A new study suggests global warming could slash global GDP by up to 30% per degree of warming and reshape climate policy debates.
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For decades, the economic consensus on climate change has depended on the assumption that even significant global warming would reduce world income by only a few percentage points. That assumption has shaped carbon pricing frameworks and international climate negotiations. But a new revised study argues that the economic damage from rising temperatures may be far larger than previously believed.
Established Consensus
Most economic models used to guide climate policy suggest that a permanent 1C rise in global temperature reduces global GDP by around 1-3%. These estimates are embedded in widely used integrated assessment models, including those that inform government calculations of the Social Cost of Carbon (SCC), a metric used to estimate the economic damage caused by emitting one additional tonne of carbon dioxide. Under this framework, climate change is serious but economically manageable. This reasoning has helped justify carbon prices in the range of US$100-200 per tonne in advanced economies, with many countries pricing carbon far below even that level.
But these models rely heavily on empirical studies that measure the impact of local, country-level temperature changes on economic output. Short-run weather fluctuations are observed, their economic effects estimated, and those effects extrapolated to longer-term warming scenarios. The new study suggests this approach may be understating the risk.
New Findings
In the recent working paper, published by the National Bureau of Economic Research, economists Adrien Bilal and Diego R. Känzig estimate that the macroeconomic damages from climate change may be larger than previously thought. The authors find that a permanent 1C increase in global temperature could reduce world GDP per capita by more than 20% in the long run, with some estimates approaching 30%.
Following a 1C global temperature shock, global output initially falls by around 2-3%, but the decline intensifies over several years, peaking at 12-18% after five to six years. The effects do not fully reverse, suggesting lasting damage to productivity and capital accumulation. Under a pathway in which global temperatures rise by roughly 2C above current levels by 2100 – broadly consistent with present policy trajectories – global GDP per capita could fall by more than 50% relative to a no-warming scenario.
Global vs. Local Temperature
The difference from previous research largely boils down to one question: which temperature metric matters most? Most earlier studies focus on local temperature variation, for example how a hotter-than-usual year affects agricultural output or labor productivity within a specific country.
The authors instead examine fluctuations in global mean temperature. Their argument is that climate change is a systemic transformation of the Earth’s climate system and not just a collection of local weather anomalies. Global temperature, they find, is strongly correlated with increases in extreme climatic events such as droughts, heatwaves, intense precipitation and wind extremes. Ocean warming, in particular, appears to drive much of the aggregate economic impact. Local temperature shocks, by contrast, show weaker links to these extremes.
What Does This Mean for Carbon Pricing?
The most consequential implication concerns the SSC. Governments use this metric to determine how high carbon prices should be. In theory, a carbon tax or emissions trading system should set a price on carbon that reflects the damage those emissions impose on society. By making pollution more expensive, carbon pricing aims to encourage companies and consumers to reduce emissions and invest in cleaner technologies.
Using their higher damage estimates, the authors calculate an SCC exceeding US$1,200 per tonne. Even at the lower bound of their confidence interval, the figure remains several times higher than current policy benchmarks. For comparison, carbon prices in the European Union’s Emissions Trading System have recently hovered around 80 euros (US$93) per tonne, while many jurisdictions price carbon at much lower levels.
If climate damages are indeed substantially larger than previously estimated, current carbon prices may dramatically understate the true economic cost of continued emissions. Under conventional models, unilateral decarbonization can appear costly because the costs of reducing emissions are borne domestically while the benefits (avoided climate damages) are shared globally. However, under the new estimates, large economies may find that the domestic benefits of emission reductions alone justify aggressive climate policy.
What Happens Next?
By focusing on global temperature rather than short-term local weather changes, the study challenges the way economists have traditionally tried to measure the economic risks of climate change. If rising global temperatures affect productivity, investment and the frequency of extreme weather more strongly than earlier research suggested, then the assumptions underpinning many economic models may need to be revisited.
This would have practical consequences. Governments often rely on these models when deciding how high carbon prices should be or how quickly to reduce emissions. This could mean governments might have to revisit carbon pricing frameworks. It could also influence long-term fiscal planning, as climate change would pose a larger threat to future economic growth. The implications extend beyond governments. Investors and financial institutions increasingly assess climate risk when making long-term investment decisions. Higher estimates of economic damage would suggest that climate change poses a greater macroeconomic risk than many financial models currently assume.
At the same time, larger damage estimates do not mean economic decline is inevitable. Rather, they strengthen the economic rationale for climate action. If the potential costs of inaction are significantly higher, then the returns on mitigation or green technology rise accordingly.
Climate change has often been framed as an environmental constraint on growth. This research suggests it may be something more fundamental: a determinant of growth itself.
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