From Vulnerability to Value: The Economic Payoff of Adaptation in Small Island States

The economies and livelihoods of SIDS are particularly vulnerable to the impacts of climate change due to their geographic characteristics and economic structure, often dependent on tourism and trade. Critical infrastructure in SIDS is typically located near coasts or in areas at high risk of climate impacts. Countries such as the Maldives, with low-lying areas and roads, and hotels located in hazardous zones; and the Marshall Islands, which is at risk of being submerged due to rising sea levels, illustrate how SIDS are at risk of large economic damage from climate impacts. 

Macroeconomic models can help create a clearer picture of the long-term implications of climate change and how adaptation action has the potential to create economic stability in SIDS.  

For example, using the Green Economy Model (GEM), an assessment was made of the impacts of climate change, extreme weather events, and climate adaptation investments across six SIDS. They include island states in the Indian Ocean (the Comoros, Maldives, and Mauritius), the Pacific Ocean (Fiji and the Marshall Islands), and the Caribbean (Barbados).  

Under a scenario of no climate action in the six countries analyzed, loss and damage would amount to more than $25 billion cumulatively by 2050, and foregone GDP may reach $117 billion cumulatively by 2050. In other words, climate impacts will result in the loss of 1.7 to 6.5 years’ worth of GDP across the six SIDS, depending on their vulnerability to extreme weather events. 

Based on the results of these six countries and using the collective GDP of all SIDS, the total climate impact between 2022 and 2050 would reach between $418 billion and $476 billion cumulatively, or $23.5 billion to $25.7 billion per year on average. 

These losses constitute an enormous drag on economic development. However, the modeling also shows that with stretched but feasible adaptation investment programs over the next 15 years for all SIDS, a total of $209 billion to $238 billion in climate damages could be avoided between now and 2050. One dollar invested in adaptation can generate an economic return of as much as $6.50 in avoided damages and new growth opportunities in SIDS.  

Adaptation actions include infrastructure improvements, coastal protection, and promoting sustainable agricultural practices. In the economic modeling of adaptation actions carried out with the GEM, the options included wind and flood protection measures for thermal and renewable power generation assets, as well as power transmission networks, and climate-proofing related to flood damage for buildings and productive capital. On crop production, the scenarios incorporated drip irrigation to manage water scarcity, climate-resilient agricultural practices and net shading to mitigate heat effects, and drainage systems to handle flooding. Strategies to enhance labor productivity under heat stress included air conditioning, building retrofitting, and urban greening.  

With such adaptation investments, modelling shows significant reductions of economic losses due to climate change (Figure 1) over time.  

Figure 1: Percentage of GDP Lost in 2050 Due to Climate Impacts Under Business-as-usual Scenario Versus Adaptation Scenario

While the benefits of climate adaptation investments are clear, the required annual investment poses a significant challenge for SIDS economies. The investment required for climate adaptation as modeled ranges from 0.18% (Mauritius) to 1.78% (Comoros) of annual GDP. 

For economies that are already under pressure due to limited domestic resources (and high dependence on external aid for the least-developed SIDS), this level of investment is substantial. However, in the global context, the cumulative investment of $3.8 billion by 2050 is small compared to the investment capacity of larger and more developed economies. The total required investment of $3.8 billion for climate adaptation in the six SIDS analyzed is approximately 0.00038% of the global GDP in 2022 – a very small amount from a global perspective.  

Macroeconomic modeling shows that there is a strong case to be made for the global community to provide the necessary financial resources to help SIDS implement critical adaptation measures. International support for climate adaptation would relieve pressure on fiscal balances in SIDS, reduce loss and damage, and support the transition to stronger and more resilient economies – allowing SIDS to become less dependent in the long term on foreign support. 

The ideas presented in this article aim to inspire adaptation action – they are the views of the author and do not necessarily reflect those of the Global Center on Adaptation.

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