The macroeconomic case for investing in climate adaptation

With a Foreword by the Hon. Matia Kasaija, Minister of Finance, Planning & Economic Development, Uganda and Co-Chair of the Coalition of Finance Ministers for Climate Action

This report provides a groundbreaking new synthesis of the economic and fiscal risks arising from physical climate change and the economic case for investing in adaptation to climate impacts. The report combines the results of nearly 300 studies and more than 6,000 unique estimates of the consequences of climate change and adaptation investment, and includes case studies from six countries.

The report shows that the macroeconomic and fiscal consequences of climate impacts are already significant, growing, and likely to continue and intensify without further efforts to adapt and increase resilience. The evidence shows that early and strategic adaptation investments can bolster economic stability, reduce debt levels and borrowing costs, and accelerate development.

Findings

• By 2050, climate change could reduce average GDP per capita by 3–15% due to rises in local temperatures and sea-level, and some climate tipping points, based on a rise in global average temperature of 2.2–2.8°C relative to the pre-industrial climate, and assuming no further increases in adaptation and resilience. Some people in low- and lower-middle-income countries could face losses exceeding 20% of GDP per capita by 2050.
• People in the low- and lower-middle-income countries (LICs and LMICs) are today already 4 to 12% poorer in terms of GDP per capita due to local temperature changes and sea-level rise.
• In addition to these outcomes are the substantial impacts expected from changes in the frequency and severity of other extreme climate-related events, such as flooding, wildfires and drought. As such, the figures above are likely to constitute significant underestimates of the overall impacts of climate change on GDP per capita. 
• In the absence of further increases in adaptation and resilience, climate change impacts will cause global labour productivity to decline, especially in economies more reliant on weather-exposed labour, while inflation, unemployment and inequality are expected to increase.
• Dealing with the physical impacts of climate change is expected to result in rising government expenditure and decreasing revenue, and sovereign credit ratings will be at increasing risk, affecting borrowing costs and fiscal stability, in the absence of further increases in adaptation and resilience.
• Adaptation investments can yield substantial returns at the macroeconomic level, resulting in a ‘triple dividend’: preventing losses, stimulating economic activity and providing social and environmental co-benefits.
• Economic metrics indicate substantial returns on adaptation investment, with median economic benefit–cost ratios of around 4:1 and economic internal rates of return of around 25%.  
• There are many adaptation actions that can provide rapid benefits. Focusing on these interventions, accumulated benefits are expected to exceed costs after approximately three years for the average project.
• The evidence strongly indicates the need for proactive action, rather than a wait-and-see strategy, to ameliorate outcomes in the worst-case scenarios and to take full advantage of potential co-benefits.
• While this report focuses on the benefits of domestic adaptation, the evidence also clearly points to the returns on investments in adaptation and resilience overseas, particularly in lower-income countries.
• Robust assessments and data are lacking, particularly for emerging markets and developing economies, which underscores the need for enhanced investment in expanded and diverse macroeconomic and adaptation analyses.
• Public sector leadership will be crucial in helping countries manage the risks of climate change proactively and for investment in adaptation.
• Strategic adaptation investments led by the public sector require effective governance, collaboration with the private sector and integration into national economic and development planning processes to maximise resource allocation and impact.
• The role of Ministries of Finance and other economic decision-makers in proactively incorporating climate risks and opportunities to invest in adaptation within their macroeconomic and budget projections and capital investment planning processes is especially important.

The report’s case studies are as follows: