Heat wave economics: The price of rising temperatures
Across the wet, cold, and sometimes dreary island of the UK, a heat wave used to be a rare excuse to break out the BBQ and enjoy ice-cold refreshments under the blistering sun. However, the impacts of recurring heatwaves are far-reaching and can come back to not only burn the grass in your backyard, but also leave a hole in your wallet and the economy.
As the planet warms, heatwaves are no longer rare or unpredictable events; they are becoming a recurring fixture of global weather patterns. The Met Office predicts that by 2035, the average summer temperature will reach 40°C.
These prolonged periods of extreme heat are reshaping not just our climate but also the very structure of our economies. From labour productivity and infrastructure costs to agriculture, health, energy demand, and inequality, heatwaves exert a powerful economic force.
Understanding “heatwave economics” is now essential for policymakers, businesses, and communities navigating a hotter, more volatile world.
The Rising Toll of Extreme Heat
According to the World Meteorological Organization, the past decade has seen a steep increase in the frequency, intensity, and duration of heatwaves. In 2023 alone, countries across Europe, Asia, and North America experienced record-breaking temperatures, with economic losses in the tens of billions of dollars.
Heatwaves differ from other natural disasters in that their effects are more diffuse. They don’t destroy buildings the way hurricanes or floods do, but their cumulative toll can be more insidious and longer-lasting. They're silent economic disruptors, deeply embedded into energy markets, healthcare systems, and labour-intensive industries.
Source: Ember. Heat and power: Impacts of the 2025 heatwave in Europe. 4 Jul 2025.
Labour and Productivity Losses
The most immediate economic impact of heatwaves comes in the form of reduced productivity. Workers exposed to extreme temperatures, particularly in agriculture, construction, mining, and manufacturing, experience physical fatigue, cognitive impairment, and even life-threatening health conditions.
A 2021 study in Nature Climate Change estimated that heat-related labour productivity losses cost the global economy $100 billion per year.
In India, where much of the workforce is informal and outdoors, productivity can drop by over 20% during peak heat months.
In the U.S., heat-related labour losses are most felt in the South and Southwest, where outdoor work is common and access to cooling is unequal. A 2018 study found that for every 1°F (C) above average, annual growth decreases by 0.15 – 0.25%.
Even everyday office jobs aren’t immune. Poorly ventilated office buildings and malfunctioning HVAC systems can affect employee concentration and performance.
Strain on Energy Systems
When temperatures soar, so does electricity demand, with the increased use of air conditioning being the primary source. This creates sharp spikes in energy use that stress grids, cause blackouts, and drive up energy prices.
In July 2022, Texas broke its record for peak electricity demand five times in a single month.
Countries with underdeveloped energy infrastructure face greater risks of brownouts and blackouts during heat waves.
This strain has cascading effects:
Higher prices – with many still struggling with costs, an increase in demand raises prices. July’s heatwave in Europe saw daily average prices increase by 106% in Poland, 108% in France, and 175% in Germany.
Limitations of thermal and nuclear plant outages with the overheating of cables and cooling becoming obstacles. From the 1st-2nd of July, France’s nuclear power fleet forced at least 7GW of power offline, impacting nearly 15% of their capacity.
There's also a climate feedback loop: higher AC use means more electricity consumption. When the grid cannot supply enough renewables to meet the demand, this is often generated from fossil fuels. Leading to increased emissions and, ultimately, more heatwaves.
Agriculture, Water Stress, and Food Prices
Agriculture is among the most vulnerable sectors to heatwaves. High temperatures can damage crops, reduce yields, and increase the need for irrigation, which puts greater pressure on freshwater resources already strained by droughts.
A heatwave in southern Europe in 2022 cut wheat yields by up to 30% in some regions.
In California’s Central Valley, extreme heat events, combined with water scarcity, led to widespread fallowing of farmland.
Heatwaves also affect livestock, leading to lower milk production, heat stress in poultry, and increased mortality rates in animals. These impacts ripple through food systems, driving up prices and contributing to inflation.
Public Health and Economic Costs
The human cost of heatwaves is staggering. During the summer of 2022, more than 60,000 people across Europe died from extreme heat exposure. This disproportionally affects the elderly, infants, and those with pre-existing conditions. This toll comes with a significant economic burden:
Healthcare systems become overwhelmed with heatstroke, dehydration, and cardiovascular emergencies.
Lost productivity from heat-related illnesses can depress entire regional economies.
Insurance costs rise, especially for health and life insurers covering heat-exacerbated risks.
Estimates from a 2024 study suggest that heat-related deaths among people over 65 increased by more than 50% over the past two decades.
Insurance, Finance, and Macro Risks
As heatwaves become more frequent, financial institutions are beginning to account for climate risk more rigorously in their models:
Insurance premiums are rising, especially in high-risk zones, creating affordability crises in both residential and commercial markets.
Sovereign credit ratings may be affected, particularly in heat-vulnerable emerging markets.
Investor pressure is mounting for companies to disclose and mitigate heat-related risks to their supply chains and operations.
Heatwaves are now classified by some central banks as systemic financial risks, much like inflation or geopolitical instability.
Inequality and Vulnerability
Perhaps the most concerning aspect of heatwave economics is its disproportionate impact on the poor and marginalised. Those without access to cooling, living in poorly insulated homes, or working in outdoor jobs are far more likely to suffer economic and health consequences.
Cooling inequality is a growing issue. According to the IEA, over 2.3 billion people worldwide lack access to air conditioning or sustainable cooling.
Housing inequality means poorer neighbourhoods absorb more heat and lack trees or green space.
Informal labourers are often excluded from labour protections or rest breaks during extreme heat.
This imbalance exacerbates existing economic disparities, turning climate events into engines of inequality.
Policy Responses and Economic Adaptation
Governments and institutions are beginning to respond:
Heat action plans in cities like Ahmedabad, India and Los Angeles include early warning systems, emergency shelters, and public cooling centres.
Green infrastructure investments can help cities adapt while creating jobs.
Carbon pricing and energy subsidies can help reduce emissions and support adaptation technologies.
At a macro level, international financial bodies like the IMF and World Bank are increasingly tying climate resilience to economic development strategies.
The Future: Rethinking Economic Models for a Hotter World
Traditional economic models often treat climate events as isolated “shocks.” But heatwaves and climate change more broadly require a new way of thinking about economics. These are not shocks. They are structural shifts.
What might heatwave-resilient economics look like?
Integrated climate risk into GDP forecasts, employment models, and inflation targets.
More granular climate stress tests for financial institutions and cities.
Transitioning industries toward heat-tolerant technologies, materials, and schedules.
Reframing infrastructure, healthcare, and labour laws to reflect new heat realities.
The Cost of Inaction
Heatwaves are not just environmental crises; they are economic disruptors with global reach. The longer we delay systemic adaptation, the more costly and inequitable the impacts will become. Understanding the full scope of heatwave economics isn’t just about counting losses; it’s about designing resilient systems for a warming world.
The economics of heat is no longer theoretical. It is already shaping the way we work, live, eat, and grow. The question is whether our economies can adapt fast enough.