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Adapting to Climate Change Covers Its Costs and Beyond
For a long time, humanity has learned to coexist with harsh weather conditions. Without centuries of innovative adaptation to the continuous threat of floods, a significant portion of the Netherlands would be submerged. Similarly, ancient communities along the Tigris and Euphrates rivers developed methods to capture and redirect excess water to nourish and protect their fields.
However, the number of places exposed to extreme weather conditions is continuously increasing. According to new research from the McKinsey Global Institute, titled “Advancing Adaptation: Mapping Costs from Cooling to Coastal Defenses,” the world spends $190 billion annually on investments in twenty primary adaptation measures that protect approximately 1.2 billion people. Meanwhile, 3 billion others, with over three-quarters living in low-income areas, have only limited protection.
Expanding the scope of protection standards adopted by advanced economies to include all at-risk locations requires $540 billion annually. This results in a funding gap of $350 billion, with 60% of that needed to assist low-income regions in building greater resilience and robustness. Moreover, adaptation costs will rise. Based on current emissions pathways, the world is likely to reach 2 degrees Celsius above pre-industrial levels by around 2050, exposing an additional 2.2 billion people to heat stress and another 1.1 billion to drought, for instance.
Our analysis indicates that the world will need to spend $1.2 trillion annually by 2050, at 2 degrees Celsius of warming, to protect everyone exposed to climate risks according to advanced economy standards, which is nearly 1% of the GDP in impacted areas. More than three-quarters of this expenditure will be allocated to protection against heat and drought.
This price tag may seem steep, but the benefits of adaptation efforts will exceed their costs by about sevenfold. Air conditioning not only protects indoor workers but also enhances their productivity. Cool shelters save lives during heat waves. Irrigation prevents crops from dying in hot and dry conditions. Coastal barriers shield assets along shorelines from flooding. If these solutions are effectively employed, they provide immense value.
However, recognizing that adaptation is a worthwhile investment does not guarantee the expenditure of necessary funds. Currently, the world invests only one-third of what is needed, and achieving protection according to advanced economy standards with an increase of 2 degrees Celsius by 2050 will require more than 6.2 times what is currently spent. The lack of spending capacity, competing priorities, collective action challenges, and other factors threaten to impede implementation efforts.
Additionally, the challenges of scaling up adaptation in advanced countries may be entirely different from those in developing nations. For instance, costs will be much higher in Sub-Saharan African countries, reaching up to 3% of GDP in vulnerable areas—around 50% more than regional governments have spent as a percentage of GDP to service their external debts in 2024. In the Middle East, North Africa, and India, the percentages of GDP necessary for protection according to advanced economy standards will increase by 2 degrees Celsius; these percentages are even lower in North America, where they stand at about 0.3% of GDP in vulnerable regions.
Economic development can help improve spending capacity, but even if adaptation spending grows in parallel with GDP growth, it will only cover about 60% of global needs at 2 degrees Celsius of warming. If lower-income regions increase their spending in line with their expected economic growth, it will only cover a quarter of adaptation costs at that level of warming. Furthermore, the existence or absence of adaptation measures can affect the pace of economic development itself. Drought or flooding might slow down income growth for small farmers, and heat stress can influence the productivity of outdoor workers.
So, what can be done, and what role can various stakeholders play? The good news is that many households can implement some adaptation measures independently, especially concerning heat. As solutions become affordable, some forms, such as passive cooling (shade, natural ventilation, etc.), reflective roofs, fans, or air conditioners, can provide substantial protection in many cases.
However, governments can also play a significant role, particularly in low-income regions and communities. They can fund critical infrastructure such as coastal defenses and create cooling shelters to protect the public. They can also establish adaptation incentives by setting and enforcing standards that promote resilience while raising awareness of risks. They are capable of distributing support grants or targeted purchasing programs to make adaptation more accessible for families and small businesses.
On the other hand, companies—especially large ones—can manage their risks, either directly or indirectly through their supply chains. They can also harness innovation to help make adaptation measures more affordable and efficient, such as providing better and cheaper cooling systems to combat heat stress.
Finally, financial institutions can leverage existing tools to finance adaptation, such as providing project-level funding for infrastructure like coastal barriers. Blended finance approaches may also help bridge feasibility gaps and attract private capital, although more work is needed to scale up these methods. In developing economies, there are also opportunities to integrate adaptation into broader investment strategies related to energy infrastructure, transportation systems, or urban expansion. Integrating adaptation early into these projects is significantly cheaper than retrofitting or rebuilding later.
Effective adaptation can enhance resilience and robustness, protect vulnerable communities, and support economic growth. The world possesses the necessary tools, and the benefits are undeniable. The decisions we make today will shape our ability to achieve long-term prosperity.
