Climate input-output amplification: Assessing the impact of physical risks on global supply chains

While global supply chains have garnered attention during the Covid-19 pandemic and the war in Ukraine, their role in transmitting and amplifying climate-related physical risks across countries remains underexplored. This paper addresses this gap by combining country-level GDP-at-risk from climate-related physical events with a global Input-Output (IO) model covering 77 countries. We first quantify the direct impact of physical risks on GDP and simulate how these shocks propagate through international trade linkages. Our findings show that direct GDP-at-risk estimates can substantially underestimate the ultimate impact of physical risks, since trade linkages transmit losses across borders. For the European Union, amplified risks can be 2 to 25 times the direct impact, depending on supply chain resilience. These results underscore the dual role of global supply chains: depending on the flexibility of production and trade networks, they can either exacerbate or buffer climate-related economic disruptions. We identify two priorities for future research: (i) developing more granular, holistic, and forward-looking data on global physical risks, and (ii) examining the role of partially substitutable outputs alongside critical, non-substitutable ones. By highlighting the systemic nature of climate risks, this paper calls for a more integrated approach to assessing and managing the economic impacts of climate change in an interconnected global economy.