What will Europe’s heatwave cost?

Hello from a London that continues to swelter under a historic European heatwave — brought to us courtesy of climate change, scientific analysis shows today, in case anyone had any doubt.

The health impacts of this continent’s worsening extreme heat events can be seen in gruesome excess death statistics. Now the economic implications are coming into clearer focus, too.

The economic consequences of the heat

Electricity prices surging, as cooling systems go into overdrive and power plants reduce output or shut down altogether. Trains heavily delayed or cancelled across much of the continent. Workers sweating through the day after nights of disturbed sleep.

All over Europe’s economy, there are signs of serious impact from the current temperatures. We can expect still worse effects from the more severe heatwaves that will come with continued global warming. But how costly will it all be?

Conveniently, there’s a fast-growing body of in-depth research on this question. It does not make for reassuring reading.

Shortly before the heatwave, economists at Allianz, the continent’s biggest insurance company, published a valuable analysis of the state of the science, warning that “extreme heat is emerging as a structural economic risk, with Europe highly exposed”.

Globally, the rate of unusually severe “heat stress events” has increased sevenfold since the 1980s, it noted. The worst impacts are being seen in tropical developing countries in Asia and Africa. New Delhi residents, for example, have spent much of the past few weeks in soaring temperatures as high as 43.5C.

Thermometers in much of Europe have been approaching that level this week. Parts of France and Spain have actually exceeded it, with 45.1C recorded in the Spanish town of Andújar. National temperatures have hit new June records in both those countries, as well as in the UK.

The heatwave is wreaking havoc on Europe, the fastest-warming continent, whose economy is simply not designed for these conditions.

The continent has “dense urban building stock designed to retain warmth”, noted Allianz, with air-conditioning penetration of just 19 per cent, compared with the US’s 90 per cent.

A jump in cooling demand has still sent power prices skyward this week — a rise made more extreme as the high temperatures reduce output from gas and solar plants.

Three French nuclear reactors have been taken offline, after the river water they use for cooling exceeded the regulatory maximum temperature. Train operators have been forced to cut speeds and cancel services, as rails buckle and overhead power lines sag in the heat.

How big will the economic hit be? Allianz notes research showing that previous heatwaves reduced Europe’s annual GDP by as much as 0.5 per cent, and by more than 1 per cent in southern regions. The current event could be worse, according to what Allianz calls the “non-linear economic transmission of heat stress”, whereby losses intensify sharply after a “critical threshold around 30C”.

Labour output per hour decreases by about 3 per cent, Allianz found, for every degree of temperature increase across the 30-35C range. Temperatures this week have approached or exceeded 40C in much of Europe. Meanwhile, energy consumption rises around 1.2 per cent per degree over 30C, pushing up business costs.

Put together, this threatens a combination of reduced productivity, lower capital investment and squeezed government tax revenue: an ugly prospect for a Europe already grappling with a crisis of confidence over its economic competitiveness.

It’s too soon to give a meaningful estimate of the cost of this heatwave, which is forecast to continue in earnest for several days. Temperatures are set to stay elevated into July.

Allianz gave a sense of the scale of the medium-term threat by analysing a scenario in which the five hottest years between 2014 and 2024 were repeated sequentially between 2026 and 2030. That would result in cumulative GDP losses of between 5 and 7 per cent in France, Germany, Italy and Spain.

Other analysts will come up with higher or lower estimates. The crucial point is that the economic effects of extreme heat should now be an object of serious attention for every government, investor and corporate leader.

Conversation about physical climate risks commonly focuses on spectacular events such as hurricanes. But extreme heat is easily the most serious physical climate risk for companies, according to index and research company MSCI. In a study of 11,215 listed global companies, it found that 99.8 per cent faced a material financial risk from heat — far more than the rate for other physical hazards.

MSCI this week announced the $120mn acquisition of First Street, a company that provides analytics on physical climate risks. That’s part of a push to capitalise on growing financial-sector concern about these hazards, MSCI chief executive Henry Fernandez told me. “Right now, the world is not pricing climate risk,” he said. “But the banks and insurance companies are now demanding data, models and analytics on physical risk. They’re getting into it.”

As heatwaves and other extreme events become harder to ignore, you can expect the demand for this type of analysis to keep growing. But the precision of such work will always be limited by the endlessly complex interplay between our climate and economic systems — and by the fact that, where weather trends are concerned, the past is no longer a reliable guide to the future. The temperature records set this week are unlikely to stand for long.

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