Kuwait: Physical risks from climate change are rising globally and GCC countries could become more vulnerable to their economic and financial effects over the next few decades if investments in adaptation and resilience stagnate, S&P Global Ratings said on Monday. Extreme heat and water stress caused by global warming could result in an annual drop of up to 8 percent in the region’s gross domestic product by 2050, without risk mitigation and adaptation, the report said.

“GCC governments have some of the highest assets-to-GDP ratios among the countries we rate,” it said. “Consequently, they have significant financial means to invest in adaptation and resilience measures.” To assess the economic impact of physical climate risks, S&P applied four shared socioeconomic pathways (SSP) scenarios in its Lost GDP: Potential impacts of physical climate risks report released last month before the start of COP28.

SSPs are a set of scenarios for projected greenhouse gas emissions and temperature changes, and include changes in socioeconomic systems, including population growth, economic growth, resource availability and technological developments. On the other end of the spectrum is SSP5-8.5, which has high emissions and limited mitigation measures. Compared with other regions, the GCC shows the third-largest GDP at risk of a drop of about 8 percent annually by 2050 without adaptation under SSP3-7.0, the report said.

Water stress and extreme heat events are not uncommon in the GCC. Generally, higher temperatures raise energy requirements for cooling while compounding water stress, the report said, adding that there is also the risk of potential damage from pluvial flooding, which occurs during heavy rainfall.

At risk is the share of GDP that could be lost annually due to exposure to physical climate risks. This metric is based on a static view of the economy and does not account for adaptation to climate risk, changes in the economy’s geography and structure, or any other growth dynamics. Without adaptation, S&P’s Lost GDP report found that up to 4.4 percent of the world’s GDP could be lost annually by 2050 if global warming does not stay well below 2ºC above pre-industrial levels.

The rating agency estimated that 3.2 percent of global GDP is at risk annually under SSP1-2.6 and this could rise to 5.1 percent under SSP5-8.5, where emissions are high under limited mitigation. The GCC’s economic geography is relatively concentrated in cities, hydrocarbon-producing centers and import or export-free zones. This makes the region highly exposed to water stress, extreme heat and occasional flooding after extreme rainfall, according to S&P’s latest report.

Decision makers throughout the region have – to differing extents – embedded adaptation and resilience measures into their national infrastructure, it said. “These measures may help reduce the potential impacts of physical climate risks. Yet they may also contribute to increased greenhouse gas emissions, particularly where additional energy is required, such as for desalination and cooling,” the report said. The GCC is estimated to hold 44 percent of the world’s water desalination capacity, S&P said, citing a 2022 World Bank report.

As part of efforts to put in place mitigation measures, regional policymakers recognize continued investment as a prerequisite for sustainable economic development and have been integrating net-zero commitments into national economic diversification plans, the rating agency said.