Climate and the economy

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Climate change is a global externality: one country’s emissions affect all countries by adding to the stock of heat-warming gases in the earth’s atmosphere from which warming arises.
The process of climate change is set to have a significant economic impact on many countries, with a large number of lower income countries being particularly at risk.
Direct damages from climatic disasters over the past decade are estimated to add up to around US$ 1.3 trillion (or around 0.2% of world GDP on average, per year).
Empirical examples highlighted:
- Damage from the 2011 floods in Thailand amounted to around 10 percent of Thailand’s GDP.
- Total costs of the 2018 wildfires in California were estimated up to $350 billion, or 1.7 percent of U.S. GDP.

Macroeconomic policies in vulnerable countries will need to be calibrated to accommodate more frequent weather shocks, including by building policy space to respond to shocks.
Infrastructure will need to be upgraded to enhance economic resilience.

Climate change can entail significant risks to macrofinancial stability.
Nonfinancial corporate sectors face risks from:
- Climate damages.
- Stranded assets—such as coal reserves that become uneconomic with carbon pricing—which could disrupt corporate balance sheet quality.

Fiscal policies have provided large emergency lifelines during the COVID-19 pandemic and are also invaluable to increase a country’s readiness to respond to a crisis and to help with recovery and beyond (Fiscal Policies for the Recovery from COVID-19, May 06, 2020).
Delayed action increases loss of life and economic damage; policy choices can create growth opportunities driven by technological innovation, sustainable investment, and a dynamic private sector (Finance & Development Magazine: The Economics of Climate, December 2019).
Equity investors and financial sector participants are urged to pay attention to physical climate risk and the economic implications of disasters (Equity Investors Must Pay More Attention to Climate Change Physical Risk, MAY 29, 2020).