Policy implications of climate sensitivity

𝗠𝗼𝘀𝘁 𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗺𝗼𝗱𝗲𝗹𝘀 𝘂𝘀𝗲𝗱 𝗶𝗻 𝗳𝗶𝘀𝗰𝗮𝗹 𝗽𝗼𝗹𝗶𝗰𝘆𝗺𝗮𝗸𝗶𝗻𝗴 𝘀𝘁𝗶𝗹𝗹 𝘂𝗻𝗱𝗲𝗿𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗲 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗱𝗮𝗺𝗮𝗴𝗲𝘀 - 𝗯𝘆 𝗮 𝗳𝗮𝗰𝘁𝗼𝗿 𝗼𝗳 3 𝗼𝗿 𝗺𝗼𝗿𝗲 or ignore them all-together. This shapes decisions on public investment, debt sustainability, and our collective ability to transition in time. I recently looked into how deep the modelling gap runs: 🔹 Global income losses from climate change 𝗺𝗮𝘆 𝗿𝗲𝗮𝗰𝗵 19% 𝗯𝘆 2050, with a likely range of 11–29%, according to the latest empirical studies. Yet widely used models like 𝗗𝗜𝗖𝗘-2024 𝘀𝘁𝗶𝗹𝗹 𝗽𝗿𝗼𝗷𝗲𝗰𝘁 𝗼𝗻𝗹𝘆 3.1% output loss at 3°C warming and 7% at 4.5°C - a dramatic underestimation. 🔹 $2.86 trillion in historical climate damages (2000–2019) are recorded empirically, versus just $0.8 trillion in DICE estimates - 𝗮 𝗳𝗮𝗰𝘁𝗼𝗿 𝗼𝗳 3.5 𝗹𝗼𝘄𝗲𝗿. 🔹 𝗧𝗵𝗲 𝗳𝗶𝘀𝗰𝗮𝗹 𝗶𝗺𝗽𝗹𝗶𝗰𝗮𝘁𝗶𝗼𝗻𝘀 𝗮𝗿𝗲 𝗲𝗾𝘂𝗮𝗹𝗹𝘆 𝘂𝗻𝗱𝗲𝗿-𝗮𝗰𝗸𝗻𝗼𝘄𝗹𝗲𝗱𝗴𝗲𝗱. The UK Office for Budget Responsibility projects that delaying decarbonisation could increase the national debt-to-GDP ratio by 10–100 percentage points by 2050. Yet mainstream Debt Sustainability Assessments (𝗗𝗦𝗔𝘀) 𝗶𝗻 𝘁𝗵𝗲 𝗘𝗨 𝗶𝗴𝗻𝗼𝗿𝗲 𝘀𝘂𝗰𝗵 𝗿𝗶𝘀𝗸𝘀 𝗲𝗻𝘁𝗶𝗿𝗲𝗹𝘆. 🔹 Perhaps most concerning: 𝗮𝗰𝘁𝗶𝗻𝗴 𝗻𝗼𝘄 𝗶𝘀 𝗮𝗹𝗺𝗼𝘀𝘁 50% 𝗰𝗵𝗲𝗮𝗽𝗲𝗿 𝘁𝗵𝗮𝗻 𝘄𝗮𝗶𝘁𝗶𝗻𝗴. Climate damages by 2050 outweigh the combined GDP losses from mitigation and impacts by a factor of 1.8 - yet our economic models still bias us toward delay. 𝗧𝗵𝗲𝘀𝗲 𝗯𝗹𝗶𝗻𝗱 𝘀𝗽𝗼𝘁𝘀 𝗮𝗿𝗲𝗻’𝘁 𝗷𝘂𝘀𝘁 𝗮𝗰𝗮𝗱𝗲𝗺𝗶𝗰. 𝗧𝗵𝗲𝘆 𝗰𝗼𝗻𝘀𝘁𝗿𝗮𝗶𝗻 𝘄𝗵𝗮𝘁 𝗽𝗼𝗹𝗶𝗰𝘆𝗺𝗮𝗸𝗲𝗿𝘀 𝘃𝗶𝗲𝘄 𝗮𝘀 𝗳𝗶𝘀𝗰𝗮𝗹𝗹𝘆 𝘀𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗹𝗲 𝗼𝗿 𝗽𝗼𝗹𝗶𝘁𝗶𝗰𝗮𝗹𝗹𝘆 𝗳𝗲𝗮𝘀𝗶𝗯𝗹𝗲 - especially in EU settings where fiscal rules and DSAs are central tools of economic governance. 📌 𝗙𝗼𝗿𝘁𝘂𝗻𝗮𝘁𝗲𝗹𝘆, 𝘁𝗵𝗲𝗿𝗲 𝗮𝗿𝗲 𝗲𝗳𝗳𝗼𝗿𝘁𝘀 𝘂𝗻𝗱𝗲𝗿𝘄𝗮𝘆 𝘁𝗼 𝗰𝗹𝗼𝘀𝗲 𝘁𝗵𝗶𝘀 𝗴𝗮𝗽. I want to highlight the excellent work by Dezernat Zukunft - Institut für Makrofinanzen, who recently reviewed how to integrate climate risk and transition investment into EU DSAs. Their proposals offer a crucial pathway to update the way we think about debt, risk, and climate. Another leader is Network for Greening the Financial System (NGFS), who brings together the climate with the fiscal and monetary policy community. 🛠️ Finance ministries need to work on approaches that merge macroeconomic and climate science insights and use them! 🧠 𝗪𝗲 𝗸𝗻𝗼𝘄 𝗯𝗲𝘁𝘁𝗲𝗿 𝗺𝗼𝗱𝗲𝗹𝘀 𝗮𝗿𝗲 𝗽𝗼𝘀𝘀𝗶𝗯𝗹𝗲. 𝗟𝗲𝘁’𝘀 𝗺𝗮𝗸𝗲 𝘀𝘂𝗿𝗲 𝘁𝗵𝗲𝘆’𝗿𝗲 𝘂𝘀𝗲𝗱! Peter Handley Ursula Woodburn Philippa Sigl-Glöckner Ludovic Suttor-Sorel Leslie Johnston, M.Sc. Jo Swinson Rosa Klitgaard Andersen Ida Lærke Holm Olivia Lazard Linda Zeilina-Cross Pascal Canfin Karl Pincherelle Philippe Lamberts Radan Kanev Alexander Reitzenstein Brian Kettenring Daniel Valenzuela Apratim (Tim) Sahay Adam Tooze Rana Foroohar

🌍 Urgent Climate Action Needed: New Study Reveals Higher Climate Sensitivity A groundbreaking research published in Science that has significant implications for our climate future. The PhanDA study provides a comprehensive reconstruction of Earth's Global Mean Surface Temperature (GMST) over the past 485 million years, revealing an Apparent Earth System Sensitivity (AESS) of approximately 8°C per doubling of CO₂. While there are challenges in directly applying long-term correlations to the current rise in CO₂ and its warming effects, historical trends indicate that increasing atmospheric CO₂ from preindustrial levels of 270 ppm to today's 428 ppm has implicitly induced approximately 4.6°C of warming. This level of temperature increase significantly exceeds the goals set by the Paris Agreement. 🔍 Key Insight: Higher Climate Sensitivity: This AESS is substantially higher than the commonly cited Equilibrium Climate Sensitivity (ECS) of 2°C to 5°C. It suggests that our planet may warm more intensely in response to CO₂ increases than previously thought. 📈 Implications: Stronger Need to Cut Emissions: With a higher sensitivity, the urgency to reduce greenhouse gas emissions intensifies. The potential for more severe temperature rises means we must act swiftly and decisively to mitigate climate change. Policy and Innovation: This finding calls for enhanced climate policies, accelerated adoption of renewable energy sources, and innovative solutions to lower our carbon footprint. Together, we can leverage this new understanding to drive meaningful change and safeguard our planet for future generations. #ClimateChange #Sustainability #ClimateAction #RenewableEnergy #GreenhouseGas #EnvironmentalScience #PhanDA #ClimateSensitivity #ActNow #GlobalWarming

Climate exposure is rapidly becoming a core determinant of sovereign and corporate creditworthiness. Macro-financial analysis from the University of Cambridge and others shows that without decisive mitigation, climate impacts could begin to erode sovereign credit ratings within five years raising borrowing costs for governments and, by extension, businesses. Over time, the economic drag could reach double-digit GDP losses, driven not by capital destruction alone but by a sustained fall in productivity and output. This reshapes fiscal and monetary policy fundamentals. Climate risk is now a structural factor in debt sustainability, cost of capital, and financial stability. The risk is no longer distant or diffuse, it’s embedded in the credit system itself. The cost of inaction was a central theme in my UK meetings in June, particularly discussing the research by Kamiar Mohaddes and others at Cambridge Judge Business School where the connection between climate credibility and economic credibility was unmistakably clear. For policymakers and investors alike, the question is shifting from “what is the cost of action?” to “what is the credit cost of inaction?” Photos from my visit with the team at Cambridge #macroeconomics #climaterisk #fiscalpolicy #climatechange

Climate risk is changing lending now. And it’s not just about charging more. New research analysing 86,000 loans across 77 countries over 26 years reveals what regulators are still debating: climate vulnerability is already embedded in the cost of capital. Borrowers in high-risk geographies pay a 39 basis point premium on average. For financially stressed companies or those seeking long-term debt, that premium doubles. Banks aren't just charging more. They're demanding higher collateral, reducing loan sizes, and shortening maturities based on physical climate exposure. The market is doing what policy frameworks struggle to enforce, integrating climate risk through direct financial incentives. Here's the policy problem: -> The firms that need capital most urgently to build climate resilience face the highest borrowing costs. -> It's a vicious cycle: climate vulnerability → higher debt costs → less capital for adaptation → greater vulnerability. This inequity compounds geographically. Poorer countries face both worse climate impacts and higher financing costs, creating a double penalty for the economies least equipped to absorb it. What this means for policymakers: -> Blended finance mechanisms are essential to de-risk climate adaptation investments in vulnerable regions -> Public guarantees may be needed to unlock private capital for resilience infrastructure -> Disclosure mandates should expand beyond emissions to physical risk exposure across value chains -> Development finance institutions must explicitly target the financing gap for high-vulnerability, low-creditworthy borrowers Climate risk isn't a future concern for lenders. It's being priced into portfolios today. Markets are moving. The question for policy is whether it can move fast enough to prevent a climate-driven credit divide that locks vulnerable firms and countries out of the capital they need to adapt. 🔗 Link to the research in the comments (open access) 👂 Heard through Dr. Tom Herbstein ♻️ Repost this to help your network 👉 Follow Dr Sophie Taysom for more

Risk Sciences | Multiple Climate Ambiguities Shape Optimal Carbon Abatement When climate sensitivity, damages, and abatement costs are all ambiguous—three big unknowns, one tough choice: cut carbon more—or less—right now? Explore how to decide in Risk Sciences: Multiple climate ambiguities and optimal carbon emission abatement decisions, by three economists, Peixin Liu, Hao Wang, and Lihong Zhang. It builds a unified climate‑economy framework to explain why equally rational decision makers can arrive at opposing carbon policies when facing different kinds of ambiguity. 🔎 Why it matters · Climate choices are ambiguous in three places: climate sensitivity to emissions, the scale and likelihood of climateinduced economic damage, and the costeffectiveness of abatement. · These coexisting ambiguities help explain the gap between academic calls for strong mitigation and realworld hesitation. 💡 What the study does · A stylized comparison of abatement versus nonabatement to isolate each ambiguity’s effect. · A continuous optimalabatement model with smooth ambiguity preferences and standard risk preferences. · A certaintyequivalent productivity metric that summarizes welfare under different beliefs and ambiguity attitudes. · Calibrations anchored to widely cited ranges, including IPCC climate sensitivity, empirical damage estimates, and plausible abatement cost spreads. ✒️ Key findings · Ambiguity aversion about climate sensitivity and climate damage raises optimal abatement. Ambiguity aversion about abatement costs lowers it. · If decision makers believe climate sensitivity or economic damage is overstated, optimal abatement falls sharply and can drop to zero in extreme cases. · When ambiguities push in the same direction, their effects reinforce; when they pull in opposite directions, they offset. · Perceived relationships among uncertainties matter: positive dependence amplifies reinforcement, negative dependence strengthens offsetting. Please read the article: https://lnkd.in/gM6HRx4d #risksciences #Ambiguity #Climatepolicy #Emissionabatement #Decisionmakingunderuncertainty #Climateeconomymodeling