# Peril and Promise: Tackling Climate Change in Latin America and the Caribbean

Allen Blackman, Eduardo Cavallo, Bridget Hoffmann, Adrien Vogt-Schilb

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Allen Blackman, Eduardo Cavallo, Bridget Hoffmann, Adrien Vogt-Schilb. Peril and Promise: Tackling Climate Change in Latin America and the Caribbean. Inter-American Development Bank, 2025, 10.18235/0013427 halshs-04977766

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# Peril and Promise

## Tackling Climate Change in Latin America and the Caribbean

<figure><img src="image_2.png" /></figure>

**Edited by:**

Allen Blackman
Eduardo Cavallo
Bridget Hoffmann
Adrien Vogt-Schilb

<figure><img src="image_3.png" /></figure>

IDB
<figure><img src="image_4.png" /></figure>
PERIL AND
PROMISE
<figure><img src="image_5.png" /></figure>
PERIL AND
PROMISE

Tackling Climate Change in
Latin America and the Caribbean

Edited by:

Allen Blackman

Eduardo Cavallo

Bridget Hoffmann

Adrien Vogt-Schilb

Inter-American Development Bank
Cataloging-in-Publication data provided by the
Inter-American Development Bank
Felipe Herrera Library

Peril and promise: tackling climate change in Latin America and the Caribbean / edited by Allen Blackman, Eduardo A. Cavallo, Bridget Hoffmann, Adrien Vogt-Schilb.

p. cm.

Includes bibliographic references.

978-1-59782-575-7 (Paperback)

978-1-59782-574-0 (Digital)

1. Climatic changes-Economic aspects-Latin America. 2. Climatic changes-Economic aspects-Caribbean Area. 3. Climatic changes-Social aspects-Latin America. 4. Climatic changes-Social aspects-Caribbean Area. I. Blackman, Allen, editor. II. Cavallo, Eduardo A., editor. III. Hoffmann, Bridget, editor. IV. Vogt-Schilb, Adrien, editor. V. Inter-American Development Bank. Department of Research and Chief Economist. VI. Inter-American Development Bank. Climate Change and Sustainable Development Sector. VII. Series.

QC981.8.C5 P48 2025

IDB-BK-293

Copyright © 2025 Inter-American Development Bank ("IDB"). This work is subject to a Creative Commons license CC BY 3.0 IGO (https://creativecommons.org/licenses/by/3.0/igo/legalcode). The terms and conditions indicated in the URL link must be met and the respective recognition must be granted to the IDB.

Further to section 8 of the above license, any mediation relating to disputes arising under such license shall be conducted in accordance with the WIPO Mediation Rules. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the United Nations Commission on International Trade Law (UNCITRAL) rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this license.

Note that the URL link includes terms and conditions that are an integral part of this license.

The opinions expressed in this work are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.

<figure><img src="image_6.png" /></figure>

Cover design: Paula Saenz Umaña

Layout: The Word Express
# Contents

<table><tr><td>List of Tables</td><td>vii</td></tr><tr><td>List of Figures</td><td>ix</td></tr><tr><td>List of Boxes</td><td>xv</td></tr><tr><td>Preface</td><td>xv</td></tr><tr><td>Acknowledgments</td><td>xix</td></tr><tr><td>List of Authors</td><td>xxiii</td></tr></table>

<table><tr><td>1.</td><td>Averting Danger, Seizing Opportunity</td><td>1</td></tr><tr><td>2.</td><td>The Cold Macroeconomic Reality of a Warmer Climate</td><td>19</td></tr><tr><td>3.</td><td>Lives and Livelihoods in the Age of Climate Change</td><td>39</td></tr><tr><td>4.</td><td>Double Jeopardy: Climate Change and Biodiversity Loss</td><td>59</td></tr><tr><td>5.</td><td>Feeding a Warmer World</td><td>79</td></tr><tr><td>6.</td><td>Forecast for Financial Sector Resilience</td><td>107</td></tr><tr><td>7.</td><td>Delivering Resilient Infrastructure Services</td><td>131</td></tr><tr><td>8.</td><td>The Road to Net Zero</td><td>159</td></tr><tr><td>9.</td><td>Barriers En Route to a Net-Zero Economy</td><td>193</td></tr><tr><td>10.</td><td>Fiscal Policy: A Two-Way Street</td><td>215</td></tr><tr><td>11.</td><td>Navigating Climate and Trade Policies</td><td>247</td></tr></table>
12. Filling the Finance Gap: What Multilateral Development Banks Can Do 281

13. Cities: A Hot Spot in the Fight against Climate Change 305

14. Voting for a Better Future: Citizens and the Climate Transition 321

References 337
# List of Tables

<table><tr><td>Table 1.1</td><td>Effects of Climate Change on Social, Economic, and Natural Systems</td><td>5</td></tr><tr><td>Table 3.1</td><td>Projected Excess Demand for Health Care Services due to Extreme Heat</td><td>45</td></tr><tr><td>Table 3.2</td><td>Educational Facilities Where Heat Will Make Learning Difficult</td><td>47</td></tr><tr><td>Table 5.1</td><td>Regression Results: Effect of Climate Vulnerability on Undernourishment</td><td>90</td></tr><tr><td>Table 5.2</td><td>Policies to Mitigate Effects of Climate Change on Food Availability</td><td>94</td></tr><tr><td>Table 5.3</td><td>Policies to Mitigate Effects of Climate Change on Food Access</td><td>100</td></tr><tr><td>Table 5.4</td><td>Policies to Mitigate Effects of Climate Change on Food Use</td><td>103</td></tr><tr><td>Table 5.5</td><td>Policies to Mitigate Effects of Climate Change on Food Stability</td><td>104</td></tr><tr><td>Table 6.1</td><td>Banking Indicators in 17 Latin American and Caribbean Countries, as of End-2022</td><td>117</td></tr><tr><td>Table 6.2</td><td>Highlights of the Survey on Preparedness for Climate Change Impacts on Financial Stability</td><td>127</td></tr><tr><td>Table 7.1</td><td>Main Impacts of Climate Change Reported by Latin American and Caribbean Water Utilities</td><td>135</td></tr><tr><td>Table 7.2</td><td>Impacts of Climate Change and Disasters on Infrastructure Services</td><td>142</td></tr><tr><td>Table 7.3</td><td>Climate-Fueled Risk to Infrastructure Assets by 2030</td><td>145</td></tr><tr><td>Table 7.4</td><td>Examples of Grey Infrastructure and Nature-Based Solutions in Water and Sanitation Services</td><td>152</td></tr></table>
<table><tr><td>Table 8.1</td><td>Net-Zero Transformations and Progress Indicators by Sector</td><td>166</td></tr><tr><td>Table 8.2</td><td>GHG Emissions and Estimated Willingness to Pay (WTP) for Net Zero, by Country (standard error)</td><td>190</td></tr><tr><td>Table 9.1</td><td>Carbon Taxes in Latin America and the Caribbean, 2023</td><td>195</td></tr><tr><td>Table 10.1</td><td>Estimated Impact of Rebate Strategies on Real GDP by Year 10</td><td>232</td></tr><tr><td>Table 11.1</td><td>Latin American and Caribbean Exposure to EU CBAM, 2022</td><td>267</td></tr><tr><td>Table 12.1</td><td>Types of Technical Assistance Provided to Mobilize Private Capital</td><td>298</td></tr></table>
List of Figures

<table><tr><td>Figure 1.1</td><td>Temperature Anomalies in the World, the Americas, and the Caribbean (1900–2023)</td><td>3</td></tr><tr><td>Figure 1.2</td><td>Incidence of Disasters by Type, 1970–2023</td><td>4</td></tr><tr><td>Figure 1.3</td><td>World and Regional Contributions to GHG Emissions by Sector, 2020</td><td>10</td></tr><tr><td>Figure 2.1</td><td>Nonlinear Response of Growth in GDP per Capita to Rising Temperatures</td><td>20</td></tr><tr><td>Figure 2.2</td><td>Illustration of Expected Changes in Distribution of Temperature</td><td>22</td></tr><tr><td>Figure 2.3</td><td>Impact of Heatwaves on Economic Growth</td><td>23</td></tr><tr><td>Figure 2.4</td><td>Projected Effect of Temperature Changes on GDP in 2050 by Country</td><td>28</td></tr><tr><td>Figure 2.5</td><td>Comparative Impacts of Storms on Economic Growth, World and Region</td><td>30</td></tr><tr><td>Figure 2.6</td><td>Effects of Storms: World and Latin America and the Caribbean</td><td>31</td></tr><tr><td>Figure 2.7</td><td>Effects of Floods: World and Latin America and the Caribbean</td><td>35</td></tr><tr><td>Figure 3.1.</td><td>Poverty in Municipalities Projected to Experience Extreme Heat</td><td>52</td></tr><tr><td>Figure 4.1</td><td>Wildlife Population Trends</td><td>60</td></tr><tr><td>Figure 4.2</td><td>Drivers of Biodiversity Loss and Climate Change Caused by Human Activities</td><td>61</td></tr><tr><td>Figure 4.3</td><td>Cost-Effective Mitigation Potential of 12 Natural Climate Solutions, by Pantropical Region</td><td>67</td></tr><tr><td>Figure 4.4</td><td>Interaction of Biodiversity and Climate Change Challenges with the Financial Sector</td><td>77</td></tr></table>
<table>
  <tr>
    <td>Figure 5.1</td>
    <td>Food Insecurity in the World and Latin America and the Caribbean</td>
    <td>80</td>
  </tr>
  <tr>
    <td>Figure 5.2</td>
    <td>Undernourishment in the World and Latin America and the Caribbean</td>
    <td>81</td>
  </tr>
  <tr>
    <td>Figure 5.3</td>
    <td>Climate Vulnerability in the World and Latin America and the Caribbean</td>
    <td>83</td>
  </tr>
  <tr>
    <td>Figure 5.4</td>
    <td>Disaster Events in Latin America and the Caribbean, 2000–2019</td>
    <td>85</td>
  </tr>
  <tr>
    <td>Figure 5.5</td>
    <td>Correlation between Food Insecurity and Climate Vulnerability</td>
    <td>87</td>
  </tr>
  <tr>
    <td>Figure 5.6</td>
    <td>Correlation between Food Insecurity and Disaster Events, 2000–2019</td>
    <td>88</td>
  </tr>
  <tr>
    <td>Figure 5.7</td>
    <td>Value of Food Production in Latin America and the Caribbean, 2000–2020</td>
    <td>91</td>
  </tr>
  <tr>
    <td>Figure 5.8</td>
    <td>Correlation between Food Production and Climate Vulnerability</td>
    <td>94</td>
  </tr>
  <tr>
    <td>Figure 5.9</td>
    <td>Simulated Effect of a 20 Percent Increase in Food Prices on Poverty</td>
    <td>97</td>
  </tr>
  <tr>
    <td>Figure 5.10</td>
    <td>Correlation between Population Living in Poverty and Climate Vulnerability</td>
    <td>99</td>
  </tr>
  <tr>
    <td>Figure 5.11</td>
    <td>Correlation between Stunting and Climate Vulnerability</td>
    <td>102</td>
  </tr>
  <tr>
    <td>Figure 5.12</td>
    <td>Correlation between FPI Volatility and Climate Vulnerability</td>
    <td>104</td>
  </tr>
  <tr>
    <td>Figure 6.1</td>
    <td>Impact Chain of Climate Change Risks</td>
    <td>114</td>
  </tr>
  <tr>
    <td>Figure 6.2</td>
    <td>Loan Losses under SSP2 and SSP3 Relative to SSP1, as of 2050</td>
    <td>118</td>
  </tr>
  <tr>
    <td>Figure 6.3</td>
    <td>Loan and Public Debt Losses under SSP2 and SSP3 Relative to SSP1, as of 2050</td>
    <td>119</td>
  </tr>
  <tr>
    <td>Figure 6.4</td>
    <td>Regulatory Capital to Risk-Weighted Assets, as of Late 2022</td>
    <td>120</td>
  </tr>
  <tr>
    <td>Figure 6.5</td>
    <td>Basel Capital Ratios under SSP2 and SSP3 Relative to SSP1, as of 2050</td>
    <td>121</td>
  </tr>
  <tr>
    <td>Figure 7.1</td>
    <td>Infrastructure Damage by Sector and Type of Event in Latin America and the Caribbean</td>
    <td>132</td>
  </tr>
</table>
<table><tr><td>Figure 7.2</td><td>Effect of Temperature on Household Electricity Consumption by Income, Colombia</td><td>140</td></tr><tr><td>Figure 8.1</td><td>Contribution to Total Global GHG Emissions, by Region, and Contribution to Total Latin American and Caribbean Emissions, by Country</td><td>160</td></tr><tr><td>Figure 8.2</td><td>Latin America and Caribbean Emissions, by Sector and Year</td><td>161</td></tr><tr><td>Figure 8.3</td><td>Per Capita GHG Emissions, by Region and Year</td><td>162</td></tr><tr><td>Figure 8.4</td><td>World and Regional Contributions to GHG Emissions by Sector, 2020</td><td>163</td></tr><tr><td>Figure 8.5</td><td>World and Regional Energy Sector Contributions to GHG Emissions, 2020</td><td>163</td></tr><tr><td>Figure 8.6</td><td>Sector Contributions to Regional GHG Emissions, by Country</td><td>165</td></tr><tr><td>Figure 8.7</td><td>GHG Emissions under Five Different Development Strategies</td><td>181</td></tr><tr><td>Figure 8.8</td><td>GHG Emissions by Sector under Traditional Development and All Actions</td><td>183</td></tr><tr><td>Figure 8.9</td><td>Costs and Benefits of Reaching Net Zero under Four Development Strategies, Compared to Traditional Development</td><td>185</td></tr><tr><td>Figure 8.10</td><td>Net Benefits by Associated Sector under All Actions</td><td>186</td></tr><tr><td>Figure 8.11</td><td>Emissions in 2050 versus Implementation of Critical Transformations</td><td>187</td></tr><tr><td>Figure 8.12</td><td>Net Benefits and Net 2050 Emissions of Critical Actions Variants under Uncertainty</td><td>188</td></tr><tr><td>Figure 10.1</td><td>Fossil Fuel and Electricity Subsidies in Latin America and the Caribbean, 2022</td><td>219</td></tr><tr><td>Figure 10.2</td><td>Impact of Carbon Tax on Real GDP under Alternative Tax Rebate Strategies</td><td>231</td></tr><tr><td>Figure 10.3</td><td>Carbon Tax Rate Needed to Counter Tax Evasion</td><td>233</td></tr><tr><td>Figure 10.4</td><td>Impact of a Catastrophe on Real GDP under Different Scenarios</td><td>243</td></tr><tr><td>Figure 11.1</td><td>Gains and Losses from Global Warming in 2050</td><td>250</td></tr><tr><td>Figure 11.2</td><td>Trade-Related Production and Consumption GHG Shares by Country</td><td>252</td></tr></table>
<table>
  <tr>
    <td>Figure 11.3</td>
    <td>CO<sub>2</sub> Emissions Embodied in Exports and the Share of Export-Related CO2 Emissions</td>
    <td>255</td>
  </tr>
  <tr>
    <td>Figure 11.4</td>
    <td>Intensity of CO<sub>2</sub> Emissions in Total Exports</td>
    <td>255</td>
  </tr>
  <tr>
    <td>Figure 11.5</td>
    <td>Decomposition of GHG Emissions from Production of Exports, 1990 and 2014</td>
    <td>256</td>
  </tr>
  <tr>
    <td>Figure 11.6</td>
    <td>Average Applied Tariffs on Environmental Goods by Country, 2019</td>
    <td>259</td>
  </tr>
  <tr>
    <td>Figure 11.7</td>
    <td>Numbers of Environment-Related Notifications and Measures, 2009–21</td>
    <td>260</td>
  </tr>
  <tr>
    <td>Figure 11.8</td>
    <td>Relative Carbon Efficiency for Countries by Sector</td>
    <td>262</td>
  </tr>
  <tr>
    <td>Figure 11.9</td>
    <td>Voluntary Sustainability Standards Uptake in Selected Agricultural Commodities, 2021</td>
    <td>269</td>
  </tr>
  <tr>
    <td>Figure 11.10</td>
    <td>Latin American and Caribbean Exposure to the EUDR</td>
    <td>270</td>
  </tr>
  <tr>
    <td>Figure 11.11</td>
    <td>Covariances of Applied Tariffs and Goods Emission Intensities</td>
    <td>277</td>
  </tr>
  <tr>
    <td>Figure 12.1</td>
    <td>The Sector Distribution of Climate-Related Overseas Development Assistance, 2021</td>
    <td>285</td>
  </tr>
  <tr>
    <td>Figure 12.2</td>
    <td>Geographical Distribution of Climate-Related Overseas Development Assistance, 2021</td>
    <td>286</td>
  </tr>
  <tr>
    <td>Figure 12.3</td>
    <td>Relationship between GHG Emissions and Mitigation Finance, 2013–20</td>
    <td>288</td>
  </tr>
  <tr>
    <td>Figure 12.4</td>
    <td>Relationship between Countries' Vulnerability Index and Adaptation Finance, 2013–20</td>
    <td>289</td>
  </tr>
  <tr>
    <td>Figure 12.5</td>
    <td>Average Climate Finance Flows in Latin America and the Caribbean, by Provider, Financial Instrument, and Use, 2021–22</td>
    <td>291</td>
  </tr>
  <tr>
    <td>Figure 12.6</td>
    <td>Type of Support Provided by Multilateral Development Banks, 2022</td>
    <td>295</td>
  </tr>
  <tr>
    <td>Figure 12.7</td>
    <td>Green Bonds Issuance, by Country and Year</td>
    <td>300</td>
  </tr>
  <tr>
    <td>Figure 12.8</td>
    <td>Thematic Bond Issuances by Theme</td>
    <td>301</td>
  </tr>
  <tr>
    <td>Figure 14.1</td>
    <td>Perceived Urgency of Climate Change</td>
    <td>324</td>
  </tr>
  <tr>
    <td>Figure 14.2</td>
    <td>Perceived Urgency of Climate Change, by Education</td>
    <td>325</td>
  </tr>
  <tr>
    <td>Figure 14.3</td>
    <td>Fossil Fuel Companies' Transfers to Government as a Share of General Revenues, by Country</td>
    <td>330</td>
  </tr>
  <tr>
    <td>Figure 14.4</td>
    <td>Top Issues as Ranked by Survey Respondents</td>
    <td>332</td>
  </tr>
</table>
# List of Boxes

<table><tr><td>Box 1.1</td><td>Climate Change: Key Terms</td><td>2</td></tr><tr><td>Box 1.2</td><td>Framework for Response: The Paris Agreement</td><td>7</td></tr><tr><td>Box 3.1</td><td>Feeling the Heat: Temperatures, Criminality, and Violence</td><td>41</td></tr><tr><td>Box 3.2</td><td>A Bad Feeling about Climate Change</td><td>42</td></tr><tr><td>Box 3.3</td><td>The Impact of Climate Change on Poverty in Latin America and the Caribbean</td><td>51</td></tr><tr><td>Box 3.4</td><td>Empowering Vulnerable Populations through Financial Innovation</td><td>53</td></tr><tr><td>Box 4.1</td><td>An Unlikely Hero: Mangroves</td><td>61</td></tr><tr><td>Box 4.2</td><td>The Economic and Environmental Fallout of an Amazon Tipping Point</td><td>65</td></tr><tr><td>Box 4.3</td><td>Costa Rica's Payments for Environmental Services Program</td><td>71</td></tr><tr><td>Box 5.1</td><td>The Notre Dame Global Adaptation Initiative (ND-GAIN) Country Index</td><td>82</td></tr><tr><td>Box 5.2</td><td>Regression Models</td><td>89</td></tr><tr><td>Box 5.3</td><td>Climate-Smart Technologies for Food Security in Nicaragua</td><td>95</td></tr><tr><td>Box 5.4</td><td>Agricultural Technologies for Food Security in Bolivia</td><td>101</td></tr><tr><td>Box 5.5</td><td>Women's Income Diversification and Empowerment for Food Use in Nicaragua</td><td>103</td></tr><tr><td>Box 6.1</td><td>Climate Change Impact on the Insurance Industry</td><td>112</td></tr><tr><td>Box 6.2</td><td>Potential Losses for Banks: Methodological Approach</td><td>114</td></tr><tr><td>Box 6.3</td><td>Robustness Checks with Bank-Level Data for Colombia</td><td>122</td></tr></table>
<table>
  <tbody>
    <tr>
      <td>Box 7.1</td>
      <td>How Climate Change Disrupts Electricity Services: The Case of Hurricane Odile</td>
      <td>136</td>
    </tr>
    <tr>
      <td>Box 7.2</td>
      <td>Climate Change Disruptions to Maritime Transportation and World Trade: The Panama Canal</td>
      <td>141</td>
    </tr>
    <tr>
      <td>Box 7.3</td>
      <td>How Diversification Helps Santiago de Chile Keep Tap Water Flowing</td>
      <td>150</td>
    </tr>
    <tr>
      <td>Box 8.1</td>
      <td>Will Agtech Deliver on Its Climate Change Potential?</td>
      <td>168</td>
    </tr>
    <tr>
      <td>Box 8.2</td>
      <td>More Renewables, More Savings</td>
      <td>171</td>
    </tr>
    <tr>
      <td>Box 8.3</td>
      <td>Less Combustion, Better Health</td>
      <td>173</td>
    </tr>
    <tr>
      <td>Box 8.4</td>
      <td>The SiSePuede Modeling Suite</td>
      <td>174</td>
    </tr>
    <tr>
      <td>Box 9.1</td>
      <td>Synchronizing Power Transmission Capacity with Solar and Wind Uptake in Chile</td>
      <td>199</td>
    </tr>
    <tr>
      <td>Box 9.2</td>
      <td>Market Design Can Make or Break Business Models for Electric Buses</td>
      <td>201</td>
    </tr>
    <tr>
      <td>Box 9.3</td>
      <td>Making Transportation Systems Inclusive and Accessible</td>
      <td>203</td>
    </tr>
    <tr>
      <td>Box 9.4</td>
      <td>Addressing the Fear Factor</td>
      <td>206</td>
    </tr>
    <tr>
      <td>Box 9.5</td>
      <td>The Multiple Barriers to Slowing Deforestation</td>
      <td>208</td>
    </tr>
    <tr>
      <td>Box 10.1</td>
      <td>Fiscal Impacts of Disasters</td>
      <td>216</td>
    </tr>
    <tr>
      <td>Box 10.2</td>
      <td>GHG Emissions from Public Spending in Brazil</td>
      <td>221</td>
    </tr>
    <tr>
      <td>Box 10.3</td>
      <td>What Would Happen? Comparing Carbon Taxation in Brazil and Mexico</td>
      <td>225</td>
    </tr>
    <tr>
      <td>Box 10.4</td>
      <td>A Bird's Eye View of the Economy</td>
      <td>227</td>
    </tr>
    <tr>
      <td>Box 10.5</td>
      <td>Climate Change and Fiscal Decentralization</td>
      <td>237</td>
    </tr>
    <tr>
      <td>Box 10.6</td>
      <td>Improving Resilience by Transferring Risk</td>
      <td>241</td>
    </tr>
    <tr>
      <td>Box 11.1</td>
      <td>Trade and Climate Change Mitigation: Key Concepts</td>
      <td>254</td>
    </tr>
    <tr>
      <td>Box 12.1</td>
      <td>Multilateral Climate Funds</td>
      <td>284</td>
    </tr>
    <tr>
      <td>Box 12.2</td>
      <td>Apples to Oranges: Measuring Adaptation and Mitigation Finance</td>
      <td>287</td>
    </tr>
    <tr>
      <td>Box 12.3</td>
      <td>The Bridgetown Initiative</td>
      <td>293</td>
    </tr>
    <tr>
      <td>Box 12.4</td>
      <td>Incentivized Infrastructure Bonds</td>
      <td>302</td>
    </tr>
    <tr>
      <td>Box 13.1</td>
      <td>Fires in Informal Settlements</td>
      <td>310</td>
    </tr>
  </tbody>
</table>
# Preface

Achieving net-zero carbon emissions by 2050 could generate between US$1 trillion and US$3 trillion above and beyond investment costs for Latin America and the Caribbean. Equivalent to 40 percent of gross domestic product, this is an investment opportunity the region cannot afford to pass up. Benefits from fuel cost savings and improvements in health, safety, and productivity drive this result. And while the size of the health and safety benefits may be surprising, it is important to recognize that, today, more people in our region are dying from the effects of particulate matter, ozone, and other conventional air pollutants than from climatic events. Decarbonization would dramatically cut such pollution.

This year's edition of the Inter-American Development Bank's flagship *Development in the Americas* report series explores why investing in climate resilience and reducing greenhouse gases is a strong plan for economic growth. The region needs such a plan. It is arguably caught in the middle-income growth trap. It has seen a reversal of the gains in poverty reduction made in the first decade of this century. Loss and damage from climate events are worsening, and properties are increasingly becoming uninsurable. Too often, resilience and emission-reduction investments are only considered in terms of avoided peril in the long term. The benefits and promise in the short to medium terms have been grossly undervalued.

Why are these investments not happening at anywhere near the pace required to keep average temperatures below the tipping points for the planet's physical, chemical, and biological systems? The role of governance—of integrated, country-owned, long-term, effective climate policymaking—looms large in the answer to this question. This is challenging even in wealthy places with well-resourced institutions. But without the right governance and decision-making around these issues, little progress can be made. Emission reductions will yield winners and losers across sectors and over time. If the losers, especially the most vulnerable, are not compensated in some way, they will oppose progress. Country-owned plans, collaboration
among governments, and cross-sectoral considerations are crucial to the effectiveness of any plan to reach net zero by 2050 or earlier. Resilience is about making whole-of-country systems resilient, not just the parts covered by individual government departments. And, in some parts of our region, effectiveness requires governments' reach to be longer. Almost 90 percent of deforestation in the Amazon is illegal; just making it so hasn't stopped it from happening. Such factors drive the IDB's support for country platforms, policy-based loans, enhanced adaptive social protection, other rights-based approaches for vulnerable communities in transition, and the development of loans to support citizen security and peace.

Another high hurdle is the finance gap. In Europe and North America, where the cost of capital is low, many emission-reducing investments are commercially viable with little public support. In many parts of Latin America and the Caribbean, however, where capital costs two to three times more, the same technologies and contracts are not feasible. At a fundamental level, the high cost of capital reflects the low supply of available savings and high demand for investment typical of a developing economy. To be sure, measures to raise and mobilize local savings are both vital and common fare for development banks, but they take time.

Moreover, local savings are not limitless, and pushing more investment demand in a short period of time could raise the cost of capital and crowd out other investments. To address this dilemma, the IDB works toward reducing barriers to the cross-border flow of capital from places where it is cheaper and more abundant. In line with its new institutional strategy, and along with the more granular IDB Strategy+ Approach Document on Climate Change and Environmental Degradation, the Bank promotes cross-border capital flows for investments in sea walls, drought defenses, and other largely public goods that strengthen resilience. Through IDB CLIMA, a program of sustainability-linked or reward-for-result loans, the cost of loans is reduced when the targeted resilience has been certified. These and other initiatives highlighted in the 2024 MDB Viewpoint Note on multilateral development bank reform will enable countries to bring forward much-needed investments in resilience and adaptation. For those that generate revenues, as do many emission reduction projects, Eco-Invest, a joint initiative of the Brazilian Ministry of Finance and the IDB, seeks to de-risk projects and unblock the flow of cross-border capital by reducing foreign exchange hedging costs and introducing blended finance. As part of our support for the international finance reform agenda, we are also encouraging bank and savings regulators in countries from which capital could flow to reduce historic or geographical and non-risk-based impediments to investment in emerging economies.
The authors of *Perils and Promise: Tackling Climate Change in Latin America and the Caribbean* come from across the IDB, IDB Invest, and IDB Lab. Their wide-ranging, scholarly contributions make clear how scaling up initiatives like these, together with others that advance resilience and decarbonization, will have both short- and long-term benefits, mapping a route to strong, inclusive, resilient growth in Latin America and the Caribbean.

**Ilan Goldfajn**
President

**Avinash Persaud**
Special Advisor on Climate Change
Inter-American Development Bank
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# Acknowledgments

*Development in the Americas (DIA)* is the flagship publication of the Inter-American Development Bank (IDB). This issue was produced under the direction of Allen Blackman, principal advisor of the Climate Change and Sustainable Development Sector, Eduardo Cavallo, principal advisor of the Infrastructure and Energy Sector, Bridget Hoffmann, senior economist at the Research Department, and Adrien Vogt-Schilb, senior economist in the Climate Change Division.

Ana María Ibáñez, vice president for Sectors and Knowledge, Juan Pablo Bonilla, manager of the Climate Change and Sustainable Development Sector, and Eric Parrado, chief economist and economic counselor of the Research Department, provided constant support and guidance throughout the life of this project.

The main chapter authors are as follows:

Chapter 1 Allen Blackman, Eduardo Cavallo, Bridget Hoffmann, and Adrien Vogt-Schilb

Chapter 2 Eduardo Cavallo, Bridget Hoffmann, and Juliana Dueñas

Chapter 3 Mariana Alfonso, Maria Soledad Bos, and Juliana Helo Sarmiento

Chapter 4 Francisco Alpízar, Ariana Salas-Castillo, and Gregory Watson

Chapter 5 Lina Salazar, Mario González Flores, Ana R. Ríos, and Luis Alvaro Alvarez

Chapter 6 Ricardo Bebczuk, Arturo José Galindo, and Carolina Celis

Chapter 7 Lenin H. Balza, Agustina Calatayud, María Pérez-Urdiales, Tomás Serebrisky, and Ben Solis

Chapter 8 Allen Blackman and Adrien Vogt-Schilb

Chapter 9 Adrien Vogt-Schilb and Allen Blackman

Chapter 10 Luis Alejos, Eduardo Cavallo, and Valentina Gabrielli

Chapter 11 Juan Blyde, Marcelo Dolabella, and Mauricio Mesquita Moreira

Chapter 12 Raul Delgado, Arturo José Galindo, Hilen G. Meirovich, and Patricia Yañez-Pagans
Chapter 13 Nora Libertun de Duren and María José González Jaramillo

Chapter 14 Valentina Gabrielli and Bridget Hoffmann

The book contains a number of extremely valuable boxes. Thanks are
due to the following authors of these important contributions: Graham
Watkins (Box 1.2); Santiago M. Perez-Vincent and Norma Peña (Box 3.1);
Mariana Alfonso, Maria Soledad Bos, and Juliana Helo Sarmiento (Box 3.2
and 3.3); Yuri Soares (Box 3.4); Francisco Alpízar, Ariana Salas-Castillo, and
Gregory Watson (Box 4.1); Onil Banerjee (Box 4.2); Pablo Ordóñez (Box 4.3);
Lina Salazar, Mario González Flores, Ana R. Ríos, and Luis Alvaro Alvarez
(Boxes 5.1, 5.2, 5.3, 5.4, and 5.5); Ricardo Bebczuk, Arturo José Galindo, and
Carolina Celis (Boxes 6.1, 6.2, and 6.3); Lisa Bagnoli, Lucía Delgado, Jerónimo
Luza, Oscar A. Mitnik, Clara Pasman, and Tomás Serebrisky (Box 7.1);
Agustina Calatayud, Maria Eugenia Rivas, Jessica Camacho, Carlos Beltrán,
Mariano Ansaldo, and Eduardo Café (Box 7.2); Ben Solis (Box 7.3); Yuri Soares
and Valeria López Portillo Purata (Box 8.1); Allen Blackman (Boxes 8.2, 8.3,
and 8.4); Natacha C. Marzolf, Claudia Valdés Florenzano, and Adrien Vogt-
Schilb (Box 9.1); Agustina Calatayud (Box 9.2); Manuel Rodríguez Porcel
and Lauramaria Pedraza Sanchez (Box 9.3); Santiago M. Perez-Vincent and
Norma Peña (Box 9.4); Allen Blackman (Box 9.5); Luis Alejos, Eduardo Cavallo,
and Valentina Gabrielli (Boxes 10.1 and 10.6); Victoria Nuguer and Cezar
Santos (10.3); Marcio Alvarenga Junior and Luis Alejos (Box 10.2); Eduardo
Cavallo (Box 10.4); Axel Radics (Box 10.5); Juan Blyde, Marcelo Dolabella, and
Mauricio Mesquita Moreira (Box 11.1); Tomás Lisazo (Box 12.1); Adrien Vogt-
Schilb (Box 12.2); and Raul Delgado, Arturo José Galindo, Hilen G. Meirovich,
and Patricia Yañez-Pagans (Boxes 12.3 and 12.4).

Additional valuable inputs and comments were provided by Vanessa
Alviarez, Lisa Bagnoli, Oscar Becerra, Martin Breitkopf, Juan Pablo Brichetti,
Marco Buttazzoni, Juan José Castillo, Omar Chisari, Clarissa Dallenbach, Lucía
Delgado, José Luis Díaz Ramos, Juliana Dueñas, Valentina Gabrielli, Nick
Godfrey, Santiago Gómez-Malagón, María José González Jaramillo, Diego
Herrera, Marc Jeuland, Nidhi Kalra, Emilio Leguízamo, Amy Lewis, Tomás
Lisazo, Rudy Loo-Kung, Valeria Lopez Portillo Purata, Jerónimo Luza, Susana
Marin Arango, Pedro Martel, Nicole Martens Revilla, Juan I. Mercatante,
Oscar A. Mitnik, Edmundo Molina, M. Laura Ojeda, Clara Pasman, M. Priscila
Ramos, Alejandro Rasteletti, Mateus Santos Rodrigues, Mario Saeteros, Jaime
Sarmiento, Daniela Torres, Oscar Valencia, and Juan Pablo Vila Martínez.

Karen Fisher-Vanden, Carlos Nobre, Ilan Noy, and Gernot Wagner served
as external advisors, providing critical guidance and feedback at various
stages in the preparation of this book.
Special thanks are due to Mariano Bosch, Amanda Glassman, Avinash Persaud, Carlos Scartascini, Tomás Serebrisky, Graham Watkins, and the members of the IDB President's Committee for additional comments and encouragement.

The production of this book was managed by Tom Sarrazin from the Research Department. Lisa Ferraro Parmelee did an excellent job editing the manuscript in English. Rita Funaro provided additional editorial support. The Spanish edition was translated by Alberto Magnet and edited by Claudia M. Pasquetti and her team. The Portuguese version was translated by Hilda Lemos and edited by Andressa Rovani. Mariano Rabassa and Bruna Cricci reviewed the Spanish and Portuguese versions of the manuscript. The Word Express, Inc. typeset this book.

Special thanks go to the administrative teams of the Climate Change and Sustainable Development Sector, the Infrastructure and Energy Sector, and the Research Department, who devoted immense effort and dedication to advancing all steps required to produce this book. Particular thanks to Malanie Castilla, Beatriz Contreras, Jessica Córdova, Myriam Escobar, Juan Carlos Gómez, Cesar Leyva, Elton Mancilla, Maria Fernanda Mariel, Greta Mills, Aglae Parra, Ana Doris Rodríguez Buitrago, María Fernanda Villa González, and Federico Volpino.

Catalina Aguiar Parera, Lina María Botero Estrada, Andrés Cavelier, Janaina Goulart, and Tom Sarrazin helped immensely with the communication and dissemination strategy.

Notwithstanding the valuable contributions of the many people who provided inputs to this volume, the editors and authors assume full responsibility for any errors in information or analysis. The opinions expressed in this publication are those of the editors of the project and authors of the corresponding chapters and do not necessarily reflect the views of the IDB, its board of directors, or the countries they represent.
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# List of Authors

**Luis Alejos**, a citizen of Guatemala, is a sector specialist in the Fiscal Management Division of the Inter-American Development Bank. He holds a PhD in public policy and economics from the University of Michigan.

**Mariana Alfonso**, a citizen of Argentina, is a sector lead specialist in the Climate Change Solutions Division of the Inter-American Development Bank. She holds a PhD in economics and education from Columbia University.

**Francisco Alpízar**, a citizen of Costa Rica, is a professor and the chair of the Environmental Economics and Natural Resources Group at Wageningen University in the Netherlands. He holds a PhD in economics from the University of Gothenburg, Sweden.

**Luis Alvaro Alvarez**, a citizen of Peru, is a consultant in the Rural Development and Disaster Risk Management Division of the Inter-American Development Bank. He holds a master of arts degree in economics from the University of British Columbia.

**Lenin H. Balza**, a citizen of Venezuela, is a knowledge coordinator and senior energy specialist in the Energy Division of the Inter-American Development Bank. He holds a master of arts degree in public administration and international development from Harvard University.

**Ricardo Bebczuk**, a citizen of Argentina, is a full professor at Universidad Nacional de La Plata, Argentina, and a visiting professor at the University of Illinois at Urbana-Champaign, where he also earned his PhD in economics.

**Allen Blackman**, a citizen of the United States, is a principal economic advisor to the Climate and Sustainable Development Sector of the Inter-American Development Bank. He holds a PhD in economics from the University of Texas at Austin.
**Juan Blyde**, a citizen of Venezuela, is a principal economist in the Integration and Trade Sector of the Inter-American Development Bank. He holds a PhD in economics from the University of Colorado Boulder.

**Maria Soledad Bos**, a citizen of Argentina and the United States, is an advisor to the Social Sector of the Inter-American Development Bank. She holds a master of public policy degree from the University of California, Berkeley.

**Eduardo Cavallo**, a citizen of Argentina and the United States, is a sector economic advisor to the Infrastructure and Energy Sector of the Inter-American Development Bank. He holds a PhD in public policy from Harvard University.

**Carolina Celis**, a citizen of Colombia, is a research fellow in the Research Department of the Inter-American Development Bank. She holds a master's degree in economics from Universidad de los Andes, Colombia.

**Raul Delgado**, a citizen of Mexico, is a climate change lead specialist at the Inter-American Development Bank. He is an economist specializing in macroeconomics.

**Marcelo Dolabella**, a citizen of Brazil, is an economic consultant in the Integration and Trade Sector of the Inter-American Development Bank. He holds a master's degree in economics from Tilburg University.

**Agustina Calatayud**, a citizen of Argentina, is the head of transportation research at the Inter-American Development Bank. She holds a PhD in mechanical and systems engineering from Newcastle University, United Kingdom.

**Juliana Dueñas**, a citizen of Colombia, is a former research fellow in the Research Department of the Inter-American Development Bank. She holds a master of arts degree in economics from Universidad de Rosario.

**Valentina Gabrielli**, a citizen of Argentina, is a former consultant in the Inter-American Development Bank's Research Department. She is a PhD candidate at the Paris School of Economics.

**Arturo José Galindo**, a citizen of Colombia and Spain, is the regional economic advisor of the Southern Cone Country Department at the Inter-American Development Bank. He holds a PhD in economics from the University of Illinois at Urbana-Champaign.
**Mario González Flores**, a citizen of Mexico, is a senior economist in the Environment, Rural Development and Disaster Risk Management Division of the Inter-American Development Bank. He holds a PhD in economics from American University.

**María José González Jaramillo**, a citizen of Colombia, is a former consultant in the Research Department of the Inter-American Development Bank. She holds a master's degree in economics from Universidad de los Andes.

**Juliana Helo Sarmiento**, a citizen of Colombia, is an assistant professor in the Economics Department at Universidad de los Andes in Bogotá, Colombia. She holds a PhD in economics from the University of California, Santa Barbara.

**Bridget Hoffmann**, a citizen of the United States, is a senior economic specialist in the Research Department of the Inter-American Development Bank. She holds a PhD in economics from Northwestern University.

**Nora Libertun de Duren**, a citizen of Argentina, is a lead specialist in the Housing and Urban Development Division of the Inter-American Development Bank and a faculty member at Harvard University Extension School. She holds a PhD in regional development from the Massachusetts Institute of Technology.

**Hilen G. Meirovich**, a citizen of Argentina, is a director of climate change in the Advisory Services Division of IDB Invest. She holds a PhD in political science from Georgetown University.

**Mauricio Mesquita Moreira**, a citizen of Brazil, is a senior consultant in the Integration and Trade Sector of the Inter-American Development Bank. He holds a PhD in economics from University College London.

**María Pérez-Urdiales**, a citizen of Spain, is a knowledge coordinator in the Water and Sanitation Division of the Inter-American Development Bank. She holds a PhD in economics from the University of Oviedo, Spain.

**Ana R. Ríos**, a citizen of Guatemala, is a senior specialist in the Rural Development and Disaster Risk Management Division of the Inter-American Development Bank. She holds a PhD in agricultural economics from Purdue University.
**Ariana Salas-Castillo**, a citizen of Costa Rica, is a postdoctoral research fellow in the Climate School at Columbia University. She holds a PhD in political science from the University of California, Santa Barbara.

**Lina Salazar**, a citizen of Colombia, is a lead economist at the Environment, Rural Development and Disaster Risk Management Division of the Inter-American Development Bank. She holds a PhD in economics from American University.

**Tomás Serebrisky**, a citizen of Argentina, is the manager of the Infrastructure and Energy Department of the Inter-American Development Bank. He holds a PhD in economics from the University of Chicago.

**Ben Solis**, a citizen of Peru, is a former consultant in the Infrastructure and Energy Sector of the Inter-American Development Bank. He holds a master's degree in competition and market regulation from the Barcelona School of Economics.

**Adrien Vogt-Schilb**, a citizen of France, is a senior economist in the Climate Change Division of the Inter-American Development Bank. He holds a PhD in economics from Paris Est University and an engineering degree from École Nationale des Ponts et Chaussées.

**Gregory Watson**, a citizen of the United States, is a principal specialist for biodiversity and natural capital at the Inter-American Development Bank. He holds a master of arts degree in political economy and development from the Fletcher School of Law and Diplomacy.

**Patricia Yañez-Pagans**, a citizen of Bolivia and Spain, is a principal economist in the Development Effectiveness Division of IDB Invest. She holds a PhD in applied economics from the University of Wisconsin-Madison.
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# Averting Danger, Seizing Opportunity

Addressing climate change in Latin America and the Caribbean is not only feasible—the requisite technological and behavioral transformations are well within reach—but beneficial. Climate action, including both adaptation and mitigation, generally pays for itself by advancing a range of sustainable development goals. Keys to success for the region are strengthening climate governance, closing the climate finance gap, and transforming agricultural, forestry, and other land use.

For Latin America and the Caribbean, as for the world, climate change is at once a clear and present danger and a significant—if not generational—opportunity for technological, economic, and social progress. On one hand, climate change threatens to undermine the region's hard-won economic development gains. It substantially increases morbidity and premature mortality; depresses employment and both labor and agricultural productivity; slows educational progress and skills development; endangers food security, infrastructure service provision, and financial stability; drains fiscal revenue; and, ultimately, significantly reduces incomes. On the other hand, mounting evidence shows that policy action to avert these dangers speeds development. Many of the investments needed to prevent climate change from exacerbating poverty, for example, are the same ones needed to alleviate poverty. And investments in abating the emission of greenhouse gases that cause climate change generate substantial payoffs for health, productivity, and natural systems. This book offers a roadmap for averting the dangers associated with climate change and seizing the opportunities it presents.

Latin America and the Caribbean has at least three notable features that inform this roadmap. First, among the world's regions, it is the second most vulnerable to the storms and slow-onset events caused or intensified by climate change (UNDRR 2023). Caribbean countries are particularly exposed to storms and sea-level rise, while other countries in the region are especially prone to droughts and floods. Second, the region is endowed with bountiful
and exceptionally diverse natural resources that provide indispensable tools for confronting climate change while also facing an existential threat from it. Of particular note is the Amazon rainforest, the so-called “lungs of the earth,” which each year sequesters billions of tons of greenhouse gases from the atmosphere. Yet forest loss and degradation threaten to transform the Amazon from a carbon sink to a source of carbon emissions. Finally, the region faces daunting socioeconomic and political challenges related to high levels of urbanization, income inequality, labor informality, and poverty, especially among women, Indigenous and Afro-descendant peoples, and other vulnerable groups.

This book has six main messages, which are summarized below. Box 1.1 provides definitions and descriptions of some key terms used throughout.

**Box 1.1. Climate Change: Key Terms**

**Adaptation:** Adjustment in human systems to climate-related changes in natural conditions aimed at moderating harm or exploiting beneficial opportunities.

**Climate change:** Shifts in temperatures and weather patterns that persist for an extended period, typically decades or longer.

**Externality:** A positive or negative effect of an economic activity on parties not directly involved in the activity that is not fully reflected in the costs of the goods or services associated with that activity.

**Global externality:** An externality with a global geographical extent.

**Global warming:** The gradual progressive increase in the earth's surface temperature that is responsible for climate change.

**Greenhouse gases (GHGs):** Gases that absorb infrared radiation in the atmosphere, including, but not limited to, carbon dioxide ($CO_2$), methane ($CH_4$), and nitrous oxide ($N_2O$).

**Mitigation:** Human intervention to reduce the emission of greenhouse gases and/or remove them from the atmosphere.

**Resilience:** The capacity of social, economic, and environmental systems to cope with a hazardous event, trend or disturbance by responding or reorganizing in ways that preserve the systems' essential functions, identities, and structures while also maintaining their capacity for adaptation, learning, and transformation.

*Source:* Adapted from IPCC (2023b).
Climate Action Is Urgent

A scientific consensus has emerged regarding the drivers and impacts of climate change (IPCC 2023b). It holds that, while climate change can be caused by natural events like volcanic eruptions, since the 1800s, it has been driven by emissions of greenhouse gases (GHGs) from human activities like fossil fuel burning and deforestation.

Since the early twentieth century, global temperatures have been rising, a trend that accelerated after 1970 (Figure 1.1). Averaged over the last decade, current global temperatures are more than 1°C above preindustrial levels and are on track to exceed 1.5°C by 2030 (WMO 2023). The year 2023 was the warmest on record, and 2024 is set to break that record. Since 1970, temperature anomalies for South America have generally exceeded those for the world, while the opposite has been true for the Caribbean.

Climate change has an array of adverse geophysical effects, including changes in temperature and precipitation, sea-level rise, loss of ecosystem services provided by nature, and more frequent and intense storms, floods, and droughts. Cities in the region will be at the forefront of these geophysical effects. Globally, meteorological disasters (in the form of storms and extreme temperatures), hydrological disasters (floods and landslides), and

<figure><img src="image_10.png" /><figcaption>**Figure 1.1.** Temperature Anomalies in the World, the Americas, and the Caribbean (1900–2023)</figcaption></figure>

Source: IDB staff, based on data from the National Centers for Environmental Information (NCEI).

Note: Global and Caribbean Island anomalies are based on land and ocean average temperatures. For the rest of the regions, land average temperatures are used.
<figure><img src="image_11.png" /><figcaption>**Figure 1.2.** Incidence of Disasters by Type, 1970–2023</figcaption></figure>

Source: IDB staff, based on data from the EM-DAT international disaster database and the Center for Research on the Epidemiology of Disasters (CRED) at UCLouvain.

climatological disasters (wildfires and droughts) have all risen five- to sixfold (Figure 1.2, Panel A). Latin America and the Caribbean mirrors global trends (Figure 1.2, Panel B). Meteorological disasters, particularly storms affecting the Caribbean region and Central America, increased from an average of nine per year in the 1970s to thirty-seven annually in the decade from 2014 to 2023. For the same periods, climatological disasters, especially droughts in South America, rose from an average of one to five per year (IPCC 2023b).

As a result of disasters, changes in precipitation, sea-level rise, and other geophysical impacts, climate change has exceptionally wide-ranging adverse effects on social, economic, and natural systems. Table 1.1 summarizes the empirical evidence on these effects, which are grouped into six categories:
<table><caption>**Table 1.1.** Effects of Climate Change on Social, Economic, and Natural Systems</caption><thead><tr><th>Type</th><th>Causal pathways and references</th></tr></thead><tbody><tr><td><strong>Social</strong></td><td></td></tr><tr><td>a. Health</td><td><ul><li>Increased morbidity and premature mortality due to heat stress, proliferation of tropical disease, increases in frequency and intensity of disasters, and impaired access to health services (IPCC 2023b; Hartinger et al. 2023)</li></ul></td></tr><tr><td>b. Employment and productivity</td><td><ul><li>Employment and labor productivity: adverse effects via morbidity, mortality, heat stress, informality, and migration (Lai et al. 2023; Dasgupta 2021; Kaczan and Orgill-Meyer 2020; Desbureaux and Rodella 2019; Pecha Garzon 2017)</li><li>Agricultural productivity: reduced yields, water availability, and labor productivity (IPCC 2023b; Ortiz-Bobea et al. 2021)</li></ul></td></tr><tr><td>c. Education and skills development</td><td><ul><li>Short- and long-term effects of temperature and climate shocks (Pazos et al. 2023; Park et al. 2020; Rosales-Rueda 2018)</li></ul></td></tr><tr><td>d. Income</td><td><ul><li>Reduced employment and both labor and agricultural productivity (see above)</li><li>Increased frequency and intensity of disasters, including extreme weather events (Wouter Botzen et al. 2019)</li></ul></td></tr><tr><td><strong>Financial</strong></td><td><ul><li>Increased exposure of assets to physical and transition risk (Zhou et al. 2023)</li></ul></td></tr><tr><td><strong>Fiscal</strong></td><td><ul><li>Stranded assets (Welsby et al. 2021; Delgado et al. 2021)</li><li>Fiscal impacts of disasters and climate action (Deryugina 2022; Brichetti et al., forthcoming)</li><li>Fiscal impacts of slower economic growth (IPCC 2023b)</li></ul></td></tr><tr><td><strong>Food security</strong></td><td><ul><li>Reduced agricultural productivity and income (IPCC 2023b; Ortiz-Bobea et al. 2021)</li><li>Increased frequency and intensity of disasters, including extreme weather events (IPCC 2023b)</li><li>Reduced nutrient content foods (Hallegatte et al. 2016; Fanzo et al. 2018)</li></ul></td></tr><tr><td><strong>Infrastructure services</strong></td><td><ul><li>Increased frequency and intensity of disasters (CDRI 2023; Cavallo et al. 2022)</li><li>Effect of climate on service demand (IEA 2021b)</li><li>Effect of water stress on hydropower generation (IEA 2021a)</li></ul></td></tr><tr><td><strong>Ecosystems</strong></td><td><ul><li>Changing conditions to which ecosystems are adapted (Dasgupta 2021; Lovejoy and Hannah 2006)</li><li>Increased frequency and intensity of disasters and extreme weather events (Dasgupta 2021)</li></ul></td></tr></tbody></table>

social (including health, employment and productivity, education and skills development, and income); financial; fiscal; food security; infrastructure services; and ecosystems. The second column of the table identifies the causal pathways for these effects. For example, the first row indicates that climate
change jeopardizes human health through heat stress, the proliferation of tropical disease, the increased frequency and intensity of disasters, and impaired access to health services. The magnitude of the cumulative adverse impacts of climate change is difficult to overstate. Hsiang (2010), for instance, finds that a rise of 1°C in the average annual temperature in Central America and the Caribbean—which likely already has occurred—leads to an estimated 2.5 percent reduction in gross domestic product (GDP).

These negative effects are intensifying in a challenging context. The COVID-19 pandemic exacerbated the trend of gradually increasing poverty in Latin America and the Caribbean and undid most of the gains in poverty reduction attained from 2003 to 2013. In 2020, during the pandemic, the percentage of the population with incomes below US$3.10 per day increased by almost 20 percent, implying 26 million more people living below that level (Cavallo, Becerra, and Acevedo 2022). Slow-onset and extreme weather events driven by climate change could push an additional 5 million people into poverty by 2030 (Jafino et al. 2020), with the warmer and lower-income countries in the region hardest hit.

The adverse effects of climate change will intensify unless the entire world, including Latin America and the Caribbean, acts quickly and decisively. Climate change is a global externality problem, meaning that emissions of the GHGs that cause it have global effects. As a result, for climate action to succeed, all regions must contribute.

The Paris Agreement aims to incentivize and manage each country's contributions (Box 1.2). The goal is to reduce global GHG emissions enough to limit global warming to between 1.5 and 2°C above preindustrial levels. Success hinges on signatory countries' compliance with self-determined emissions targets called nationally determined contributions (NDCs). But current NDC targets are not sufficiently ambitious; even if all countries in the world meet them, GHG emissions will still be too high to limit global warming to 2°C above preindustrial levels by 2100 (UNEP 2023). Countries will need to set more ambitious NDC targets to close this gap and to achieve net-zero emissions by approximately 2050. That, in turn, will require transformative changes across all sectors of the economy, including increasing the share of renewable sources in electricity generation, electrifying transport, protecting and restoring forests, and enhancing energy efficiency.

## Climate Action Is Feasible

The technological and behavioral transformations needed both to adapt to climate change and reach net-zero carbon emissions are well understood and readily achievable (IPCC 2023b).
In general terms, climate adaptation requires three steps. The first is to identify and communicate risk (Fakhruddin et al. 2020). Identifying risk involves gathering data through simulations and stress tests, including by

**Box 1.2. Framework for Response: The Paris Agreement**

Adopted in 2015 by 194 signatories under the United Nations Framework Convention on Climate Change (UNFCCC), the Paris Agreement seeks to limit global warming to well below 2°C above preindustrial levels, while pursuing efforts to limit it to 1.5°C. Achieving these goals requires countries to reach net-zero emissions by approximately 2050. The agreement also sets a goal of enhancing adaptive capacity, strengthening resilience, and reducing vulnerability to climate change.

The principal mechanism of the Paris Agreement is inviting countries to design and communicate mitigation and adaptation commitments, called nationally determined contributions (NDCs), based on their differing national circumstances, capabilities, and responsibilities. A ratcheting ambition mechanism permits countries to implement long-term visions by taking gradual steps toward change by enhancing their targets at five-year intervals. Recognizing that long-term and multisectoral change is needed, the agreement recommends developing long-term strategies (LTSs).

All countries in Latin America and the Caribbean that have signed the Paris Agreement have established NDCs, and many have completed second iterations of them (LEDS LAC 2022). Only eight countries, however, have established LTSs. And while more than half of the countries in the region have established national climate laws, national emissions inventories, and monitoring, reporting, and verification systems, only 20 percent have designed implementation plans and financing strategies.

The Paris Agreement describes channels for implementation to achieve its goals. The first is technology transfer, which is needed to balance the playing field and foster systemic transformations in the areas of energy, transportation, water, sanitation, and land use. The second is capacity building, which may include strengthening social protection, education, and health care systems, improving disaster preparedness, enhancing government and private sector institutional capacities, and retraining workers. Third, the Paris Agreement recognizes the need for fundamental shifts in financial and governance systems and calls for aligning international, national public, and private sector financial flows to its goals.
creating hazard maps and analyzing supply chain impacts. Once identified, the risks must be communicated to communities, investors, government agencies, and other stakeholders through awareness-raising campaigns. Also important is emergency preparedness coupled with establishing early warning systems that rely on technologies like automated messaging, satellite imagery, and drones. Collaboration with local meteorological agencies is needed for timely and accurate dissemination of information, including evacuation orders and public alerts.

The second step is to reduce exposure and vulnerability to climate hazards. This can be accomplished by locating or relocating critical infrastructure to safer areas—for example, away from floodplains and slopes. When reducing exposure is not feasible, protection is essential. Infrastructure such as seawalls, retention basins, and pumping stations can alleviate the impacts of floods, urban cooling centers can offer refuge during heatwaves, and urban green spaces can reduce the heat island effect. Nature-based solutions, like vegetated slopes and coastal wetlands, can provide may of the same services (Cavallo, Powell, and Serebrisky 2020). To reduce vulnerability, designing and strengthening structures with climate in mind is important. Building to higher standards ensures infrastructure can withstand extreme weather conditions. Bridges, for instance, can be fortified to endure severe floods, and roads can be constructed with materials resistant to extreme heat. Incorporating design elements that take climate into account, such as orienting structures to minimize sun exposure, also reduces vulnerability. Investing in resilient infrastructure yields substantial economic benefits. For example, infrastructure that is resistant to weather shocks can strengthen fiscal accounts through the high multiplier effect of investment spending, lower future contingent liabilities for the government, and faster recovery after extreme weather events. IDB estimates show that preemptive investments can potentially reduce GDP losses by 0.5 percent on average in the year of the shock and by more than half of the accumulated losses up to three years later (Chapter 10). According to the IMF, investing in resilient infrastructure could increase GDP growth by 2 to 6 percent in Caribbean countries and 0.2 to 1.4 percent in Central American countries. Three years after a disaster, it would also result in 0.25 percent higher GDP in the Caribbean and 0.1 percent higher GDP in Central America, while reducing the rate of public borrowing by 0.75 percent and 0.25 percent, respectively (IMF 2021).

The third step in climate adaptation is to enhance the capacity to cope and bounce back. Introducing diversification and redundancy into resources and systems by, for example, growing a variety of crops, maintaining backup power generators, and getting water from a variety of sources reduces the
risk of system failure (Hallegatte et al. 2016). Maintaining buffers by stock-
piling essential supplies and expanding protected areas is effective against
both extreme weather events and slow-onset ones. Risk-sharing mech-
anisms, including insurance, adaptive social protection, and contingent
credit products, help firms, households, and governments absorb shocks
and bounce back. Preparedness plans, regular drills, and established com-
munication protocols ensure communities and organizations can respond
effectively to emergencies and recover swiftly.

As for mitigation, the requisite transformations are also well understood
and readily achievable (Kalra et al. 2023). As discussed below, agriculture,
forestry, and other land uses (AFOLU) contribute almost half of the region's
GHG emissions. Reducing emissions in agriculture means cutting excess
fertilizer use, adopting conservation agriculture, improving livestock man-
agement to lower methane emissions, and growing foods that emit less
GHGs per calorie or unit of protein. Conservation measures, like establishing
protected areas, can stem deforestation and land use change, and refor-
estation and afforestation efforts can offset residual emissions from other
sectors by boosting carbon sequestration.

Another vital step for decarbonization is to substitute renewable energy
sources like solar and wind for fossil fuels in electric power generation. This not
only reduces emissions directly but facilitates the decarbonization of other
emitting sectors, such as transportation and industry, through electrification.
The transportation sector can be decarbonized by promoting the adoption
of electric vehicles, increasing the ridership of public transportation systems,
and encouraging the use of nonmotorized modes of transportation, such as
biking and walking. Electrifying railways and shifting freight transportation
from road to rail or maritime options are also crucial to reducing emissions. In
the industrial sector, emissions can be lowered by using materials more effi-
ciently and switching to low-carbon energy sources for industrial processes.
Waste management practices can be improved by expanding solid waste
collection and wastewater treatment, enhancing recycling efforts, and using
waste-to-energy technologies to reduce emissions from landfills.

Climate Action Is Development Action

Historically, the debate about climate policy has focused on temporal tradeoffs: countries need to make costly investments in climate adaptation and mitigation today in order to reap the benefits of averted damages tomorrow. In the light of mounting evidence, however, that framing has given way to a very different one: many investments in climate adaptation and mitigation today more than pay for themselves in short order because
<figure><img src="image_12.png" /><figcaption>**Figure 1.3.** World and Regional Contributions to GHG Emissions by Sector, 2020</figcaption></figure>

Source: IDB staff calculations, based on the World Resources Institute Climate Tracker Database.

they advance a range of sustainable development goals. In other words, climate action is development action.

Consider climate adaptation first. Virtually all the adaptation actions advocated in this book advance sustainable development goals. They include strengthening the health care system, bolstering job training, supporting climate
migrants in their urban destinations, improving transportation, water, sanitation, and telecommunications infrastructure, speeding the adoption of new agricultural technologies, expanding and improving the targeting of cash transfer programs, strengthening food safety and pest management systems, enhancing regional integration through trade, strengthening urban land use zoning, upgrading urban informal neighborhoods, and expanding urban green spaces.

In addition, avoiding the worst impacts of climate change saves households, businesses, and governments money and, by extension, spurs development. For example, improving disaster risk management pays dividends. Evidence from Latin America and the Caribbean and other regions shows that avoiding the direct economic damage of disasters—for example, by improving and hardening infrastructure—reduces the negative effects of disasters on economic growth. Simply put, money not used to recover from a disaster can be used for development purposes.

One way in which these and other adaptation measures spur development is by alleviating poverty. Climate change and poverty have mutually reinforcing negative effects. On one hand, as a result of the adverse effects summarized in Table 1.1, climate change exacerbates poverty and extreme poverty. On the other hand, poverty intensifies the adverse effects of climate change because the poor are more exposed, more affected, and have fewer resources to adapt.

This two-way link between climate change and poverty can generate a downward spiral. Rural poverty provides a compelling example. In rural areas, the poor are heavily dependent on small-scale agriculture. Climate change wreaks havoc on that sector by reducing crop productivity, helping to spread pests and diseases, and worsening crop losses due to storms, floods, and droughts. The poor have minimal resources to avert or soften these shocks by, for example, adopting more resilient crop varieties, or taking advantage of crop insurance. The result is they are pushed further into poverty, which makes them even more vulnerable to future climate shocks. Climate adaptation reduces rural poverty by helping break this vicious cycle.

Like climate adaptation, climate mitigation also spurs development. Investments in the transformations needed for decarbonization have significant benefits in terms of enhanced productivity, fuel cost savings, and improvements in health, safety, and well-being. Again, a simple list of the mitigation measures this book recommends makes this point. They include shifting to renewable energy sources, which in some cases are already less expensive than fossil fuels; electrifying transportation, buildings, and industry; promoting public transportation, shared mobility, and micromobility; enhancing the energy efficiency of buildings and industry; reducing food loss and waste; stemming deforestation; and modernizing agriculture.
The benefits of implementing these transformations in Latin America and the Caribbean to achieve net-zero carbon emissions by 2050 far exceed the costs. Using a set of integrated bottom-up partial equilibrium models, a recent study estimates the present discounted value of the net benefits (benefits minus costs) of these transformations to be between US$1 trillion and US$3 trillion—that is, on the order of one-third of regional GDP (Kalra et al. 2023). The benefits arise mainly from fuel cost savings and improvements in health, safety, and productivity. Switching to renewable energy, for example, is expected to cut fuel costs by US$900 billion, and avoiding the premature mortality associated with air pollution from burning fossil fuels is expected to save US$500 billion.

Still, tradeoffs exist between climate action and economic development: climate action generates losers as well as winners, and some temporal tradeoffs may still exist. For example, fossil fuel exploitation will be hard hit, negatively impacting workers and geographies specializing in this activity, along with supporting sectors and fiscal revenues that depend on it, while benefiting geographies that are well suited for renewable energy. In addition to these geographic tradeoffs, renewable energy policies may also be subject to temporal tradeoffs. Therefore, climate action must be proactively designed and implemented to ensure the benefits and costs are equitably distributed, an objective referred to as a *just transition* or *just and equitable transition*. This goal is particularly important for Latin America and the Caribbean because it is among the world's most unequal regions, with the richest 10 percent of the population earning twenty-two times the income of the bottom 10 percent (Busso and Messina 2020). A just transition entails softening the adverse impacts of climate and environmental policies on communities tied to polluting industries, such as fossil fuel extraction, by promoting job training and other social protection measures; compensating affected households, particularly poor ones, for increases in the prices of essential goods and services (such as transportation and food) resulting from climate and environmental policies; managing the financial effects of lost fiscal revenues from polluting sectors; ensuring that new jobs (for example, in renewable energy) are distributed equitably across workers with different skills, of different genders, and in different locations; and engaging in dialogue with affected groups and communities to anticipate and manage political opposition and dislocation (Alfonso et al. 2023).

## AFOLU Is Half the Battle

Tackling climate change requires transformational changes in every economic sector. In Latin America and the Caribbean, however, one particular sector—agriculture, forestry, and other land uses—has outsized importance.
There are three reasons, all related to the prominence of AFOLU in the region's ecology and economy.

First, in Latin America and the Caribbean, the road to net zero runs directly through AFOLU. The sector contributes 48 percent of the region's GHGs, a higher share than any other sector. Of these emissions, 27 percent come from agriculture and 21 percent from forestry and other land uses (Figure 1.3). In contrast, AFOLU contributes only 15 percent of global GHG emissions, with 12 percent coming from agriculture and 3 percent from forestry and other land uses.

Second, in addition to being key to mitigation, AFOLU plays an important role in climate resilience. Climate change undermines food security in a range of ways that are all related to agriculture. It degrades food availability by reducing crop, livestock, and labor productivity; makes food harder to obtain by exacerbating poverty; reduces the quality of food by reducing the nutrients and vitamins in crops; and raises food prices and makes them less predictable. Climate-smart agriculture is needed to avoid and minimize these effects.

Forests and other land uses, the second component of AFOLU, also contribute to climate resilience. Inland forests help stem flooding, the contamination of surface and groundwater, and soil erosion. And in coastal areas, mangroves and wetlands protect against the increasingly frequent and intense storm surges and floods associated with climate change. Conservation measures like protected areas and agricultural subsidy reform are needed to ensure the continued provision of such ecosystem services.

Finally, among economic sectors, AFOLU is especially important in addressing climate change in Latin America and the Caribbean because it is at the heart of two-way linkages between it and a second grave challenge facing the region: biodiversity loss. Blessed with plentiful and diverse natural resources, Latin America and the Caribbean is often referred to as a biodiversity superpower. Biodiversity loss, however—mostly driven by land use change related to agriculture—has now reached critical levels. From 1970 to 2018, the region's Living Planet Index, which tracks changes in the relative abundance of wild species populations, fell by 94 percent, by far the greatest decline of any region in the world (Almond et al. 2022). This biodiversity loss both exacerbates climate change and amplifies its adverse effects.

Given its central role in climate mitigation, climate resilience, and biodiversity loss in Latin America and the Caribbean, climate action in the region must focus squarely on AFOLU.

## Climate Governance: Key to Success

Climate governance is inherently challenging for several reasons (OECD 2015). Both the drivers and impacts of climate change span geographical areas and numerous economic sectors. In addition, the investments needed
to address these problems—in public transportation, low-carbon energy, wastewater treatment, and so on—often require substantial outlays in the short term but generate benefits over a more extended period—a temporal mismatch that hinders political support. Moreover, the benefits of these investments can be enjoyed by those who do not directly pay for them—including people in other countries and regions—a free-rider problem that also dampens political support. Another problem is that both policymakers and the voters are often ill-informed about the benefits of climate action, which can involve considerable uncertainties. Finally, as noted above, climate action generates both winners (for example, in renewable energy) and losers (in fossil fuels), and managing these tradeoffs can be difficult.

Exacerbating all these challenges is the reality that, in general, public sector climate governance in the region remains weak (Solorio 2024; Mosqueira and Alessandro 2023). Typically, those institutions are frail relative to the finance, energy, transportation, and agriculture institutions with which they must coordinate; as a result, their agendas can founder. Private sector climate and environmental governance is another significant constraint (Eurasia Group 2023). Companies tend to evaluate risks and investment opportunities based on experience and data. Generally, they are not set up to consider climate risks.

A number of strategies can enhance governance. First, to be effective, climate policy must be integrated across economic sectors and across levels of government. Investments in making health clinics resilient to the effects of storms, for instance, will not pay off unless the transportation sector, which facilitates access to those clinics, is also hardened. Sector-specific policies like the ones discussed in individual chapters of this book need to be part of a unified strategy. The level of government where decisions are made is also important: renewable power plants or zoning that prohibits construction in risky areas impose local costs for national benefits. Involving influential stakeholders, such as heads of government, can ensure coordinated actions across both sectors and government levels.

Second, a number of strategies can be used to advance climate policy. Clear and enforceable climate laws that extend beyond political cycles can address discounting issues. Adaptive management strategies—flexible, learning-based approaches—can help handle uncertainties and adjust course when new information becomes available. Incorporating climate goals into annual budgeting and relying on independent oversight agencies and commitment devices like NDCs can hold governments accountable. And prioritizing no-regrets actions, such as investing in water and sanitation access, deploying renewables, and upgrading to electric buses, can deliver clear development benefits and create constituencies that favor change.
With the right mandate and vision, government agencies from all sectors and levels of government can use a variety of instruments to enable climate action. The key is to identify the barriers to green growth, such as outdated regulations and market rules that favor incumbent fossil-fuel-based technologies; inadequate public infrastructure that exacerbates climate risk or makes commuting in transit inconvenient; and pricing schemes that favor overconsumption of natural resources. From there, governments can plan public action to lift these barriers, by reforming regulations, investing in the right infrastructure, and adjusting price signals.

Finally, policymakers must shore up citizen support for climate action. While support for climate change policies is generally strong among Latin American and Caribbean residents, it depends, among other things, on perceptions of the fairness of the policies. Proactively designing and implementing climate policies that ensure benefits and costs are equitably distributed—that is, ensuring a just transition—can garner citizen support. Past transitions, like globalization in the commercial trade sphere, demonstrate that governments have much to gain by rethinking inequality and social protection.

Another important means of boosting citizen support is communication. To be effective, communication strategies must specifically address the drivers of support for climate policy. Environmental ministries can play a pivotal role in developing and deploying consistent, science-based communication strategies. Such strategies can boost demand for climate-friendly policies and investments, which in turn require climate finance.

## Closing the Financing Gap

Financing climate action is a pressing challenge (Prasad et al. 2022), and, in Latin America and the Caribbean, tight fiscal constraints magnify it. Countries could, in principle, borrow to finance climate investments, taking advantage of seemingly high-return opportunities in clean energy, mining, and other sectors associated with decarbonization. But the availability of low-cost external financing is limited by Latin American and Caribbean countries' high levels of debt and vulnerability to crises (Powell and Valencia 2023). Moreover, low national saving rates and other distortions constrain the availability of local financing (Cavallo et al. 2016). The result is that climate investment levels fall significantly short of what is required for both mitigation and adaptation.

Global climate finance flows have been increasing, from US$0.3 trillion per year in 2011–12 to US$1.3 trillion per year in 2021–22. More is needed, however. According to one estimate, Latin America and the Caribbean alone needs between US$0.5 trillion and US$1.3 trillion annually (Galindo,
Hoffmann, and Vogt-Schilb 2022). To put that estimate into perspective, consider that reaching the high end of the range would imply absorbing 19 percent of the region's GDP. The climate finance gap underscores the urgent need for the efficient deployment of available financial resources. The good news is that, although large, the global financing gap represents less than 10 percent of the total value of assets managed by investment firms globally (PwC 2023). With the right policies, some of those resources could be mobilized for climate action.

Multilateral development banks (MDBs) and bilateral agencies have been the main sources of public climate finance in the region, providing loans, concessional finance, grants, and technical assistance. National development banks support domestic initiatives, often focusing on infrastructure and smaller-scale projects. At the same time, private sector investment has been growing rapidly but remains limited. Blending concessional finance from development banks with private capital, for instance, can improve project risk-return profiles, making them more attractive to private investors. An example is the approach that was used by IDB Invest, the private sector arm of the Inter-American Development Bank Group, to support the first four wind and solar projects in Uruguay between 2014 and 2016. Initially, IDB Invest provided concessional finance. This helped attract commercial banks and institutional investors that might have been hesitant to invest in the early stages of development. By 2020, the projects had reached a level of financial maturity that allowed them to be refinanced by the private sector at more attractive rates. The use of blended finance can also facilitate the development of new financial instruments. The creation of green bonds, for instance, supported by MDBs, provides investors with opportunities to finance projects that generate both financial returns and positive outcomes for the climate agenda.

International climate funds can also play a pivotal role in catalyzing private sector investments by providing guarantees, insurance, and other risk transfer and mitigation tools. This is particularly important in Latin America and the Caribbean, where financial markets are still developing and may not have appetites for risky or innovative investments. The Clean Technology Fund (CTF), for example, provided concessional financing in Mexico to reduce the perceived risks associated with investing in renewable energy. Guarantees and supporting first-loss equity tranches offered by CTF were instrumental in mobilizing over US$2 billion in private capital for large-scale solar and wind projects. The Green Climate Fund (GCF) has also been active in providing risk mitigation instruments.

A second mechanism for enhancing climate finance is mobilizing additional resources, especially private money that largely remains on the sidelines. Although institutional investors like pension funds, mutual funds,
and insurance companies manage trillions of dollars worldwide, they provide relatively little financing for climate projects, and increasing their participation is fraught with challenges (Cavallo, Powell and Serebrisky 2020). Large-scale climate projects, such as building a clean energy power plant, are typically funded by sponsors—companies that take up equity— and commercial banks, both of which have dedicated teams to manage the risks associated with such projects. In contrast, institutional investors generally prefer other types of assets, including liquid ones that are easily traded in financial markets. However, once construction is complete, the cash flows of these large-scale projects become more stable and predictable. At this point, institutional investors may find these projects attractive. To facilitate their participation, it would be necessary to develop tradable financial products like, for instance, the infrastructure bonds that are currently used to finance some infrastructure projects in Brazil (Borensztein, Cavallo, and Pereira Dos Santos 2022). The additional financing available through this source can be quantified, first, by assuming institutional investors could allocate approximately US$40 trillion in investable funds to climate projects worldwide, a sum that represents just one-third of the total funds managed by institutional investors (PWC 2023). If only 5 percent of these funds were allocated to climate projects in emerging markets, roughly US$300 billion in new financing could be available for climate initiatives in Latin America and the Caribbean (based on the region's share in the emerging markets group).<fnref n="1" />

The bottom line is that the financing of climate action in Latin America and the Caribbean calls for a multifaceted approach. It involves making more of the financial resources currently being mobilized through various sources, mobilizing additional resources, and leveraging private sector investment. MDBs, with their unique blend of financial and technical expertise, are well positioned to lead these efforts and help to bridge the financing gap.

## A Road to Follow

This book provides a comprehensive roadmap for climate action in the region, divided into three parts. The first part focuses on adaptation, covering the macroeconomic effects of climate change and disasters (Chapter 2), financial sector climate stress tests (Chapter 6), the intertwined challenges of climate change and biodiversity loss (Chapter 4), the links among food security, climate change, and disasters (Chapter 5), social policies in the

<footnote n="1">¹ See Cavallo, Powell, and Serebrisky (2020). The exercise considers that Latin America and the Caribbean's share of the GDP of all emerging economies is around 15 percent and further assumes that financing flow would follow the same proportions.</footnote>
era of climate change (Chapter 3), and the building of resilient infrastruc-
ture (Chapter 7). While each chapter deals with a distinct sector, effective
adaptation to climate change requires a systems approach that integrates
adaptation policies across sectors because failure to adapt to climate change
in one can spill over to others.

The second part addresses decarbonization, exploring methods and benefits of achieving net-zero emissions (Chapter 8) and removing barriers that stand in the way (Chapter 9).

The third part examines crosscutting issues relevant to both adapta-
tion and mitigation, including the two-way links between fiscal policies and
climate change (Chapter 10), trade and climate change (Chapter 11), how to
increase financing for climate action (Chapter 12), the role of cities in climate
action (Chapter 13), and the role of citizens in implementing effective cli-
mate policy (Chapter 14).

By addressing these important topics, this book aims to provide
policymakers and stakeholders with detailed analysis and actionable rec-
ommendations needed to tackle the perils of climate challenge while
seizing the promise it presents for Latin America and the Caribbean.
<figure><img src="image_13.png" /></figure>

# The Cold Macroeconomic Reality of a Warmer Climate

Climate change will have significant impacts on economic growth and productivity in Latin America and the Caribbean. Rising temperatures and extreme weather events, such as heatwaves and storms, threaten growth, with poorer areas and those with hotter climates suffering most. Adaptation strategies across all sectors can reduce these effects and sustain growth.

Climate change has profound economic implications. Higher temperatures, changes in precipitation trends, and erratic weather patterns can affect economic sectors and factors of production, especially those whose activities take place largely outdoors. The increasing frequency and severity of extreme weather events are also a growing concern for the macroeconomy. Hurricanes, floods, droughts, wildfires, and extreme temperatures bring significant loss of life, capital, and productive resources, disrupt supply chains, and impair labor markets. They also usually necessitate public spending for recovery and reconstruction that can strain national budgets and divert resources from other important areas, such as social spending.

The unpredictability of the changing climate can deter investment and innovation, while its adverse impacts may reduce economic growth rates and will likely exacerbate income inequalities. While there are numerous sources of uncertainty, including uncertainty in climate projections, the magnitude of these impacts suggests the immense benefits that mitigation and adaptation could deliver to the economy.

## Small Changes, Big Impact: The Magnitude of Economic Effects

Economic production is influenced by climate and weather conditions. Even relatively minor fluctuations in temperature and precipitation patterns can significantly affect gross domestic product and its rate of growth (Dell, Jones, and Olken 2012; Colacito, Hoffmann, and Phan 2019). These impacts are already noticeable in Latin America and the Caribbean. In Central America and the
Caribbean, for instance, a 1°C rise in the average annual temperature is estimated to lead to a 2.5 percent reduction in economic output (Hsiang 2010). Because effects on the GDP growth rate compound over time, small changes in temperature can imply substantial economic effects in the longer term.

The effect of rising temperature differs for countries with differing climates because the response of economic growth rates to an increase in temperature is nonlinear (Burke, Hsiang, and Miguel 2015). Using country-level data from 1960–2010, Burke et al. find the effect on economic growth of an additional 1°C of warming has an inverted U-shape relationship, in which the effect is positive in countries with cooler climates and negative in those that are warmer. The updated analysis presented here, which extends the number of countries as well as the time period (using data for 1960–2019), finds a similar relationship.

The results differ from those of Burke et al. (2015), with the maximum of the response function occurring at a slightly higher temperature (14.88°C). Figure 2.1 shows that, for countries with annual average temperature below 14.88°C, growth increases as the temperature increases, with the improvements declining closer to the maximum. After this point, growth declines with further warming, and the decline accelerates at higher temperatures. Based on this analysis, Latin America and the Caribbean would be negatively affected by increases in annual average temperature because, of the 37 Latin American and Caribbean countries in the sample, 36 (all except Chile) have average temperatures between 14.88 and 30°C—the part of the temperature distribution where the response function slopes downward.

<caption>**Figure 2.1.** Nonlinear Response of Growth in GDP per Capita to Rising Temperatures</caption>

A. Effect of annual average temperature on global annual GDP growth

<figure><img src="image_14.png" /></figure>

(continued on next page)
<figure><img src="image_15.png" /><figcaption>**Figure 2.1.** Nonlinear Response of Growth in GDP per Capita to Rising Temperatures (continued)</figcaption></figure>

Source: IDB staff calculations, based on World Development Indicators and the Climate Change Knowledge Portal.

Note: In Panel A, the thick black line indicates the nonlinear relationship between annual average temperature and change in log GDP per capita, with 90 percent confidence interval (indicated by blue shading). Model includes country fixed effects, flexible trends, and precipitation controls.

Even in temperate countries, however, which are expected to experience little effect or a positive effect of rising temperatures on GDP growth, some economic sectors—especially those directly exposed to weather—may be adversely affected. While Chile's overall GDP growth may benefit, for example, Hernandez and Madiera (2022) document negative effects in several sectors, with reduced growth in agriculture-silviculture, fishing, construction, electricity generation, and the water sectors. In Central America and the Caribbean, the wholesale, retail, restaurant, and hotel sectors are adversely affected (Hsiang 2010). The negative effect of higher temperatures is not confined to economic sectors directly exposed to the weather, however; higher
<figure><img src="image_16.png" /><figcaption>**Figure 2.2.** Illustration of Expected Changes in Distribution of Temperature</figcaption></figure>

Source: IDB staff calculations, based on numerical simulations.

Note: This figure depicts the hypothetical temperature distributions for two simulated one-year periods for illustrative purposes. For the "before climate change" period, the data follow a normal distribution with a mean temperature of 21°C and a standard deviation of 2. In contrast, the "after climate change" period has a mean temperature of 24°C with a standard deviation of 4. Each dot on the figure corresponds to one day of the year. The vertical height of a bar of dots represents the total number of days with that particular mean daily temperature during the simulated year.

summer temperatures in the United States, for instance, affect growth in a broad range of sectors that includes agriculture, finance, services, retail, wholesale, and construction (Colacito, Hoffmann, and Phan 2019).

Although the approach taken by Burke et al. (2015) demonstrates the important fact that countries will be differentially affected by warming, it has shortcomings. It focuses only on temperature, a single dimension of climate. It also estimates one temperature threshold globally at which the effects of warming switch from positive to negative.<fnref n="1" /> Furthermore, much of the variation that takes place over time is smoothed by average annual temperature, which does not capture well many of the expected changes to the distribution of temperature that will lead to an increase in the intensity, duration, and frequency of heatwaves. Figure 2.2 illustrates this by showing how

<footnote n="1">¹ Another approach uses country-specific temperature thresholds to focus on the deviation of annual temperature from these norms. Kahn et al. (2021) finds that both positive and negative deviations from the historic average have negative effects on GDP per capita growth.</footnote>
<figure><img src="image_17.png" /><figcaption>**Figure 2.3.** Impact of Heatwaves on Economic Growth</figcaption></figure>

Source: IDB staff calculations, based on Dueñas, Goytia, and Hoffman (2024).
Note: Each square represents the magnitude of the coefficient from a separate regression of the annual count of heatwaves of each intensity (in percentiles of the location's monthly heat index distribution shown on the x-axis) and duration (in days shown on the y-axis) on the growth rate of GRP.

an increase in the mean and variance of a distribution (bell curve) affects the frequency of observations in the right tail. As seen in the figure, this implies the bell curve shifts rightward and flattens out substantially, increasing the dispersion. For temperatures, these changes together imply a substantial increase in the area under the curve for high temperatures, which indicates more frequent and intense periods of extreme heat.

Dueñas, Goytia, and Hoffman (2024) investigate the impact of heatwaves on economic growth as measured by the heat index, which takes into account both temperature and humidity, using a panel of subnational data on gross regional product (GRP) for 15 countries in Latin America from 1970 to 2010.<fnref n="2" /> Extreme heat reduces economic growth, and the magnitude of this effect is increasing in terms of both the intensity and duration of heatwaves (Figure 2.3). The negative effect of a single hot day becomes statistically significant at the

<footnote n="2">² Air temperature and relative humidity are combined in the heat index to give a better reflection of the way in which people perceive heat than is provided by the measure of air temperature alone.</footnote>
93rd percentile (that is, the day is in the top 7 percent) of the heat index dis-
tribution, with the magnitude of the impact increasing with the number of
consecutive hot days and the percentile at which a heatwave is defined.

The magnitude of the effects is economically meaningful. In a typical
year in the sample, for instance, the growth rate of economic output for
the region of São Paulo, Brazil, is reduced by 0.4 percentage points by the
days with a maximum heat index in the 95th percentile (top 5 percent) of
the month's distribution, and the effects are even larger in hotter regions.
The negative effect of a day with, for example, a maximum heat index in the
96th percentile (top 4 percent) of the month's distribution is 1.07 times that
of a day in the 93rd percentile (top 7 percent). Moreover, this ratio generally
increases as the heatwave gets longer. Two consecutive days with maximum
heat index in the 96th percentile of the month's distribution, for example,
has an impact 1.93 times that of two consecutive days in the 93rd percentile.

Climate change will also alter precipitation patterns, leading to changes
in total annual precipitation and in the number of wet days, extreme rainfall
events, and droughts, all of which affect economic growth rates. Like the
relationship between temperature and economic growth, total annual rain-
fall has a nonlinear effect on growth (Kotz, Levermann, and Wenz 2022). And,
like rising temperatures, increases in the number of wet days and extreme
daily rainfall have negative effects on economic growth rates that can per-
sist over time (ibid.).

Altogether, extreme weather events have important economic consequences, both direct and indirect. Direct losses encompass mortality and morbidity, damage to physical assets, and harm to natural resources and raw materials. Indirect losses involve subsequent impacts on the economy, including, for example, on growth, consumption, investment, trade, poverty, income inequality, and government budgets.

There are divergent theories about the economic recovery from extreme
weather events. Schumpeterian models predict an initial decline in output
as a result of depleted labor and capital, ultimately leading to increased pro-
ductivity and growth through creative destruction (Caballero and Hammour
1994). The Solow growth model (Solow 1956) posits that economies should
experience higher growth rates after disasters if the capital-to-labor ratio
falls below a steady-state level. On the other hand, learning-by-doing models
suggest the loss of human and physical capital from a disaster can have lin-
gering adverse effects on productivity and growth (Martin and Rogers 1997).
Understanding if and how economies recover from the destruction caused
by extreme weather events requires empirical analysis of the indirect losses.

Such empirical evidence is mixed. A growing consensus is that extreme
weather events generally lead to negative economic impacts at the time
they occur and in the immediate aftermath. Their medium- to long-term effects remain uncertain, however, although individual studies have noted continuing adverse impacts (Noy and duPont 2018). In a meta-analysis of 750 estimates from 22 studies conducted in the early 2000s, Klomp and Valckx (2014) find that disasters generally have short-term negative impacts on economic growth, especially in low- and middle-income countries with less ability to cope with them. Other studies using macroeconomic panel data in a global sample show that the average output level drops between two and four percentage points in the disaster year, and recovery isn't strong enough to match pre-disaster trends (Borensztein, Cavallo, and Jeanne 2017). Cavallo, Becerra, and Acevedo (2022) find low- and middle-income countries experience an average *permanent* GDP loss between 2.1 and 3.7 percentage points post-disaster. When the severity of the events is proxied, however, using physical intensity (for example, wind speed in the case of hurricanes) rather than mortality—which implies a more diversified sample of countries, including higher-income countries—the impacts on growth are mostly negligible (ibid.).

## A High Price for the Poor to Pay

Both across countries and within them, the impacts of climate change fall disproportionately on the poor (Hallegatte et al. 2020; Busso and Mesina 2020). Because many higher-income countries are located at higher latitudes with cooler climates and many lower-income countries are at the hotter low latitudes, the inverted u-shape relationship between temperature and economic growth found by Burke, Hsiang, and Miguel (2015) implies that negative effects will be concentrated among low- and middle-income countries. In general, they will suffer most from rising temperatures while the cooler, primarily higher-income countries may benefit from a warmer climate (Burke, Hsiang, and Miguel 2015)—a difference that will exacerbate economic inequality across countries (Diffenbaugh and Burke 2019; Acevedo et al. 2020).

Similarly, lower-income countries disproportionately bear the brunt of disasters, including extreme weather events. Although they account for 74 percent of the world's population, they experience 93 percent of disaster-related mortality (Cavallo and Noy 2011). Additionally, economic growth in these countries is more significantly reduced by disasters than in those with higher incomes, which makes their high incidence a hurdle for economic development (Cavallo, Becerra, and Acevedo 2022).

The extent of both direct and indirect damage caused by extreme weather events is often influenced by economic factors, with lower-income
countries typically facing greater challenges. In a lower-income country, for instance, a flood may not only destroy homes but will lead to prolonged unemployment and poverty because the affected area is less economically resilient. While wealthier and larger countries usually incur higher monetary costs because of the greater pecuniary value of the wealth that is exposed, they also tend to have lower mortality rates because they are generally better prepared to deal with disasters. These countries can also minimize indirect economic losses more effectively, as their size and diversified economies enable them to manage the reallocation of economic resources and aid across economic sectors and between geographical regions. They can, for example, more readily absorb the income loss from localized disasters. On the other hand, small island states, such as those in the Caribbean, are particularly vulnerable to disaster impacts that are felt across the entire nation.

Climate change and extreme weather events also exacerbate poverty and inequality within countries (see Chapter 3). The adverse effects of higher temperatures on household income become less severe as one moves up the income scale (Gilli et al. 2023). Furthermore, higher temperatures are associated with higher levels of income inequality, as measured by the Gini index, in studies by Gilli et al. (2023), Malpede and Percoco (2021), Dasgupta, Emmerling, and Shayegh (2023), and Paglialunga, Coveri, and Zanfei (2022).

Additionally, social inequality influences the political dynamics surrounding disaster prevention, which is a factor in determining the magnitude of immediate harm. Societies with greater income disparities are generally less inclined to allocate sufficient resources for preventive actions, as they struggle to overcome the communal challenge of instituting risk-reducing steps (Anbarci, Escaleras, and Register 2005).<fnref n="3" /> This implies that, as the effects of climate change worsen in countries with higher levels of inequality, external entities like international development banks, charitable institutions, or other players may have an increasingly significant role in encouraging decision makers to invest in measures that minimize risks for impoverished and vulnerable communities. Strategies that enhance disaster readiness can both lower the number of individuals affected and diminish the immediate damage incurred, particularly among those countries most vulnerable.

<footnote n="3">³ Relatedly, Besley and Burgess (2002) note an inverse relationship between the effects of flooding in India and the distribution of newspapers. They ascribe this phenomenon to greater political accountability and more proactive government when newspaper readership is more widespread in terms of both lessening and mitigating disaster consequences. Eisensee and Strömberg (2007) arrive at analogous findings concerning the responsiveness of U.S. disaster assistance to media coverage.</footnote>
Enduring Economic Effects

Climate change is likely to affect the economy significantly in the longer
term. A back-of-the-envelope estimate of these impacts can be produced
by combining the estimates of the short-term effects of temperature on
GDP growth, described above, with long-term climate projections to 2050.
These calculations are a simplification. They consider only one dimension of
climate change in isolation and rely on extrapolation, since the short-term
estimates are based on the temperatures within the range of the histori-
cal temperature distribution. They also ignore adaptation, which implies the
estimates are likely an upper bound. These calculations do, however, indi-
cate the substantial influence of climate on the economy in the longer term
and the importance of climate action.

The GDP growth rate projected from historical GDP growth is adjusted
by using the estimated response function to determine the change in
growth brought about by future temperatures under the RCP 7.0 scenario,<fnref n="4" />
relative to average temperatures in 1989–2019. As Figure 2.4 shows, all coun-
tries in Latin America and the Caribbean except for Chile are projected to
be adversely affected by rising annual average temperatures, with the larg-
est impacts in the Bahamas and El Salvador. The expected decline in GDP
ranges from 1.2 to 22 percent.

How Climate and Disasters Affect the Economy

Climate and weather affect each of the main components of economic pro-
duction, including labor, capital, and total factor productivity. The effects
of temperature on total factor productivity are particularly large (Henseler
and Schumacher 2019; Orlov et al. 2021). Similar to the relationship between
temperature and GDP growth rates, temperature has an inverted u-shape
relationship with firm-level total factor productivity, regardless of whether
a firm is considered capital intensive or labor intensive (Zhang et al. 2018).

Higher temperatures reduce contemporaneous labor supply and labor
productivity by leading to physical discomfort and health risks that reduce
the ability of people to work efficiently and for extended periods of time
(Graff Zivin and Neidell 2014; Cachon, Gallino, and Olivares 2012). They may
also reduce productivity in the longer term through their effect on human
capital (see Chapter 3).

<footnote n="4">⁴ RCPs are trajectories of emissions and concentrations of greenhouse gases, adopted by the Intergovernmental Panel on Climate Change, that map into temperature projections. See https://www.ipcc-data.org/guidelines/pages/glossary/glossary_r.html.</footnote>
<figure><img src="image_18.png" /><figcaption>**Figure 2.4.** Projected Effect of Temperature Changes on GDP in 2050 by Country</figcaption></figure>

Source: IDB staff calculations, based on World Development Indicators and the Climate Change Knowledge Portal.

Weather and climate also affect the stock of capital available for economic production through the destruction of capital and changes in investment. Extreme weather events can destroy productive capital, which must be replenished. But higher temperatures and extreme weather also
reduce output, which reduces the resources available for investment and could even lead to the sale of productive assets to replenish the lost capital. The effects on investment are considerable. One study using a panel of country-level data for 1950–2015 estimates that investment is 10 percent lower in a median lower-income country seven years after a 1°C increase in mean annual temperature (Acevedo et al. 2020).

Climate and disasters can also affect access to finance (see Chapter 6), which firms rely on to manage shocks, make investments, expand their operations, and meet their loan obligations. Small and medium-sized enterprises (SMEs) are likely to be particularly affected, as they are less diversified in their sources of revenue and finance and the geographical locations in which they operate. This is especially relevant in Latin America and the Caribbean, where SMEs comprise 99.5 percent of firms (OECD and CAF 2019). In Mexico, for example, extreme temperatures increase credit delinquency rates for SMEs (Aguilar-Gomez et al. 2021), driven by an increase in nonperforming loans. The failure of SMEs to meet their financial obligations can restrict their access to credit in the future, increasing the volatility of their cash flows and hampering their growth.

Climate change also affects the macroeconomy through its impact on trade, with extreme weather events interrupting the production and shipment of goods and services (see Osberghaus 2019). Mohan (2023) finds, for example, that in Eastern Caribbean Small Island Developing States (SIDS), exports and imports decline in the immediate aftermath of a hurricane's landfall. Encouragingly, the same research indicates that trade activities rebound swiftly, often within a matter of months—recovery that may be influenced by unique features of the countries examined. The heavy reliance of Eastern Caribbean SIDS on trade for essential goods and their geographical closeness to their primary trading partners could account for the rapid restoration of trade flows. Unfortunately, as discussed in Chapter 11, climate change and disasters are sometimes used to justify shifts toward protectionist climate policies in major economies, which is detrimental to recovery.

## Extreme Weather Events and the Macroeconomy

The estimated impacts of extreme weather events on the economy point to intriguing disparities between Latin America and the Caribbean and the rest of the world. Four types of such events are linked to climate change: storms, floods, droughts, and extreme temperatures, each varying in nature, location, duration, and the kinds of damage caused. Globally, floods are the most common (39 percent of the events in the sample), followed by storms
(30 percent), with droughts (5 percent) and extreme temperatures (5 per-
cent) less frequent but with significant impacts.

Latin America and the Caribbean has experienced 30 percent of the world's most severe storms since 1970, a considerable figure given that it is home to only 8.3 percent of the global population. Mortality rates associated with storms in the region are on par with global averages. For the 50 most severe<fnref n="5" /> storms since 1970,<fnref n="6" /> the average mortality rate was about 80 per 1 million inhabitants. Despite affecting fewer people (20,000 per million, versus 70,000 per million inhabitants in the global sample) and causing more direct damage (5.4 percent versus 2.5 percent of GDP), the impact on GDP per capita growth is similar. Figure 2.5 compares the results of case studies looking at the estimated impacts of disasters on real GDP per capita growth

<figure><img src="image_19.png" /><figcaption>**Figure 2.5.** Comparative Impacts of Storms on Economic Growth, World and Region</figcaption></figure>

Source: IDB staff calculations, based on EM-DAT.

Note: Each panel considers the top-X events in each group, where the ranking is based on a synthetic measure of intensity using mortality, number of people affected, and estimated direct economic damage from the EM-DAT database. For a description of the methodology and estimating equation, see Cavallo, Becerra, and Acevedo (2022).

<footnote n="5">⁵ The severity ranking is based on a composite index considering economic damage, affected population, and mortality.</footnote>

<footnote n="6">⁶ Data are from the EM-DAT database. EM-DAT was created with the initial support of the World Health Organization (WHO) and the government of Belgium. Current sponsors include the International Federation of Red Cross and Red Crescent Societies (IFRC), the United Nations International Strategy for Disaster Reduction (ISDR), and the United States Agency for International Development (USAID), among others. EM-DAT is available online at https://www.emdat.be/.</footnote>
in the year of a disaster with a counterfactual scenario without the disaster. The figure shows the coefficient estimates and 10 percent confidence bands of regressions, capturing the impact of selected extreme weather events on GDP per capita growth in Latin America and the Caribbean and in the world. Growth rates decreased by 1.7 percentage points in Latin America and the Caribbean and 1.9 percentage points globally for countries hit by severe storms. Interestingly, the figure shows the GDP impact in the global sample lessens for milder storms, but this pattern is absent in Latin America and the Caribbean. This suggests that, in the region, the frequency of occurrence rather than just the intensity of storms matters for economic outcomes. In the era of climate change, this is a worrisome development because the intensity and frequency of storms are expected to increase, and, therefore, the region could suffer even worse impacts than the rest of the world (Seneviratne et al. 2021).

Figure 2.6 shows the coefficient estimates and 10 percent confidence bands of regressions capturing the impact of selected storms on GDP per capita growth and each of its components from the demand side (Panels A and B) and supply side (Panels C and D) of the economy, in Latin America and the Caribbean and in the world. The results show that, in the aftermath of storms, recovery patterns are similar in Latin America and the Caribbean and globally, with no compensatory above-average growth rates,

<caption>**Figure 2.6.** Effects of Storms: World and Latin America and the Caribbean</caption>

**A. World demand**

<figure><img src="image_20.png" /></figure>
Figure 2.6. Effects of Storms: World and Latin America and the Caribbean (continued)

B. World supply

<figure><img src="image_21.png" /></figure>

C. Latin America and the Caribbean demand

<figure><img src="image_22.png" /></figure>

(continued on next page)
<figure><img src="image_23.png" /><figcaption>**Figure 2.6.** Effects of Storms: World and Latin America and the Caribbean (continued)</figcaption></figure>

Source: IDB staff calculations, based on EM-DAT.

Note: Short-term effects are the estimated effects on GDP per capita growth in the year of the event, compared to a counterfactual without the event. Medium-term effects are the average growth rates up to three years after the event minus the average growth rates up to three years before the event. Each panel considers the top 10 storms in each group, where the ranking is based on a synthetic measure of intensity using mortality, number of people affected, and estimated direct economic damage from the EM-DAT database. For a description of the methodology and estimating equation, see Cavallo, Becerra and Acevedo (2022).

which indicates enduring economic impacts. Still, storms affect economic growth through different channels. On the demand side,<fnref n="7" /> severe storms lead to a 1 percentage point drop in consumption per capita growth and a 3.3 percentage point surge in imports per capita in the global sample, partially balanced by a 2.5 percentage point increase in government spending per capita growth in the short run (Figure 2.6, Panel A). In contrast, Latin America and the Caribbean sees a more significant drop in consumption per capita (-2.6 p.p.) and a notable increase in government spending (+4 p.p.) and investment per capita growth (+4.3 p.p.; Figure 2.6, Panel B). Unlike the global pattern, Latin America and the Caribbean does not exhibit

<footnote n="7">⁷ GDP on the demand side is the sum of consumption, investment, government spending, and net exports (exports minus imports). All components can be expressed in per capita terms by dividing by population. GDP per capita growth is the sum of the growth rates of consumption per capita, investment per capita, government spending per capita, and exports per capita, minus imports per capita; all of them are mediated by the corresponding shares of each component in aggregate output.</footnote>
a medium-term recovery (measured as average growth rates up to three years after the event minus the average growth rates up to three years before the event). The only significant medium-term effect in Latin America and the Caribbean is that government spending per capita increases permanently (+3.6 p.p). Panels C and D of Figure 2.6 show that, on the supply side,<fnref n="8" /> the negative economic impact of storms is primarily the result of misallocation of productive resources, reflected in total factor productivity (TFP) growth, which does not recover in the medium term in either sample. Instead, the growth rates of capital per worker and labor force participation remain unchanged after the storms.

Latin America and the Caribbean accounts for a disproportionately high 22 percent of the world's most severe floods. Mortality rates for the region's floods (13.4 per million inhabitants) are similar to the global average (17.4 per million). The floods cause less direct damage to economic structures in the region than globally (1.3 percent versus 3.5 percent of GDP), and they affect fewer people per million in the region (37,000) than the global average (113,000).

The impact of floods on GDP per capita growth is heterogeneous. Figure 2.7 shows the coefficient estimates and 10 percent confidence bands of regressions capturing the impact of selected floods on GDP per capita growth and each of its components from the demand and supply sides of the economy, in Latin America and the Caribbean and in the world. In the short term, investment per capita growth drops notably (–4.5 percentage points) in the global sample, while import per capita growth surges (+7.6 percentage points); this is nearly balanced by increased export per capita growth (+9.7 percentage points) for the most severe floods, leading to a

$$Y_t = A_t K_t^\alpha (L_t)^{1-\alpha}.$$

The equation is a Cobb-Douglas specification of the production process, which is especially convenient for analytical purposes. Y is aggregate output, α is the output elasticity to physical capital (K), and L is the productive capacity of the labor force, which in turn corresponds to the headcount of the labor force. Finally, A is total factor productivity (TFP), which measures the effectiveness with which accumulated factors of production are used to produce output. The sub-index t introduces the time dimension to the process. The equation implies that GDP per capita growth can be disaggregated into three terms: (1) TFP growth; (2) the growth rate of capital per worker; and (3) the growth rate of workers to population (or labor force participation). The TFP component includes average skills (human capital). The terms (2) and (3) are also mediated by α, the output elasticity to physical capital.

<footnote n="8">⁸ To identify the sources of economic growth, it is useful to analyze the data by applying a model that can combine the various inputs of the production process in a tractable and straightforward way. Consider the following aggregate production function:</footnote>
muted overall impact on GDP per capita growth (Panel A). In Latin America and the Caribbean (Panel B), consumption per capita falls by 1.5 percentage points initially, but this effect is offset by increased government spending and exports as flood severity decreases. Similar to the pattern observed with storms, government spending in the region consistently rises in the short and medium terms following floods. Subsequent years show a

<caption>Figure 2.7. Effects of Floods: World and Latin America and the Caribbean</caption>

A. World demand

<figure><img src="image_24.png" /></figure>

B. World supply

<figure><img src="image_25.png" /></figure>

(continued on next page)
<figure><img src="image_26.png" /><figcaption>**Figure 2.7.** Effects of Floods: World and Latin America and the Caribbean</figcaption></figure>

Source: IDB staff calculations, based on EM-DAT.

Note: Short-term effects are the estimated effects on GDP per capita growth in the year of the event, compared to a counterfactual without the event. Medium-term effects are the average growth rates up to three years after the event minus the average growth rates up to three years before the event. Each panel considers the top 10 floods in each group, where the ranking is based on a synthetic measure of intensity using mortality, number of people affected, and estimated direct economic damage from the EM-DAT database. For a description of the methodology and estimating equation, see Cavallo, Becerra, and Acevedo (2022).
slight recovery in the world sample (Panel A), with a 0.7 percentage point increase in average GDP per capita growth rates, while Latin America and the Caribbean (Panel B) does not show significant medium-term economic impacts. The supply side analysis in Panels C and D indicates that the primary impact of floods on GDP per capita growth is driven by TFP growth, highlighting the influence of changes in resource allocation on economic outcomes.

As the impacts of droughts on the economy often take years to materialize and are more diffuse than those of floods, they are not fully captured by this event study approach.<fnref n="9" /> Still, in Latin America and the Caribbean, droughts adversely affect short-term GDP per capita growth, with a 0.7 percentage point decline. This is primarily the result of decreased per capita consumption and exports, which drop by 2.4 and 7.5 percentage points, respectively. A fall in imports by 5.2 percentage points only partially offsets these effects. The impacts are not sustained in the medium term, however, except for government spending per capita, which increases by an average of 4.3 percentage points. On the supply side, negative TFP growth drives these negative impacts.

For extreme temperature, global data indicate a negative effect on short-term GDP per capita growth of 1.5 percentage points, which is not compensated by higher growth rates later.<fnref n="10" /> The downturn is attributed to a combination of reduced labor participation (a 1 percentage point decrease) and a decline in TFP growth (-0.8 percentage points). This suggests extreme temperatures are detrimental to workforce productivity and participation.

This comprehensive analysis highlights the unique vulnerabilities of Latin America and the Caribbean to extreme weather events and underscores the need for tailored strategies to mitigate these impacts.

## A Stream of Strategies to Help the Economy Adapt

To adapt effectively to climate change and disasters, countries have a suite of strategies available to them. Implementing policies that promote innovation and technology adoption can mitigate climate impacts on economies.

<footnote n="9">⁹ Droughts affect energy, agriculture, food security, and employment. Freire-González, Decker, and Hall (2017) show that conceptual frameworks traditionally used to assess the impacts of natural hazards do not adequately capture all of the factors that contribute to the economic impacts of droughts.</footnote>

<footnote n="10">¹⁰ For Latin America and the Caribbean, the sample size is too small for definitive conclusions. Heatwaves are underreported, and their impacts are not measured. This is compounded by the lack of a unified framework for measuring heatwaves, leading to inconsistent definitions and measurements (see Perkins 2015).</footnote>
Heatwaves, for instance, spur advances in cooling technologies like air conditioning, as noted by Noy and Strobl (2022). Higher temperatures are likely to increase the adoption of such technologies by households and businesses, emphasizing the need for governments to ensure equitable access. McRae (2023) observes that while wealthier households in Colombia are more likely to adopt and intensively use air conditioning, lower-income households are gradually catching up. Strengthening the resilience of individuals, households, and communities (see Chapter 3) also fortifies the overall resilience of the economy.

In dealing with extreme weather events, countries can reduce disaster impacts through policies that include land use planning, enhanced building codes (see Chapter 13), and other engineering solutions to boost resilience. Improving infrastructure resilience, as discussed in Chapter 7, helps minimize disruptions to services during disasters, thereby lessening their economic impacts.

Governments face challenges, however, in funding humanitarian assistance and reconstruction following disasters, especially under tight budget constraints (Chapter 10). Although foreign aid, which typically increases by 18 percent in the year of a disaster, provides some relief, it is often insufficient and poorly allocated (Becerra, Cavallo, and Noy 2014). Chapter 12 explores additional financing options for mitigation and adaptation activities.

Spatially reallocating economic activity and people is another adaptation strategy. In regions like Latin America and the Caribbean, where cities house about 80 percent of the population and are economic hubs, migration becomes a method of adapting to climate change. Trade and market integration offer a means to distribute the impacts of weather shocks, especially for lower-income countries, which can share the effects with higher-income countries through agricultural and industrial exports (see Chapter 11).<fnref n="11" />

In conclusion, a multifaceted approach that includes technological innovation, policy reforms, infrastructure resilience, and strategic planning is essential for countries to adapt to the impacts of climate change and extreme weather events on the macroeconomy. This comprehensive strategy not only addresses immediate challenges associated with output loss and income inequality but paves the way for sustainable and resilient economic growth in the face of evolving climate risks.

<footnote n="11">¹¹ See Jones and Olken (2010).</footnote>
<figure><img src="image_27.png" /></figure>

Lives and Livelihoods in the
Age of Climate Change

Climate change, including extreme weather events, disrupts lives and live-
lihoods through health, education, employment, and migration. Poor and
vulnerable households are more exposed to these impacts because they
lose a greater share of assets when climate shocks hit and have access to
fewer coping and adaptive strategies. Climate change also impacts the
supply of and demand for public services; for example, extreme weather
events may increase the demand for health care at the same time they
hindering supply. Governments can pursue adaptation strategies such as
strengthening health care systems, improving the resilience of public
services, protecting workers and providing employment strategies and
strengthening social protection.

Climate change alters and disrupts people's lives and livelihoods and, by 2030, may push as many as 5.8 million people into extreme poverty in Latin America and the Caribbean (IPCC 2023; Jafino et al. 2020). Higher temperatures, changing precipitation patterns, and extreme weather events affect a broad range of interrelated outcomes, including physical and mental health, violent behaviors, learning, and labor market outcomes. A disproportionate share of these impacts falls upon households living in poverty, which are more vulnerable to climate change and have access to fewer coping strategies.

Climate change also affects the supply of and demand for key social
services. Extreme weather events can increase the demand for health care
at the same time it hinders its provision by destroying health care facilities
or making them less accessible. Similarly, education can be disrupted when
academic calendars are shortened because of extreme heat and extreme
weather events impede access to schools.

To minimize the impacts of climate change on people's lives and
livelihoods, countries can adopt a series of strategies to improve the
resilience and readiness of public services; expand cash transfer programs
and make them responsive to shocks to protect poor and vulnerable
households; promote labor policies that protect workers from extreme heat and provide access to employment opportunities; and provide housing and social services to climate migrants.

## Climate Change Is Bad for Your Health

Climate change affects human health directly; indirectly, by, for example, impairing nutrition and reducing income; and by impeding access to good quality health care.

## Effects on Body and Mind

Climate change increases both average temperatures and the number of extremely hot days. Heat directly affects physical health through three mechanisms. First, it can impair physiological functioning. Without adequate water and salt reserves to produce sweat and reduce internal temperature, the body will experience dizziness, muscle cramps, and fever, which can lead to cardiovascular, respiratory, and cerebrovascular reactions, dehydration, kidney failure, and fetal distress.

Second, higher temperatures and changes in precipitation patterns can boost the incidence of vector-borne diseases by expanding the geographical range and altering the reproduction patterns of mosquitos that transmit illnesses like dengue, malaria, and zika (Romanello et al. 2022; Meiro-Lorenzo et al. 2017). The incidence of dengue, for instance, is expected to increase 260 percent by 2050 in comparison with the 1961–90 average, amounting to an additional 6.9 million cases per year (Colón-González et al. 2018).

Third, extreme heat has been linked to more erratic behavior, irritability, intimate partner violence, accidents, and conflict (Box 3.1).

Heat has adverse effects on mortality and morbidity in Latin America and the Caribbean, with significant effects in utero and during infancy, childhood, and old age. In Colombia, an additional day with a mean temperature above 27°C increases mortality rates by approximately 0.24 deaths per 100,000, equivalent to 0.7 percent of monthly deaths. Based on data for 1931–59, this effect is similar to that of a day in the United States with a mean temperature between 27°C and 32°C; it is greater than estimates for more recent years (Helo Sarmiento 2023). The negative effect of days above 27°C on mortality in Colombia is explained mainly by the incidence of vector-borne diseases and respiratory illnesses among children (ibid.). Extreme heat also increases hospitalization rates for pregnant women due to fetal distress (ibid.), reduces birthweight (Molina and Saldarriaga 2017; Andalón et al. 2016), and leads to lower APGAR scores in newborns (Andalón et al.
Box 3.1. Feeling the Heat: Temperatures, Criminality, and Violence

Rising temperatures are expected to increase violence and criminal-
ity through at least two channels. First, higher temperatures influence
human physiology by prompting the human body to produce lower levels
of serotonin, a neurotransmitter linked to temperature regulation. Reduced
serotonin levels are associated with individuals' becoming more aggressive
and impulsive (Baysan et al. 2019). Excessive heat can also cause discomfort
and frustration and reduce the quantity and quality of sleep (Rifkin, Long,
and Perry 2018).

Second, higher temperatures can bring about changes in time allocation and routines (Evans, Gazze, and Schaller 2023; Mahendran et al. 2021). On mildly hot days, for instance, young people tend to congregate in open and shaded spaces, which could create crime-prone environments and opportunities for interpersonal conflicts (Mahendran et al. 2021). When temperatures are very high, parents and children spend more time inside their homes, which may make intrahousehold violence, such as child abuse, more likely (Evans, Gazze, and Schaller 2023).

Empirical studies have found a positive, nonlinear relationship between temperature increases and homicides (Gamble and Hess 2012). In the United States, a 1°C rise in average annual temperature is related to an increase of 7.5 assaults and homicides per 100,000 population (Anderson and DeLisi 2011). Similarly, in South Africa, a 1°C increase in same-day maximum temperature is associated with a 1.5 percent increase in homicides (Gates et al. 2019).

These effects demonstrate the importance of broadening efforts to reduce
the impacts of climate change by incorporating social prevention policies and
strengthening institutions for citizen security.

2016).<fnref n="1" /> Exposure to heatwaves at birth and during infancy and adolescence, when children experience growth spurts, is also negatively associated with adult height, likely because of food insecurity (Agüero 2014).

Extreme heat is particularly dangerous for city residents subject to the “urban heat island” effect (see Chapter 13) and for agricultural laborers. Among the latter, especially sugarcane cultivators in Central America, heat has been linked to an increase in the prevalence of chronic kidney disease of unknown etiology (CKDu). In Mesoamerica in particular, occupational heat stress resulting from climate change is already causing an epidemic of chronic kidney disease (Wesseling et al. 2020). And, based on guidelines

<footnote n="1">¹ The APGAR score is a summary measure of a newborn's health based on appearance (skin color), pulse (heart rate), grimace (reflexes), activity (muscle tone), and respiration (breathing rate and effort).</footnote>
from the U.S. Occupational Safety and Health Administration (OSHA), sug-
arcane workers in Nicaragua are at moderate or high risk of heat-related
illness more generally during a great part of their workday (Wesseling et
al. 2016; Petropoulos et al. 2021). As temperatures continue to rise, workers
across a wide range of outdoor occupations (such as construction workers
and street vendors) could be similarly affected.

Beyond physical health, climate change affects mental health (IPCC 2023). Awareness of climate change in general is generating anxiety, particularly among young people (Hickman et al. 2021; Box 3.2). Moreover, exposure to climate disasters, high temperatures, and wildfires can cause distress, post-traumatic stress disorder, substance abuse, pain, and depression (To, Eboreime, and Agyapong 2021; Foudi, Osés-Eraso, and Galarraga 2017; Manning and Clayton 2018; Charlson et al. 2021; Lawrance et al. 2021; Dixon et al. 2014), as well as more severe conditions leading to psychiatric hospitalization and suicides (Clayton 2020; Foudi, Osés-Eraso, and Galarraga 2017; Rataj, Kunzweiler, and Garthus-Niegel 2016; Burke et al. 2018). Studies on the relationship between climate change and extreme weather events and mental health in Latin America and the Caribbean are lacking, even though the region has one of the world's highest rates of life years lost to

Box 3.2. A Bad Feeling about Climate Change

An emerging body of evidence suggests that the perception of climate change—that is, awareness about climate change that is unrelated to a specific climate event—may generate negative emotions, like unhappiness, anger, or fear (Clayton 2020; UNICEF 2023; Lawrance et al. 2021). In a survey conducted by Greenpeace in Chile in 2023, for example, almost 64 percent of the 450 respondents reported having frequently or very frequently experienced hopelessness and anguish because of climate change (Cerpa and Navarro 2023).

People's sense of well-being suffers as they learn about the harm humans are inflicting on the climate and the natural world, and many report feeling anxiety, grief, and distress (Lawrance et al. 2021). This is particularly true for young people, who will disproportionately suffer the consequences of climate change. Younger adults report greater climate anxiety than their elders (Clayton 2020; Clayton and Karazsia, 2020; Lawrance et al. 2021). In a recent survey of youth between the ages of 16 and 25, almost 67 percent of respondents in Brazil reported being very or extremely worried about the threat of climate change to people and the planet (Hickman et al. 2021). Among respondents across all ten countries in the survey the share was 59 percent.
mental disorders,<fnref n="2" /> and an estimated 74.7 percent of people who need mental health treatment do not receive it (Hartinger et al. 2023).

Beyond the deaths, severe injuries, and other harms they cause directly, extreme weather events have important indirect effects on health. In Northeast Brazil, for instance, the malnutrition and intestinal infections produced by drought increase infant mortality rates (Rocha and Soares 2015). Droughts can also raise the probability of wildfire events, which generate both direct and indirect effects on health, as well as adverse economic outcomes.

## When Demand for Health Services Outpaces Supply

Heatwaves, floods, droughts, wildfires, and other extreme weather events increase the demand for health services. In Colombia, hospitalization rates rise with rising temperatures as a result of vector-borne and other infectious diseases,<fnref n="3" /> distress during pregnancy and among newborns, respiratory and circulatory ailments, and increased incidence of accidents and homicides (Helo Sarmiento 2023). In Chile, hospitalizations increase by as much as a third during the week when wildfires are at their height, with particularly acute effects for infants (Arrizaga et al. 2023). Greater demand and overcrowding can also affect the quality of care (WHO 2015), with impacts on all types of health outcomes.

An analysis conducted for this chapter identifies areas in Latin America and the Caribbean where more frequent hot days are likely to lead to excess demand for health care services. Temperature projections from the IPCC WGI Interactive Atlas under two climate change scenarios (SSP1-2.6 and SSP3-7.0)<fnref n="4" /> and data on the locations of clinics and hospitals<fnref n="5" /> are

<footnote n="2">² https://www.paho.org/en/enlace. This is based on age-standardized disability-adjusted life-years (PAHO 2021), which includes measures of the years of life lost to premature mortality and time lived in states of less than full health as a result of mental disorders.</footnote>

<footnote n="3">³ Temperature and extreme climate events have been associated with the proliferation of vector-borne or water-borne viruses and bacteria, like malaria, dengue, and zika, among others.</footnote>

<footnote n="4">⁴ Projections from https://interactive-atlas.ipcc.ch on the change in the number of days with temperatures above 35°C for two periods, the near term (2021-40) and medium term (2041-60), compared to the 1981-2010 baseline, and two scenarios (SSP1-2.6 and SSP3-7.0). SSP1-2.6 is a relatively optimistic scenario that assumes a gradual shift toward sustainability and low challenges to climate mitigation and adaptation. SSP3-7.0 is a more pessimistic scenario that assumes regional rivalry and high challenges to climate mitigation and adaptation (O'Neill et al. 2014).</footnote>

<footnote n="5">⁵ Data from https://healthsites.io/ are used to identify health facilities. This database includes geographical information on nine different types of health care amenities. Only those tagged as "clinics," defined as medium-sized medical facilities or health</footnote>
used to identify municipalities,<fnref n="6" /> first, with access to health care below the regional average (that is, less than 4.6 health care sites per 100,000 people) and, second, projected percentage change in the number of days with temperatures higher than 35°C above the regional average.

The analysis finds that, unless health care services are expanded, close to 140 million people by 2040 and approximately 138 million people by 2060 will live in municipalities with excess demand for health services as a result of extreme heat (Table 3.1).<fnref n="7" /> Most will be in Brazil and Mexico, although people in Bolivia, Colombia, Ecuador, and Paraguay will also be considerably affected. The figure for 2041–60 represents 18 percent of the projected population for the region for 2060 and is equivalent to the current combined populations of Argentina, Colombia, Peru, and Uruguay. Approximately 7 percent of health care sites in the region (1,577 by 2040 and 1,546 by 2060) are expected to experience an increase in demand for their services because of extreme heat, which could result in lower quality of care if no investments are made in health and climate adaptation. These estimates could be higher under more pessimistic climate scenarios and when accounting for other potential sources of demand for health services.

Last, climate change also affects the supply of health services. Disasters such as landslides, floods, and tropical storms can impair access to care, as they destroy facilities and disrupt other essential services, such as transportation, water, sanitation, and electricity (Meiro-Lorenzo et al. 2017). Between 2007 and 2017, climate-related disasters prevented around 24 million people in the region from getting access to health services (ECLAC

centers, and “hospitals,” defined as hospitals providing inpatient medical treatment, are included in this analysis. Physicians’ practices and surgical centers are excluded.

<footnote n="6">⁶ Administrative boundaries come from GADM (https://gadm.org/). Administrative areas of level 2 (such as municipalities, districts, or counties) are prioritized, unless level 1 is the minimum administrative level in the country. This allows temperature projections to be summarized at the municipal, district, county, or equivalent level.</footnote>

<footnote n="7">⁷ It is important to highlight that the purpose of these projections is to find in each scenario (and not across time) the most vulnerable municipalities and, within them, potentially affected social services and people. Each climate change projection has its own level of uncertainty at the global level. The uncertainty is even higher at the regional level, as increases in average global temperature have different manifestations locally and imply different regional averages across time. Moreover, each scenario has its own range of values, and, therefore, the number of days used as a criterion to prioritize the most vulnerable municipalities changes across scenarios. This explains why, for some countries, a reduction in the number of municipalities, health services, or people can be observed for the more pessimistic scenario—a result that might appear at first to be counterintuitive. This, combined with the assumption that the mitigation and adaptation measures of the optimistic scenario will be implemented, explains why some countries see the number of municipalities, health services, or people decrease for the time period 2041–60.</footnote>
<table><caption>**Table 3.1.** Projected Excess Demand for Health Care Services due to Extreme Heat</caption><thead><tr><th rowspan="3">Country</th><th colspan="4">Population in municipalities projected to have excess demand</th></tr><tr><th colspan="2">Relatively optimistic climate scenario</th><th colspan="2">More pessimistic climate scenario</th></tr><tr><th>2021-40</th><th>2041-60</th><th>2021-40</th><th>2041-60</th></tr></thead><tbody><tr><td>Argentina</td><td>478,538</td><td>415,406</td><td>428,430</td><td>351,781</td></tr><tr><td>Belize</td><td>169,812</td><td>169,812</td><td>169,812</td><td>169,812</td></tr><tr><td>Bolivia</td><td>3,560,523</td><td>3,614,459</td><td>3,560,523</td><td>3,560,523</td></tr><tr><td>Brazil</td><td>51,361,958</td><td>53,585,890</td><td>52,495,481</td><td>54,881,053</td></tr><tr><td>Colombia</td><td>10,493,334</td><td>11,799,196</td><td>10,983,727</td><td>12,652,120</td></tr><tr><td>Costa Rica</td><td>345,893</td><td>345,893</td><td>345,893</td><td>396,831</td></tr><tr><td>Ecuador</td><td>5,622,454</td><td>5,617,299</td><td>5,571,867</td><td>5,631,059</td></tr><tr><td>El Salvador</td><td>2,294,902</td><td>2,295,744</td><td>2,294,902</td><td>2,804,985</td></tr><tr><td>Guatemala</td><td>2,459,797</td><td>2,677,875</td><td>2,508,155</td><td>3,579,707</td></tr><tr><td>Guyana</td><td>79,256</td><td>80,533</td><td>84,382</td><td>114,970</td></tr><tr><td>Honduras</td><td>815,957</td><td>857,358</td><td>854,846</td><td>1,900,790</td></tr><tr><td>Mexico</td><td>53,120,470</td><td>48,191,700</td><td>50,481,499</td><td>46,584,933</td></tr><tr><td>Nicaragua</td><td>1,560,507</td><td>1,419,189</td><td>1,559,122</td><td>2,352,120</td></tr><tr><td>Paraguay</td><td>4,072,833</td><td>3,548,932</td><td>3,881,333</td><td>3,361,817</td></tr><tr><td>Peru</td><td>2,630,016</td><td>2,630,016</td><td>2,485,518</td><td>2,630,016</td></tr><tr><td>Suriname</td><td>383,298</td><td>383,298</td><td>383,298</td><td>384,066</td></tr></tbody><tfoot><tr><td><strong>Regional total</strong></td><td><strong>139,449,548</strong></td><td><strong>137,632,600</strong></td><td><strong>138,088,788</strong></td><td><strong>141,356,585</strong></td></tr></tfoot></table>

Source: IDB staff calculations based on data from the IPCC WGI Interactive Atlas using SSP1-2.6 and SSP3-7.0; a 1981-2010 baseline; and data from Meta (https://dataforgood.facebook.com/dfg/tools/high-resolution-population-density-maps) for population, from healthsites.io for health sites, and from GADM for municipalities.

Note: Table shows the people in municipalities with lower-than-average access to health care and where the change in the number of days with temperatures above 35°C is equal to or above the mean for the region.

2021). In addition, 67 percent of health care facilities in Latin America and the Caribbean are exposed to climate events, with five countries having more than 80 percent of their facilities at risk (Astorga, Sorio, and Bauhoff 2023).

## The Threat to Education and Skills

Climate change will affect human capital development throughout people's educational careers and working lives, beginning even before they are born.
In-utero exposure to climate shocks can affect early childhood development, with impairment persisting into adulthood. Later exposure can affect learning outcomes among school-aged children, with implications for the labor market.

## Exposure Begins before Birth

In-utero exposure to extreme heat and weather events is associated with worse birth outcomes, which can have longer-term impacts on cognitive development, including working memory and inhibitory control (Pazos et al. 2023; Zamand and Hyder 2016), and on learning. Ecuadoran children, for instance, who were exposed to excessive El Niño rainfalls in utero during 1997–99 had lower scores on vocabulary tests five and seven years later than children not affected by these rainfalls (Rosales-Rueda 2018). Moreover, the effects of climate shocks during the gestational period can persist throughout the entire educational career. A 1°C increase in average monthly temperature before birth is found to lower the probability of completing secondary and higher education in Ecuador, translating into a 0.7 percent decline in adult earnings, with larger effects for women (Fishman, Carrillo, and Jason Russ 2019).

## Learning at Risk

Cognitive performance and learning are also impaired by high temperatures and extreme weather events that take place during children's school years. In Brazil, an analysis of the results of college entrance exams administered to millions of students over a six-year period finds higher temperatures associated with lower scores (Melo and Suzuki 2023). A study in Mexico shows that an increase in annual temperatures leads to decreases in math and Spanish test scores, particularly among the socioeconomically disadvantaged (Arceo-Gomez and Lopez-Feldman 2024). Droughts have also been linked to lower learning. A study that uses data from educational assessments administered in Brazil (Prova Brasil) finds droughts associated with lower scores on both math and Portuguese exams among fifth and ninth grade students from rural schools in Brazil's Northeast Region (Branco and Feres 2018).<fnref n="8" />

The analysis presented here identifies schools in Latin America and the Caribbean that are projected to be severely affected by higher temperatures. It uses temperature projections for the SSP1–2.6 and SSP3–7.0 scenarios for the months March to May from the IPCC WGI Interactive

<footnote n="8">⁸ Although the effects of temperature on performance are found to be negligible on high-stakes exams; see Li and Patel (2021).</footnote>
Atlas for municipalities<fnref n="9" /> and data on the current locations of schools from the Humanitarian Data Exchange.<fnref n="10" /> The analysis finds that, under the most optimistic scenario (SSP1-2.6), municipalities that are projected to experience an increase in the number of extremely hot days greater than the regional mean will be home to approximately 40,000 schools and 20 million school-aged children by 2040 (Table 3.2). Most of the schools expected to be

<table><caption>**Table 3.2. Educational Facilities Where Heat Will Make Learning Difficult**</caption><thead><tr><th rowspan="3">Country</th><th colspan="4">Scenarios</th></tr><tr><th colspan="2">Relatively optimistic<br>climate scenario</th><th colspan="2">More pessimistic climate<br>scenario</th></tr><tr><th>2021-40</th><th>2041-60</th><th>2021-40</th><th>2041-60</th></tr></thead><tbody><tr><td>Argentina</td><td>1562</td><td>987</td><td>1091</td><td>843</td></tr><tr><td>Belize</td><td>37</td><td>37</td><td>37</td><td>37</td></tr><tr><td>Bolivia</td><td>122</td><td>122</td><td>122</td><td>122</td></tr><tr><td>Brazil</td><td>5823</td><td>7426</td><td>7211</td><td>8242</td></tr><tr><td>Colombia</td><td>1401</td><td>1373</td><td>1378</td><td>1481</td></tr><tr><td>Costa Rica</td><td>9</td><td>16</td><td>9</td><td>16</td></tr><tr><td>Ecuador</td><td>1674</td><td>1634</td><td>1602</td><td>1634</td></tr><tr><td>El Salvador</td><td>273</td><td>295</td><td>235</td><td>285</td></tr><tr><td>Guatemala</td><td>173</td><td>180</td><td>139</td><td>175</td></tr><tr><td>Guyana</td><td>6</td><td>6</td><td>6</td><td>22</td></tr><tr><td>Honduras</td><td>171</td><td>172</td><td>172</td><td>174</td></tr><tr><td>Mexico</td><td>17459</td><td>17392</td><td>16669</td><td>17309</td></tr><tr><td>Nicaragua</td><td>538</td><td>546</td><td>538</td><td>550</td></tr><tr><td>Panama</td><td>0</td><td>4</td><td>0</td><td>8</td></tr><tr><td>Paraguay</td><td>1959</td><td>502</td><td>1110</td><td>431</td></tr><tr><td>Peru</td><td>8944</td><td>8944</td><td>8944</td><td>9204</td></tr><tr><td>Trinidad and Tobago</td><td>12</td><td>12</td><td>12</td><td>12</td></tr></tbody><tfoot><tr><td><strong>Regional total</strong></td><td><strong>40,163</strong></td><td><strong>39,648</strong></td><td><strong>39,275</strong></td><td><strong>40,545</strong></td></tr></tfoot></table>

Source: IDB staff calculations based on data from IPCC WGI Interactive Atlas using SSP1-2.6 and SSP3-7.0; a 1981-2010 baseline; data from the Humanitarian Data Exchange for educational facilities; and data from GADM for municipalities.

Note: Table shows the number of educational facilities in municipalities where the number of days with temperatures above 35°C between the months of March and May exceeds the regional mean.

<footnote n="9">⁹ https://interactive-atlas.ipcc.ch. Administrative boundaries come from GADM (https://gadm.org/). Level 2 administrative areas (municipalities, districts, or counties) are prioritized, unless level 1 is the minimum administrative level in the country. This allows temperature projections to be summarized at the municipal, or equivalent, level.</footnote>

<footnote n="10">¹⁰ http://data.humdata.org/.</footnote>
affected are in Brazil, Mexico, and Peru, although effects could be significant for schools in Argentina, Colombia, Ecuador, and Paraguay, as well. The estimated number of affected schools exceeds the current total number of schools in Colombia, Ecuador, El Salvador, and Uruguay combined, and the number of school-aged children expected to be affected amounts to 32 percent of the current primary school enrollment for the entire region.<fnref n="11" />

In addition to suffering from the impacts of heat, learning outcomes can be affected by extreme climate events that reduce school attendance and instructional time. Exposure to a severe drought in 2011, for instance, is found to have reduced the probability that rural Mexican boys between the ages of 12 and 17 attend school by almost 3 percentage points compared to boys in households that were not affected by the drought (Arceo-Gomez, Hernández-Cortés, and López-Feldman 2020). Attendance also declines when school-aged children must go to work during severe droughts (Branco and Feres 2018), while extreme weather events reduce instructional time by damaging educational infrastructure, learning materials, and the infrastructure connecting schools with the community and by disrupting infrastructure services (González Cappa 2021). Hurricanes Eta and Iota, for example, damaged over a thousand schools in Guatemala and Honduras in 2020, and classes were disrupted in the seven hundred additional schools that had to be used as shelters (IDB and CEPAL 2021; Bello and Peralta 2021).

## Climate Change and Labor

Climate change has indirect effects on labor market outcomes through its effects on learning and cognition. More directly, climate change can lead to losses in working hours, labor productivity, and employment.

## A Changing Climate Changes Work

By physiologically affecting the human body, extreme heat affects labor supply and productivity, occupational safety, and employment (ILO 2024). Heat exposure diminishes labor supply as workers work fewer hours or days or leave the labor force temporarily. By 2030, according to the International Labour Organization, 0.91 percent of total working hours could be lost to heat stress in Central America (equivalent to almost 800,000 full-time jobs) and 0.76 percent in South America (equivalent to 1.6 million full-time jobs; ILO

<footnote n="11">¹¹ The number of educational facilities in some countries will decrease with time or across scenarios for reasons similar to those applying to the health care centers identified above as expected to experience increased demand.</footnote>
2019). While the estimates for Central and South America are lower than the estimated 2.2 percent of total working hours that could be lost to heat stress globally, they are also higher than the estimates for high-income regions (ILO 2019). For example, the International Labour Organization estimates that the total working hours lost to heat stress could be 0.19 percent (equivalent to 390,100 full-time jobs) in North America, 0.01 percent (equivalent to 8,700 full-time jobs) in Eastern Europe, and 0.02 percent (equivalent to 14,400 full-time jobs) in Southern Europe (ILO 2019). Effort and productivity may decline as workers reduce their levels of exertion (Graff Zivin and Neidel 2014; Behrer and Park 2017). Although following occupational safety recommendations, such as providing work breaks to prevent heat-related illnesses, can help protect workers' health and productivity from the impacts of heat, they could also lead to greater reductions in economic output relative to a scenario with the 2°C temperature goal (Takakura et al. 2017). Simulations implementing such measures find that, when the recommended work-to-rest ratio is enforced, the economic cost in terms of gross domestic product resulting from reduced worktime will range from 0.02 to 0.31 percent in Brazil and 0.12 to 0.86 percent in the rest of Latin America by 2100 under a set of climate change scenarios. In comparison, the economic cost in terms of gross domestic product resulting from reduced worktime will range from 0.15 to 0.79 percent in the United States and from 0.49 to 2.84 in the world (ibid.).

Climate extremes and shocks also affect the likelihood of workers' obtaining or continuing employment, especially among those whose work, in sectors like agriculture, silviculture, and fishing, exposes them to the weather. In Guatemala, for example, sugarcane workers with impaired kidney function are twice as likely to leave employment before the end of a harvest because of extreme heat as those without kidney disease (Dally et al. 2018). A study covering seventy-eight Latin American cities finds that small “dry shocks”—that is, episodes of below-average rainfall—sustained over two months decrease the probability of employment by 0.4 percent and large shocks by 1.5 percent among people between the ages of 16 and 60 relative to a period with near “normal” weather, with greater effects occurring among informal workers (Desbureaux and Rodella 2019). In rural areas, droughts can lead workers to seek additional employment, as reduced crops generate less need for labor. In rural Brazil, for instance, an additional month of drought per year increases the probability of working in more than one job by up to 6.15 percent and reduces the supply of agricultural work by 1 percent (Branco and Féres 2021).

Finally, climate shocks can affect whether workers are employed formally or informally. In Jamaica, tropical storms increase men's probability of becoming informal workers by up to 12 percent, with the largest effects in the service sector (Pecha Garzón 2017).
## People on the Move

The effects of slow-onset climate events, like rising temperatures and droughts, on people's economic opportunities, agricultural productivity, food security, and water availability eventually induce some to migrate in search of better opportunities. Up to 17 million people in Latin America are projected to migrate by 2050, mostly within their own countries, as a result of slow-onset climate change impacts, compared to 5 million people in Europe and Central Asia and 86 million people in Sub-Saharan Africa (Clement et al. 2021). Central American countries are expected to experience particularly large international migration flows. In El Salvador, the damage inflicted on agricultural production by extreme temperatures is already leading some workers to migrate internationally, usually to the United States (Ibáñez et al. 2022). In the case of Honduras, climate-related negative income shocks like droughts are associated with an increase in migration to the United States (Bermeo and Leblang 2021).

Sudden weather shocks, like flooding or hurricanes, can also displace people. Loss of infrastructure, productive capital, and housing and interrupted access to social services like education and health care give people incentive to migrate. Between 2008 and 2017, rapid-onset disasters linked to natural hazards led to the internal migration of at least 3 million people in Central America and Mexico, almost 11 million in South America, and over 6.5 million in the Caribbean, mainly in Cuba and Haiti (Cantor 2018).

Migration, if it is planned and desired and leads to improved living conditions, can be a successful adaptation strategy, enabling people to diversify their incomes and offset climate impacts (Bardsley and Hugo 2010). The most vulnerable, however, who have neither financial resources nor access to financial markets, may be unable to migrate, with the result that local poverty rates increase (Black et al. 2011). Similarly, evidence from Guatemala suggests that areas affected by high temperatures experience less migration in the following year because lower rural productivity and income make moving unaffordable (Barbosa Alves and Britos 2023). Climate change also can increase the vulnerability of migrants at their urban destinations (see Chapter 13).

## The Plight of the Poor

Poverty and climate change effects are interlinked (Hallegatte et al. 2020). In Latin America and the Caribbean, chronic poverty is a key determinant of climate vulnerability (IPCC 2023), and climate and weather events disproportionately affect the most vulnerable populations, further exacerbating inequalities in the region and pushing more people into poverty (see Box 3.3).
### Box 3.3. The Impact of Climate Change on Poverty in Latin America and the Caribbean

Through its impacts on agricultural and labor productivity, prices, incomes, exposure to and losses from disasters, and health, climate change could push an additional 2.4 million to 5.8 million people into extreme poverty in Latin America and the Caribbean by 2030 (Jafino et al. 2020). These estimates imply an increase in the average poverty headcount of 126 to 300 percent.

Health is the primary channel by which climate change will cause more people to become impoverished, highlighting the importance of investing in social services to improve access to and the quality of health care and in policies to increase the resilience of the health care system. The next most important role is played by climate-driven disasters. The drought episodes that affected Nicaragua in 1997, 1998, and 2000, for example, are associated with a 10 percent increase in the likelihood of households falling into poverty in that country (Williams and Gonzalez 2020).

## Greater Exposure, Greater Impact

Poor and vulnerable households are more exposed than more affluent ones to the impacts of climate change. While income is not the only determinant of vulnerability, women, Indigenous people, Afro-descendants, and other groups are also more vulnerable to the impacts of climate change. However, income is the determinant of vulnerability with the most evidence. In Latin America and the Caribbean, at least 78 million people live both in poverty and in areas that have experienced at least five climate disasters, such as floods, hurricanes, and droughts, in the previous ten years (Bagolle, Costella, and Goyeneche 2023). This is true of between 51 and 98 percent of poor people in the seven countries of the region most vulnerable to climate change (Bolivia, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Paraguay; Bagolle, Costella, and Goyeneche 2023). People in poverty are expected to continue to be disproportionately exposed to climate shocks. In El Salvador, Mexico, and Peru, 27 million people live in poverty in municipalities that will experience, under the most optimistic climate scenario, an increase in the number of very hot days above the regional mean by 2040 (Figure 3.1).

In addition to being more exposed to the effects of climate change, poor and vulnerable households lose a greater share of their assets to extreme weather events than more affluent ones (Busso and Messina 2020). In 1998, for example, Hurricane Mitch destroyed 18 percent of assets
<figure><img src="image_28.png" /><figcaption>**Figure 3.1.** Poverty in Municipalities Projected to Experience Extreme Heat</figcaption></figure>

Source: IDB staff calculations based on data from IPCC WGI Interactive Atlas using SSP1-2.6; a 1981-2010 baseline; data from GADM for municipalities; and poverty data from IDB's social data lake for 2020 (Mexico), 2019 (El Salvador), and 2017 (Peru). National poverty rates obtained from World Bank and IDB.

owned by Honduran people in the lowest income quintile, compared to only 3 percent in the highest (Morris et al. 2002). More generally, Hallegatte and Rozenberg (2017) find that in some cases poor households lose two to three times more assets than non-poor households when there is a flood or a storm.

## Less Able to Cope

Poor and vulnerable households are usually ill-prepared, have worse coping strategies, and may draw on maladaptive strategies when facing slow-onset climate change and climate shocks because they have fewer formal and informal networks and limited access to savings, insurance, and credit (Dabla-Norris et al. 2015; Nazrul Islam and Winkel 2017). Among poor rural households in isolated municipalities in Colombia, for example, the frequency of land sales increases and average farm size decreases after extreme temperature events, implying a loss of productive assets that could limit future income-generating opportunities (Arteaga et al. 2023). Furthermore, as mentioned earlier, weather events trigger survival migration to urban areas that, although they may offer economic opportunities, are highly vulnerable to climate change.
## Helping People Cope

The adverse impacts of climate change on the lives and livelihoods of people in Latin America and the Caribbean are extensive. Governments in the region can, however, deploy a series of strategies to adapt to the changing climate and increase the resiliency of people and social services. These strategies focus on improving the continuity and readiness of key social services, investing in a robust social protection system to avoid maladaptive responses to shocks and build resilience, promoting labor policies that can protect workers and provide opportunities, and supporting climate migrants at their new. While the most transformative adaptations will be driven by government policies, individuals can also pursue adaptation strategies (see Box 3.4).

### Box 3.4. Empowering Vulnerable Populations through Financial Innovation

Financial markets and products provide services to individuals that are essential for adaptation to climate change. Financial services can help finance assets that build resilience to climate shocks, build savings that can be used to recover from them, protect property against climate events through formal insurance, and facilitate payments from informal networks during crises. Both case studies and experimental evidence show that access to all these financial services helps people cope with the consequences of climate shocks (IPA 2019; Miller, Krishnan, and Alvarez Ruiz 2023).

Today, financial services are either unavailable to address or inadequately adjusted to the realities of climate change (Zetterli 2023). Credit products typically do not finance activities that build resilience, since improved resilience does not generate cash flows for repayment. Moreover, credit can only help the poor up to a point because indebtedness itself can limit their ability to respond to climate crises (Guermond et al. 2022). Likewise, informal credit or savings arrangements or networks are typically overly stressed during widespread shocks, limiting the amount of liquidity they can provide (Sandri, Beckmann, and Robinson 2021).

While insurance products have emerged as a leading financial resource for transferring climate risk, they, too, have significant limitations. Coverage is often restricted to agriculture, leaving other sectors exposed; and, except for index insurance, which pays based on climate events rather than reported damage, market potential is hindered by issues like moral hazard and adverse selection (Chambers 1989), which may also lead to under-investment in adaptation (Annan and Schlenker 2015). Furthermore, evidence indicates that a

*(continued on next page)*
Box 3.4. Empowering Vulnerable Populations through Financial Innovation (continued)

retrenchment of financial services, in response to a better understanding of the mounting climate risks, is reducing existing services—a phenomenon seen globally. As climate events occur, lenders and insurers raise eligibility criteria, reprice products, or exit markets entirely, often disproportionately affecting the poor (Knaack and Zetterli 2023). Added to these constraints is a lack of demand for climate-linked financial services, something clearly seen in a survey of the financial sector conducted by CGAP (Zetterli 2023). This is motivated in some part by lack of understanding, as well as behavioral considerations.

To overcome these barriers, and to make financial services for adaptation more accessible to the poor, financial innovation is imperative. Such innovation is spurred by having better data on underlying climate risk and expanded data on clients, with an improved understanding of risk potentially lowering transaction costs for credit products, enabling the extension of credit to clients without traditional credit histories, and linking the cost of financial services more strongly to underlying climate risk at the local or even plot level. Better data can also help reduce costs and streamline processes in insurance underwriting, a trend that is already taking place in "insuretech" companies. These approaches have been demonstrated to lower risk and expand access in several contexts (Sarah 2024).

An additional promising approach is further experimentation with the flexibility of financial products, making them a more attractive solution for firms or households after a climate shock (Gine and Yang 2009; Mobarak and Rosenzweig, 2013; King and Singh 2020). Furthermore, financial services can be bundled to diversify products. Resilience can be improved by innovation in digital payments, including their use for cash transfers. Beneficiaries will have access to their transfers despite climate shocks, and clients with access to mobile money and digital payment channels will typically receive more assistance from private sources following climate events.

Another important area for innovation is gender-sensitive financial services. Because of socioeconomic inequalities, women are disproportionately affected by climate change, yet they are often underserved by financial systems. Tailored financial products, such as savings plans, microloans, and insurance schemes, can address their specific adaptation needs while fostering greater resilience at the household and community levels (UNFCCC 2024).

In sum, the intersection of financial innovation and climate adaptation presents immense opportunities to empower vulnerable populations. By addressing both supply- and demand-side barriers through technology, product design, and policy integration, financial services can become a cornerstone of adaptation.
## Resilient and Climate-Ready Public Services

Preparing for the future climate entails expanding public services, ensuring the continuity of social services throughout extreme weather events, and equipping health care systems to respond to climate threats. Health impacts can be mitigated by improving access to water and sanitation, cooling centers, and green spaces. Providing piped water and sanitation and cisterns is, for example, a cost-effective way to reduce the incidence of child mortality and low birthweight related to droughts (Rocha and Soares 2015; Da Mata et al. 2023). Also, cooling centers and urban green spaces can help moderate the impact of extreme heat on people's health, particularly in the most vulnerable populations, such as those experiencing homelessness or living in informal settlements (see Chapter 13; Fletcher et al. 2021; Mettler-Grove 2020; Sera et al. 2019).

Continuity of the provision of essential social services in the health and education sectors is vital to improving people's resilience to extreme weather events. The infrastructure on which health care facilities and schools depend should be designed based on robust decision-making principles (see Chapter 7) so they can continue operating under strong winds, torrential rainfalls, and floods. Since schools can be used as community shelters during extreme weather events, their resilience is particularly important. Furthermore, to ensure continuity of learning, classrooms should be designed and equipped to maintain tolerable temperatures. Schools and health care facilities should also adopt water saving and storage strategies to cope with water shortages and droughts. Finally, expanding digital health and education can guarantee service delivery when the movement of students, patients, teachers, and doctors becomes limited (Minoja, Fernández, and Yurivilca 2018; Bos and Schwartz 2023; Astorga, Costella, and Goyeneche 2023).

Health care services need to be prepared to respond to new patterns of disease and injury driven by climate change, including heat-related illness, air pollution-related diseases, nutritional deficiencies, and injuries from extreme weather events (WHO 2017; IDB 2021). Readiness should be improved, first, by enhancing health information systems and epidemiological surveillance systems. Early warning systems implemented to monitor climate events and guide people to respond properly to them (by seeking cooling centers, hydrating, limiting outdoors activities, and so on) can limit negative health impacts (Astorga, Sorio, and Bauhaoff 2023; WHO 2017; Chapter 13); while strengthening epidemiological surveillance systems that monitor the incidence and prevalence of climate-related health conditions can serve to identify the population's most vulnerable groups (Astorga, Sorio, and Bauhaoff 2023) and target services to them.
Second, access to timely, high-quality health services should be ensured. This requires planning, including guaranteeing access to medicines in emergencies and training the health care workforce to meet demands imposed by climate change (Astorga, Sorio, and Bauhaoff 2023). It can also include the creation of programs to ease the strain on health care systems by helping reduce the incidence and prevalence of health problems, such as the propagation of mosquito-related diseases like malaria and dengue fever, that are exacerbated by climate change. Better coordination of the emergency system can optimize the use of integrated health care service networks for delivering care.

## Cash Transfer Programs

Cash transfer programs can make poor and vulnerable households more resilient to extreme weather events through two main channels. First, regular cash transfers guarantee a minimum income, which improves resilience by making possible, for example, precautionary savings (Talbot-Wright, Vogt-Schilb, and Bagolle 2023). Second, cash transfers that are promptly activated after a climate shock can prevent affected households from falling into poverty (Mansur, Doyle, and Oleksiy Ivaschenko 2018; Gallego et al. 2021). By enabling them to maintain their consumption and food security levels, cash transfers improve households' ability to withstand and recover from weather shocks (Asfaw and Davis 2018; Lawlor et al. 2019; Premand and Stoeffler 2020) and prevent them from adopting maladaptative strategies to cope with the impacts. Beneficiaries of a cash transfer program in Mexico, for example, are found to be less likely to withdraw children from school in the aftermath of a shock (Hallegatte et al 2016).

A key adaptation measure to build resilience through cash transfers is to strengthen social protection systems to improve the coverage of households in extreme poverty and increase the size of the transfer (Bagolle, Costella, and Goyeneche 2023). In Latin America and the Caribbean, only 56 percent of the population in extreme poverty is covered by cash transfers (Stampini et al. 2021). Social protection systems can also be redesigned to be more flexible. The amount or the coverage of the transfers can, for instance, be increased in the aftermath of a disaster. Cash transfers can even be disbursed before disasters strike to allow households to prepare for them (Pople, Dercon, and Brunckhorst 2023). To ensure they are disbursed rapidly when needed, governments can set rules that trigger extraordinary transfers in advance (Talbot-Wright, Vogt-Schilb, and Bagolle 2023).
Cash transfer programs can also build households' resilience by inte-
grating them into the formal financial market. Beyond cash transfers,
insurance and credit can provide households with funds to smooth con-
sumption and recover from economic shocks. Cash transfer programs that
encourage opening formal bank accounts and receiving transfers digitally
can integrate households into the formal financial market and increase their
access to affordable formal credit to smooth consumption during future
shocks (Vera-Cossio et al. 2023).

The Job of Protecting Workers

Measures to protect workers in jobs most exposed to extreme temperatures can keep them healthy and productive. These measures include educating workers on heat stress, having them use protective clothing, shifting tasks away from the hottest hours of the day, instituting regular rest breaks, and proper hydration (Jacklitsch et al. 2016).

Adverse effects of climate change on employment can also be mitigated. The creation of labor intermediation programs that link workers with jobs and skills development training can provide access to new jobs after disasters or climate-induced migration. Such programs can proactively relocate workers from climate-affected areas to jobs in regions that are less affected and to sectors with higher labor demand. In climate emergencies, temporary, labor-intensive programs can create employment in post-disaster jobs, such as debris and beach cleaning, roofing, and the rebuilding of schools, hospitals, roads, and bridges, and can minimize job losses. These programs can be paired with unemployment insurance and cash transfers to provide income support for temporarily unemployed workers.

Support for Climate Migrants

The full socioeconomic integration of migrants at their destinations is key to improving their living conditions and enhancing their contributions to the economies and societies of host communities. This requires inclusion in schools and post-secondary education to enable children and young people to develop the skills they need to lead healthy and productive lives and contribute economically to their host communities. To prevent climate-induced migration from exacerbating poverty, governments can ensure migrants have access to housing, high-quality health care, social protection programs, and family support services (IDB, OECD, and UNDP 2023). Their inclusion in the formal local labor market also allows these families to become self-reliant. When entire communities need to relocate due to
sea-level rise and other factors that render their original settlements unsustainable, governments can provide additional support.

## Where Climate Goals Meet Development Goals

Climate change will affect people's lives and livelihoods through numerous channels and push millions into poverty. The impacts will be felt disproportionately by poor and vulnerable households, exacerbating inequality in a region where it is already high. Fortunately, there are many adaptation policies governments can pursue to reduce these negative impacts and build the resilience of their countries' populations. Even better, many of these policies, such as those that improve access to good quality health care, strengthen social protection systems, offer job opportunities, and provide social services for new urban migrants, contribute to development goals in addition to climate goals.
<figure><img src="image_29.png" /></figure>

# Double Jeopardy: Climate Change and Biodiversity Loss

In Latin America and the Caribbean, climate change and biodiversity loss are interconnected: They share common drivers, and each exacerbates the other. Consequently, the two problems require a coordinated policy response. To achieve it, the region must boost the efficacy, efficiency, scope, and scale of policy tools, such as protected areas and payments for ecosystems services.

Biodiversity is the variability among living organisms, including within and between species and ecosystems (Westveer et al. 2022). Latin America and the Caribbean is a “biodiversity superpower” (Bovarnick, Alpizar, and Schnell 2010). The region’s biomes include tropical and subtropical moist forests, temperate grasslands, deserts, aquatic inland waters, oceans, and coastal habitats. The Amazon basin comprises more than fifty different ecosystems, including extensive floodplains, shallow oxbow lakes, and tropical dry forests. The Andes, the world’s longest and second highest terrestrial mountain range, features more than a hundred ecosystems, including glaciers, high mountain grasslands, mountain forests, rivers, lakes, and wetlands (Tovar et al. 2022). All told, the region includes six of the most megadiverse countries in the world. It is home to 40 percent of the world’s biodiversity, 12 percent of global mangroves, 50 percent of all tropical forests, the world’s largest freshwater reserves, and some of the most extensive wilderness areas on the planet (UNEP-WCMC, IUCN, and NGS 2018).

Unfortunately, biodiversity loss in Latin America and the Caribbean —driven mostly by habitat loss related to changes in land use and other human activity—has reached critical levels. From 1970 to 2018, the region’s Living Planet Index, which tracks changes in the relative abundance of wild species populations, fell by 94 percent—by far, the greatest decline of any region in the world (Figure 4.1). Among subregions within Latin America and the Caribbean, the Amazon basin, the Northern Andes, and parts of Central
<figure><img src="image_30.png" /><figcaption>**Figure 4.1.** Wildlife Population Trends</figcaption></figure>

Source: IDB staff calculations, based on the Living Planet Index database and Westveer et al. (2022).
Note: Baseline (LP Index = 1) is 1970 for all regions.

America have been deemed high-priority areas for biodiversity conservation for all taxonomic groups across all threat categories (WWF 2022).

The declining biodiversity of Latin America and the Caribbean has serious adverse implications for the region's economy as well as its ecology. Biodiversity provides food, water, energy, building materials, recreation, and protection against floods and storms. Most food crops, for instance, depend at least partly on pollination, which in turn depends on supporting ecosystems (Potts et al. 2016). Economic activities and products that rely on natural resources generate more than 12 percent of the region's economic value (ECLAC 2023). The sectors in which biodiversity loss is likely to have the most severe effects include food and fiber production (agriculture, forestry, and fisheries); provision of water for urban development; and tourism (WEF 2020). Although activities that deplete natural resources and degrade biodiversity—for example, converting tropical forests to commercial agriculture—can generate short-term economic gains, they typically come at the cost of long-lasting creation of wealth.

How is the region's biodiversity challenge linked to the climate change challenge that is the subject of this book? The two are connected in four important ways. First, they are mutually reinforcing. On the one hand, climate change already is a leading cause of biodiversity loss and is likely to surpass habitat loss as the top cause by 2070 (Newbold 2018). As will be discussed
below, by altering temperatures, precipitation patterns, and the frequency and intensity of natural disasters, climate change disturbs key functional elements of many if not most ecosystems. Conversely, biodiversity loss exacerbates the adverse effects of climate change. The reason is that biodiversity generates vital ecosystem services that contribute to both climate mitigation and climate resilience. Mangroves, for example, contribute to climate mitigation by sequestering carbon, and they contribute to resilience by protecting populated areas from storm surges (Box 4.1).

Second, a common set of direct and indirect factors drives both climate change and biodiversity loss (Figure 4.2). Direct drivers are the immediate causes of biodiversity loss and climate change. They include changes in sea and land use, exploitation of renewable and nonrenewable resources, and pollution. Indirect drivers are underlying causes. They include weak institutions, demographic trends, and poor governance. Policies that have sought to address both direct and indirect drivers of biodiversity loss and climate change are discussed later in the chapter.

Third, since climate change and biodiversity loss have common drivers, international policy responses to address these challenges must be coordinated to be effective and efficient; they must recognize and address the connection between them. To date, that has not been the case. For the most part, the two challenges have been treated as independent problems. The United Nations, for instance, holds separate conferences on the topics:

**Box 4.1. An Unlikely Hero: Mangroves**

Mangroves are intertidal forests dominated by trees and shrubs that have evolved to tolerate salinity and soils that lack oxygen (Leal and Spalding 2022). They play a key role in climate mitigation, climate resilience, and biodiversity conservation. Among the most carbon-dense ecosystems in the world, mangroves sequester four times as much carbon per year as land-based tropical rainforests (De Lacerda, Borges, and Ferreira 2019). By one estimate, they store 6.4 billion metric tons of carbon (Sanderman et al. 2018).

Mangroves promote climate resilience because they stabilize coastlines, reducing erosion and protecting inland communities from waves, storm surges, and sea-level rise (Arkema et al. 2013). They are also extremely ecologically rich, providing essential shelter and breeding grounds for fish, crabs, and shrimp, among other species. For all these reasons, twenty-eight countries have included restoration of coastal forests in their commitments to climate mitigation in their nationally determined contributions (NDCs) under the Paris Agreement (Herr and Landis 2016).
<figure><img src="image_31.png" /><figcaption>**Figure 4.2.** Drivers of Biodiversity Loss and Climate Change Caused by Human Activities</figcaption></figure>

Source: Adapted from Pörtner et al. (2021).

the UN Climate Change Conference and the Conference of the Parties to the Convention on Biological Diversity. Fortunately, some coordination has recently taken place. In 2021, the Intergovernmental Panel on Climate Change (IPCC) and the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) held a joint workshop that generated a report addressing the common drivers of climate change and biodiversity loss and the need for coordinated policy response (Pörtner et al. 2021). In addition, recent meetings of both conventions have sought to link their programming and deliverables more closely.

Fourth, both the climate and biodiversity crises contribute to existing social and gender inequalities (De Lamo et al. 2020). As discussed in Chapter 3, climate change has disproportionate effects on the poor and marginalized, the populations who are the most exposed to storms, floods, and other climate-related disasters and the worst positioned to adapt to these risks (Hallegatte et al. 2016). The same is true of biodiversity loss; the poor and marginalized are the most exposed and least able to adapt and, therefore, the most affected (Rice et al. 2018).

Given the strong, bidirectional, and multifaceted links between climate change and biodiversity, meeting global climate goals will be impossible without meeting biodiversity goals, and vice versa (NGFS 2022). With its immense natural wealth, the Latin American and Caribbean region is well positioned to address these challenges.
## The Climate's Toll on Key Biomes

Climate change is in the process of altering terrestrial and marine biomes, some fundamentally (Gerten et al. 2013; Warszawski et al. 2013; Heyder et al. 2011). In the American continents, for instance, the South American Río de la Plata grassland, the Mexican mesic broadleaf forest, and the Caribbean tropical dry forest have lost 60 percent or more of their habitats, which in turn has led to a significant loss of biodiversity and ecosystem functioning (Rice et al. 2018). Below are some examples of the impacts of climate change in some of the region's key biomes and biodiversity hotspots—that is, areas with exceptional concentrations of endemic species (species that are native and restricted to the region) that are also undergoing exceptional losses of habitat (Myers et al. 2000).

### Mangroves

Worldwide, mangrove forests cover a total of 147,000 square kilometers, of which 16 percent are in North America, Central America, and the Caribbean and 14 percent are in South America. Mangroves provide a range of ecosystem services, including climate mitigation, climate resilience, and biodiversity habitat (Box 4.1), and they are under growing threat around the world. Of all the global regions, North and Central America and the Caribbean show the second largest reduction in mangrove cover, with 5 percent having been lost between 1996 and 2020 (Leal and Spalding 2022).

As with most ecosystems, mangroves are threatened by human activities, including agriculture, aquaculture, and urban expansion, and by phenomena related to climate change, including rising sea levels and temperatures and changes in precipitation. In Latin America and the Caribbean, the drivers of mangrove degradation have changed. Old drivers, like damming, are being eclipsed by new ones, like climate change and shrimp aquaculture (De Lacerda, Borges, and Ferreira 2019). In the future, changes in the frequency and intensity of tropical storms resulting from climate change are expected to be increasingly detrimental to the health of mangroves (Ward et al. 2016).

### Coral Reefs

Coral reefs are among the most ecologically and economically valuable marine coastal systems (Leão et al. 2016). Although they cover just 0.1 percent of the Earth's surface, coral reefs support 25 percent of global marine biodiversity (Hoegh-Guldberg, Pendleton, and Kaup 2019). They also provide ecosystem goods and services to over 500 million people in coastal
communities worldwide (Allemand and Osborn 2019; Burke et al. 2011; Speers et al. 2016). By one estimate, for example, the Mesoamerican Reef provides US$183 million in value each year from fisheries, US$3.9 billion from tourism, and US$438 million from coastal protection to Belize, Mexico, Guatemala, and Honduras (Ruiz de Gauna et al. 2021).

Unfortunately, climate change-induced ocean warming and acidification are rapidly degrading and destroying these systems. Coral reefs are at increased risk of bleaching, a biological process in which corals expel the algae living inside them, causing the corals to turn white (Reyer et al. 2017). Bleaching events cause disease, bioerosion, and the loss of vital habitat for associated reef fishes (Baker, Glynn, and Riegl 2008). In 2023, unprecedented heat stress caused significant coral bleaching events to take place across the Caribbean (Hoegh-Guldberg et al. 2023). In contrast to coral reefs in the Indian Ocean, which were devastated by a single large bleaching event in 1998 and have since largely recovered, the Caribbean has the largest proportion of corals in high extinction risk categories (Baker, Glynn, and Riegl 2008; Carpenter et al. 2008).

Given their economic importance, the degradation and destruction of coral reefs in Latin America and the Caribbean will have significant adverse economic consequences (Baker, Glynn, and Riegl 2008; Lovejoy and Hannah 2006). According to the UN, if reefs continue to decline, their yearly value could fall by US$3.1 billion in Mesoamerica alone by 2030 (UN Environment et al. 2018).

## The Amazon

The Amazon basin hosts the world's largest tropical forest and, arguably, its most species-rich terrestrial ecosystem (Cheng et al. 2013; Hoorn et al. 2010). The basin features 18 percent of the world's vascular plant species, 14 percent of its bird species, 9 percent of mammal species, 8 percent of amphibian species, and 18 percent of tropical fish species (Science Panel for the Amazon 2021). Endemism is high, particularly for birds and mammals. Of all endemic mammal species, for example, 80 percent are in the Amazon.

The Amazon provides crucial ecosystem services (Banerjee et al. 2021; Science Panel for the Amazon 2021). It helps regulate temperature and precipitation not only at the local and regional levels but at the global level, affecting precipitation across both hemispheres (Science Panel for the Amazon 2021; Werth and Avissar 2002). And the Amazon plays an important role in the global carbon cycle. Undisturbed regions of its lowland forest act as net carbon sinks, currently storing an estimated 150 billion to 200 billion tons of carbon in soils and vegetation (Science Panel for the Amazon 2021).
Climate change, together with intense human intervention, local defor-
estation, and increased forest fires, are pushing the Amazon toward an
ecological tipping point where restoration to its previous state may no longer
be possible (WWF 2022; Banerjee et al. 2021; Lovejoy and Nobre 2019). To date,
roughly 17 percent of the rainforest has been cleared and an additional
17 percent has been degraded (Bullock et al. 2020). An emerging scientific
consensus holds that once 20-40 percent has been lost, vast swaths of the
rainforest will transition to drought-deciduous or degraded, savanna-like
environments, an irreversible event with dire ecological and socioeconomic
consequences (Box 4.2). This is because the rainforest regulates the local cli-
mate, including by generating rainfall through evapotranspiration. As a result,
forest loss reduces local rainfall, which in turn boosts tree mortality, exacer-
bating forest loss—a negative feedback loop that leads to a tipping point.

The Amazon basin is also one of the most socioculturally diverse
regions in the world. It is home to 47 million people, including more than
400 Indigenous peoples groups, Afro-descendant communities, and
peoples of mixed descent (for example, mestizos, caboclos, and ribeirinhos)
(WWF 2022; Science Panel for the Amazon 2021). Contrary to the popular
conception, the Amazon's population is more than 60 percent urban. Major
cities include Manaus and Belem in Brazil, each with a population of more
than 2 million. The inhabitants of the Amazon basin, among others in the

Box 4.2. The Economic and Environmental Fallout of an Amazon Tipping Point

Self-reinforcing interactions between deforestation, climate change, and fire are pushing the Amazon biome toward an ecological tipping point where restoration to its previous state may no longer be possible. To assess the economic and environmental fallout that would ensue, Banerjee et al. (2021) leverage a computable general equilibrium model called the Integrated Economic-Environmental Modeling Platform, coupled with high-resolution spatial modeling of land use and land cover change and ecosystem services. This system generates estimates of the effect of policy scenarios on a range of outcomes relevant to policymaking, including not only GDP, employment, and poverty, but also metrics of wealth, sustainability, natural capital stocks, and ecosystem services supply. The study finds that while the adverse economic impacts of reaching an Amazon tipping point vary by country, a conservative estimate puts lost GDP for the region at US$257 billion through 2050, with Brazil incurring losses equivalent to US$184 billion. By contrast, policies that would avert a tipping point, including by avoiding deforestation, adopting climate-smart agriculture, and improving fire management, would generate US$339 billion in additional wealth.
region, depend on the ecosystem services the basin provides and would suffer substantial losses if it were degraded.

## The Andes

The Andes are classified as a global biodiversity hotspot because of the high density of species that inhabit them, with high rates of endemism. The tropical Andes alone (the northernmost extension of the mountain range) host 15 percent of the world's plants and 12 percent of its vertebrate species (Myers et al. 2000). From valley to valley and from mountain to mountain, the numerous and various microclimates and soils create a heterogeneous biophysical space that allows biodiversity to flourish (Gonda 2020).

This area is, however, suffering from the impacts of climate change, with the tropical Andes, the longest and widest cool region in the tropics, ranked among the world's most threatened biodiversity hotspots (Gonda 2020). Changes in temperature and precipitation patterns are likely to shrink five of the system's biomes: the temperate deciduous forest (expected to diminish by 30 percent), peatlands (by 23 percent), dry high Andean steppes (23 percent), Patagonian steppes (21 percent), and humid high Andean grassland and shrublands (17 percent; Tovar et al. 2022). Moreover, lake levels are dropping, and valley glaciers and ice cap margins are retreating. These events are causing populations of some species to decline and others to migrate to higher altitudes. Tovar et al. (2022) predict, for example, that a 3°C temperature increase in high Andean superpáramo and Puna grassland ecosystems would result in a 600 meter upward movement of species, implying a loss of habitat area.

These changes would have significant adverse consequences for the inhabitants of the Andes region, especially for farmers and pastoralists who depend on the integrity of its ecosystems for fresh water, food, and many other goods and services (Josse et al. 2011). In the Andes and the adjacent lowlands, for example, people rely on these ecosystems for water-related services, in particular for water supply, flow regulation, energy, and waste assimilation (Anderson et al. 2011).

## Addressing the Dual Challenges

As noted above, because climate change and biodiversity loss have common drivers, the same policies can be used to address both challenges simultaneously. One study finds, for example, that restoring 15 percent of lands converted to other uses in priority areas could both avert 60 percent of expected extinctions and sequester 30 percent of the total increase of
CO₂ in the atmosphere since the Industrial Revolution (Strassburg et al. 2020). Another study finds that so-called natural climate solutions (NCSs)—interventions that promote climate mitigation by conserving, restoring, or expanding natural systems—could provide 37 percent of the cost-effective CO₂ mitigation needed through 2030 (Griscom et al. 2017).

Pursuing policies like these that address both climate change and biodiversity loss in developing countries is vital because, as discussed in Chapter 8, 48 percent of the region's total greenhouse gas emissions arise from agriculture and changes in land use and land cover—a much higher percentage than in industrialized regions, as well as in many developing regions. In addition, Latin America and the Caribbean can take advantage of cost-effective opportunities to reduce these emissions. As a result, the business case for NCSs in Latin America is particularly strong compared to that in other tropical areas. For two of the three most important means of using natural climate solutions to sequester carbon—avoided forest conversion and reforestation—Latin America leads both Africa and Asia in terms of potential total mitigation (Figure 4.3).

<figure><img src="image_32.png" /><figcaption>**Figure 4.3.** Cost-Effective Mitigation Potential of 12 Natural Climate Solutions, by Pantropical Region</figcaption></figure>

Source: IDB staff calculations, based on Griscom et al. (2020).

Note: Cost-effective pantropical climate mitigation potential of 12 natural climate solutions (avoided forest conversion, avoided peat impacts, etc.) grouped into three pathways (protect, manage, restore), across three tropical regions (Latin America, Africa, Asia). Cost-effective levels entail less than US$100 per Mg CO2e. The percentage of total mitigation potential for each category is reported at the bottom of each pathway.