The economic impact of the climate crisis will be 6 times higher than we think

Current studies predict an economic impact of the climate crisis of 1-2% of GDP for every +1°C

So far we have underestimated the damage that rising temperatures can do to our societies. And an entire order of magnitude. Most studies predict that each increase in temperature of 1,0 ºC corresponds to a decrease in GDP of about 1-2 percentage points. A study by the National Bureau of Economic Research on the economic impact of the climate crisis claims that the most reliable value is a decrease of 12%.

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Rethinking the economic impact of the climate crisis

Why this huge difference? Underlying this is a radical change in the approach of how to calculate the economic impact of the climate crisis. To estimate the effects on GDP, studies conducted so far use temperature changes at the national level. It’s a granular approach designed to capture certain phenomena. For example, the effects of heat waves, which can vary – a lot – even a few hundred kilometers away for several factors.

But this approach fails to account for a fundamental aspect of the climate crisis, the NBER study argues. The Earth’s climate system responds non-linear and global to changes. Also, and above all, as regards extreme climatic events, the phenomena on which most of the economic impact of the climate crisis depends.

To reflect this, the authors use a very different methodology from the traditional one, which relies on global temperature anomalies as a proxy for increasing the frequency and intensity of extreme events, integrating both the anthropic and the natural variability aspects of the Earth’s climate. From here, they then propose projections on the effects at national and local level.

The result? Each extra degree can erase 12% of GDP, on average. If we stay on a trajectory of global warming like the one we have today, by the end of the century we will have a 31% loss of prosperity compared to today. Including other variables, the conclusion is that the economic impact of the climate crisis is 6 times greater than previously thought.

Based on this data, the study then calculates the “true” social cost of carbon, that is, the cost that should be associated with every ton of CO2 we emit to compensate for the negative impacts it generates. Again, the difference is an order of magnitude depending on the approach used to estimate the economic impact. Using local temperatures leads to values around 150 dollars per ton of CO2, while the approach adopted in the study indicates 1,056 $/tCO2. The consequence? Mitigation and adaptation are far more affordable, and for more types of economies, than you think now. “The unilateral policy of decarbonisation is economically advantageous for large countries like the United States,” concludes the study.