Climate Change Is Affecting the Economy. But Proving So Is a Challenge.

Alice Hill is the David M. Rubenstein senior fellow for energy and the environment at the Council on Foreign Relations. Priyanka Mahat is a research associate for climate change policy.

Estimating the economic damage from worsening weather extremes is wickedly hard. By comparison, assessing the price of cutting the pollution that causes climate change is “simple stuff” [PDF], according to William Nordhaus, who won the 2018 Nobel Prize in Economics for his climate modeling. The challenge of modelling climate loss has not kept economists from trying. Their current efforts, however, almost certainly underestimate the costs, even as emerging studies show the price is increasing. With atmospheric carbon likely at its highest level in three million years, it is important to understand the significant limitations of current damage estimates.

One metric that economists use to measure climate damage is the projected loss to global gross domestic product (GDP). In 2017, Nordhaus estimated that a rise in average temperature of over 3°C (5.4°F) above preindustrial levels would reduce global GDP by 2.1 percent by 2100 and that a 6°C (10.8°F) increase would cause GDP to decline by just 8.5 percent. More recent estimates of GDP decline now range up to 85 percent by 2100 for a 2°C (3.6°F) world. Other experts liken the damage from a 3°C world to that wrought by the 1929 Great Depression—but on a permanent basis. Whatever the final number comes to, some researchers are beginning to estimate larger economic impacts than previously thought.

The multifaceted nature of climate change adds a high degree of complexity to the task of climate modelling. Climate change affects virtually everything—from public health to the structural integrity of existing infrastructure to the viability of ecosystems. Consider heat. Heat degrades power generation and transmission when power plants shut down because the waters that cool them have become too warm and wires carry lower loads. It causes trains to come to a halt as tracks kink under elevated temperatures. It undermines public health as people suffer more heat-related illnesses. It limits academic achievements as kids struggle to learn in hot conditions. It wilts crops and bleaches coral reefs. And water availability shrinks as evaporation increases. Capturing the economic costs of those events is a Herculean challenge. 

Nordhaus’ groundbreaking work reveals this difficulty. In his 1991 modelling, Nordhaus assumed that climate change would not have a direct impact on 87 percent of U.S. industry because that work takes place in “carefully controlled environments.” That assumption, however, ignored the impacts climate change has on indoor industries. For example, excessive rainfall floods factories, wildfires burn power plants, extreme heat buckles roads, droughts collapse fresh water supplies needed by industry, and the spread of mosquitoes sickens workers. All these events and more degrade economic productivity by disrupting supply chains, damaging infrastructure, increasing energy prices, and reducing labor productivity. Because climate repercussions play out in multiple dimensions in uncertain ways, capturing the panoply of costs is exceptionally challenging.

Another limitation of most climate models is that they typically focus on one climate extreme: increase in temperatures. By limiting climate stressors [PDF] to one variable, they miss the damage from other effects such as sea-level rise and extreme rainfall. The models often fail to capture acute weather events, like droughts that decimate crops or wildfires that incinerate energy infrastructure. One study from 2025 found that even newer econometric models severely underestimate losses by accounting only for the impact of local weather on national economies. Adding the effect of global weather on economic growth increased projected end-of-century GDP losses from approximately 11 percent to nearly 40 percent.

Climate models also struggle to capture the nonlinearity of climate change. If climate moved in a line, each 0.1°C (0.18°F) of warming would cause proportionally larger impacts. But that is not true. For every tenth of a degree of warming, the consequences grow disproportionately larger. Earlier models typically do not capture this nonlinearity. Models also do not usually reflect the potential for climate tipping points, like the thawing of permafrost or ice sheet disintegration, that introduce abrupt, irreversible changes. One study warns that there is a 10 percent chance that tipping points could at least double economic costs.  

As empirical knowledge has advanced, newer studies have started to account for the nonlinear effects from critical thresholds and tipping points, intersectoral shocks, and nonmarket damages to better reflect systemic threats. Even so, the literature acknowledges the deep uncertainties that remain: gaps in the understanding of climate-economy interactions, the potential for earth system shifts with unpredictable consequences, and the risk of extreme outcomes associated with heavy-tailed temperature distributions. The Intergovernmental Panel on Climate Change (IPCC) acknowledges in its Sixth Assessment Report the significant challenge of identifying a “robust” range of estimates for economic impacts. As models increasingly incorporate emergent evidence previously unaccounted for, damage estimates will likely continue to rise. 

One thing that models do agree upon is that the costs of climate change will hit emerging markets and developing countries the hardest. In fact, while earlier models simply relied on global averages—largely based on developed country data—to estimate damages, recent studies have used spatially disaggregated regional and developing country data that reveal disproportionately larger losses in poorer countries. Those nations are often in areas already hard hit by climate-worsened extremes, and they lack the economic means to invest in adaptation to lessen the damage. 

Current economic models can inform understanding of climate change. The likely failure of those models to appreciate the magnitude of future loss, however, raises the specter of a too narrow focus on the cost of stopping the harmful pollution without properly valuing the catastrophic losses that could lie ahead.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy