Power Projects Face Climate “Double Whammy”

By Xia Li

A new power plant can look like a straightforward win for a fast-growing economy. It means more electricity for homes, hospitals, factories and schools. But our new study suggests the story is far more complicated. Today, every major energy investment is increasingly shaped by two climate realities at once.

First, there’s the risk from the changing climate itself: stronger storms, worsening floods, rising seas, harsher heat and growing water stress. These hazards can damage infrastructure built for historical climate conditions; for example, power plants designed to withstand flooding expected once every 100 years may now face these conditions more frequently.

Second, there’s the risk from the world’s response to climate change: tighter regulations, changing energy markets and growing pressure to cut emissions. For high-carbon projects, these shifts can turn a “good investment” into a costly liability.

A new journal article in Environmental Research Letters calls this pairing a climate “double whammy”: the same power projects that face high risks from the energy transition often also face high physical climate risks.

Two Climate Risks That Are Usually Studied Separately

The authors—Xia Li, Kevin P. Gallagher and Xu Chen—look at 578 overseas power projects across 105 countries, financed bilaterally by the US, China and Japan, the world’s three largest economies. They focus on two categories of climate risks:

• Transition risk: the risk that a project becomes less valuable in a world moving toward lower emissions. The study measures this using a project’s committed CO₂ emissions—the carbon pollution a plant is expected to produce over its operating lifetime once it’s built.
• Physical risk: the risk that climate impacts such as flooding or water stress harm the project or disrupt its performance. The team geolocates each plant and matches its coordinates with forward-looking climate risk indicators from Moody’s ESG Solutions.

Finance and policy debates often treat decarbonization and climate resilience as separate conversations. This study, by linking project-specific emissions with the corresponding physical climate exposure, brings the two together.

The Risks Often Pile Up, Not Cancel Out

Across the full set of projects, the researchers find a positive relationship between transition and physical climate risks. In other words, projects that lock in more CO₂ emissions also tend to be in places with greater exposure to climate hazards. This is the double whammy.

Physical and transition climate risks aren’t just two separate problems. They can reinforce each other. A plant hit by floods, heat waves or water shortages may become more expensive to insure and maintain—leaving less financial room to adapt or upgrade. Meanwhile, a plant threatened by tougher climate policies may struggle to attract new capital for resilience investments. As Figure 1 shows, these bilaterally financed power projects are geographically distributed across regions with varying fuel types and levels of physical climate risks.

Figure 1: Distribution of Overseas Power Projects and Their Physical Climate Risks

Fossil Fuels Are the Main Driver of The Double Whammy

The strongest pattern comes from fossil fuel projects. The study finds that the overall positive relationship between physical risk and emissions is driven primarily by fossil fuel investments, with coal and gas standing out.

This matters because overseas fossil fuel plants are often long-lived. Once built, they can operate for decades, locking in emissions and shaping national power systems. If these projects are also located in places with intensifying physical hazards, they may become expensive burdens for host countries through repairs, outages, higher financing costs or early retirement.

The authors connect this to a familiar term in climate finance: stranded assets. These are assets that lose value earlier than expected as policies, markets or technologies change. Our results suggest another reason this can happen: infrastructure may also become financially vulnerable because of physical climate exposure.

A Reminder: “Clean” Doesn’t Automatically Mean “Safe”

One interesting part of the study is its nuance about renewables. Clean energy projects generally have low transition risks because they don’t rely on high emissions to generate revenue, but they still face the physical impacts of climate change. For example, hydropower projects face the highest flood risk among fuel types, while solar projects show high exposure to water stress. Each energy technology has a distinct climate-resilience profile. Planning and financing decisions need to consider those profiles upfront.

It Doesn’t Matter Much Who Finances the Project

Because the study focuses on projects financed by the US, China and Japan, it also speaks to a major geopolitical and development question: do different financiers create different risk outcomes?

Surprisingly, the study finds no evidence that the positive relationship between physical and transition risks differs meaningfully by the financing country, neither do we find major difference in the double-risk pattern across financing channels.

This is an important message for the broader policy debate. It suggests the double whammy should not just be a blame on the private sector or a country. Instead, it indicates a systemic issue tied to how and where the global power sector has been built over the last two decades, and what climate change is now doing to the risk landscape.

What Decision-Makers Can Do

The paper points to a straightforward policy and finance lesson: integrate physical and transition climate risk assessments in international energy finance. In practice, that could mean:

• Screening projects for both risks from the start. Not just “How much CO₂ will this plant emit?” but also “How vulnerable is it to floods, heat, storms and water stress over its lifetime?”
• Reconsidering new overseas fossil fuel investments. The study offers another rationale for reducing investment in coal and gas abroad, or considering earlier retirement for existing projects. 
• Building resilience into clean energy expansion. Clean energy can support decarbonization, but they need climate-smart siting, design and operation to ensure that these projects are also resilient.

The Botton Line

Climate risks don’t come one at a time. For overseas power projects, the economic risk of a low-carbon transition and the physical climate risk exposures can stack up on the same assets—creating a double whammy that investors, governments and communities may not be prepared for. A clear understanding of how these risks interact is essential to designing policies that strengthen resilience while supporting an equitable, efficient shift to low-carbon activities.

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