Exploring the Economic Impact of Climate Change: Key Insights from 2020 to 2023

As we near the end of 2024, it is essential to reflect on the significant economic repercussions of climate change over the past few years. The latest Lancet Countdown reports (1-4) shed light on critical indicators concerning the financial costs of climate change and our shift toward a low-carbon economy. Let’s delve into how these indicators have evolved since 2020 and what they reveal about the changes in our world.

The Rising Economic Costs of Inaction (Indicator 4.1)

Weather-Induced Financial Losses 

The financial toll from climate-related disasters has been on an upward trajectory. In 2020, there were 242 extreme climate events, leading to staggering losses of $178 billion. Notably, two-thirds of these setbacks were seen in countries with a high Human Development Index (HDI). However, when we look at gross domestic product (GDP)-adjusted figures, medium HDI nations experienced losses nearly three times greater than their high HDI counterparts. In low HDI countries, these losses were almost five times worse.

Even among high HDI countries, insurance only covered about 66% of the losses, leaving nearly $34.2 billion uninsured. This issue of uninsured losses becomes even more pronounced in medium HDI countries—where 97% of their total losses were unprotected—and low HDI nations where all recorded losses remained utterly uninsured. This stark disparity not only highlights the financial strain but also deepens socioeconomic inequalities, especially for disadvantaged nations.

In 2021, global economic losses soared to $253 billion due to climate extremes, with high HDI nations shouldering a significant share—84% of the total. This trend continued into 2022, with losses climbing to $264 billion, yet again with high HDI countries bearing the brunt, accounting for 57.1% of those losses. Moreover, medium HDI countries faced challenges threefold higher than their high HDI counterparts, while low HDI countries endured disproportionately significant, uninsured losses.

Economic Costs of Heat-Related Fatalities 

Heat-related deaths profoundly impact those aged 65 and older, especially during extreme heat events that can lead to serious health complications. Vulnerable groups, such as older adults and those without proper access to cooling systems, are particularly at risk. The financial implications of these heat-related fatalities are assessed using statistical values for life across member countries of the Organization for Economic Co-operation and Development (OECD), with adjusted ratios applied for non-OECD nations based on their gross national income.

In 2021, the economic toll from heat-related deaths reached an alarming $144 billion, equivalent to the annual income of approximately 12.4 million people. This figure has been increasing consistently, nearly $4.9 billion yearly since 2000. Europe is the region facing the most significant financial impact, accounting for losses representing the annual incomes of between 6.1 and 11 million citizens.

From 2000-2004 to 2018-2022, low HDI countries saw a staggering 131% increase in heat-related mortality costs, while medium and high HDI countries followed with increases of 84% and 110%, respectively. Very high HDI countries experienced a relatively minor rise of 61%.

The Alarming Consequences of Extreme Heat on Labor Productivity

Extreme heat is not just an uncomfortable nuisance; it can drastically hinder our ability to work effectively, leading to significant financial losses. Labor productivity is a complex measure that includes physical and mental capabilities and the conditions in which we work. These elements are influenced by factors like temperature, humidity, and broader climate stressors, which are crucial in shaping how effectively we can perform our jobs.

Several vital aspects must be considered when evaluating productivity. Consideration must be given to sick leave policies, whether workers have sick-pay rights, and the availability of shade or protection from the sun, especially in sectors like agriculture and construction. The combined impact of these factors can severely limit an individual's ability to fulfill job responsibilities, underlining the urgent need for climate-resilient strategies and adaptations in the workplace to combat the effects of extreme heat.

The economic ripple effects of working under such conditions are profound. In 2020, productivity losses due to extreme heat resulted in earnings reductions of 4-8% of GDP in countries with low HDI scores. Medium HDI countries faced potential income losses of 2.2-4.1% of GDP, while high HDI nations saw decreases between 0.9-1.5%. Notably, very high HDI countries experienced the slightest losses, ranging from 0.3-0.5% of GDP.

These economic impacts disproportionately affect men working in sectors like construction, which alone encompasses over 90% of the global workforce, and manufacturing and agriculture, which account for more than 60%. Informal and unpaid domestic work, where women often dominate, are unaccounted for in these figures.

In 2021, the economic toll from heat-related productivity reductions hit a staggering $669 billion worldwide, illustrating the severe consequences of extreme heat on labor output. Low and medium HDI countries were particularly vulnerable, experiencing income losses representing 5.6% and 3.9% of their GDPs, respectively. Losses in these regions were primarily concentrated in the agriculture sector, which, despite its critical role in food production, often remains the lowest-paid field. 

Fast forward to 2022, and the estimated income loss due to diminished labor capacity from extreme heat soared to $863 billion—about 0.87% of the global gross product. The agricultural sector again took the most brutal hit, accounting for 82% of the losses in low HDI countries and 68% in medium HDI countries. Farming represented 40% of total global losses, with construction adding another 31%.

Workers in agriculture, particularly in low and medium-HDI countries where poverty is rampant, faced substantial losses. They bore an average of 82% and 68% of the impacts in their respective countries. Exposure to heat resulted in a staggering loss of 490 billion potential labor hours in 2022, marking a nearly 42% increase compared to the period from 1991 to 2000. On average, each worker globally lost 143 potential hours of labor capacity. Alarmingly, over 1.3 billion workers, or 39% of the global labor force, suffered losses more significantly than this average, with 80% originating from low or medium HDI countries. In contrast, 87% of those with below-average losses were from high or very high HDI nations.

From 2000 to 2022, the number of outdoor workers fell by approximately 0.2 billion, while the percentage of working-age individuals engaged in outdoor work dropped by 15.3%. These figures underscore the urgent need for targeted interventions to protect laborers, particularly those in vulnerable sectors and regions, from the alarming impacts of extreme heat on productivity.

The Economic Impact of Premature Mortality Due to Air Pollution

Air pollution seriously threatens global health, causing millions of deaths each year. This alarming reality carries significant economic consequences, highlighting the importance of climate change mitigation as an environmental necessity and a financially sound investment. By tackling air pollution, we stand to gain considerable cost savings.

This indicator considers the Years of Life Lost (YLL) shift attributable to human-made PM2.5 emissions across 137 countries from 2005 to 2020. It utilizes data drawn from mortality from ambient air pollution by sector (indicator 3.2.1) and incorporates the value of statistical life years (VSLY) as estimated for OECD member countries. The VSLY is determined using a consistent ratio to the respective GDP per capita, offering a thorough economic lens through which to view the repercussions of air pollution.

In 2020 alone, the financial toll of premature deaths linked to air pollution reached a staggering $2.2 trillion, accounting for 2.4% of the global gross product. Countries with high HDI bore the highest costs in terms of their per capita income, which is equal to the average yearly earnings of 92.3 million individuals. Meanwhile, nations within the medium HDI bracket faced the heftiest burden relative to the scale of their economies, with costs nearing 4% of their GDP. These insights reveal the profound economic burden that air pollution imposes on health worldwide, urging us to act decisively.

The Economics of the Low-Carbon Transition (Indicator 4.2)

Indicator 4.2 reveals both strides and hurdles as we move towards a sustainable economy, complementing what we learned from indicator 4.1 about the costs of inaction.

Clean Energy Investment: A Bright Horizon

There's some encouraging news in the renewable energy sector. By 2021, 80% of electricity generation investments were directed towards zero-carbon sources. While fossil fuels still hold a firm grip in non-electricity sectors, the momentum is shifting: clean energy investments outpaced those in fossil fuels by an astonishing 61% in 2022. Last year alone, global clean energy investments rose by 15% from 2021, showing a significant 51% increase since 2015, reaching a staggering $1.6 trillion. In comparison, fossil fuel investments climbed 10% over 2021 but remained 24% below 2015, totaling $1.0 trillion. 

Energy efficiency accounted for 15% of all energy investments 2022, reflecting a steady commitment from the previous year. Yet, to achieve global net-zero emissions by 2050, we need to nearly triple clean energy investments by 2030 while cutting fossil fuel investments to less than half of their current levels. This emphasizes an urgent call for sustained and escalated investment in clean energy to meet our climate goals.

Employment Shifts: A New Era of Jobs

In 2020, employment in the renewable energy sector finally surpassed 12 million jobs, overtaking direct employment in fossil fuel extraction for the first time. By 2021, renewable energy jobs grew by 5.6%, reaching nearly 12.7 million, while fossil fuel extraction jobs rose by 20%. While employment in fossil fuel extraction is increasing, the renewable energy sector is creating jobs at an even faster rate, indicating a brighter and cleaner future.

Fossil Fuel Subsidies: A Barrier to Progress

From 2008 to the end of 2022, approximately $40.51 trillion was committed globally to fossil fuel divestment, with healthcare institutions contributing a notable $54 billion. Divesting from fossil fuel companies can diminish financial support, challenging the social legitimacy these firms rely on. Additionally, such actions help mitigate stranded asset risks as the world approaches decarbonization.

The path forward is complicated by government actions. Despite increasing environmental concerns, many nations continue to provide substantial subsidies for fossil fuels. In 2019, 80% of the countries studied in the Lancet Countdown had net-negative carbon prices, allocating around $400 billion to the fossil fuel industry. This is a crucial moment for transformation, requiring organizations and governments to reconsider their roles in promoting a sustainable future.

Key Trends and Insights

Since 2020, climate-related events have increasingly weighed down our economy, influencing a wide range of sectors, from healthcare to employment. Despite rising renewable energy jobs, the shift to cleaner energy sources still needs to catch up to the urgent timeline necessitated by the climate crisis. One significant hurdle remains the persistent fossil fuel subsidies, which impede essential progress.

The impact of the COVID-19 pandemic has further complicated these challenges. While emissions declined in 2020, they surged at an alarming speed in 2021. Additionally, the pandemic has exacerbated energy disparities around the globe, underscoring the critical need for a fair transition to sustainable energy for all.

As we look ahead, it's imperative that we recognize the urgency of our circumstances. The window for transformative action is closing, and the stakes have never been higher. We cannot afford to linger in discussions of threats; instead, we must pivot to decisive action that generates tangible results.

Implementing robust policies now will not only mitigate the ongoing damage but also create a more equitable and healthier society for all. Investors, businesses, and governments must collaborate to forge innovative solutions that drive us toward a sustainable, low-carbon future. 

Let us harness this moment of clarity and commitment. Together, we can turn our intentions into impactful change and pave the way for generations to come. The time for action is now—let's seize it!

Notes: 

Human Development Index (HDI) is defined as a composite index measuring average achievement in three basic dimensions of human development: a long and healthy life, knowledge, and a decent standard of living. The HDI is calculated based on life expectancy at birth, expected years of schooling, and gross national income per capita (United Nations Development Programme (UNDP)).

References

1. The 2020 report of The Lancet Countdown on health and climate change: responding to converging crises. Watts, Nick, et al. The Lancet, Volume 397, Issue 10269, 129 – 170.

2. The 2021 report of the Lancet Countdown on health and climate change: code red for a healthy future. Romanello, Marina et al. The Lancet, Volume 398, Issue 10311, 1619 – 1662.

3. The 2022 report of the Lancet Countdown on health and climate change: health at the mercy of fossil fuels. Romanello, Marina et al. The Lancet, Volume 400, Issue 10363, 1619 – 1654.

4. The 2023 report of the Lancet Countdown on health and climate change: the imperative for health-centered response in a world facing irreversible harms. Romanello, Marina et al. The Lancet, Volume 402, Issue 10419, 2346 – 2394.