WP2: Adaptation and Physical Risks

Climate change is increasingly affecting societies, and even with rapid progress toward net-zero emissions, a certain level of impact is already inevitable (Kotz et al., 2024). These impacts, including those in the project partner countries, are expected to disproportionately affect regions with high exposure and low adaptive capacity, exacerbating global inequalities and hindering development.

A comprehensive assessment of the associated geopolitical risks requires:

1. Robust quantification of country-level economic damages and vulnerabilities under various emission scenarios (e.g., Representative Concentration Pathways) using empirically derived response functions.
2. Improved understanding of additional risks faced by developing countries, such as those stemming from indirect effects like increased capital costs.

This work package leverages fixed-effect panel regression models to address both components for project partner countries and regions, providing critical input for the integrated analysis of geopolitical risks from physical and transition effects in WP3.

Task 2.1 Quantification of Economic Impacts of Climate Change

This task focuses on advancing damage functions to quantify how changing climate conditions and extreme weather events affect economic growth. Recent innovations assessing the impacts of variability and extremes in temperature and precipitation, with robust constraints on their persistence, will serve as a baseline (Kotz et al., 2024). These damage functions are grounded in empirical insights from fixed-effects panel regression models applied to the DOSE global database of subnational economic output (Wenz et al., 2023), which will be continuously updated with the latest data throughout the project.

By integrating these empirical models with projections from state-of-the-art global circulation models (GCMs), the task will provide detailed sub-national insights into the impacts of temperature and precipitation variability, extremes, and gradual warming (Kotz et al., 2024).

Additionally, the task will investigate new damage function developments specific to partner countries like India and Indonesia. This includes analyzing the economic effects of climate-induced groundwater depletion (Janardhanan et al., 2023) while accounting for regional trends and vulnerability patterns.

Task 2.2 Climate Damages in Integrated Assessment Modelling

This task aims to enhance the representation of climate damages in the REMIND integrated assessment model to better assess interactions and feedback between physical and transition risks within a geopolitical context, as explored in WP3.

Currently, REMIND includes aggregate damages to output, but this will be updated with the improved damage functions developed in Task 2.1. The model will also incorporate a new representation of adaptation capacity and costs.

A second key focus will explore the effects of climate change on sovereign risk and the resulting impacts on capital costs, particularly relevant for developing countries. By assessing the literature, we will derive a climate risk premium to be included in REMIND as an additional component of capital costs.

Furthermore, the task will analyze direct damages to capital from floods, particularly critical in India and Indonesia. Other significant climate extremes, such as tropical cyclones or heat waves (e.g., highly relevant for Saudi Arabia), will also be studied for their aggregate economic impacts. The updated damage functions from Task 2.1 will be incorporated alongside a refined representation of adaptation capacity and costs.

Expected Outcomes

• Projections of economic climate change impacts: Detailed assessments of climate damages with a special focus on risks most relevant to the focus countries.
• Enhanced modeling capabilities: Advanced implementation of climate change damages, adaptation capacity, and the effects on capital costs within the REMIND integrated assessment model, supporting WP3 analysis.