Supply chains under pressure from extreme weather
As climate change progresses, extreme weather events are becoming more frequent and intense — with serious consequences for global supply chains. For example, water shortages can hinder production in many industries, while flooding can disrupt ports and transport routes. Both businesses and governments can help to make supply chains more resilient by investing in critical infrastructure, for instance, and by aligning their climate resilience policies. A new study from the EU-funded RETHINK-GSC research project, led by the Kiel Institute, highlights the necessary considerations.
"There is a high risk that, following weather-related harvest failures, governments will impose export restrictions on agricultural goods. Such restrictions in turn reduce availability in other countries, driving up prices both domestically and abroad—showing how local extreme weather events can have global repercussions. One example is the rice crisis of 2007/08, when world market prices for rice tripled within just six months," says Dr Niclas Poitiers, researcher at the think tank Bruegel and one of the authors of the study Climate Risks to Global Supply Chains. His conclusion: "Climate risks place a burden on value chains worldwide. It is therefore crucial that governments coordinate their measures at an international level."
Creating investment incentives for businesses
Governments often provide financial support to companies for rebuilding after weather-related damage or subsidize insurance payments in areas with a high climate risk. However, Poitiers says that "if the state shoulders too much of the financial burden of safeguarding global value chains, this undermines the private sector’s motivation to invest in its own climate protection measures." The study’s authors therefore advise governments to create incentives for companies in affected regions, encouraging them to either relocate to safer areas or to invest in measures that reduce their climate risk.
Governments face direct and indirect climate risks
Climate-related risks pose a threat to global supply chains in several ways: production or harvest losses following natural disasters; restricted water and energy supplies; and damage to infrastructure as well as trade routes. The authors cite examples such as floods damaging factories or warehouses and the proliferation of agricultural pests. Sectors such as electricity generation, which depend on large quantities of water, may also be forced to reduce output during droughts, while rivers can become unnavigable during periods of extremely low water levels.
Until now, such extreme weather events have had a measurable—albeit relatively limited—impact on global supply chains. However, experts expect these events to become more frequent and severe. "This will affect not only the regions that are directly impacted, but also larger economic areas through international trade, and potentially the global economy as a whole," says Professor Holger Görg, leader of the RETHINK-GSC project and head of the "International Trade and Investment" research group at the Kiel Institute for the World Economy. "Measures to mitigate damage are therefore becoming increasingly important for businesses and governments," he adds.
Read study now: Climate Risks to Global Supply Chains
About RETHINK-GSC
The project ‘Rethinking Global Supply Chains: Measurement, Impact and Policy’ (RETHINK-GSC) captures the impact of knowledge flows and service inputs in Global Supply Chains (GSCs). Researchers from 11 institutes are applying their broad expertise in a multidisciplinary approach, developing new methodologies, and using innovative techniques to analyseanalyze, measure, and quantify the increasing importance of intangibles in global supply chains and to provide new insights into current and expected changes in global production processes.
