Extreme Heat and EU Carbon Rules Threaten MENAAP Growth, World Bank Report Finds

The World Bank finds that rising temperatures are already reducing productivity, employment, wages, and export competitiveness across the MENAAP region, with small firms and financially constrained businesses suffering the greatest losses. At the same time, climate adaptation, green finance, energy efficiency, and compliance with emerging global climate regulations could unlock new investment, trade opportunities, and long-term economic resilience.

Climate change is no longer a future challenge for the Middle East, North Africa, Afghanistan, and Pakistan (MENAAP) region. According to the World Bank's latest development report, rising temperatures are already reducing productivity, lowering wages, and increasing business costs. The study, based on data from more than 10,000 firms across Egypt, Iraq, Jordan, Lebanon, Morocco, Saudi Arabia, and Tunisia, found that nearly 32% of firms operate in areas experiencing more than 100 extreme heat days annually, with temperatures exceeding 35°C.

The economic impacts are significant. An increase of about 17 additional extreme heat days per year is associated with a 6% decline in sales, a 4% drop in labor productivity, a 2% reduction in employment, and an 8% fall in wages. Small firms are the most affected, facing sales losses of up to 10% and productivity declines of 9%. The report warns that without stronger adaptation measures, rising temperatures could further weaken private-sector growth across the region.

Weak Business Environments Make Climate Impacts Worse

The report finds that climate shocks are more damaging in countries where firms face regulatory hurdles and financing constraints. Businesses with the highest regulatory burden experienced sales declines of 17%, compared to around 5% for firms facing moderate regulations. Likewise, firms with severe financial constraints saw sales drop by 21%, three times more than firms with better access to finance.

Adaptation remains limited. In Egypt, only 9% of firms have invested in cooling technologies despite growing heat risks. Across the region, adoption of water management systems, energy-efficient equipment, and climate-related planning remains low. The report argues that improving access to finance, simplifying regulations, and investing in reliable infrastructure could help firms adapt while also boosting productivity and competitiveness.

Europe's Green Trade Rules Are Reshaping Export Markets

Beyond rising temperatures, MENAAP exporters face new challenges from climate-related trade regulations. The European Union's Carbon Border Adjustment Mechanism (CBAM), which places a carbon cost on imports, will affect sectors such as aluminum, cement, fertilizer, and iron and steel.

The overall regional impact is expected to be modest, with projected losses of around US$1.4 billion, or 0.1% of regional GDP. However, some sectors could face major disruptions. Countries with carbon-intensive production methods may lose market share in Europe, while those producing lower-carbon goods could gain a competitive advantage.

For example, Egypt and Algeria could see significant declines in iron and steel exports, while Morocco, Egypt, and the United Arab Emirates may benefit from increased competitiveness in fertilizer and aluminum exports if they can demonstrate lower carbon emissions. The report highlights the growing importance of carbon measurement, certification, and cleaner production systems for maintaining access to global markets.

New Opportunities for Governments and Investors

The report stresses that climate adaptation should be viewed as an economic opportunity rather than only a risk. Demand for sustainable cooling systems, renewable energy, energy-efficient buildings, batteries, and low-carbon industrial products is expected to grow rapidly over the coming decades.

The region has strong potential to attract investment in solar and wind energy, thanks to its abundant natural resources. Improved energy efficiency could also lower production costs and strengthen export competitiveness. The report notes that more productive and internationally connected firms are already significantly more energy-efficient than other businesses, showing that climate resilience and productivity often go hand in hand.

Foreign investment patterns are also changing. Since the announcement of CBAM, European investment in some carbon-intensive sectors has slowed, while Chinese investment has increased in selected industries. This shift suggests that global investors are already adjusting their strategies in response to climate policies.

What Policymakers and Development Partners Should Do Next

The report calls for urgent action from governments, development institutions, and the private sector. Key recommendations include expanding access to green finance, developing green bonds and sustainability-linked loans, reducing barriers to importing green technologies, and strengthening national certification and quality infrastructure.

Governments are also encouraged to reform fossil-fuel subsidies and gradually introduce carbon pricing. In Egypt, for example, combining subsidy reform with a carbon tax could generate revenues equivalent to 4–5% of GDP, creating resources for social protection, infrastructure, and economic diversification.

For international development partners, the findings highlight the need for greater support for climate adaptation, SME financing, resilient infrastructure, and technical assistance for carbon reporting systems. For private-sector stakeholders, the message is clear: firms that invest early in energy efficiency, cooling technologies, and low-carbon production are likely to be better positioned to compete in future global markets.

The report concludes that climate change poses serious risks to growth and competitiveness, but it also offers a unique opportunity for MENAAP economies to modernize industries, attract investment, create jobs, and build a more resilient and sustainable economic future.