The Economic Cost of Climate Change May Be Far Worse

The Damage Function

In the 1990s, Nobel Prize-winning economist William Nordhaus calculated that a 3°C rise in temperatures would lower global GDP by more than 2%. But new research suggests much more dramatic numbers.

Testing Temperature

A mere 1°C additional rise in temperature could already amount to as much as a 12% loss in global GDP, according to a working paper from economists at Northwestern University and Harvard.

Extreme weather from excessive heat or cold spells, to storms, floods, or droughts, have already caused economic fallout. And those types of weather events are only getting more frequent.

Earlier this year, recurring weather phenomenon El Niño contributed to a dry spell in Western Africa, which created a cocoa shortage and drove cocoa futures to a record high. And that’s just one of many examples of weather affecting agriculture, farmers, traders, companies, and ultimately consumers.

Higher temperatures also increase the amount of carbon dioxide released into the atmosphere. The economists calculated that each metric ton of carbon dioxide effectively costs households $1,056, more than five times the EPA’s estimates of $190.

Climate Economics

There are limits to what economic models can tell us about our world, in part because different dynamics play out at the same time. For example, the period studied in the new working paper coincided with economic shocks in Latin America. It is a dilemma of the social sciences that we can’t observe things in a lab – our world keeps turning while we try to figure out answers to the big questions.

Even so, the research reiterates that there is an economic impact from climate change, and governments, companies and consumers alike need to pay attention.

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