The physical impacts of climate change affect the relative productivity of sectors and regions, which may lead to shifts away from activities, sectors, and regions that are most affected by climate change. Agriculture is predicted to be among the sectors that would be most affected by climate change, where changes in the frequency and intensity of extreme weather events and changes to temperature and precipitation patterns will have significant impacts on the productivity of particular crops and areas. Sea‐ level rise is also expected to have major impacts on the productivity of low‐lying coastal areas, including through flooding and saline contamination. Potential reactions to these developments include the pre‐ emptive switch to more resilient, but typically lower yield crops, the intensification of agricultural inputs to maintain production, and the movement of people from agriculture to other activities.

Countries that are highly dependent on a limited number of export products, such as tourism, fish, and copra for many small island economies, or agricultural exports in many African countries, are particularly vulnerable to even small changes in relative prices or comparative advantages. If their main sector is lost, it is extremely difficult for them to diversify into other products and “reinvent” themselves.

However, sectoral impacts of climate change can be complex. For example, if climate change reduces the physical yield of a particular crop, the price of the crop may increase, potentially more than offsetting the decline in physical yield. This is indeed a likely outcome for food production: while climate change is expected to reduce physical agricultural productivity, the low elasticity of food consumption means that prices may increase, making agriculture a more productive (in economic terms) activity (although relocation of agricultural activity to regions less impacted by climate change would still be expected). In this case, the impact of climate change would fall on consumers in the form of higher food prices.

Internal and international migration will accompany these changes, leading to shifts in labor supply (Carleton and Hsiang, 2016). Burzynskia et al. (2019) estimate that climate change will induce the voluntary and forced displacement of 100 million to 160 million workers (200 million to 300 million climate migrants of all ages) over the course of the 21st century. To the extent that climate change also results in conflict, the numbers of climate migrants could be significantly higher.

The cost of climate adaptation and mitigation measures is high and risks crowding out other investments and consumption. Climate change adaptation entails public and private expenditure on reduction and prevention of physical risks, preparation, and restoration (GCA, 2019). UNEP (2016) estimates the global annual cost of adaptation to range from US$140 billion to US$300 billion by 2030 and from US$280 billion to US$500 billion by 2050. Rozenberg and Fay (2019) show that annual spending on new infrastructure to the tune of 4.5 percent of GDP would “enable LMICs to achieve the infrastructure‐related Sustainable Development Goals and stay on track to limit climate change to 2°C. Such defensive expenditure (Olson, 1977) has to be undertaken by all economic agents (public, private and financial sectors, households), crowding out productive investment or consumption, and thus directly affecting the growth outlook and welfare of a society.

A low‐carbon transition (LCT) brings qualitatively new macrostructural challenges to countries that rely on fossil fuels’ value chains. An LCT carries the possibility of a structural decline in fossil fuel‐based industries, with associated systemic risks to the countries, firms, financial institutions, and communities that depend on them. This low‐carbon transition risk, recognized by financial sector regulators,<sup>4</sup> can be 4 See for example: Carney, M. (2015), Bank of England (2018), ESRB Advisory Scientific Committee (2016), DG Trésor, Banque de France and ACPR (2017), European Central Bank (2019), Regelink et al. (2017) or Schotten et al. (2016).

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