The economic impact of climate change

Anna Triponel

April 28, 2024
Our key takeaway: A new study published in Nature by researchers from the Potsdam Institute for Climate Impact Research, Potsdam University, and the Mercator Research Institute on Global Commons and Climate Change is a dramatic wake-up call. They have found, by using methods that integrate data from over 1,600 regions around the world, that the global economy will shrink by at least 19% in the next 26 years because of the carbon that we have already emitted. And they have also found that these losses will be unevenly distributed across the globe, with warmer countries closer to the equator facing higher economic impacts from heat, changes in rainfall patterns and flooding. They are calling these economic impacts our 'committed losses' and the numbers are shocking. These economic losses will only get worse if we don’t take immediate action to mitigate climate change, since the costs of new emissions will compound with our committed losses. The study allows us to conclude what we knew but can now better demonstrate: the costs of inaction by far exceed the costs of climate action and net-zero. It also allows us to conclude that delaying climate action will lead to even severe economic impacts to regions that are already vulnerable. This knowledge should shake up business strategies and policymaking and galvanise large-scale action to secure a financially stable and equitable future for all.

Nature published The economic commitment of climate change by researchers from the Potsdam Institute for Climate Impact Research, Potsdam University, and the Mercator Research Institute on Global Commons and Climate Change (Maximilian Kotz, Anders Levermann & Leonie Wenz), which estimates the economic costs of climate change:

  • Economists are now giving us a detailed picture of the costs of climate change. This study applies new econometric models to predict how climate change will impact our economy. While similar studies had been done before, this study is pioneering a more granular economic model that integrates data from over 1,600 regions in the world as well as a wide range of climate variables – such as daily temperature, annual precipitation, annual number of wet days and extreme rainfall days – which are necessary to better understand climate change impacts in factors like crop yields, workers’ productivity, supply chain stability, and asset value. Past economic studies had looked at the costs of climate change from a big-picture perspective: they had only measured the costs of temperature changes at a national level. However, “by accounting for these extra climatic variables at the sub-national level, we aim for a more comprehensive description of climate impacts with greater detail across both time and space,” the scientists explain. Therefore, this paper gives us a clearer picture of which places will be economically impacted, what kind of income losses to expect and how some places will likely suffer much more than others.
  • The result? Global economy will shrink by at least 19% in the next 26 years because of past emissions. The study finds that, due to past emissions, the global economy is already “committed to an income reduction of 19% within the next 26 years independent of future emission choices.” That is, we are already on the path to suffer great economic losses from climate change in the coming years, even if we take meaningful and global climate action now. Scientists are calling these 'committed losses', which are also unevenly spread across the globe: warmer, less wealthy regions near the equator will face the biggest economic hits, while cooler regions in higher latitudes might see milder impacts. Awareness of these ‘committed losses’ makes taking immediate climate action even more critical. It also calls for action that acknowledges the inequalities in the impacts, since the study finds that the regions with less responsibility for climate change are also the most vulnerable to its economic losses.
  • Leveraging this knowledge for better and more strategic climate action today. Understanding the economic losses from climate change allows businesses to design more effective climate and transitional strategies. As the study suggests, "projections of the macroeconomic damage caused by future climate change are crucial to informing public and policy debates about adaptation, mitigation and climate justice." This new information can empower companies to proactively plan and justify climate actions. It can also enable businesses to tailor climate action, adaptation and human rights strategies to the specific economic risks faced by each region and integrate knowledge of these unequal impacts into risk management and more equitable climate policies. Most importantly, awareness of the magnitude of the economic costs of climate change allows business – as well as governments and society as a whole – to better assess the cost of not taking action to mitigate climate risks. By describing the monumental economic impacts of past emissions, the study offers a clear call to action to businesses and governments: the costs of inaction greatly exceed the costs of meaningful climate change mitigation and adaptation.

You may also be interested in

This week’s latest resources, articles and summaries.