Anyone attempting to notch up a productive day’s work in the searing heat of southern England this last week was left in little doubt about the impact of extreme weather.
But the economic effects of the climate crisis for the UK are not confined to the many hours lost to quietly perspiring – or fetching kids dismissed early from scorching classrooms.
A pair of well-timed interventions from the finance lobby group TheCityUK and Swati Dhingra, the economist and independent member of the Bank of England’s monetary policy committee, made that point powerfully last week.
As Andy Burnham races towards No 10, both pointed to the need for a more active role for government in moderating the effects of the crisis in the years ahead.
TheCityUK’s report, written with the insurer Marsh, focused on the mounting challenge of insuring homeowners and businesses against the costs of extreme weather events.
With such events, including wildfires and floods, happening increasingly frequently and with growing severity, it argues the risk of damage is becoming more difficult for insurers to price; and warns of growing “protection gaps”.
“Traditional actuarial methods – the basis for insurance pricing – assume the underlying probability of loss is broadly stable year to year. That assumption is becoming less reliable as climate hazards intensify, undermining the confidence with which insurers model expected future losses,” it said.
That’s a tragedy for those affected, whose homes and livelihoods are left uninsured in the face of natural disasters.
But because of the important role of insurance in oiling the wheels of investment, CityUK argues that the difficulties of pricing climate risk will also have knock-on effects across the financial system. It is, they say, “not simply a sectoral issue, but a foundational concern for bankability, investability, and orderly economic activity”.
Of course, a financial lobby group has an interest in alerting us to the travails of the insurance sector, for which few are likely to shed a tear.
But they are right to warn that the unpredictability and severity of weather events is likely to be increasingly felt more widely.
And they say that could create a vicious cycle, in which too little is spent on adapting to climate risks, which increases the cost of climate damage and in turn, raises the cost of investment, as insurers and lenders recoup their losses.
The report argues there is more that could be done by the private sector, for example in developing ways to account for climate resilience in insurance. But it suggests there may also have to be more public – or partly public – backstops.
Dhingra’s speech points to another, related vicious cycle. She highlights the increasing impact of adverse weather events worldwide, such as drought or excessive rainfall, on UK inflation.
As just one example, she says: “Chocolate alone contributed roughly 1 percentage point to UK food inflation in 2025, reflecting a surge in cocoa prices driven largely by extreme heat in West Africa and the fact that chocolate accounts for close to 6% of the UK food basket.”
In fact, further evidence for the impact of severe weather in our shopping baskets came in an analysis last week from the Energy and Climate Intelligence Unit (ECIU), which found that 13% of UK food imports last year came from countries that are the least climate resilient, yet most exposed to extreme weather.
These imports included rice from India, soft and citrus fruits from South Africa, Peru and Egypt, coffee from Vietnam and Brazil, Colombian and Ecuadorian bananas and Kenyan tea.
A few pence on the price of a bar of chocolate or a bunch of bananas is a minor inconvenience compared with the punishing conditions endured by workers in these countries. The ECIU calculates that agricultural labourers across the 15 most climate-vulnerable countries lost 216bn hours to heat stress in 2024.
But when the ripples reach the UK in the form of higher prices, the Bank’s MPC is at the forefront of the policy response. Yet, as Dhingra points out, raising interest rates to offset the inflationary impacts of the climate crisis also increases the cost of borrowing to make much-needed investments in the transition to net zero and climate adaptation.
Similarly, using higher rates to constrain the inflationary effects of rocketing energy prices resulting from geopolitical chaos – most recently the Iran war – could raise the cost of investing in the renewable alternatives that would help to insulate the UK from such chaos.
Her argument is that monetary policy – interest rates, in other words – and government tax and spend policies, may have to work more closely to break that cycle.
“Monetary policy remains essential for anchoring inflation expectations and preventing temporary price shocks from feeding into broader wage and price-setting, but it is a blunt instrument for dealing with relative-price shocks arising from climate change, energy markets or the green transition,” she says.
Instead, she argues, governments may need to be poised to cushion consumers against these repeated shocks with targeted support measures, leaving the Bank to focus on the bigger picture, and avoiding the knock-on effects for green infrastructure investment. That might mean targeted subsidies, price controls or temporary tax measures.
After a series of recent economy-wide shocks – Covid, Ukraine, Iran – politicians have become more used to wading into markets in a way that would have until recently been taboo.
One of Burnham’s early decisions will have to be whether and how much to intervene this autumn to prevent the full force of the Middle East crisis being felt in the public’s energy bills, for example.
But, in the era of the climate emergency, the shocks are coming thick and fast; and policymakers must be ready to act – crucially, while protecting the green transition.
Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: theguardian.com
