Competing in the face of climate risks: evidence from firms and policy priorities in MENAAP

This World Bank Development Report examines how rising climate risks — chiefly extreme heat and the European Union's new climate-mitigation policies — are reshaping the competitiveness of firms across the Middle East, North Africa, Afghanistan, and Pakistan (MENAAP) region, one of the most climate-exposed parts of the world. Already among the most water-scarce regions globally, MENAAP faces interlinked hazards of heat extremes, droughts, floods, and sea-level rise that are undermining agriculture, threatening food and water security, and imposing mounting economic and social costs. Drawing on firm-level data from seven countries over 2019–24 and computable general equilibrium (CGE) modelling of trade effects, the report focuses on two concrete and immediate channels: how higher temperatures erode firm performance through lower labour productivity and higher costs, and how EU and UK Carbon Border Adjustment Mechanisms (CBAMs) will raise costs for regional exporters. Its central argument is that climate-responsive reforms can deliver a "double dividend" — addressing both climate vulnerabilities and long-standing structural constraints in MENAAP economies.

The report finds that the impact of extreme heat on firms is significant: nearly 32% of firms across the seven countries already face more than 100 days of extreme heat annually (days averaging above 35°C), and more frequent heat is associated with a 6% drop in sales, a 4% reduction in labour productivity, and an 8% decline in wages — with smaller firms and those outside global value chains hit hardest. These effects are amplified by weak business environments and limited access to finance: firms facing the heaviest regulatory burden saw sales fall 17% as heat days rose (more than triple the drop for those with moderate burdens), and firms with the tightest financing constraints saw a 21% decline. Yet adaptation remains rare — in Egypt, only 9% of firms invested in cooling technologies. On trade, the EU CBAM's aggregate effect is modest (a net regional GDP loss of about USD 1.4 billion, or 0.1%), but sectoral exposure is sharp — Algeria's and Egypt's primary iron and steel exports to the EU are projected to fall 68% and 78% respectively — while low-emission producers such as the UAE (aluminium) and Morocco and Egypt (fertilizer) could gain substantially if they certify their carbon intensities. The report concludes that improving access to finance, strengthening the business environment, and fostering "green competitiveness" through decarbonization will be critical for firms to both adapt to heat and preserve access to European markets.