Exploring the impact of climate risk on economic activities by capturing critical transitions in the climate system

Abstract

Purpose This study investigates how climate risk affects economic activities represented by key economic sectors, including agriculture, industry and services, via applying the theory of critical transitions originally developed in the natural sciences. The primary objective is to capture dynamic shifts in climate system and examine their economic consequences. Design/methodology/approach Critical transition \ VAR model \ Granger causality test \ Literature research method. Findings Empirical evidence indicates that climate risk raises agricultural production costs and reduces industrial output growth rate in the short term, while increasing service sector output. However, these effects are reversible in the long term. These findings provide implications for managing the economic impacts of climate risk, mitigating its negative shocks, and supporting effective policymaking. Originality/value This study offers three main contributions. First, it empirically applies critical transition theory to the study of climate risk in complex systems. While existing literature theoretically explains the feasibility of critical transition theory in measuring climate risks, there remains a lack of empirical application. Second, the study broadens the research scope on the economic consequences of climate risk. It addresses the empirical gap in understanding climate-induced structural economic transformations, while also enriching the theoretical discourse on this topic. Finally, the study proposes targeted policy recommendations for enhancing climate resilience.