How Does Climate Change Affect the Economy?

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Written By David Jay
A future med student, I write to learn.
The agricultural economy was directly impacted by climate change.

According to the Intergovernmental Panel on Climate Change (IPCC), the global temperature rose by nearly 1.2 °C in August 2021. While the notice raised red flags for many governments and environmental organizations, businesses did not bat an eye.

Climate change is a gradual change in Earth’s temperature and climate caused by the varying solar cycle. Human activity, such as burning fossil fuel, aerosols, and deforestation, has caused more heat and greenhouse gasses to absorb the sun’s radiation, leading to an increase in temperature. This has affected the landmass, our way of living, and the environment.

According to Stanford News, AI has predicted Earth’s temperature to increase by 1.5 °C in 2030 despite rapid carbon reductions. Additionally, there is a 50% chance that Earth’s temperature will reach 2 °C by 2054. Professionals are concerned about its ecological and political impact, but it also has implications for many economies, both for the worse and for the better. However, humanity can still prevail over climate change with various strategies.

Table of Context

Natural Disasters are Bad News

During Hurricane Katrina, many businesses were affected by water damage. Looting commenced. (Credit: U.S. News)

Due to the rising atmospheric temperature, more water vapor will be evaporated which amplifies the effects of droughts and storms, and economies would be negatively impacted by its destruction and its fallout. According to Erick Burgueño Salas, a market researcher at Statista, more than $313 billion is lost from the global economy through natural disasters.

Natural disasters damage infrastructures that are essential for economic functions, such as industries and agriculture. The destruction of transport facilities hinders exports of commodities, and the cost of reconstruction and redevelopment has a massive toll on businesses and governments, leading to layoffs and closures. This harms poverty and homelessness.

The graph shows plunges in crop yields caused by natural disasters. (Credit: Dr. Priya Banerjee)

Natural disasters can destroy natural resources used in manufacturing, such as forests, fertile soil, and livestock. As these disasters become repetitive, suppliers may lower their production rate to minimize losses. If the affected area is a major provider of a certain product, a shortage nationwide can lead to a price hike.

Many employees have been injured or killed by natural disasters, especially in droughts and floods, resulting in labor shortages. On average, between 10,000 to 20,000 workers have lost their lives in natural disasters annually according to Hannah Ritchie, a famous data scientist; there would be a shortage of skilled workers due to their death and the destruction of educational facilities, pausing the creation of new specialized employees.

Fallouts of Natural Disasters

Even after industries pull through after a natural disaster, they yet have to face its fallout. The sudden decline in demand would diminish the earnings and capital of businesses, while taxation, material costs, and renovation fees heighten, invoking economic instability and criminal activities. Moreover, product loss can cost establishments up to millions of dollars. Residents would relocate to safer areas after a natural disaster which reduces the workforce.

Industry Blues

(Credit: Niall McCarthy)

As greenhouse gas emissions rising, there will be a decline in economic productivity and output which are highly subjective to the global temperature. Countries with prominent industries, especially in labor and agriculture, will suffer from lowering GDPs, exports, and income. The European Commission stated that global warming will result in a loss of 17% in outdoor labor productivity in 2100 should no further actions be taken. 


Hotter climates reduce the capacity for laborers to perform to the best of their abilities, lowering productivity and output. To reduce the number of heat-related illnesses and deaths, governments are likely to lower laborer work hours, and workers are uncomfortable working in sweltering environments, reducing the labor force significantly. Furthermore, workers can be left dehydrated and exhausted from the heat, allowing room for more accidents and injuries.

Food Industry

Food shortages have been on the rise across the globe due to climate change, leaving many food industries in shambles. Although the growing seasons are extended by climate change, many farmers have lost their farmland over droughts and floods destroy which destroy the soil and water sources. With pests, weeds, and diseases reproducing in humid conditions, producers would need to spend more on protection as there will be longer rains; heat and humidity also affect producers’ quality and production. As a consequence, food scarcity will rise worldwide which impacts all economies.

Utility Availability

The effects of climate change have a long-lasting effect on every type of manufacturing. High temperatures will strain power grids, lower power plants’ efficiency, and dry up water sources, reducing energy and water production, and thus, increasing utility costs for businesses. Similarly, machines in production plants have lower performances to avoid overheating. Combined with shorter working hours and possible disasters, the productivity of industries has lowered significantly. 



Tourism is one of the most vulnerable industries to climate change as many attractions are destroyed. According to the University of Cambridge, rising sea levels will destroy beautiful coastlines and communities, shortening winters limit snow-based activities, air pollution destroys landmarks and local fauna, and natural disasters deter visitors. The price of attracting and handling tourists is increasing due to depleting resources, affecting the hospitality industry.

Supply Chain Pains

Operations at a harbor in Riesa, Germany halted by floods. (Credit: Yale School of Environment)

Supply chains are essential to keep consumer prices low, persuading more customers to buy the product or service. However, with the rise of climate change, there are disruptions within the supply chain which creates bottlenecks within the system. The number of supplies decrease due to production issues, while demands remained the same; consequently, businesses increase the prices to reduce economic losses, resulting in less circulation.

Moreover, natural disasters resulting from global warming amplify the severity. Certain types of products may pause due to the lack of utilities, infrastructure, or manpower. On the other hand, certain commodities either skyrocket or crash in demand depending on circumstances, for example, demands fuel may increase as people migrate out of the impacted areas.

The Silver Lining

According to the graph, there has been an increase in employment related to green energy. (Credit: World Economic Forum)

Despite the catastrophic consequences on the world economy, climate change also has its fair share of benefits for certain sectors of the world economy.

Climate-friendly Energy

Governments are aiming to reduce carbon emissions and support clean energy, especially solar, hydropower, and wind energy. These forms are less effective than nuclear or fission power but are popular due to their affordability, duplicability, and minimal maintenance. Global electricity consumption is expected to grow by nearly 50%, according to the US Energy Information Administration.


Insurance demands will soar due to the intensifying and frequent natural disasters, and many variants of insurance, especially for property damages and illnesses, will have more customers. Jennifer Rudden, a research expert in insurance, stated that the insurance industry will grow at a compound rate of 9% annually, reaching $8.4 trillion in 2026. However, the sudden demand for insurance may cause insurers to lose profits, increase the price of premiums, or raise deductibles.

Engineering and Construction

The construction and engineering companies will prosper from increasing demands for new infrastructure, refurbishments, and reconstructions. Many obsolete and defenseless buildings, such as power plants, houses, or governmental buildings, require new additions to combat natural disasters and the increasing global temperature.

Agricultural Boost

While the majority of farmers have lost profits due to climate change, some have managed to profit from it. Higher global temperatures will result in longer growing seasons and frequent precipitation; higher yields of produces can be expected. Additionally, barren areas, such as tundras, will be able to yield crops due to the rising temperature.

Handling Climate Change

Patagonia is one of the most environmental-friendly clothing brands worldwide due to its usage of durable, recycled components, and its repair and reuse programs.

As the economic consequences of climate change are disastrous, it is best to lower its impact by any means. Since the 2010s, many businesses have adopted climate change awareness into their branding to promote sustainability and resilience. According to Harvard Business Review, nearly all major companies release sustainability reports to address their transition, and one-third of Europe’s major companies have pledged to reach zero emissions by 2050.

By implementing energy-efficient procedures, renewable energy sources, and sustainable transportation plans, businesses may lower their greenhouse gas emissions. For instance, a company may construct solar or wind turbines, convert them to energy-efficient lighting, and encourage staff members to carpool or take the bus.

Massive levees were built in New Orleans after Hurricane Katrina to prevent future destruction. (Source: New York Times)

Businesses can prepare for climate change by creating climate-resilient plans and investing in equipment and infrastructure that can survive harsh weather conditions. Examples include building levees or sea walls as flood defenses, or moving activities to a more secure location.

Businesses should interact with all relevant parties to promote sustainability and create awareness about climate change. To minimize emissions across the supply chain, companies may collaborate with suppliers or engage with clients to promote environmentally friendly habits.

Businesses can lobby for laws that promote sustainability and resilience, such as a carbon tax or more money for renewable energy technology. These laws can include requirements and rewards for switching to renewable energy sources and promoting energy efficiency.

Final Thoughts

While the consequences of climate change are becoming more evident, it is still reversible through various solutions. Businesses and governments are making efforts to reduce emissions and develop environmental technology; on the other hand, some corporations and officials remained ignorant. Should there be no activism, climate change will mainly negatively affect the environment, directly impacting the world economy. While reaching over 1.5°C is likely, humanity can still lower carbon emissions to avoid global temperatures rising over 2°C.

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