From Disaster to Decarbonization: Climate Risks and the Structure of Global Value Chains

This paper examines the effects of climate risks on participation in global value chains (GVCs). Using data from the EORA MRIO database for 173 countries over the period 1995-2018, we investigate how both the physical risk associated with climate change and the transition risk arising from environmental policy shifts may affect total, forward, and backward GVC participation. We further explore whether these effects differ across country groups and regions to account for heterogeneity in structural and regional characteristics. We assess the robustness of our findings using alternative measures of both the dependent variable (GVC participation) and the key explanatory variables capturing physical and transition climate risks. The results indicate that physical climate risks are consistently associated with lower GVC participation, particularly in forward linkages, whereas transition-related measures are positively associated with GVC participation. These findings are consistent with the Porter Hypothesis, suggesting that stronger environmental commitments can support technological upgrading and countries’ integration into GVCs. We further show that the effects of climate risks are highly heterogeneous, varying across levels of economic development, oil dependency, institutional quality, and geographical regions. Moreover, stronger environmental commitments appear to attenuate the adverse effects of physical climate risks on GVC participation, particularly in countries with stronger institutions. These findings underscore the importance of integrating climate, trade, and industrial policies while accounting for countries’ structural characteristics and institutional capacities.