The Philippines faces mounting economic and financial risks from climate change, with projected losses reaching as much as 13 percent of gross domestic product (GDP) by 2040 unless the country urgently scales up climate financing and aligns adaptation and mitigation efforts, according to state-run policy think tank Philippine Institute for Development Studies (PIDS).

In an April 27 policy note titled “Closing the Climate Finance Gap: Making Every Peso—and Partner—Count for Developing Resilience,” PIDS noted that the Philippines ranks as the most disaster-prone country in the world in the World Risk Index due to extreme hazard exposure and socioeconomic vulnerability.

“These physical trends translate into large economic losses,” the report said, noting that climate change could reduce Philippine GDP by six to eight percent by 2040 under moderate scenarios and by as much as 13.6 percent under more severe assumptions.

PIDS said losses would stem from infrastructure damage, lower labor productivity due to heat stress, reduced agricultural output, health impacts, and recurring disaster recovery costs that crowd out long-term development investments. Core adaptation investments in resilient infrastructure, agriculture, and water systems alone are estimated to require spending equivalent to around 0.7 percent of GDP annually.

The think tank said climate change should no longer be viewed merely as an environmental issue, but as a macroeconomic, fiscal, and financial stability challenge that threatens growth, worsens inequality, and strains public finances.

It also urged policymakers to treat adaptation and mitigation as complementary—not competing—priorities.

While adaptation addresses immediate vulnerabilities, the report said exclusive reliance on resilience-building without mitigation would result in the highest long-term climate costs because it does not reduce the intensity of future hazards.

This challenge is especially relevant in the Philippines, where the government’s Nationally Determined Contribution (NDC) commits to a 75-percent reduction in greenhouse gas (GHG) emissions by 2030 relative to business-as-usual, alongside a 35-percent renewable energy (RE) share by 2030 and 50 percent by 2040.

However, implementation has lagged, with PIDS noting that the country’s RE share fell from 34 percent in 2008 to 21 percent in 2020, while coal-fired capacity expanded by 6.7 gigawatts (GW), underscoring the gap between mitigation ambition and actual outcomes.

“The gap between mitigation ambition and reality highlights the need for urgent correction,” the report said.

The think tank said the Philippines also has a distinct policy advantage: public awareness. Around 90 percent of Filipinos consider climate change a serious problem—the highest proportion among 14 Asian economies surveyed in the Asian Development Bank’s (ADB) 2024 Climate Change Perception Survey—creating a rare window for sustained and ambitious climate action.

Still, PIDS said public understanding of specific climate finance tools such as carbon pricing, green bonds, and climate risk insurance remains limited, potentially weakening support for revenue-raising measures and regulatory reforms.

The report noted that climate finance in the Philippines currently comes from domestic public spending, official development assistance (ODA), multilateral development banks (MDBs), and private sustainable finance.

However, current flows remain insufficient, as the Department of Finance’s (DOF) Sustainable Finance Roadmap estimates annual climate finance flows of $2.5 billion to $3 billion against annual needs of roughly $12 billion to $15 billion, implying a financing gap of $9 billion to $12 billion per year.

PIDS warned that the dominance of loans—even for adaptation projects that generate no direct financial returns—adds to the fiscal burden of a country already highly vulnerable to climate shocks. ODA and concessional finance will remain essential not only to increase funding volumes but also to de-risk private investments and build viable project pipelines.

The report also highlighted governance and institutional challenges. For instance, PIDS noted that climate finance responsibilities are fragmented across the Climate Change Commission (CCC), the Department of Economy, Planning, and Development (DEPDev), the Bangko Sentral ng Pilipinas (BSP), and several line agencies, with no single institution maintaining full oversight of climate finance flows and alignment with vulnerability priorities.

In particular, the BSP has advanced sustainable finance regulations, but legal restrictions prevent it from undertaking developmental financing, limiting its ability to deploy targeted climate finance facilities unlike some of its peers in Southeast Asia.

PIDS said a narrowly scoped legislative clarification of the BSP’s mandate to recognize systemic climate risk could unlock stronger financial sector tools without compromising central bank independence.

The report also called for mobilizing more private capital through stronger incentives, such as regulatory reforms to reduce investment risks, such as guaranteed grid access for independent renewable energy producers, as well as stronger financial incentives such as feed-in tariffs for clean electricity. It also cited green bonds and blended finance as promising tools, provided transparency and verification standards are strengthened.

PIDS outlined four key policy directions, including integrating mitigation and adaptation into a single climate investment framework, replacing ex post climate expenditure tagging with ex ante “climate proofing” of major public investments, reforming legal and institutional structures for climate finance, and introducing market-based instruments such as carbon taxes or emissions trading systems with safeguards for vulnerable households.

The think tank also called for a unified climate finance governance mechanism to reduce fragmentation, improve accountability, and align spending with the country’s most vulnerable communities.

“Climate finance is the bridge between risk and resilience,” the report said, adding that the cost of decisive climate action remains far smaller than the accumulating cost of inaction.