Repeated heat waves, wildfires, droughts
and storms are solidifying the understanding that new investments are unavoidable.
·
Extreme
weather is increasingly disrupting businesses, with power outages, heat waves, storms,
wildfires and flooding damaging inventories, operations and revenues.
·
Economic
losses are becoming harder to ignore:
repeated climate-related emergencies are forcing companies to treat extreme
weather as a core business risk rather than an occasional disruption.
·
Heat
could significantly reduce economic output. Allianz Research estimates that if the
next five years resemble the five hottest years of 2014–24, economic output in
exposed countries such as France, Japan, Italy, Germany and Spain could be 5–7% below baseline by 2030.
·
Government
finances are also affected:
lower production and consumption reduce tax revenues while governments face
higher spending on damaged infrastructure. European government deficits could
rise by around 0.5% of GDP
annually under the heat scenario.
·
Extreme
heat raises energy costs
because electricity-generation systems become less efficient while demand for
air-conditioning rises, increasing both power prices and the risk of outages.
·
Heat
reduces labour productivity:
construction hours are shortened, sleep is disrupted, and school and childcare
closures prevent parents from working.
·
Wildfires
are adding to the economic damage.
European fires have already reduced growth in affected regions, particularly in
retail and tourism, while the scale and proximity of recent fires to major
cities have increased the impact.
·
Food
production faces additional risks:
droughts and excessive rainfall can disrupt planting and harvesting, while high
temperatures reduce livestock productivity—for example, hens lay fewer eggs
during extreme heat.
·
Food
prices could rise as
heat damages crops and refrigeration failures spoil food during transportation
and distribution.
·
Climate
shocks are complicating monetary policy. Central banks are already dealing with
inflationary pressures from trade tensions and Middle East-related energy and
fertilizer disruptions, making the choice between supporting growth and
controlling inflation more difficult.
·
Businesses
are increasingly bearing the adaptation costs, as government assistance remains limited
while insurance becomes more expensive and provides less coverage.
·
Climate
disruptions are directly hurting small businesses: storms, smoke, flooding and persistent
rainfall can force closures and reduce tourism-related sales.
·
Climate
adaptation requires substantial investment. McKinsey estimates that comprehensive
protective measures could cost around US$540
billion annually, although the avoided damage could make such
spending economically worthwhile.
·
Short-term
measures
include changing work schedules, establishing cooling centres, providing water
breaks and expanding air-conditioning in regions previously less dependent on
it.
·
Air-conditioning
alone is not a sustainable solution,
because it increases electricity demand and may become increasingly expensive
as power generation faces its own climate-related constraints.
·
Medium-term
adaptation should focus on systemic solutions, including heat-resistant building
designs, greener urban spaces and avoiding new development in the hottest
areas.
Climate
change is shifting from a long-term environmental concern into an immediate
economic and business risk.
Rising heat, wildfires, storms and disruptions to food and energy supplies are
increasing costs, reducing productivity and threatening public finances. Adaptation can reduce near-term damage,
but cutting greenhouse-gas emissions remains essential to prevent adaptation
costs from becoming unaffordable.
In
early June, the power went out at Stephanie Hart’s bakery on Chicago’s South Side,
during an intense storm and a suffocating heat wave.
Five
hundred ice cream bars meant for a restaurant customer had already perished, along
with chocolate candies, and $30,000 worth of cakes in her walk-in freezer were at
risk.
Ms.
Hart quickly directed her staff to pack the freezer with dry ice, which cost $1,700.
Then she began calling every politician she knew. “Every good-will thing I’ve ever
done, I called it in,” Ms. Hart said. Finally, it worked: The utility turned her
power back on the next day, and her cakes were saved.
Ms.
Hart was relieved. But she’s not resting easy — the power outages that have followed
more frequent summer storms in Chicago could still wipe out her inventory. So she has been making more of her cakes to order, which means
slower delivery times and more intermittent work. For next summer, she’s contemplating
an expensive backup generator.
“That
was a lot of pressure, and who knows if I’m going to able to pull it off again?”
Ms. Hart said. “Cake is just not meant for extreme weather.”
Take
that stress and that expense and multiply them by thousands to understand what this
summer has been like just in Chicago, where torrential rain has repeatedly brought
down power lines to crash a grid already strained by the relentless need for air-conditioning.
Multiply
them by millions to understand approximately the financial toll this brutal summer
of heat, fires, smoke and storms has taken on businesses and households around the
world. This July was the hottest month on record in the contiguous United States,
according to federal data, and Western Europe experienced its hottest June-to-July
average ever recorded.
Economists
have long studied the worsening impact of climate change on economic growth, inflation
and employment. Most estimates for damage caused to date have been moderate, while
projections for damage over the long run become more drastic. But the past year
has delivered climate-related shocks that are becoming
impossible for businesses to avoid.
“Without
these reoccurring annual events, it’s easy to say, ‘It’s part of our enterprise
risk-management system, so we’re going to get to this,’” said Alexander Heil, a
climate-focused economist at the Conference Board. “Nothing focuses the attention
more than an emergency.”
Higher Costs, Less Income
Consider
the effects of heat in isolation, without accounting for the attendant wildfires
and storms. Allianz Research, an arm of the global insurance company, analyzed the likely economic impact over the next five years
if they looked like the five hottest years from 2014 to 2024. The economic output
of the most exposed countries, including France, Japan, Italy, Germany and Spain,
would be 5 to 7 percent lower than their base-line trajectories by 2030.
There
are also serious fiscal consequences. Heat hits tax revenues by reducing production
and consumption, and requires more spending on damaged infrastructure. Across Europe,
the Allianz Research authors found that annual government deficits would rise by
0.5 percent of gross domestic product, potentially destabilizing the debt loads
of the worst-affected countries.
The
projection is likely conservative. “When I proposed the scenario, some people said,
‘You are taking the five maximum heat waves during the last 10 years — this is a
bit of a pessimistic scenario,’” said Hazem Krichene, an Allianz Research climate
economist who started working on the project last fall. “Already 2026 is going higher
than that.”
Heat
affects economies through two main channels. The first is energy costs. Nearly all
forms of generating electricity — solar panels, wind turbines, dams, gas turbines
— operate less efficiently in extremely high temperatures. At the same time, outside
of the northernmost nations, energy demand increases as households and businesses
crank up their air-conditioning. Both of those dynamics boost prices and raise the
risk of outages.
The
second channel is productivity. Construction sites have to shorten their hours,
and sleep suffers. When schools and child care facilities can’t operate, parents
can’t get to their jobs. One recent study found that every day of school-based child
care canceled because of wildfire smoke reduces the probability
of employment by 1 percent for mothers of young children, likely because inflexible
workplaces make repeated absences untenable.
Paloma
Corona is feeling both of those effects. She runs two day
care locations in Los Angeles, and the heat and smoke of the past few years have
doubled her electricity bills. Sometimes the temperatures force her to keep the
toddlers inside all day, and multiple times this summer she has had to warn parents
that the power might go out or send her charges home early because of heat.
“It’s
a huge impact,” Ms. Corona said. “Not only us as a business, but also the families,
because they don’t know if I’m going to call them today and ask them to pick up
their babies because we don’t have electricity.”
Collectively,
abnormally high temperatures degrade economic well-being even in rich nations. A
working paper published in July found that state-level economic conditions in the
United States deteriorated for months after a heat wave.
Those
effects count just the “soft” impact of heat on people’s costs and ability to work.
But the destructive power of wildfires shifted into a new gear this year in Europe,
as fast-moving blazes ravaged landscapes, choked cities and forced thousands to
evacuate.
Sarah
Meier, an economist who studies interactions with natural systems, published a study
that found European wildfires from 2010 through 2018 slowed the annual growth rates
for affected regions, especially for the retail and tourism industries. This summer
could soar past those figures — the bills for fighting the fires have exceeded the
overall economic cost she had detected.
“I
think the difference now is wildfire has never been so close to major cities in
Europe,” Ms. Meier said. And there’s no reason to think this is the worst of it.
“For Portugal, Greece and Spain, we saw there is no natural ceiling of how these
fires can get statistically,” she said. “Each record can blow the last one by a
wide margin.”
No Easy Fixes
This
year, rather than relief, autumn will bring new strains. An unusually strong El
Niño weather pattern is expected to impose severe droughts on some parts of the
world and excessive rainfall in others, disrupting planting and harvest cycles and
reducing production of staples like wheat, corn and sugar.
Hens
even lay fewer eggs as temperatures rise. The meat processor Pilgrim’s Pride noted
on its second-quarter earnings call that production may be depressed as a result.
Heat waves also attack the food supply chain, spoiling crops as refrigeration fails
on the way to markets. Scarcity is likely to drive food costs higher.
The
macroeconomic consequences have already put central banks in a difficult position.
This year’s climate disruptions have come during a trade war that has pushed up
prices in the United States and a conflict in the Middle East that has squeezed
energy and fertilizer supplies around the world. The central banks may raise interest
rates to keep costs in check, even if doing so ratchets up financial strain.
“Raising
interest rates doesn’t create more supply of food, so central bankers have typically
not wanted to go there,” said Richard de Chazal, an analyst at the investment house
William Blair. “Now, if solutions aren’t coming from other areas, the fiscal side
of things, then they feel they need to address it.”
With
little aid from governments, and insurance policies that cost more and cover less,
businesses are scrambling to adapt.
Nikki
Bravo owns Momentum Coffee, a small cafe chain in Chicago. Even though she hasn’t
experienced power outages like Ms. Hart’s bakery, she had to close one location
during a smoky day and sustained water damage in one of her locations after a storm.
But the big drag has just been the intensely rainy days, which are increasingly
frequent in Chicago and depress weekend tourist traffic.
Ms.
Bravo had expected Lollapalooza, the four-day music festival at the start of August,
to generate big sales at her downtown location. But it rained most of the weekend,
and she generated 40 percent lower sales than last year. Going forward, she will
try to adjust staffing more quickly, and bring more customers in during the week.
“It
now becomes incumbent on me to say, ‘I need to look at the forecast and be ready
to pivot,’” Ms. Bravo said. “Part of it is really understanding, or accepting, what
is. We have to figure out, what to do with that? Is there a way to weatherproof
our business?”
The
cost of shielding people from climate change, with measures like burying power lines
and shrouding crops to blunt the sun, would be likely to more than pay for itself
in avoided damage, according to the consulting firm McKinsey. But it is still expensive
upfront: Full protections would cost around $540 billion annually, the firm estimated.
In
the short term, businesses and governments are taking obvious steps, like shifting
work schedules and trying to protect residents and workers with cooling centers and water breaks. And there is a push toward more air-conditioning
in places that never needed it before, like France and England.
But
Eleni Myrivili, the chief heat officer for the United Nations Human Settlements
Program, cautions that air-conditioning can’t be the only solution. Although it
has allowed wealthy societies to develop in the desert, committing to energy-intensive
cooling systems may not be feasible on a global scale, as electricity becomes more
difficult and expensive to generate.
That’s
why in the medium term, she’s pushing for building designs that keep interiors cooler
and greenery-filled streetscapes that absorb heat rather than reflect it, and pushing
against new development in the hottest places.
“What
seems to be the way forward, and what a lot of companies are looking into right
now, is to look at cooling less as less of an appliance issue and more of a systemic
issue,” Ms. Myrivili said.
Longer
term, avoiding further warming by reducing greenhouse gas emissions is the only
way to contain the damage. “Adaptation is buying us time, but mitigation will determine
whether adaptation remains affordable,” she said.