Allianz: Extreme Heat is Not Just an Environmental Crisis

The climate crisis is predominantly framed in environmental terms, though the impacts of climate change will be far broader than just that.

The economic and societal impacts of unmitigated global heating are already on show.

According to Allianz Trade’s report, ‘Too hot to grow: The economic costs of extreme heat’, heat stress events have increased sevenfold since the 1980s, with the average number of deaths per event rising fivefold.

The knock-on effects of the crisis are particularly visible in the energy sector right now, where grid instability, infrastructure stress and a huge spike in the demand for cooling are all converging.

Escalating heat and energy demand

Climate change is intensifying both the frequency and severity of heatwaves, with direct consequences for energy consumption patterns worldwide.

Between 1980 and 1989, only 14 heatwave events were recorded globally, compared with 99 between 2020 and 2024.

Over the same period, the average death toll per event rose from 244 to 1,222, underlining the growing difficulty of adapting to rising temperatures.

Europe is particularly exposed, not only because of demographic and urban factors but also due to its relative lack of cooling infrastructure and energy system flexibility.

“Following the multi-actor frame of IPCC, closing the gap in Europe requires coordinated action on four fronts: labour regulation, buildings, public finance and households,” writes Jade Elisabeth, Climate Economics Research Assistant at Allianz Investment Management, in the report.

“A workable occupational regime needs binding temperature thresholds, automatic work restrictions when those thresholds are crossed, paid compensation for lost hours and coverage that reaches fixed-term, seasonal and platform workers.

“No major European economy has all four and the gap is concentrated on the last: protections were designed around standard contracts and leave the workers most exposed to heat largely outside the regime.”

The report notes that extreme heat is already weighing on European GDP during hotter years, with energy demand spikes playing a growing role in these economic losses.

“Extreme heat is emerging as a structural economic risk, with Europe highly exposed. Heat stress events have multiplied sevenfold since the 1980s while the average death toll per event has risen fivefold,” Hazem Krichene, Senior Climate Economist at Allianz Trade, explains in the report.

“That share partly reflects measurement: vital registration and excess-mortality surveillance are far more developed in Europe than in much of Africa and South Asia, where heat deaths go largely uncounted.”

Pressure on generation and grids

Rising global temperatures are placing unprecedented strain on energy systems by simultaneously increasing cooling demand and reducing the efficiency of energy generation and transmission.

The report identifies a critical tipping point at around 30°C, beyond which electricity consumption rises sharply as cooling systems become essential. At 35°C, a marginal increase in heat stress correlates with a 1.2% rise in per-capita energy use.

At the same time, generation assets are becoming less reliable under heat stress. Many European power plants rely on thermoelectric processes that depend on water availability and efficient cooling, both of which are compromised during extreme heat.

“The economic transmission of heat stress is non-linear, with a critical threshold around 30°C beyond which productivity losses intensify sharply,” says Bjoern Griesbach, Head of Macroeconomic & Capital Markets Research at Allianz Trade, in the report.

“Below this level, warming reduces heating costs and is associated with modest productivity gains. Above this level, the relationship reverses and both channels worsen with each additional degree.

“The dominant effect operates through labour: output per hour declines for every degree across the 30-35°C range.

“Wage adjustments follow productivity with a lag, so the short-run cost falls disproportionately on firm profitability before gradually transmitting to household income and consumption.”

Transmission networks and generation technologies, including solar PV, also experience reduced performance at higher temperatures, further tightening supply at times of peak demand, according to Allianz's data.

Infrastructure strain and supply disruption

Extreme heat is increasingly testing the resilience of energy-linked infrastructure and supply chains.

Transport systems, essential for fuel delivery and maintenance operations, can be disrupted by softened road surfaces and expanding rail tracks. These interruptions can delay logistics and constrain energy supply chains.

Electricity grids are particularly vulnerable during heatwaves, as demand surges while generation capacity is simultaneously constrained. This mismatch can lead to bottlenecks, reduced reliability and increased risk of outages.

“To gauge the macroeconomic stakes, we construct a stress scenario in which the five hottest years observed in each country between 2014 and 2024 are replayed in ascending order over 2026 to 2030, the fifth-hottest year in 2026, the fourth in 2027 and so on, culminating in the country‘s hottest year on record in 2030,” says Jasmin Gröschl, Senior Economist for Europe at Allianz Trade, in the report.

“Under this trajectory, cumulative implied GDP losses (2026 – 2030) could reach 5–7% for the most exposed economies: US$240bn for France, US$354bn for Japan, US$147bn for Italy, US$131bn for Germany and US$120bn for Spain.”

Much of today’s infrastructure was designed for cooler climates and is now being pushed beyond its operational limits, particularly within energy networks that must cope with higher loads and more volatile conditions.

The rising costs

For businesses, extreme heat is translating into higher energy costs, reduced productivity and growing operational risks.

“Most heat damage accumulates through excess mortality, lost working hours, healthcare-system pressure and infrastructure stress – channels that indemnity contracts are not designed to handle,” writes Katharina Utermoehl, Head of Thematic and Policy Research at Allianz Trade, in the report.

“This makes extreme heat harder to insure than other climate risks because losses are widespread and are often indirect – like lower productivity or health impacts – making them difficult to measure and price.”

The report highlights that output per hour declines by approximately US$1.30 for every degree above 30°C, while energy expenditure rises in parallel as cooling demand intensifies.

Over time, these combined pressures can weaken consumption, reduce investment and erode economic resilience. Governments are also exposed, facing reduced tax revenues alongside higher spending on healthcare, energy subsidies, infrastructure upgrades and climate adaptation.

Taken together, the findings reinforce the need for sustained investment in energy system resilience, grid modernisation and adaptive infrastructure to withstand the growing impacts of extreme heat.