Last week, those trying to squeeze in a productive day’s work in the searing heat of southern England had little doubt about the effects of extreme weather.
But the economic impact of the climate crisis in the UK is not limited to the many hours lost in a quiet sweat or getting children out of the scorching classroom early.
Two well-timed interventions last week by financial lobby group TheCityUK and Swati Dhingra, an economist and independent member of the Bank of England’s Monetary Policy Committee, drove home that point.
Both men pointed to the need for the government to play a more active role in cushioning the impact of the crisis in the coming years, as Andy Burnham races towards 10th place.
TheCityUK’s report was co-authored with insurance company Marsh and focuses on the growing challenge of insuring homeowners and businesses against the costs of extreme weather events.
As such events, such as wildfires and floods, become more frequent and more severe, it is becoming increasingly difficult for insurers to price the risk of loss, the report argues, warning that a “coverage gap” is widening.
The report said: “Traditional actuarial methods, the basis of insurance pricing, assume that the underlying probability of loss is approximately stable from year to year. As the risks of climate change intensify, that assumption is becoming less reliable, making it less reliable for insurers to model expected future losses.”
This is a tragedy for disaster victims, whose homes and livelihoods are left uninsured in the face of natural disasters.
However, TheCityUK argues that difficulties in pricing climate risk will also have knock-on effects across the financial system, as insurance plays a key role in driving investment. They say this is “not just a sectoral issue, but a fundamental concern for bankability, investability, and orderly economic activity.”
Of course, the financial lobby has an interest in warning us about the dire situation in the insurance industry, for which few will shed a tear.
But they are right to warn that the unpredictability and severity of weather events is likely to be felt increasingly widely.
Double quotes The report argues that the private sector can do more
They say that could create a vicious cycle in which too little is spent on adapting to climate risks, increasing the cost of climate damage and raising investment costs as insurers and lenders recoup losses.
The report argues that more can be done by the private sector, for example by developing ways to account for climate resilience in insurance. But it suggests that a more public or partially public backstop may also be needed.
Dhingra’s speech points to another related vicious circle. He highlighted the increasing impact of global adverse weather conditions, including drought and excessive rainfall, on UK inflation.
As just one example, she says: “Chocolate alone contributed around 1 percentage point to UK food inflation in 2025, largely reflecting high cocoa prices due to the heatwave in West Africa and the fact that chocolate makes up nearly 6% of the UK food basket.”
Indeed, further evidence of the impact of bad weather on our shopping carts was revealed last week by the Energy and Climate Information Agency, which found that 13% of the UK’s food imports last year came from countries that are least climate resilient but most exposed to extreme weather events.
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These imports included rice from India, soft and citrus fruits from South Africa, Peru, and Egypt, coffee from Vietnam and Brazil, bananas from Colombia and Ecuador, and tea from Kenya.
A few pence for a chocolate bar or a bunch of bananas is nothing compared to the harsh conditions that workers in these countries endure. The ECIU calculates that agricultural workers in the 15 most climate-vulnerable countries will have lost 216 billion hours to heat stress in 2024.
However, when the repercussions hit the UK in the form of higher prices, the World Bank’s MPC was at the forefront of policy response. But, as Dhingra points out, raising interest rates to offset the inflationary effects of the climate crisis will also increase the cost of borrowing to make much-needed investments in the transition to net zero and adaptation to climate change.
Similarly, using higher interest rates to limit the inflationary effects of rising energy prices resulting from geopolitical turmoil (most recently the Iran war) could increase the cost of investing in renewable energy alternatives that help protect the UK from such turmoil.
People on a punt on the River Cam in Cambridge take shelter from the heat wave under umbrellas. Photo: Chris Radburn/AFP/Getty Images
Her argument is that monetary policy – interest rates and government tax and spending policies – may need to work more closely together to break the cycle.
“While monetary policy remains essential for anchoring inflation expectations and preventing temporary price shocks from affecting broader wages and pricing, 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 cushion consumers from these repeated shocks with targeted support measures, allow the Bank to focus on the big picture, and be better positioned to avoid spillovers to green infrastructure investment. That could mean targeted subsidies, price controls or temporary tax measures.
After a series of recent economy-wide shocks, including the coronavirus, Ukraine and Iran, politicians are accustomed to tapping into markets in ways that were until recently taboo.
One of Mr Burnham’s early decisions will be whether and to what extent to intervene this autumn to prevent the full impact of the Middle East crisis from being reflected in people’s utility bills, for example.
But in the era of climate emergency, the shocks are coming big and fast, and policymakers must be ready to take action while, crucially, safeguarding the green transition.
