Research on climate patterns and GDP

New research suggests that a 1°C rise in global temperatures reduces world GDP by over 20%. A timely and robust reminder that sustainability regulations protect, and not undermine, future business activities... Under a business-as-usual warming path, the estimated global GDP would be ~50% lower by 2100 compared to a world without climate change, with large welfare losses and a Social Cost of Carbon of around $1,200 per ton. While most past studies focused on local temperature changes to estimate GDP losses, this paper examines global temperature dynamics. This better captures the rise in extreme events like heatwaves, droughts, storms, and floods - all of which disrupt productivity, investment, and economic growth. 👉 Given this outlook, weakening flagship tools like the EU's Emissions Trading System (ETS) amid pressure from Italy and Germany risks entrenching short-term competitiveness concerns at the expense of long-term resilience...

Climate Change estimates a 12% GDP Hit: Why the Real Cost of Carbon Is 6x Higher Than previous research. New research by Adrien Bilal and Diego Känzig shows that the macroeconomic damage of climate change is six times larger than previously estimated. Global temperature rises—not local ones—are an economic threat, with a 1°C increase slashing global GDP by 12%. Their model sets the Social Cost of Carbon at $1,367/ton— above current policy benchmarks. Abstract: We estimate the macroeconomic damage function of climate change by combining a structural macroeconomic model with a new panel dataset for 174 countries over 1960–2019. Our approach overcomes the attenuation bias from local temperature shocks and separates the effects of persistent global warming from transitory local weather shocks. We find that a 1°C increase in global temperature leads to a 12% decline in world GDP. Damages are heterogeneous, with poorer and hotter countries suffering the most. These effects are driven by persistent productivity losses and are amplified by capital accumulation. Our estimated damage function implies a Social Cost of Carbon (SCC) of $1,385 per ton of carbon dioxide—more than six times the US government’s current estimate. Our results highlight the importance of accounting for macroeconomic persistence and heterogeneity when evaluating climate damages.” And link to paper in comments and below.

Climate change could reduce average income per person by 40% 🌎 A new study finds that a 4°C increase in global temperatures could reduce average global income by 40%, significantly more than previous estimates. Even with warming limited to 2°C, the expected decline in global GDP per capita is 16%—far higher than the 1.4% projected by earlier models. The findings suggest that current economic projections have underestimated the scale of financial losses associated with climate change. The research, published in Environmental Research Letters, critiques the traditional economic models known as integrated assessment models (IAMs). These models have played a key role in informing climate policy but have not fully accounted for the effects of extreme weather events or the interconnected nature of global supply chains. As a result, they have understated the broader economic impacts of climate risks. The new analysis improves on existing models by integrating updated climate forecasts and including the effects of supply chain disruptions caused by extreme weather. This approach provides a more comprehensive view of how climate change can impact economic systems, moving beyond the assumption that impacts are only local or easily offset by increased output elsewhere. The study challenges the idea that some regions could economically benefit from warming. While some colder regions might see marginal gains, the overall effect is negative due to the global nature of trade and economic interdependence. Disruptions in one part of the world can have cascading effects across sectors and geographies, reducing resilience and increasing vulnerability across the system. The authors conclude that current modelling practices risk underestimating both the costs of inaction and the benefits of rapid emissions reductions. Updating economic models to better reflect extreme risks and system-wide impacts is essential for informed policymaking. The findings reinforce the urgency of integrating climate risk into economic planning and decision-making. Source: The Guardian #sustainability #sustainable #business #esg #climatechange #risks

Sorry for a very long post here, but this is too interesting. 😊   If you are interested in #climate #economics and #policy you should read the below forthcoming publication in the Quarterly Journal of Economics by Adrien Bilal and Diego Känzig. The results are both truly profound, somewhat scary … and kind of straightforward in the reason *why* they arise. Let’s start with the key changes in linking climate science to economics, and then the findings.   What Bilal and Känzig do differently is that they use natural variability in *global temperature data* to identify causal effects of climate change on economic activity. Previous studies used *country-level temperature* data. The latter comes with statistical advantages, but also a major drawback.   Global temperature correlates strongly with extreme climatic events, as Bilal and Känzig explain, unlike country-level temperature. Think of major floods along rivers across countries, hurricane systems and droughts affecting large parts of continents.   It is a central tenet in climate science that "it is not the change in means, but in the extremes that will kill you" (put a bit bluntly, sorry). It is also a straightforward learning that any farmer, gardener, forester or coastal dweller will tell you. If we do not capture the effects of extremes on our economy, we are missing out on something important.   Bilal and Känzig estimate damage functions in a neoclassical growth model. Here some findings:   -         A permanent 1°C rise in global temperature causes global GDP to persistently decline by over 20%. -         A social cost of carbon (SCC) in excess of $1,200 per ton CO2e; -         A present welfare loss of more than 30% under a moderate warming scenario -         A GDP/capita loss in excess of 50% by the end of the century, same scenario.   Bilal and Känzig cleverly ask: “If the economic effects of global temperature are so large, why were they not noticed after nearly 1°C of global warming since 1960?”. The answer: Warming occurs in small increments year to year, and economic effects are blurred by other events (as we very well know these days!). However, warming effects accumulate and slow growth with profound effects. In the absence of climate change over the period 1960-2019, world GDP per capita would be 25% higher today. Furthermore, because of lagged effects, Bilal and Känzig tell us that “one quarter of the losses caused by past warming are yet to materialize.”   The findings carry a silver lining that Bilal and Känzig explore in a companion paper: With damages documented at this level (1,200 $/ton CO2e), it will be optimal for large countries like the USA and China, but also the EU, to act and mitigate on their own. Indeed, most (if not almost all) instruments, policies and technologies we have available for climate mitigation come at a much lower cost to society per ton CO2e.   Get to work! #dkgreen #dkpol  https://lnkd.in/eV4Z4uh5

Recent studies indicate that traditional economic models have significantly underestimated the financial repercussions of climate change. Research from the University of New South Wales suggests that a 4°C rise in global temperatures could reduce average per-person GDP by 40%, a stark contrast to earlier, more conservative estimates. This discrepancy is largely due to previous models failing to account for the cascading effects of extreme weather events on global supply chains, which can amplify economic losses. Similarly, a study by the Potsdam Institute for Climate Impact Research projects a 19% decrease in global income by 2049 due to climate change, equating to approximately $38 trillion in annual losses. The research highlights that the most severe financial impacts will be borne by poorer regions that have contributed minimally to global emissions. These findings underscore the urgent need for policymakers to integrate more comprehensive risk assessments into economic models, ensuring that the full spectrum of climate change impacts is considered in future planning and mitigation strategies. https://lnkd.in/efVQTt6u

𝗪𝗵𝘆 𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝘀𝘁𝘀 𝘀𝘆𝘀𝘁𝗲𝗺𝗮𝘁𝗶𝗰𝗮𝗹𝗹𝘆 𝘂𝗻𝗱𝗲𝗿𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗲 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗿𝗶𝘀𝗸𝘀 A new report (👉https://lnkd.in/eMsCKQuh) exposes a fundamental gap between what climate scientists expect and what economic models predict. 𝗧𝗵𝗲 𝗰𝗼𝗿𝗲 𝗽𝗿𝗼𝗯𝗹𝗲𝗺: 68 climate scientists from 12 countries were surveyed about economic damage estimates. Their insights differ radically from standard models: 🔴 At 3°C warming, experts estimate median GDP damage at ~35%. The Nordhaus DICE model predicts only ~3% 🔴 36% of scientists place the "collapse threshold" 𝘣𝘦𝘭𝘰𝘸 4°C, while many scenarios model up to 4°C and beyond 🔴 250 million people displaced by climate disasters in the past decade, impacts barely visible in GDP figures 𝗪𝗵𝘆 𝘄𝗲 𝗺𝗲𝗮𝘀𝘂𝗿𝗲 𝘄𝗿𝗼𝗻𝗴: We focus on global averages, but people experience 𝘭𝘰𝘤𝘢𝘭 𝘦𝘹𝘵𝘳𝘦𝘮𝘦𝘴: the 2021 Texas storm caused $195 billion damage while barely registering in global temperature statistics. GDP often 𝘳𝘪𝘴𝘦𝘴 after disasters (reconstruction spending) while real wealth declines – the "disaster industrial complex" accounts for 1/3 of US economic activity at 1.4°C warming Models assume smooth damage curves but ignore tipping points, cascades, and system failures 𝗪𝗵𝘆 𝘁𝗵𝗶𝘀 𝗺𝗮𝘁𝘁𝗲𝗿𝘀: This gap determines how pension funds assess risks and how central banks conduct stress tests. The NGFS recently raised damage estimates from 7-14% to 30% GDP loss at 3°C, but climate scientists say even this underestimates. 𝗧𝗵𝗲 𝘂𝗻𝗱𝗲𝗿𝗹𝘆𝗶𝗻𝗴 𝗰𝗮𝘂𝘀𝗲: Research ( 👉 https://lnkd.in/eVsBapbT) shows "disciplinary asymmetries": economists seek optimization within existing systems; natural scientists see limits and tipping points. Where economists use GDP as proxy, scientists see missed impacts on health, ecosystems, and inequality. As a consequence, environmental scientist see degrowth as an option, while economist favour market based solutions 👇 . 𝗪𝗵𝗮𝘁 𝗻𝗼𝘄: The report calls for "recalibration toward precaution, robustness, and transparency": ✓ Report ranges instead of point estimates ✓ Acknowledge where models fail (especially above 2-3°C) ✓ Integrate metrics beyond GDP: mortality, inequality, ecosystem degradation ✓ Model cascades and second-order effects The crucial insight: climate change introduces risks exceeding existing economic frameworks. The response is not waiting for perfect models, but recognizing that avoiding irreversible outcomes is cheaper than pricing them after the fact. For long-term investors: climate risk cannot be fully diversified away. It's a systemic risk requiring fundamentally different strategies. #climaterisk #climateeconomics #systemchange #financialrisk #sustainablefinance

How do we estimate climate change macroeconomic risks in The World Bank's Country Climate and Development Reports? We just published a methodological paper that present a methodology used in many of them, with our partners at Industrial Economics (IEc). The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability - with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. I think there are strong complementarity between empirical approaches (which measure historical aggregated impacts and are key for calibration and validation) and process-based modeling (which can consider possible thresholds in the future and run policy counterfactuals). The paper is here: https://lnkd.in/gpAURDV5. Comments welcome! Kodzovi ABALO, Ph.D, Brent Boehlert, Thanh Bui (Tania), Andrew Burns, Unnada Chewpreecha, Charl Jooste, Florent McIsaac, Kim Smet, Kenneth Strzepek, and Diego Castillo and Heather Ruberl.

#WeatherDisasters can inflict macroeconomic damage. In a new Bank for International Settlements – BIS working paper, Torsten Ehlers, Carlos Madeira, Shim Ilhyock and I seek to quantify these effects for up to 151 countries over the past quarter-century. What we find is striking: negative effects on #GDP can be quite sizable and long-lived: -2%, -1% and -0.4% after the average-size #Droughts, #Landslides and #Wildfires, respectively, over four years. At the sectoral level, we find that #Agriculture-#Forestry-#Fishing and #Mining-#Construction-#Water-#Energy are negatively affected by several types of weather disaster. Most types of weather disaster have relatively small and short-lived effects on #Inflation, but with larger and more persistent increases in #FoodPrices than in the other components of #CPI. Encouragingly, #FiscalSpace and #Insurance can reduce the negative impact of natural disasters. Our results underscore that #PhysicalRisks are too important to ignore, and that their impact is of first-order importance for the core mandates of #CentralBanks. The optimal #MonetaryPolicy response depends crucially on the nature of the shock and its impact on aggregate #Supply and #Demand conditions. This remains an important area for further #Research to support better evidence-based #PolicyMaking. With many thanks to all those who provided comments on the paper, including Gaston Gelos, Benoit Mojon, Hyun Song Shin, Frank Smets and Alexandre Tombini, and to Rafael Guerra, Alejandro Parada Cervantes and Pablo Tomasini for excellent research assistance. #Climate #Weather #NaturalDisasters #PriceStability https://lnkd.in/etCDexT8

Did we miss something in our climate models? Most people think about climate change as rising temperatures. Hotter summers. Warmer winters. And economists measured the damage accordingly — looking at how local temperature changes affect local economies. The answer they kept getting: modest. Around 1-2% of GDP per degree of warming. Manageable, almost. Research by Bilal & Känzig (Stanford/Northwestern, 2024, recent laureates of the Best Young Economist Prize in France) asked a different question.  What happens when you look at global temperature — oceans included — rather than local thermometers?  The answer changes everything. Global warming doesn't just make places warmer. It destabilizes the entire climate system. A 1°C rise in global temperature correlates with: 40% more extreme wind events  50% more extreme precipitation events  Significantly more frequent droughts Local temperature measurements miss all of this. Because storms, droughts and extreme precipitation aren't products of how warm your country is — they are products of ocean temperatures and atmospheric dynamics across the entire planet. And when you look at ocean warming specifically, it turns out to be the dominant driver of economic damage from climate change — a factor almost entirely absent from previous economic models. The result: climate damages are 6x larger than we thought. We weren't measuring the wrong problem. We were measuring it from the wrong vantage point. WeForest Rob de Laet Jonah Wittkamper Leslie Johnston, M.Sc. Thomas W. Crowther Eric Wilburn Celia Francis Jon Schull Robert Nasi Mark Galvin Johannes van de Ven Johan Rockström Bill Liao Gary White Alexander Watson Adrien Bilal Tim Christophersen #water #climate

At the UK House of Lords today to discuss the macroeconomic losses associated with #ClimateChange, economics of #sustainability, and why taking action now could result in 9x return on investment! More specifically, I discussed results from two of our recent work: (1) Motivated by the need to inform policy decisions, we hypothesize that without substantial #mitigation and #adaptation efforts, global GDP per capita could decline by up to 24 percent under high-#emissions climate scenarios by 2100. To test this hypothesis, we conduct a series of counterfactual exercises, investigating the cumulative income effects of annual #temperature increases by the end of the century. Our findings reveal significant disparities in income losses across the 174 countries in our sample, highlighting that the impacts of climate change are not uniform but depend on the projected paths of temperatures and their variability. Want to find out more, check out our latest paper in PLOS Climate "Rising temperatures, melting incomes: Country-specific macroeconomic effects of climate scenarios" with Mehdi Raissi at the International Monetary Fund: https://lnkd.in/eFkfGyZn (2) I also mentioned that the cost of #climate inaction is huge and referred to our recent work, which discusses why investing in #climate #action makes good economic sense! A short summary below: #ClimateChange slows growth and weakens resilience and, therefore, hinders our collective ability to achieve many of our common priorities, including maintaining our #health and #security. Without the investment necessary to limit further global #warming, the economic growth and #resilience on which the world relies will be severely diminished along with societies’ ability to achieve their broader goals. We show that the return on this #investment is compelling. The net cost of inaction—that is, the cost of not addressing climate change after accounting for the investment required for mitigation and adaptation—equates to 11% to 27% of cumulative economic output. The average of this range is equivalent to three times global #health care spending until 2100 or eight times the amount needed to lift the world above the global poverty line until 2100. Want to find out more? Read our latest work at the University of Cambridge #climaTRACES Lab with our brilliant colleagues at Boston Consulting Group (BCG): Annika Zawadzki, Sylvain Santamarta, Amine Benayad, Sahradha Kämmerer, Annalena Hagenauer, Lars Holm, Hamid Maher, and Edmond Rhys Jones, here: https://lnkd.in/eQTeish9 🎯 We are now working with my former Executive MBA programmes at Cambridge students: Kanhu Pattnayak, Ash Shrivastav, and Abhi Kohok to connect climate science and climate economics to financial metrics with real business applications, we call this project Cantab Alpha, more soon! CRASSH | Cambridge Judge Business School | King's College, Cambridge | Gates Cambridge