The economics of climate adaptation are clear: It’s a good buy. Every dollar spent today on proven measures such as cooling systems, irrigation, and sea dikes avoids $3 in damages on average. At 2 degrees Celsius of warming, that payoff jumps to $7 to $1.
Yet despite such great bang for the buck, the world currently significantly underspends on climate protection. While adapting to today’s pattern of climate hazards would cost $540 billion annually, we spend just $190 billion. Put simply, the world is buying just over one-third of the climate protection it needs today despite overwhelmingly good economics. Spending roughly $130 per person would be enough.
Today, emissions remain stubbornly high, with the world on a path to reach 2 C of warming by 2050. Three billion people who live in places across the globe that may experience extreme heat, prolonged drought, destructive wildfires, and intense flooding have only limited protection, and their ranks are expected to grow.
What will we spend in the future to protect the global population from increases in the duration and intensity of climate hazards as the price tag grows? New McKinsey Global Institute research finds that to protect people globally at standards typical in developed economies with a 2 C increase, the world would need to spend $1.2 trillion annually on adaptation, about 0.8% of gross domestic product in areas exposed to hazards.
Why are we leaving money on the table?
One significant challenge is the capacity to pay. Eighty-five percent of people in low-income regions today lack the protection of any of the 20 tried-and-true adaptation measures we examined, compared with one-quarter in high-income places. Even assuming robust economic growth, low-income places will face significant adaptation funding gaps without more targeted efforts in a 2 C world.
Relative to GDP, the costs of protecting communities from climate hazards at 2 C of warming would be highest by far in sub-Saharan Africa, at 3% of the region’s projected GDP in exposed places. That is about 50% more than governments in the region paid to service their external debt as a share of GDP in 2024.
A second reason is that when it comes to adaptation, success is invisible, because it effectively means “nothing happening.” That may not feel like a dramatic win, even when it actually is: Crops not affected by drought, the factory that keeps operating despite a flood, normal productivity outside work during heat stress, or no increased rate of miscarriage with heat waves. This can be a hard sell to households, companies, and governments already stretched by competing demands.
Another obstacle is that even when the upside is clear, incentives can be misaligned. Those who foot the bills for adaptation may not be those who benefit. Taxpayers living far from a coastline may be reluctant to help underwrite a sea dike that protects a shoreline community. Governments, in turn, may be thinking about what constituents want before the next election rather than protecting against a catastrophe that may happen in the next decade or two.
The lack of adaptation will matter more going forward. At 2 C of warming, more places will need protection against more extreme weather events. Heat stress alone could affect 4.1 billion people, up from 1.9 billion today, and 1.1 billion more people could be affected by drought.
About half the world could live in places exposed to three or more hazards, up from roughly 15% today. In many parts of the world, the presence or absence of adaptation measures is likely to influence the very pace of economic development.
With that in mind, we can continue to treat adaptation as a cost line in a budget — or we can take steps to adapt while we have time.
Improve understanding. Individuals and companies have many good options to adapt on their own, provided they know their risks and understand the benefits — and can afford to. About half of the $1.2 trillion of adaptation costs would go into protection against heat, which individuals can manage with active cooling measures. The benefits for them could extend beyond avoiding damages, such as irrigation that can both protect against damages from drought and boost agricultural yields.
Create the right incentives. The right standards and planning guidelines can help normalize adaptation, such as preventing new development in high-risk areas, and updating building codes to encourage more resilient real estate development. Large multinational companies, too, can offer financial and technical assistance to help suppliers — including those in developing economies — adapt, thereby minimizing their own risk of disruptions and operational losses.
Make adaptation more affordable. Companies have a clear role to play here, innovating to lower costs and enhance the effectiveness of adaptation measures — for them, this can be a strategic opportunity. Governments, too, have a role. Public programs in India invest in drought-resilient crops and irrigation systems that support smallholder farmers.
Implement well. This is especially important when resources are constrained. Adaptation measures, which yield large benefits with minimal costs — such as early-warning systems and cooling shelters which protect vulnerable populations against heat waves — should be prioritized. Infrastructure, such as stormwater systems, can also be designed keeping long-term changes in mind to avoid costly retrofits later.
Mobilize and innovate finance. Upfront financing equal to about 40% of the annual $1.2 trillion in spending would be needed for capital-intensive projects such as sea dikes and detention basins. Existing project and blended finance models must be better scaled, while newly emerging tools such as resilience bonds also hold promise. Financing for major infrastructure or home improvement projects should incorporate adaptation upfront, as it is far cheaper than rebuilding in the wake of a hazard. Smart financing can help overcome misaligned incentives, too, for example, by including a “beneficiary pays” model underwritten by those directly benefiting from the protection.
Each year we fail to adapt, we accept losses far larger than what protection would cost — and those losses will get bigger as the Earth warms. Adaptation is an extraordinary economic bargain. The question is whether we’ll start buying.
This article originally appeared in Devex.