How climate change affects the economy
Economists generally group climate change's economic effects into two categories:
- Physical risk — direct damage from extreme weather (floods, storms, wildfires), and gradual effects like reduced agricultural yields, heat-related productivity loss, and rising sea levels affecting coastal property and infrastructure
- Transition risk — the economic cost and disruption of shifting away from fossil fuels, including stranded assets, policy and carbon-pricing changes, and shifts in market demand toward lower-carbon products
Why this matters for businesses
These risks increasingly show up in corporate risk disclosures required under frameworks like TCFD and CSRD, and are a growing factor in supply chain risk management — climate-related disruption to suppliers, logistics, and raw material availability is now treated as a mainstream financial risk, not a peripheral environmental concern.
From risk to strategy
Understanding these economic effects is typically the starting point for building a climate transition plan — since credible plans need to account for both the cost of inaction (physical risk) and the cost of the transition itself (transition risk).
References
- Economic impacts of climate change — Wikipedia