The Adaptation Economy examines climate change adaptation in key emerging and fast developing markets.
The study uses a three-stage economic model to estimate the minimum investment required in climate adaptation measures, along with the economic benefits.
The study focuses on 10 markets across Standard Chartered’s footprint – Bangladesh, China, Egypt, India, Indonesia, Kenya, Nigeria, Pakistan, the UAE and Vietnam – and assumes adequate climate mitigation measures are put in place to limit global heating to 1.5 °C above pre-industrial levels (unless otherwise stated).
For the purposes of this study, climate adaptation is investment in infrastructure, market reforms, research and education to build resilience against climate change and limit the adverse effects of global warming on economic activity.
This could include measures such as the building of flood walls, the restoration of mangrove forests, early warning systems or raising up streets to protect cities from rising sea levels.
Stage 1: Estimating expected future climate damages
Expected future climate damages are estimated by combining the gradual damage (i.e. impact on labour productivity) and immediate damage (i.e. impact from extreme weather events) at a GDP level. The gradual impacts are calculated using the work of Burke et al (2015),[1] which captures labour productivity losses due to temperature change, and data from UN population projections[2] to estimate the economic impact at a market level. Immediate damage was estimated using a blend of the EM-DAT[3] database of historical extreme weather events and IPCC estimates on increases in frequency of those events due to global warming.[4] Further analysis was conducted to estimate how these combined damages would impact at a broad sector level (agriculture, industry and services).
Stage 2: Calculating the investment required to abate those damages
The investment required to abate expected future climate damages in stage 1 is calculated based on estimates by the OECD.[5] In its modelling the OECD estimates optimal adaptation investment needed for given levels of climate damages. An investment-to-damage ratio is calculated from the identified ‘cost optimal’ pathway. This ratio is then used with expected damages to determine adaptation investments.
Stage 3: Calculating the economic benefit
The economic benefit figures are calculated using a combination of the future damages avoided by the adaptation measures and the indirect economic impact of the investment of the activity on GDP.
Avoided damages are calculated as a share of total expected future climate damages. The ratio of damages that can be avoided through adaptation is calculated using investment figures computed in stage 2 and parameters of adaptation capacity obtained from OECD research.[6] In line with the OECD methodology, the modelling assumes that adaptation investments contribute to overall resilience, which is built over time, and that this resilience needs to be maintained (as investments have a rate of deprecation).
The adaptation investment figures from Stage 1 were added to the macro-econometric model E3ME[7] as ‘shocks’ to ascertain the impact the investment would have on GDP (in addition to the avoided climate damages). These impacts were calculated country-by-country and are sensitive to local economic structures. It is assumed that these adaptation investments are financed from ‘new’ money, loans or grants that otherwise would not be available in the economy, therefore spending on adaptation does not mean that investment in other areas would need to decrease.The economic benefit figures, which are a combination of avoided damages and indirect GDP impact, are reported in USD and a GDP (market) level.
All global figures reported in the report are a sum of the 10 focus markets for the study.
Interviews were conducted with 150 senior leaders in global asset managers, institutional investors and banks. The research was conducted in November 2022 under the ethical research guidelines set by both the MRS (Market Research Society) and ESOMAR (European Society for Opinion and Market Research).
[1] Burke, M., Hsiang, S.M. and Miguel, E., 2015. Global non-linear effect of temperature on economic production. Nature, 527(7577), pp.235-239.[2] https://population.un.org/wpp/[3] D. Guha-Sapir, R. Below, Ph. Hoyois - EM-DAT: The CRED/OFDA International Disaster Database – www.emdat.be - Université Catholique de Louvain – Brussels – Belgium.[4] IPCC, 2021. Summary for Policymakers[5] Agrawala, S., et al. (2010), "Plan or React? Analysis of Adaptation Costs and Benefits Using Integrated Assessment Models", OECD Environment Working Papers, No. 23, OECD Publishing, Paris, https://doi.org/10.1787/5km975m3d5hb-en.[6] Agrawala, S., et al. (2010), "Plan or React? Analysis of Adaptation Costs and Benefits Using Integrated Assessment Models", OECD Environment Working Papers, No. 23, OECD Publishing, Paris, https://doi.org/10.1787/5km975m3d5hb-en.[7] The E3ME model is a dynamic computer-based macroeconomic model of the world’s economic and energy systems and the environment, www.e3me.com
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