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Climate risk and response in Asia: Research preview

Climate risk and response in Asia: Research preview


Get an early view on how climate risk could affect the region, with a look at both physical hazards and socioeconomic impacts.

COVID-19 is highlighting the importance of risk and resilience, and as the world focuses on recovery, it is important to not lose sight of climate risk. The Earth’s climate is changing after more than 10,000 years of relative stability, and Asia is on the front line. Climate science tells us that, absent adaptation and mitigation, the climate hazards the region faces in the future, from heat waves to flooding, are likely to be more severe, more intense, or both. The impacts in Asia in some cases could be more severe than in many other parts of the world. As Asia seeks to grow its economy—and remain a key source of growth for the world—climate is thus a critical challenge that the region will need to manage.

Asia is also well positioned to address these challenges and capture the opportunities that come from managing climate risk effectively. Infrastructure and urban areas are still being built out in many parts of Asia, which gives the region the chance to ensure that what goes up is more resilient and better able to withstand heightened risk. Like all parts of the world, Asia can also contribute to reducing emissions; climate science tells us that further warming will continue until net zero emissions are reached. If policy makers and business leaders can harness the region’s innovative spirit, talent, and flexibility, Asia could lead a global response to climate risk by adapting and by mitigating the most severe potential consequences.

This paper, part of an ongoing series about the Future of Asia, is a preview of research to be published in 2020 that examines how climate risk could play out in Asia, both in physical hazards and in the socioeconomic impacts resulting from those hazards, and what measures can be taken to manage the risk. This regional view follows the publication in January 2020 of the McKinsey Global Institute’s global report, Climate risk and response: Physical hazards and socioeconomic impacts.

We look at the impacts across five systems: workability and livability, food systems, physical assets, infrastructure services, and natural capital. While McKinsey employs many scientists, including climate scientists, we are not a climate research institution. The Woods Hole Research Center (WHRC) produced much of the scientific analyses of physical climate hazards that we use in our research. Methodological design and results were independently reviewed by Dr. Luke Harrington, an expert in the modeling of climate extremes and a Research Fellow at the University of Oxford’s Environmental Change Institute. The review reflects his independent perspectives. Final design choices and interpretation of climate hazard results were made by WHRC. In addition, WHRC scientists produced maps and data visualization for the report.

Our research focuses on assessing “inherent” risk—that is, risk absent mitigation and adaptation—to understand the magnitude of the risk and the response needed. Separately, we assess a potential adaptation and mitigation response to manage the risk. We look at two time periods: between now and 2030, and from 2030 to 2050. Climate science makes extensive use of scenarios ranging from lower (Representative Concentration Pathway 2.6) to higher (RCP 8.5) CO2 concentrations. We have chosen to focus on RCP 8.5 for our analysis, because the higher-emission scenario it portrays enables us to assess the full inherent physical risk of climate change in the absence of further decarbonization.

Climate hazards in Asia to 2050

Asia faces a range of climate hazards, with potentially different impacts depending on geography. Already, climate scientists find evidence of the growing effect of climate change on the likelihood and intensity of extreme events. In China, the 2017 floods in Hunan province affected 7.8 million people and resulted in $3.55 billion of direct economic loss, including severe infrastructure damage. Researchers have examined the likelihood of fires in Australia, and found that the risk of weather conditions that result in fires as severe as observed in 2019–2020 (measured with a so-called Fire Weather Index) has increased by at least 30 percent since 1900.

In the high-emissions RCP 8.5 scenario considered here, climate science predicts significant temperature increases across Asia and conditions of rising heat and humidity in many parts of Asia. More than 75 percent of global capital stock that could be damaged from riverine flooding in a given year is in Asia.

Based on the RCP 8.5 scenario, we list some of Asia’s key climate hazards below. We illustrate these hazards with maps that show local areas most likely to see more severe or frequent hazards over the coming decades. We examine hazards out to 2030 and to 2050.

Average temperatures. Under an RCP 8.5 scenario, Asia is expected to see an increase in average temperature of more than two degrees by 2050 compared with preindustrial levels, with the magnitude and pace of warming varying across locations (Exhibit 1). Climate science predicts significant temperature increases, for example, in parts of China, Australia, and the Indian subcontinent. These effects will start to accumulate over the coming decade.

Exhibit 1

Lethal heat waves. Lethal heat waves are defined as three-day events during which the average daily maximum wet-bulb temperature exceeds the survivability threshold for a healthy human resting in the shade. Under the RCP 8.5 scenario, for example, large cities in parts of India, Bangladesh, and Pakistan could be among the first places in the world to experience heat waves that exceed the survivability threshold (Exhibit 2).

Exhibit 2

Extreme precipitation. The risk of extreme precipitation events—defined as once-in-50‑year occurrences (that is, with a 2 percent annual likelihood) in the 1950–81 period—is expected to increase. The likelihood of such events could increase three- or fourfold by 2050 under the RCP 8.5 scenario in some areas, including eastern Japan, central and eastern China, parts of South Korea, and Indonesia.

Severe typhoons. While climate change is unlikely to increase the frequency of typhoons in Asia, it could boost their average severity (and thus increase the frequency of severe events). The likelihood of severe typhoon precipitation—an event which had a 1 percent annual likelihood in the 1981–2000 period—is expected to triple by 2040 in some parts of Asia, including coastal areas of China, South Korea, and Japan (Exhibit 3).

Exhibit 3

Drought. As the Earth warms, the spatial extent of and share of time spent in drought conditions is projected to increase (Exhibit 4). The share of a decade spent in drought conditions in southwestern Australia could grow to more than 80 percent by 2050, and some parts of China could spend 40 to 60 percent of the time in drought.

Exhibit 4

Changes in water supply. The renewable freshwater supply will be affected by factors including rainfall patterns and evaporation. In several parts of Australia, mean annual surface water supply could significantly decrease by 2050. Conversely, in parts of China, water supply could increase by more than 20 percent. Parts of the Indian subcontinent could also see an increase in water supply.

Translating climate hazards into socioeconomic impacts
We then translate the hazards into socioeconomic impacts across a range of systems. We look at socioeconomic impacts on five systems: livability and workability, food systems, physical assets, infrastructure services, and natural capital. To do this, we typically overlay data on the evolution of a hazard (for example, floods of different depths, with their associated likelihoods) with exposure to that hazard (for example, capital stock exposed to flooding) and a damage function that assesses resilience (for example, what share of capital stock is damaged when exposed to floods of different depths). The socioeconomic impacts of these physical changes are nonlinear: once hazards exceed certain thresholds, the affected physiological, human-made, or ecological systems work less well or break down and stop working altogether. This is because the systems have evolved or been optimized over time for historical climates. Rising heat and humidity levels, for example, could affect the human body’s ability to work outdoors and also the survivability of healthy human beings, as discussed above. The knock-on effects can be systemic, because direct impacts in a particular geography could spread and have cascading impacts. In Ho Chi Minh City, where direct infrastructure damage from a 100-year flood could be between $500 million and $1 billion by 2050, knock-on costs could be between $1.5 billion and $8.5 billion.

Our analysis finds that the socioeconomic impacts from intensifying climate hazards could in many cases be more severe for Asia than for other parts of the world, in the absence of adaptation and mitigation. Under RCP 8.5, by 2050, between 600 million and one billion people in Asia will be living in areas with a nonzero annual probability of lethal heat waves. That compares with a global total of 700 million to 1.2 billion; in other words, a substantial majority of these people are in Asia. By 2050, on average, between $2.8 trillion and $4.7 trillion of GDP in Asia annually will be at risk from a loss of outdoor working hours because of increased heat and humidity; that accounts for more than two-thirds of the total annual global GDP impact. Finally, about $1.2 trillion in capital stock in Asia could be damaged by riverine flooding in a given year by 2050, equivalent to about 75 percent of the global impact.

How climate change will affect the ‘Four Asias’

We examine the impacts of climate change on 16 countries in Asia. For each of the countries, we consider the direct effects of rising hazards on livability and workability, food systems, physical assets, infrastructure services, and natural capital. For each of these, we derive an indicator or indicators that serve to illustrate exposure to climate hazards and proximity to physical resilience thresholds. The indicators include the following:

  • Share of population living in areas experiencing a nonzero annual probability of lethal heat waves (a measure of impact on livability and workability)
  • Annual share of effective outdoor working hours affected by extreme heat and humidity in climate-exposed regions (a measure of impact on livability and workability). Linked with this, we also measured the GDP at risk from working hours affected by heat and humidity
  • Water stress, measured as the annual demand of water as a share of the annual supply of water (a measure of impact on livability and workability)
  • Annual share of capital stock at risk of riverine flood (a measure of impact on physical assets and infrastructure)
  • Annual probability of a change in agricultural yields for four major crops (a measure of impact on food systems)
  • Share of land surface changing climate classification, referred to as “biome shift” (a measure of impact on natural capital)

Applying these indicators, we find that all 16 countries may see an increase in potential direct impacts from climate change for at least one indicator by 2050. Twelve countries may see an increase in three or more indicators by 2050. Most countries are expected to see rising impact on the annual share of effective outdoor working hours affected by extreme heat and humidity in climate-exposed regions, the annual share of capital stock at risk of flood damage, and the share of land surface changing climate classification. We categorize each of the 16 countries in the “Four Asias” framework that we have identified in our previous Future of Asia work. While impacts vary across as well as within countries, we broadly find that these factors will play out differently across the Four Asias.

We use the Four Asias framework to contextualize climate hazards, their socioeconomic impacts, and potential responses. Each category is exposed to different combinations of hazards at varying levels of intensity, suggesting that they will require distinct response frameworks. All risks discussed below are on a timeline to 2050 unless specified otherwise.

Frontier Asia in our analysis consists of Bangladesh, India, and Pakistan. These rapidly urbanizing economies have historically seen low levels of regional integration and have a diverse global base of trading partners and investors. All three countries could see extreme increases in heat and humidity, which may significantly affect workability and livability. For example, by 2050, Frontier Asia could face increased likelihood of lethal heat waves than the rest of Asia. We estimate that by 2050, between 500 million and 700 million people in Frontier Asia could live in regions that have an annual probability of a lethal heat wave of about 20 percent. Rising heat and humidity could also affect human beings’ ability to work outdoors, as they tire more easily or need more breaks. We estimate that by 2050, in an average year 7 to 13 percent of GDP could be at risk as a result. These countries could see extreme precipitation events more frequently by 2050 than in the second half of the 20th century. Indeed, despite rising heat in some areas, the countries in aggregate may be subject to reduced drought. Based on analysis by the World Resources Institute, we find that the amount of capital stock at risk from riverine flooding could rise from 0.5 percent of the total today to 3 percent in 2050, a total of $800 billion of stock at risk. Climate change would also have the biggest negative impact on Asian crop yield in this group of countries. For example, the annual probability of a yield decline of 10 percent or more for four major crops (rice, corn, wheat, and soy) is expected to increase from 12 percent today to 39 percent by 2050 for India, and from 40 percent to 53 percent for Pakistan. Annual probability of a yield improvement of 10 percent or more for four major crops (rice, corn, wheat, and soy) is expected to decrease from 17 percent today to 5 percent by 2050 for India, and from 38 percent to 27 percent for Pakistan. Frontier Asia is also expected to see an increase in the share of land changing climate classification between today and 2050.

Emerging Asia in our analysis consists of Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand, and Vietnam. These culturally diverse countries see a high share of regional trade, capital, and people flows, and are a major source of labor. Like Frontier Asia, they are expected to see increases in heat and humidity. By 2050, in an average year, between 8 and 13 percent of GDP could be at risk as a result of rising heat and humidity. The region could also experience growing exposure to extreme precipitation events and flooding. The socioeconomic impacts of these hazards could potentially be severe. Based on analysis by the World Resources Institute, we find that capital stock at risk from riverine flooding in Frontier Asia countries is expected to double from 0.7 percent today to 1.5 percent by 2050, or $220 billion. Drought could become less frequent in this region. Agriculture yields could see increased volatility here. In agriculture crop yield, annual probability of a 10 percent yield decline will increase 2 percent today to 8 percent by 2050. At the same time, annual probability of a 10 percent yield increase will decrease from 5 percent to day to 1 percent by 2050.

Advanced Asia in our analysis consists of Australia, Japan, New Zealand, and South Korea. Overall, these countries are expected to see slightly lower impacts of climate change along many dimensions than Frontier Asia and Emerging Asia countries. Under RCP 8.5, for some countries in the region, the impact on water supply and drought are the main challenges, as described above. Indeed, by 2050, southwestern parts of Australia are expected to spend more than 80 percent of a decade in drought conditions. One potential impact the region is likely to see is biome shift, or share of land changing climate classification. For example, under the RCP 8.5 scenario, biome shift is projected to climb in Japan and South Korea by an average of 27 percentage points between today and 2050, as measured against a 1901–25 baseline. Typhoon and extreme precipitation risk could also increase in some parts of Japan and South Korea, as noted earlier. In agriculture crop yield, no significant risk increase has been observed for this group. Rather, by 2050, annual probability of a 10 percent yield increase could increase; for example this could rise from 21 percent today to 45 percent for the Australia and New Zealand region.

China is large and distinct enough from other parts of Asia to sit in its own category. It acts as an anchor economy for the region and as a connectivity and innovation driver for neighboring countries. Due to its location on a wide range of latitudes, it is climatically heterogeneous. Still, the country on aggregate is projected to become hotter. In addition, eastern parts could see threats of extreme heat, including lethal heat waves. Central, northern, and western China could experience more frequent extreme precipitation events. In the country overall, the average share of outdoor working hours lost each year to extreme heat and humidity would increase from 4 percent in 2020 to as much as 6 percent in 2030 and 8.5 percent in 2050. As a result, the share of China’s GDP that could be lost to heat and humidity could double from 1.5 to 2 to 3 percent by 2050—equivalent to $1 trillion to $1.5 trillion in GDP at risk in an average year. China is expected to see a growing biome shift by 2050, with an increase of about 27 percentage points in the share of land changing climate classification, measured against a 1901–25 baseline. The country is expected to be an agricultural net beneficiary from climate change in the near term, with increasing statistically expected yields and volatility skewed toward positive outcomes. China could see expected yields increase by about 2 percent by 2050 relative to today. The annual probability of a breadbasket failure of greater than 10 percent relative to a baseline today would decrease from 5 percent to 2 percent by 2050, while the annual probability of a bumper year with a greater than 10 percent increase in yield would increase from 1 percent to approximately 12 percent by 2050.

Each of the Four Asias will need to take steps to manage their exposure to physical climate risk, and pay particular attention to the areas of risk highlighted above. Frontier Asia, Emerging Asia, and China are still building out large parts of their infrastructure and rapidly urbanizing. They will need to ensure that climate risk is embedded into forward-looking capital and urban planning decisions. For example, Emerging Asia is expected to see an influx of labor-intensive industries as manufacturing migrates away from China, and the countries will need to focus on the impact of rising heat and humidity, as well as potential impacts of flooding, on those industries. Given China’s role in regional and global trade, and the potential exposure of many of its industries and geographies, companies in China will need to pay particular attention to increasing resiliency in supply chains.

Another characteristic of climate risk is its regressive nature; the poor will be hit hardest. We find this to be the case in Asia, too. While different parts of Asia are affected differently, countries with lower levels of per capita GDP are probably most at risk from the impacts of climate change. They are often exposed to climates that are closer to physical thresholds than those of wealthier countries. They rely more on outdoor work and natural capital and have fewer financial means to adapt.

Our Frontier Asia and Emerging Asia groupings illustrate how this regressive impact may play out in both human and socioeconomic terms. Our research finds that both of these sets of countries face potentially disproportionate impacts on workability from extreme heat and humidity. By 2050, under RCP 8.5 scenario, some 7 to 13 percent of GDP in Frontier Asia and Emerging Asia could be at risk. This compares to 0.6 to 0.7 percent for Advanced Asia. The regressive impacts of climate change, if allowed to proceed without adaptation or mitigation, thus could put the Asian growth story at risk and potentially affect the lives and livelihoods of millions.

Adaptation and mitigation: Challenges and opportunities in Asia

As the Earth continues to warm, physical climate risk is ever-changing or nonstationary. Climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions. Furthermore, given the thermal inertia of the Earth system, some amount of warming will also likely occur after net-zero emissions are reached.

Given the potentially significant effects of climate change in Asia, the onus is on policy makers, companies, and individuals to develop and implement adaptation strategies that will soften impacts and enable economic activities to continue to their maximum potential, even as they consider how to mitigate the rise in carbon emissions and avoid an even more damaging scenario in future decades. These goals will require ambition and a concerted effort to build on and extend recent successful efforts.

The good news is that, in many ways, Asia is well placed to adapt and lead global adaptation and mitigation efforts. A significant opportunity lies in infrastructure development. To maintain its current growth trajectory, Asia must invest $1.7 trillion annually through 2030, according to the Asian Development Bank. Incorporating climate adaptation into projects will make a difference to regional development and resilience. As they build out their economies, policy makers in Frontier Asia and Emerging Asia can also exploit synergies between infrastructure needs and opportunities for emissions reductions. Stakeholders can also embrace public-private-sector collaboration and explore new approaches to incorporate climate factors into planning. More broadly, Asia is home to some of the world’s largest and most innovative companies, and almost half of R&D investments globally take place in Asia. Over the past decade, the region accounted for the highest share of global growth in key technology metrics—namely, technology company revenue, venture capital funding, spending on research and development, and number of patents filed. With concerted effort, Asian countries can help manage their own exposure to climate risk and can lead the way on global adaptation and mitigation efforts.

Rising to the climate risk challenge will require efforts by policy makers and business leaders. In our forthcoming report on climate risk and response in Asia, we will highlight measures that Asian leaders could consider for the region to be a global leader in protecting lives and livelihoods from physical climate risk across three dimensions: integrating climate risk into business and policy decisions, adopting measures that are effective in adapting to the changing climate, and seeking to mitigate climate risk through decarbonization.

About the author(s)

Jonathan Woetzel is a McKinsey senior partner and director of the McKinsey Global Institute (MGI), based in Shanghai; Oliver Tonby is a senior partner in Singapore and chairman, McKinsey Asia; Mekala Krishnan is an MGI senior fellow in Boston; Yuito Yamada is a partner in Tokyo; Dickon Pinner is a senior partner in San Francisco and leader of McKinsey’s global Sustainability Practice; and Ruslan Fakhrutdinov is an associate in Moscow.

Source: mckinsey
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