CLIMATE CHANGE: A LOOMING CRISIS FOR EMERGING MARKETS

Climate change, as defined by the United Nations, refers to a change in climate that is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and exceeds natural climate variability observed over comparable time periods. The recent wildfires in California, fuelled by climate change, serve as a stark reminder of the deadly potential of this phenomenon. These fires devastated entire neighbourhoods in Southern California, resulting in an estimated 250 to 275 billion USD in financial damage. Climate change poses a significant global challenge, disproportionately affecting Emerging markets. These economies, which are often characterised by the rapid economic growth and significant poverty reduction within specific groups of developing countries, are increasingly vulnerable to the effects of the warming planet. From rising sea levels and extreme weather events to disruptions in agriculture and water scarcity, the impacts of climate change are far-reaching and strike significant problems to the development trajectories of these economies.

The World Bank estimates that the effects of climate change could push an additional 100 million people below the poverty line by 2030. In addition, the impact of extreme weather results in 520 billion USD in annual consumption losses and is pushing 26 million people into poverty each year. Furthermore, major commercial ports in these nations – including Rio de Janeiro, Mumbai, Guangzhou, and Dar es Salaam – face the threat of being submerged by rising sea levels, and by 2050 at least 300 million people will live in coastal areas threatened by dangerous flooding. A recent Stanford University study found that climate change has increased economic inequality between developed and developing nations by 25% since 1960.

It is conspicuous that Emerging markets are particularly exposed to the numerous risks of climate change. These risks include: physical, transition, financial, and human landscape risks. In terms of physical risks, extreme weather, rising sea levels, and water scarcity can impact the overall development of these economies significantly. Climate change-related physical and transition risks can lead to increased financial instability. For example, extreme weather events can damage assets and disrupt supply chains, while the transition to a low-carbon economy can create stranded assets in carbon-intensive sectors and increase borrowing costs for climate-related investments. Many Emerging markets have significant investments in fossil fuel infrastructure, which could become obsolete as the world shifts to cleaner energy sources. The view that climate risks currently appear manageable might also stem from the fact that assessment methodologies of climate impacts are still in their early stages, facing data gaps, and having a limited set of direct transmission channels. They also lack insights into critical uncertainties, including climate and ecological tipping points, compound risks and adverse feedback loops, and the impacts of a disorderly transition.

Impacts on water resources, seas and coastal territories

Extreme weather events, driven by the reasons explained before, are intensifying and becoming more frequent. Rising temperatures drive more intense heat waves, leading to an increase of heat-related illnesses and mortality. Prolonged droughts are straining water resources and impacting agriculture, while heavy rainfalls are causing severe flooding, disrupting transportation and damaging infrastructure. Coastal regions face the threat of rising sea levels, leading to erosion, inundation, and the displacement of coastal communities. Moreover, the frequency and intensity of wildfires are increasing, fuelled by dry weather conditions and high winds. These extreme weather events have far-reaching economic consequences, including decreased agricultural productivity, infrastructure damage, and increased insurance costs in economies and societies worldwide, specifically in Emerging markets. They also pose significant risks to human health and well-being, leading to displacement, disease outbreaks, and mental health issues.

Rising sea level is a serious consequence of climate change which is expected to worsen in the coming years. As the Earth's climate warms, glaciers and ice sheets melt, and ocean water expands, which causes sea levels to rise. This can lead to a number of problems, including coastal erosion, flooding, and saltwater intrusion into freshwater sources. Coastal erosion is a major problem in many parts of the world: when sea levels rise, waves erode the coastline, making it more difficult for people to live near the coast. Flooding is another major problem caused by rising sea levels because as sea levels rise, coastal areas are more likely to flood during storms and high tides. Moreover, saltwater intrusion is a problem that occurs when salt water mixes with freshwater: this can contaminate drinking water supplies and make it difficult for people to grow crops. This also threatens infrastructure, including ports, power plants, and transportation networks, as well as valuable coastal ecosystems. It is important to take actions to minimise the effects of climate change and to adapt to the impacts of rising sea levels.

Furthermore, climate change is exacerbating water scarcity in many regions, particularly in arid and semi-arid areas, as the demand for water is increasing as the global population grows and economies develop. It also has a significant impact on water resources around the world by altering water availability and its quality, which impacts agriculture, industry, and domestic use. This can lead to reduced agricultural yields, water shortages for urban populations, and increased conflict over water resources could take a more disastrous path which can cause social unrest, migration, and economic decline. 
Altered rainfall patterns, rising temperatures, and melting glaciers are reducing water availability. To address this challenge, governments of these developing nations should implement sustainable water management strategies, including investing in water infrastructure, promoting water-efficient technologies, and raising awareness about water conservation.

Social implications

Women in Emerging markets countries are disproportionately vulnerable to the impacts of climate change. They are often responsible for collecting water and fuelwood, which are becoming increasingly scarce due to these events. This can result in increased workloads and reduced opportunities for education and employment which will worsen gender-based violence. In times of crisis, women are more susceptible to sexual assaults and domestic violence. Young people in the societies of Emerging markets are also particularly exposed to the impacts of climate change as it is actively disrupting their education and employment opportunities. Hence, they are more likely to be living in poverty and to be affected by climate-related disasters. Notably, younger generations are on the front lines of the climate movement as they are demanding actions from governments and businesses to address these issues.
Millions of people will be forced to leave their homes due to floods, droughts, and other climate-related disasters. These climate migrants often end up in overcrowded and insalubrious conditions, where they are vulnerable to disease and exploitation. Frequently changing rainfall patterns and high temperatures are creating ideal conditions for the spread of infectious diseases, such as Malaria, Dengue fever, and Zika virus. These diseases can have a devastating impact on public health, especially in countries with weak health systems.

Agriculture and tourism

Climate change brings a significant threat to global agriculture, impacting crop yields, food security, and livelihoods of farmers. Some of the key ways climate change is affecting agriculture are rising temperatures which can lead to heat stress in crops, reducing yields and quality, extreme heat events that can damage crops and livestock, causing significant losses for farmers; shifts in rainfall patterns, including more frequent droughts and floods, can disrupt planting and harvesting schedules, and damage crops. Also, warmer temperatures and changing weather patterns can create favourable conditions for pests and diseases to thrive, leading to crop losses. Rising levels of carbon dioxide in the atmosphere are absorbed by the oceans, resulting in ocean acidification. This can harm marine ecosystems, including fisheries, which are a vital source of food and income for many coastal communities. Catastrophic events like these are disrupting agricultural production, leading to food shortages and price increases. This is particularly devastating for poor families, who may be forced to choose between food and other essential needs. Climate change can heighten the soil degradation, which leads to reduced soil fertility and increased erosion. This can further reduce agricultural productivity. Emerging Economies like Latin American and Caribbean nations, who are thriving under exportation of agricultural products, will be affected severely, leading to amplifying negative impacts on the global economy.

Tourism, a vital revenue source for many developing economies, faces significant threats from climate change. This industry is uniquely vulnerable to this predicament due to its reliance on stable weather conditions. Indeed, extreme weather events directly impact travellers' experiences and damage tourism infrastructure, hindering tourist access, resulting in economic losses for destinations and their communities, and resulting in job losses within the industry. Coral bleaching, a consequence of warming ocean temperatures, devastates underwater ecosystems, impacting diving and snorkelling tourism.

The Maldives, an archipelago of over 1,100 coral islands in the Indian Ocean, exemplifies the vulnerability threats related to climate change. As the lowest-lying nation in the world, it faces an existential threat from rising sea levels caused by global warming. At the current rate of global warming, almost 80% of the Maldives could become uninhabitable by 2050, according to multiple reports from NASA and the U.S. geological survey.

The Caribbean provides another stark example. The tourism industry is a major source of income for many Caribbean economies and hurricanes are inflicting significant damage to hotels, resorts, beaches, and other tourist attractions, leading to closures, reduced capacity, and a decline in the quality of the tourist experience. They also disrupt travel to and from the Caribbean, with flight cancellations, road closures, and port shutdowns making it difficult for tourists to reach their destinations. News of hurricanes can create fear and uncertainty among potential tourists, resulting in a decline in bookings and travel demand, even if the destination itself is not directly affected. When hurricanes damage tourist infrastructure, disrupt travel, and create fear and uncertainty, they can arouse significant financial losses for businesses and governments. The impact of hurricanes on Caribbean economies extends beyond the immediate aftermath of the storm: long-term effects can include reduced investment, as hurricanes can make investors hesitant to invest in the Caribbean tourism industry, leading to a decline in new development and a slowdown in economic growth.

Distribution of monthly average hurricane destruction index

Mean responses of cruise ship and airplane arrivals to hurricane shocks.

Energy sector

The energy sector is both a contributor to and a victim of climate change. Many Emerging markets heavily rely on fossil fuels, which contribute to greenhouse gas emissions. They face some unique challenges since climate change can disrupt fossil fuel production through extreme weather events, such as floods and droughts, affecting infrastructure and extraction processes.

Rising sea levels threaten coastal infrastructure, including power plants and refineries, impacting energy production and distribution. However, the transition to clean energy sources can be challenging due to high upfront costs and technological barriers. As populations grow and economies develop, the demand for energy increases.

In 2023, fossil fuels remained the primary source of electricity in ASEAN nations, a bloc of countries representing 7.2% of global GDP, with coal contributing a substantial 44% of the total. While renewable energy sources accounted for 26% of power generation, this share slightly decreased from the previous year. This decline was primarily attributed to a 2.3% reduction in hydroelectricity generation.

To meet the growing demand for electricity, which was increased by 3.6% (or 45 TWh) between 2022 and 2023, these countries relied more on coal and gas power generation. Indonesia, a major user of coal, significantly increased its coal power generation by 11 TWh, highlighting its position as the largest coal user with young coal power plants. In contrast, the growth of other renewable energy sources (excluding hydroelectricity) was much slower, increasing by only 8.5 TWh during the same period.

Overall, climate change presents a significant challenge to the energy sector. Many Emerging markets still lack reliable energy access. Solar and wind energy, as depicted above, while clean and abundant, are variable resources: increased reliance on these sources requires improved grid storage and management solutions. Hence, governments should create a crucial balance between meeting energy needs and reducing greenhouse gas emissions. However, it also creates an opportunity to build a cleaner, more sustainable energy in the future. By embracing renewable energy, improving energy efficiency, and investing in new technologies, these economies can ensure a resilient and low-carbon energy system for decades to come.

Emerging markets face notable transition risks as the world shifts towards a low-carbon economy. These risks stem from the potential for economic and financial disruption as countries adapt to new climate policies and technologies. The implementation of carbon pricing mechanisms, such as carbon taxes or emissions trading systems, can increase the cost of carbon-intensive industries and this could negatively impact economies that are heavily reliant on fossil fuel exports, causing job losses and economic slowdown. Rapid technological advancements in renewable energy and energy efficiency technologies can disrupt traditional industries and create new economic opportunities. Emerging markets may struggle to adapt to these changes if they lack the necessary technological and financial resources.

Beyond the immediate climate risks, Emerging markets face a significant financing gap to fund low-carbon and climate-resilient economic growth. Domestic and private sector financing for climate goals remains limited. Bridging this gap will require scaling up cross-border climate finance, particularly from the private sector.

A broad range of policy support is needed to incentivise greater private sector participation, including encouraging banks to increase their climate-related lending.

Climate finance aps market transitions

A new World Bank report highlights a critical gap in climate finance for Emerging markets and developing economies (EMDEs). Among 60% of the countries studied, less than 5% of bank loans are used to fund projects that address climate change.

”Emerging markets and developing economies face substantial financing gaps in low-carbon, climate-resilient investments. We need to step up climate action and crowd in private investment for countries most in need” said Axel van Trotsenburg, World Bank Senior Managing Director of Development Policy and Partnerships.

He stressed the fundamental role of the banking sector in this transition, highlighting its potential to finance a green, low-carbon, and sustainable development path. According to analysis from World Bank Country Climate and Development Reports in 2023 unmitigated climate change could reduce GDP by more than 12% by 2050. The report underscores the urgency of the situation. Despite remaining uncertainty, the impact on developing economies is consistently projected to be considerably larger than on advanced economies. It is clear that in Emerging markets in particular, climate risks are further compounded by challenges arising from an already vulnerable population, weak institutional capacity, and macro financial risks.

This analysis highlights the urgent need to bridge the financing gap for climate action in Emerging markets. While these economies receive over 60% of global climate finance inflows, a significant portion originates from public sources, limiting private sector participation. Mobilising private sector investment is crucial, requiring a broad range of policy support, including incentivising banks to increase their climate-related lending.

Climate Finance by EMDE bank is Limited, with Relatively Lower Levels of Green Loan Issuance Than in Advanced Economies

Economic Realities: Costs, Risks and Uncertainties

Estimating the total economic impacts of climate change in Emerging markets presents a significant challenge since the long-term nature of climate change further complicates the analysis. Some impacts, such as those affecting market transactions and influencing metrics like GDP and inflation, are relatively easy to quantify, others, like the effects of climate change on human health, biomes, and ecosystem services, are more difficult to translate into economic terms. Hence, future policy responses and socioeconomic development trajectories remain uncertain.

Some of the rigorous economic tools and models that quantify the magnitude and distribution of climate-related damages aim to inform the development of effective policies for mitigating and adapting to climate change from an economic perspective. Various economic models and frameworks are used, including cost-benefit analysis, which explicitly examines the trade-offs between climate change impacts, adaptation strategies, and mitigation efforts. Integrated Assessment Models (IAMs) are valuable for this type of analysis, as they link key societal, economic, ecological, and atmospheric features within a single modelling framework.

These economic analyses investigate the economics of climate change mitigation and the costs of climate adaptation. Mitigation costs depend upon the approach and timing of emissions reductions; therefore, an early, well-planned action minimises them. However, these costs of planning, preparing, facilitating, and implementing adaptation are also challenging to estimate and depend on various factors. This is because the cost estimates for mitigation in Emerging markets rely on the future emissions allowances and the timing of interventions of the individual governments. Economists estimate the incremental cost of climate change mitigation at less than 1% of global GDP. Across all developing countries, these costs have been estimated at approximately USD 215 billion per year up to 2030 and are expected to increase in subsequent years.

Climate related risks can significantly impact financial stability. Severe weather events can damage assets and disrupt supply chains, potentially leading to financial losses for businesses and even triggering crises within the financial sector. Shifts in climate policies and regulations can also create uncertainty for businesses and investors, hindering investment and economic growth. This is particularly concerning in countries already facing financial sector vulnerabilities. Furthermore, the economic burden of responding to climate shocks can strain the government fiscal position, requiring increased additional spending and potentially resulting in higher levels of debt. Implementing and enforcing effective climate policies can be challenging, particularly when faced with political and social opposition.

Economic Realities: Costs, Risks and Uncertainties

In order to mitigate the climate change related risks, they need to adapt results-driven approaches such as reducing the reliance on carbon-intensive industries and investing in low-carbon sectors, such as renewable energy and green technology. It’s necessary to bolster the adaptation to climate change by building resilience to its impacts by investing in infrastructure, early warning systems, and disaster risk reduction measures such as mobilisation of  public and private finance to support climate action, through green bonds, climate funds, and public-private partnerships, development of a robust financial system that can withstand climate-related shocks and support for the transition of a low-carbon economy.

A green or sustainable finance taxonomy is a classification system for identifying activities or investments that will move a country toward specific targets related to priority environmental objectives. Compulsory credit-linked agricultural insurance has been shown to effectively protect farmers and rural banks against climate-related shocks and can also increase rural lending. Such dispositions require careful design and an assessment should be made of potential exclusionary impacts, including those that might result in higher costs for borrowers. Improving governance and regulatory frameworks by implementing effective climate policies and regulations aim to create a conducive environment for low-carbon investment. Investing in education and training the workers with the skills needed for a low-carbon economy. It would also be necessary to strengthen international cooperation to address climate change, including through technology transfer, capacity building, and financial support.

By taking those decisive and powerful actions to diminish the consequences of climate change, Emerging markets can safeguard their development gains and retrieve the ability to build a more sustainable and resilient future. Promoting climate justice would ensure that the costs and benefits of climate action are fairly distributed and the workers in fossil fuel industries are not left behind.

Sources

• https://www.bloomberg.com/opinion/articles/2024-11-14/cop29-bickers-over-money-while-the-world-burns

• https://www.bloomberg.com/news/articles/2025-01-07/la-nina-effects-surprise-argentine-farmers-as-dryness-kicks-in

• https://www.bloomberg.com/news/articles/2024-07-16/extreme-weather-how-we-know-if-it-s-climate-change-or-bad-luckitm_source=record&itm_campaign=Extreme_Weather&itm_content=Climate_Change_or_Bad_Luck?-3

• https://www.forbes.com/councils/forbesfinancecouncil/2024/11/14/challenges-to-growth-in-emerging-economies-solutions-and-strategies-for-market-entry/

• https://carnegieendowment.org/research/2023/01/economic-development-in-an-era-of-climate-change?lang=en

• https://www.unepfi.org/themes/climate-change/emerging-economies-climate-risks-and-best-practices-for-climate-risk-disclosure/

• https://openknowledge.worldbank.org/server/api/core/bitstreams/9f1f6970-5619-4f5d-a8e5-e32a2fa58db0/content

• https://abcnews.go.com/International/facing-dire-sea-level-rise-threat-maldives-turns/story?id=80929487

• https://www.reuters.com/world/americas/caribbean-braces-economic-punch-after-seasons-deadly-first-hurricane-2024-07-09/

Credits

Author: Oshani Kularathna - Editorial Area Associate
Editor: Alessandro Liberati - Editorial Area Manager
Graphics and layout: Simone Triozzi - Communication Manager