A recently published study by S&P Global Ratings indicates that an annual loss of about 4% in GDP may occur as a consequence of the physical effects of climate change, particularly if the temperature rise surpasses 2°C.
In their report titled “Lost GDP: Potential Impacts Of Physical Climate Risks,” S&P Global analyzed four climate scenarios to evaluate how 137 countries could be economically affected by the physical consequences of climate change. The study examined the potential impact on economic output and population for seven climate hazards, utilizing average historical loss rates associated with these hazards. Additionally, sovereign economic and institutional assessments were used as indicators of countries’ readiness to adapt and recover from such events.
The report predicts that by 2050, if global warming exceeds 2 degrees Celsius, up to 4.4% of the world’s GDP could be lost annually without adaptation. This poses a significant challenge to adaptation plans, especially for lower-income nations that face higher exposure and have limited capacity to prevent permanent losses. The GDP at risk measure assumes no adaptation and envisions all hazards occurring simultaneously in all exposed areas, providing a static view of the economy.
The study reveals that developing regions, particularly lower-income countries, would be disproportionately affected by climate hazards, with a 4.4-fold higher exposure compared to wealthier counterparts and less preparedness to handle economic losses.
Under the slow transition scenario, the report identifies South Asia as having the highest exposure to climate change, with around 12% of GDP at risk annually by 2050. Sub-Saharan Africa and the Middle East and North Africa (MENA) follow closely, each with 8% of GDP at risk. In contrast, North America and Europe face less than 2% GDP at risk.
The report emphasizes the increasing likelihood of compound climate events, adding complexity to climate analytics. Understanding these non-linear dynamics is crucial for assessing specific risks faced by each country, aiding policymakers in implementing more targeted policies.
Furthermore, the study notes a widening adaptation gap due to slow progress on preparedness and tightening financing conditions. As the impacts of climate hazards worsen, financing rising adaptation costs may become more challenging in an environment of higher interest rates, posing an additional hurdle for developing countries in implementing adaptation measures.