Economic impacts of extreme climate events: Policies and practices

Abstract

Extreme climate events (ECEs), increasingly intensified by anthropogenic climate change, are causing complex, multidimensional disruptions across global economic systems. This review addresses two central research questions: (1) What are the direct and indirect economic transmission channels of ECEs? and (2) To what extent are these risks incorporated into existing macroeconomic forecasting models? To investigate these questions, the study introduces the Four-Domain Disaster Economics Framework (FDDEF)—a novel, systems-based analytical construct that categorizes ECE impacts into four interdependent domains: physical, human, market, and institutional. Drawing on a structured narrative synthesis of empirical research, policy reports, and macroeconomic modeling studies published between 2000 and 2023, the review critically evaluates the strengths and limitations of prevailing modeling approaches (DSGE, CGE, IAMs, and hybrid models).

The findings indicate that conventional models often treat ECEs as exogenous shocks, thereby underestimating their cumulative and systemic effects. Key limitations include the omission of informal sector dynamics, behavioral feedback loops, and adaptive policy mechanisms. While adaptation measures—such as carbon pricing and resilient infrastructure—can offset up to 30 % of post-disaster recovery costs, their benefits are rarely captured in current modeling frameworks. Original visual mappings (Figs. 1–5) further illustrate how underrepresented pathways—such as utility loss, institutional strain, and behavioral change—are embedded in post-disaster economic performance. This review calls for a paradigm shift toward feedback-sensitive, recursive macroeconomic models and offers a replicable framework for integrating fiscal planning, development policy, and resilience-building within climate-informed economic governance.