McKinsey Global Institute

Climate risk and response in Asia

In many ways, Asia is on the frontline of a changing climate. We analyze the extent of climate risk facing the region and effective responses for adaptation and mitigation.

With many low-lying coastal cities exposed to flood and typhoon risk, dramatic increases in heat and humidity expected across the region, and extreme precipitation forecast in some areas but drought anticipated in others, Asian societies and economies will be increasingly vulnerable to climate risk without adaptation and mitigation.

Sidebar

In our January 2020 global report, Climate risk and response: Physical hazards and socioeconomic impacts, we found that physical risk from climate change is already present and growing around the world. In this report, we look more closely at Asia. While climate science makes extensive use of scenarios ranging from lower (Representative Concentration Pathway 2.6) to higher (RCP 8.5) CO2 concentrations, we focus on RCP 8.5 because it enables us to assess the full inherent physical risk of climate change in the absence of further decarbonization (see sidebar, “Our research methodology”).

This report quantifies the physical risk from climate change for Asia. We characterize risk within and across different countries and categorize impacts in four different types of countries in Asia: Frontier Asia, Emerging Asia, Advanced Asia, and China. We link climate models with economic projections to examine micro cases that illustrate exposure to climate change extremes and proximity to physical thresholds. A separate geospatial assessment examines six indicators to assess potential socioeconomic impact in 16 countries: Australia, Bangladesh, Cambodia, China, India, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Pakistan, the Philippines, Thailand, Vietnam, and South Korea. While establishing the overall risks of climate change in Asia, this report also seeks to emphasize the path forward through adaptation and mitigation. We highlight adaptation and mitigation strategies for policy makers and business leaders in the region to consider.

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Climate risk and response in Asia

Asia is 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 a chance to ensure that what goes up is more resilient and better able to withstand heightened risk. At the same time, key economies in the region, such as China and Japan, are leading the world in technologies, from electric vehicles to renewable energy, that are necessary to adapt to and mitigate climate change.

In many ways, Asia may face more severe impacts than other regions

By 2050, parts of Asia may see increasing average temperatures, lethal heat waves, extreme precipitation events, severe hurricanes, drought, and changes in water supply, based on RCP 8.5. We illustrate these hazards with maps that show local areas where impacts are most likely to be more severe, more frequent, or both over the coming decades (Exhibit 1).

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In many ways, Asia stands out as being more exposed to physical climate risk than other parts of the world in the absence of adaptation and mitigation (Exhibit 2). 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. For Asia, the probability of being exposed to a lethal heat wave at least once in the decade centered on 2050 could increase to 80 percent. By 2050, on average, between $2.8 trillion and $4.7 trillion of GDP in Asia annually will be at risk from an effective loss of outdoor working hours because of increased heat and humidity; as such conditions rise, the human body tires more easily and needs to take more frequent breaks. The Asian GDP at risk accounts for more than two-thirds of the total annual global GDP impact. 1 Finally, about $1.2 trillion in capital stock in Asia is expected to be damaged by riverine flooding in a given year by 2050, equivalent to about 75 percent of the global impact. 2

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For other systems, Asia might be less exposed to climate risks than the world, although risks in these areas are still expected to increase by 2050. For food systems, we find the risk of a grain yield decline of greater than 5 percent in a given year could be 1.4 times higher by 2050 for Asia relative to today, compared with 1.9 times globally. For natural capital, the share of today’s land area projected to experience biome shifts by 2050 is 40 percent for Asia, slightly less than the 45 percent global average. 3

We identify four types of countries in Asia, each with a different climate profile and exposure and response to physical climate risk: Frontier Asia, Emerging Asia, Advanced Asia, and China.

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What are the physical climate risks facing Asia?

Frontier Asia

Frontier Asia consists of Bangladesh, India, and Pakistan. These countries could see extreme increases in heat and humidity, which may significantly affect workability and livability. By 2050, their average temperatures are projected to rise by two to four degrees Celsius, and they could face much higher probabilities of lethal heat waves. By 2050, they could see extreme precipitation events more frequently than in the second half of the 20th century and may experience less drought. Climate change would also have the biggest negative impact on Asian crop yield in this group of countries.

Emerging Asia

Emerging Asia consists of major Southeast Asian countries: Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand, and Vietnam. Like Frontier Asia, these countries are projected to see extreme increases in heat and humidity by 2050 (although potentially less extreme than in Frontier Asia), and growing exposure to extreme precipitation events. The impact on workability will be significant for these countries due to their high percentage of work taking place in outdoor and labor-intensive sectors.

Advanced Asia

Advanced Asia 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. Rather, Advanced Asia is expected to be an agricultural net beneficiary of climate change in the near term. However, for some countries in the region, the effects on water supply and drought are the main challenges. The share of time spent in drought in southwestern Australia could grow to more than 80 percent by 2050. Typhoon and extreme precipitation risk could also increase in some parts of Japan and South Korea. In addition, the region is likely to see biome shift, or share of land surface changing climate classification.

China

China is climatically heterogeneous due to its location on a wide range of latitudes. Still, the country in aggregate is predicted to become hotter. Like Advanced Asia, China is expected to be an agricultural net beneficiary of climate change in the near term, with increasing statistically expected yields and volatility skewed toward positive outcomes. However, risks to infrastructure and supply chains will increase due to more frequent extreme precipitation events and typhoons in many areas; this is particularly important given China’s role in regional and global supply chains.

We find that countries with lower levels of per capita GDP, namely Frontier Asia and Emerging Asia, are most at risk from the impacts of climate change (Exhibit 3). Relying more on outdoor work and natural capital, they are subject to climates closer to physical thresholds that affect human beings ability to work outdoors. They also have more limited financial means to adapt (Exhibit 4).

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A micro view shows climate risks are increasing

We examined six case studies showing the impacts of climate change under RCP 8.5 on five socioeconomic systems across Asia: livability and workability, food systems, physical assets, infrastructure services, and natural capital. For the livability and workability system, we considered what extreme heat and humidity mean for urban populations and outdoor-based sectors in China and India. For food systems, we focused on the likelihood of a multiple-breadbasket failure affecting six major breadbaskets in Asia by crop (rice, corn, soy, and wheat). For physical assets and infrastructure services, we examined 17 types of infrastructure assets for their vulnerability to different types of climate hazards, with a focus on the potential impacts of flooding in Tokyo and wildfires in Australia. For natural capital, we examined the potential impacts of climate change on glaciers, oceans, and forests.

We find that climate risk is increasing in these six cases, and the characteristics of climate risk we identified from our global analysis—increasing, spatial, nonstationary, nonlinear, systemic, regressive, and underprepared—are evident. Key takeaways include the following:

Livability and effective working hours

Rising temperatures and lethal heat waves could affect livability and effective working hours in major Asian economies and cause regressive impacts within countries. In China, we find that the average share of outdoor working hours lost each year to extreme heat and humidity in exposed areas could increase from 4.5 percent in 2020 to 6.5 percent in 2030 and 8.5 percent in 2050. In India, we find that effectively 30 percent of annual daylight hours may be lost by 2050 in climate-exposed regions, an increase of more than 40 percent from today. Lower income groups in both countries are more susceptible than higher income groups, because low-income populations typically work in outdoor-based industries such as agriculture, mining, and construction or rely on the natural environment. These industries are also at risk from multiple hazards; for example, Indian agriculture may be hit not only by lost hours from extreme heat and humidity but by potential yield declines as well. Additionally, adaptation is expensive and may be out of reach for the economically most vulnerable.

Agriculture

A changing climate could increase the volatility of crop yields across Asia, potentially causing price spikes. In our case study analysis, we examined six Asian breadbaskets—China, India, Southeast Asia, the Indian subcontinent, Australia and New Zealand, and Japan and South Korea—to reveal different impacts among individual crops. 4 We find that by 2030, corn could be at increasing risk of yield declines, rice and wheat could become increasingly volatile, and soy would benefit from higher temperatures. We examined the probability of a yield decline or improvement of greater than 10 percent for today, 2030, and 2050. We find that certain countries are more exposed than others because of their climatic conditions and composition of crops, with India being the most vulnerable. Although climate risks will not necessarily reduce agricultural yields for some breadbaskets or crops, they will likely increase production volatility, destabilizing farmers’ incomes. Oversupply could affect farmers who may face lower prices for their crops, while undersupply could lead to food shortages and price spikes.

Assets and infrastructure services

Assets and infrastructure services could increasingly come under threat from climate hazards such as floods in Tokyo and wildfires in Australia. In the case of Tokyo, we estimate the impact of a compound flood event of simultaneous one-in-100-year rainfall, streamflow, and storm surge events both today and in 2050 (Exhibit 5). 5

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We find evidence of the nonlinearity of climate risk. While the average flood depth in Tokyo could increase 1.7 times by 2050, the real estate and infrastructure damage from the same event would be 2.2 to 2.4 times higher, about 30 percent more than the increase in flood depth. In Australia, we find wildfires could cause substantial damage to different types of infrastructure assets ranging from transportation to energy (Exhibit 6). The share of population living in an area with more than ten high fire risk days per year could increase to 46 percent by 2050, from 26 percent today. A changing climate could drive up the share of capital stock exposed to at least five high fire risk days from 44 percent today to 60 percent in 2050.

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Natural capital

Climate change is already having an impact on natural capital such as glaciers and ocean systems, and this could increasingly affect the services they provide. Natural capital provides valuable social and economic services to billions of people in the region, and climate change is intensifying the degradation of Asia’s natural capital that is already endangered. For example, in the Hindu Kush Himalayan region, glacial mass is expected to drop by 10 to 25 percent by 2030, and by 20 to 40 percent by 2050 in some subregions. By 2050, up to 90 percent of coral reefs in the Coral Triangle and Great Barrier Reef could suffer severe degradation under scenarios with two degrees Celsius global mean temperature increase. Rising ocean temperatures are already affecting fishing yields. From 1930 to 2010, seafood yields in the Sea of Japan fell by 35 percent.

How Asia can prepare for climate risk through adaptation

Climate science tells us that warming over the next decade is already locked in due to past emissions, suggesting that rising socioeconomic impacts are a virtual certainty across Asia. 6 In response, policy makers and business leaders will need to formulate adaptation strategies. We investigated about 50 adaptation case studies across Asia, through which we identified and detailed five adaptation measures: diagnose risk and enable response, protect people and assets, build resilience, reduce exposure, and finance and insure. These five adaptation measures are very relevant to Asian countries and in some cases are already deployed but can be expanded. Details of the measures include the following:

Diagnose risk and enable response

Adaptation measures cannot be successful without understanding and tracking intensifying climate risk. Decisive steps should be taken to adopt new mindsets and acquire the necessary tools and capabilities to model and diagnose climate risk that is continuously changing, is spatial (manifested locally), is systemic, and can lead to nonlinear impacts that are regressive. Importantly, planning and strategy building should reflect advanced modeling of climate risk probabilities and assess climate transition and liability risks as well as physical risk.

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What climate risk adaption strategies can Asian leaders consider adopting?

In Asia, many companies and public-sector organizations are beginning to assess their exposure. For example, as climate change increases the possibility of flooding, the Tokyo Metro is working to minimize the disruption of subway operations, preventing water ingress and minimizing damage caused by floods in the subways through precipitation data acquired from space, as well as enhancing station facilities and emergency response for passenger safety.

Protect people and assets

Measures to protect people and assets include: hardening assets, such as reinforcing or elevating physical assets and infrastructure; building green defenses, such as restoring natural defenses and ecosystems; and building gray defenses that reduce the severity or duration of climate events, such as disaster relief community shelters. For example, in a typical year, Kuala Lumpur experiences flash flooding. The Malaysian government has introduced flood controls by increasing river channel capacity, building a highway tunnel, and channeling water to holding ponds. The entire project provides storage for three million cubic meters of water, sufficient to offset most of the flooding in a typical year. 7

Build resilience

Apart from asset hardening, the resilience of assets and communities can be enhanced by increasing alternate and backup sources or decentralizing resource distribution (diversification). For example, Yunnan and Guangxi provinces in southwest China are predominantly rural communities. Over the past ten years, pressure on water systems and frequent droughts have led to significant crop losses. One project to foster resilience helped farmers develop new maize varieties better adapted to drought and pests. In the Ladakh region of India, which relies on melting snow and ice from the Himalayas to irrigate its fields, as glaciers have shrunk, water supplies have declined. A solution was devised to store meltwater in huge standing structures, providing irrigation throughout the year.

Reduce exposure

In the 50 case studies we investigated, reduction of exposure is not commonly practiced as an adaptation measure across Asia. But it should be reconsidered. In some cases, preferable adaptation strategies may include relocating or redesigning asset footprints.

As we found in our micro analysis, selected regions in Asia are extremely exposed to intensifying climate risks. For example, in Australia, some of the most populated and capital-dense areas (such as New South Wales) will see the steepest increase in number of high fire risk days. One example of large-scale exposure reduction is the Indonesian government's 2019 decision to relocate the country’s capital from Jakarta, parts of which may be submerged by 2050.

Decisions about when to protect and when to relocate will require balancing which regions and assets to spend on, how much to spend, and what to do now versus in the future. The impact on individual home owners and communities must be weighed against the rising burden of repair costs and possible post-disaster aid. Asian countries are home to some of the world’s largest populations of economically disadvantaged people, many of whom are highly vulnerable to the impacts of climate change. Therefore, it is crucial for Asian countries to ensure that the most vulnerable communities are protected and that their voices are included in decision making.

Finance and insure

The financing of adaption measures is particularly important because of Asia’s significant infrastructure needs. To maintain growth momentum, eradicate poverty, and respond to climate change, the region must invest $1.7 trillion a year in infrastructure through 2030, according to the Asian Development Bank. About 2 percent ($40 billion per year) is expected to be applied to climate risk adaptation. The financial burden and opportunity could be shared between the public and private sectors, and will require a collaborative approach such as joint funding. Governments can leverage loans or guarantees to encourage private-sector investment or mechanisms, such as legislation, to either raise additional adaptation finance or encourage private-sector involvement. The Asian Development Bank’s Climate Investment Funds, launched in 2008, are the largest source of financing for the bank’s climate change program and of concessional climate finance for the Asia–Pacific region. The funds have built a strong private-sector portfolio and at the time of writing had about $1.6 billion under management. Financing sourced from the government, multilateral development banks, and the private sector augments and leverages the financial resources donors have pledged to the funds.

Insurance is particularly important for Asia to minimize the impact of intensifying climate risks. This is another opportunity to crowd in the private sector. Three of the four Asian OECD countries and most non–OECD Asian countries did not achieve the average insurance penetration rate of OECD countries. 8 Underinsurance or the absence of insurance reduces resilience in Asia. Appropriate insurance can encourage behavioral changes by sending risk signals, for example discouraging development in certain locations.

How Asia can decarbonize

While adaptation is critical in the face of climate change, it is not sufficient. Climate science tells us that further warming and risk increase can be stopped only by achieving zero net greenhouse gas emissions. 9 Asia has a key role to play in global mitigation efforts. Its share of global greenhouse gas emissions has grown to 45 percent in the past 30 years from about 25 percent. Given the substantial share of emissions from Asia as well as its expected economic and corresponding emissions growth, decisions made in Asia today will be a critical determinant of the global emissions pathway.

Our analysis of Asia’s mitigation opportunities and challenges was built on four country- and sector-level decarbonization case studies: coal in India, steel in China, agriculture and deforestation in Indonesia, and transportation in Japan. These examples were not meant to be exhaustive; rather, the purpose of these case studies was to understand current decarbonization trends, to identify potential opportunities for decarbonization, including availability and applicability of new technology, and to understand the extent and costs of transition risks associated with decarbonization. Highlights include the following:

Shift from coal-powered energy to renewables

Asia is uniquely positioned to accelerate coal decarbonization, given its critical mass of regional production capacity and scale to drive down the cost of renewables. Furthermore, about half of global investment in power by 2040 is expected to occur in Asia. At the same time, the power sector accounts for about 35 percent of the region’s total CO2 emissions, and 90 percent of those emissions come from coal (compared to 70 percent globally). While a shift to renewables is under way, challenges remain to decommission coal plants while meeting growing power demand.

In our case study of the coal-fired power sector in India, we examine various scenarios: In scenario 1, we assume 30GW of additional subcritical coal capacities to be decommissioned by 2030, and 90GW by 2050. In scenario 2, we assume 60GW to be decommissioned by 2030 and 112GW by 2050. By 2050, scenario 2 would require decommissioning of about 110GW of subcritical coal plants. It would also require massive up-front investment, including a combination of solar and wind power and battery storage as well as the cost of potential payments to coal asset owners for retiring their assets before the assets reach the end of their lifetime, totaling up to about $310 billion in additional costs by 2050, compared with our reference case. 10

In the absence of effective measures, the scenarios we explore also require overcoming implementation challenges, such as a significant risk of electricity price growth caused by the capital expenditures needed to install renewables and potential job losses by coal plant workers, who may find transitioning to growing sectors (including renewable plants) challenging.

Decarbonize industrial operations and advance carbon capture, utilization, and storage

The industrial sector is the largest greenhouse gas emitter in Asia, accounting for more than 35 percent of the region’s annual CO2 emissions. 11 Furthermore, Asia’s ratio of industrial greenhouse gas emissions per unit of GDP is about 60 percent higher than the global average. Today, Asia generates about 80 percent of global CO2 emissions in the steel and cement industries. Consequently, structural shifts within these two industries in Asia are critical to success in decarbonizing the world’s industrial sector.

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What decarbonization strategies can Asian leaders undertake to mitigate climate change?

This could be done in a number of ways. First, reduce demand for and consumption of carbon-intensive intermediate products, improve energy efficiency, and electrify both industries. Second, new sources of energy, especially bioenergy and hydrogen, as well as investment in carbon capture, utilization, and storage would also play a key role.

In our China steel industry case study, assuming an accelerated scenario, China’s emissions from the steel industry could decrease by 440 MtCO2 by 2030 from 1,720 MtCO2 in 2020 with a decline in demand, improved energy efficiency, and increased scrap electric arc furnace (EAF) production. Among the new technologies, hydrogen-based steel production using an EAF is most technically feasible and already considered to be part of a potential long-term solution for decarbonizing the steel industry on a large scale.

We identify a number of external factors that will shape future development and time to adoption of green hydrogen–based steel. These include the need for a significant capacity increase in electricity from renewables, the availability of green hydrogen on an industrial scale, changes in raw materials, new production technology, demand for hydrogen-based steel, and financing and access to capital.

Transform agriculture and forestry

Decarbonizing agriculture in Asia and preventing deforestation is a significant mitigation opportunity; agriculture and deforestation combined account for 10 percent of CO2 emissions in Asia and more than 40 percent of CH4 emissions. Furthermore, methane emissions from agriculture alone in Asia account for almost 20 percent of global total methane emissions. Key strategies to reduce emissions in this sector include promoting a shift from a diet rich in animal protein to plant-based protein, improving farming practices (such as dry direct seeding, improved rice paddy water management, and improved fertilization of rice), and promoting sustainable forestry (ending deforestation and scaling reforestation).

Based on the top three contributors to Indonesia’s agricultural greenhouse gas emissions—rice cultivation, manure management, and enteric fermentation—we find six cost-efficient measures with high MtCO2e mitigation potential (these are measures related to agricultural production, versus other measures like diet shifts, that entail changes in consumer behavior). Three are in cultivation of rice, which has a significant socioeconomic impact in Indonesia, and three in meat production. 12 Evaluated according to global abatement costs, four of the six measures result in cost savings.

The biggest challenge, however, would be the transition to low-carbon farming practices from current practices, because farming supports the lives and livelihoods of billions of people in the region, and any disruptions would be widely felt. In Indonesia, for example, the agricultural sector accounts for 13 percent of national GDP and 30 percent of total employment. About 93 percent of Indonesia's farmers work on small family farms, with about 50 percent of annual household income from farm activities. 13

Finally, decarbonization efforts in Indonesia must move beyond the farm to restoration of carbon sinks. This is because unsustainable agricultural practices have significantly contributed to deforestation.

Electrify our daily life to decarbonize road transportation and buildings

More than 30 percent of global CO2 emissions from transportation and buildings comes from Asia. At the same time, Asia is a leader in technology such as electric vehicles and fuel cell vehicles (EVs and FCVs). Strategies to decarbonize in the transportation sector include improving the fuel efficiency of internal combustion engine (ICE) vehicles, EV and FCV penetration in multiple vehicle types, and decreasing the distance driven by road transportation (for example, with a shift to public transportation and ride sharing).

The big challenge is to scale the massive infrastructure required to shift from ICEs to battery EVs (BEVs) and FCVs. In our Japan case study, we found that the country’s transportation sector could achieve an annual reduction of about 70 MtCO2 by 2030 compared to 2016 by improving the fuel efficiency of ICEs, raising BEV penetration in most commercial vehicle segments, and decreasing the distance driven on the road through greater use of public transport and ride sharing for example. This reduction in emissions would help Japan meet its Paris Agreement target in 2030. However, we also found that the decarbonization of the transportation sector requires about $120 billion incremental cumulative investment by 2030 in order to deploy technology for transportation electrification and scale the infrastructure needed, such as EV charging stations.

While electrification is the most promising decarbonization measure for road transportation, decarbonizing buildings would also help overall mitigation efforts. Space and water heating, which typically rely on fossil fuels, are the primary emissions contributors, and electrifying these two processes would be the primary decarbonization driver in Asia. Also, by expanding the use of district heating and by blending hydrogen or biogas into gas grids for cooking and heating, emissions attributable to buildings could be further reduced.


Much of Asia is already responding to the adaptation and mitigation challenges of climate change. By building on those efforts, sharing best practices, and galvanizing support, Asia can emerge as a leader in one of the most monumental challenges facing the world. While we recognize that the challenges are large, Asia is well positioned to meet the challenges and capture the opportunities.

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