Competing in the Face of Climate Risks (Evidence from Firms and Policy Priorities in MENAAP)

The Middle East, North Africa, Afghanistan and Pakistan (MENAAP) region is highly exposed to climate change. Countries across the region are already among the most water-scarce in the world and increasingly vulnerable to heat extremes, droughts, floods, and sea-level rise. Rising temperatures are already reducing labor productivity, straining health systems, intensifying desertification, and contributing to water scarcity, crop losses, and higher energy demand for cooling, while water scarcity and flooding are deepening fragility, poverty, and displacement risks. This high and rising exposure creates an urgent need to respond. Climate risks are already materializing and affecting economic activity, firm performance, trade, and livelihoods. This report focuses on two concrete and immediate examples of how climate change and related policies affect firms and trade in the region. First, more frequent periods of extreme heat are associated with a 6 percent decrease in sales, a 4 percent reduction in labor productivity, and an 8 percent decline in wages, with smaller firms and those outside global value chains most affected. Second, new and forthcoming climate mitigation policies in Europe — a key trading partner — will raise costs to firms exporting to that market, particularly through the EU Carbon Border Adjustment Mechanism (CBAM). Despite these impacts, few firms are taking measures to adapt. Responding to climate change can generate benefits that go well beyond reducing climate-related losses. Economic opportunities will arise from the necessary move to more sustainable economies, including in renewable energy, sustainable cooling, and battery production. Climate-responsive reforms can deliver a double dividend by addressing both climate vulnerabilities and long-standing structural constraints in MENAAP economies — provided swift policy action is taken