a big difference, continuing business as usual will cause a projected average income losses of more than 60% by 2100. But if emissions fall to net zero by mid century, income declines will stabilise by mid century at about 20%. Countries such as Germany (-11%), France (-13%), the US (-11%) and UK (-7%) will lose out even by mid century. Worst affected will be countries in already hot regions including Botswana (-25%), Mali (-25%), Iraq (-30%), Qatar (-31%), Pakistan (-26%) and Brazil (-21%). These are caused by the impact of climate change on various aspects that are relevant for economic growth such as agricultural yields, labour productivity or infrastructure. This scenario is still conservative and incomplete, since many major climate impacts have not yet been incorporated into the analysis, including heatwaves, sea level rise, tropical cyclones, tipping points, and damage to natural ecosystems and human health.

The changes up to 2050 are already locked into the climate system, but reducing emissions would be far cheaper than doing nothing and accepting more severe impacts. By 2050, mitigation costs, for example from phasing out fossil fuels and replacing them with renewable energy, would be $6tn dollars, which is less than a sixth of the median damage costs for that year of $38tn.

SOURCES: heat_crisis: Sun, Yida, et al. 2024. Global supply chains amplify economic costs of future extreme heat risk. Nature 627, pp. 797-804, 28 March 2024, doi.org/mm2t. Woodford, James. 2024. Extreme heat could trigger the worst global financial crisis we have seen. New Scientist 261 (3483) p.11, 23 March 2024.
economic cost: Maximilian Kotz1, Anders Levermann, Leonie Wenz. 2024. The economic commitment of climate change. Nature vol. 628 pp. 551-557 18 April 2024. https://doi.org/10.1038/s41586-024-07219-0
https://www.theguardian.com/environment/2024/apr/17/climate-crisis-aver…