The economic costs of 2023’s extreme weather… so far

The recent heatwaves around the world have cost an estimated 0.6% of GDP in 2023, according to “back of the envelope” calculations from Allianz. The economic damage, along with the increasing loss of human lives across the United States, Europe, and China, are a stark reminder that countries and industries must confront the realities of climate change.

A multitude of temperature records have tumbled this year, with the cost of extreme weather ranging from 0.1% of GDP in France to 1.3% in China. The increasing frequency and severity of these events is having direct consequences on a wide range of industries. While reports have highlighted the inflationary impacts of droughts on food production, the events this summer have emphasised the vulnerability of the tourism sector to climate change.

In the past year, Europe’s travel and tourism industry accounted for $2.1tn, but even with a global temperature increase of 1.2°C from pre-industrial levels, this year’s events have inflicted huge tolls around the globe. These events showcase the substantial changes underway, reinforcing research predictions that London’s climate in 2050 will be similar to that of present-day Barcelona. Countries and regions that rely on tourists for economic growth will be disproportionately affected.

The tourism industry contributed 14.9% to Greece’s GDP in 2021 while adding as much as 9.1% and 8.5% to the economies of Italy and Spain respectively. Last month, over 19,000 people were forced to evacuate the popular Greek island of Rhodes, while honeymoon destination Maui also succumbed to devastating wildfires.

Although the economic impacts of this summer’s events have not yet been quantified, there are other recent examples; Australia witnessed a drop in tourism in the wake of mass coral bleaching, while the warmer climate has dramatically reduced snow cover in the Alps, resulting in a doubling of snow cannon use since 2016. Aside from the ecological costs, the economic figures associated with snow cannons are significant. According to one report (in Italian), snow cannons cost €136,000 per hectare a year. The Trentino region of Italy has, according to the report, 1,279 hectares of artificially covered snow, which amounts to over €170mn per year.

The frequency of extreme weather events could remap the sector, especially if temperatures continue to increase in the summer months. German health minister Karl Lauterbach recently claimed that holiday spots in southern Europe “will have no future in the long run”. Rising global temperatures pose not merely a threat to tourism, but a threat to the very existence of countries such as the Maldives.

A European Commission report modelled extreme scenarios in order to gauge the consequences of this possible remapping. It estimated that a 4°C scenario would, alongside ecological devastation, see a sharp decline of more than 9% in Greek Ionian island tourism, while western Wales would see an increase by around 16%.

However, the EC’s report is another example of climate risk research that solely analyses temperature change without factoring in systemic failure. The report assumes that tourism will continue business as usual in a 4°C scenario, an optimistic assumption given that some areas will simply become “uninhabitable”.

There have been numerous examples of financial models failing to capture the reality of climate risks in general and when performing climate stress tests. More pluralist research suggests that half the world’s GDP may be destroyed by as early as 2070.

It has also been reported that almost 90% of natural disaster-driven losses in Europe were not insured in the first half of this year. This climate insurance protection gap has already been the spotlight of research at the European Central Bank and the sectors’ policymakers have been the centre of recent criticism with accusations that certain actors are “watering down” climate ambition in EU capital frameworks for the industry.