Scientists warn that current economic models dramatically underestimate the impact of climate change on global economies. Governments, central banks, and investors rely on frameworks that fail to reflect the growing risks of a warming world.
A new report from the University of Exeter’s Green Futures Solutions team, in partnership with financial think-tank Carbon Tracker, states that today’s flawed damage models create a false sense of security. Researchers urge stronger collaboration between climate scientists, economists, regulators, and investors before global temperatures rise two degrees above pre-industrial levels. Crossing this threshold could trigger catastrophic tipping points, including mass biodiversity loss and accelerated ocean acidification.
Dr Jesse Abrams, lead author of the report, says, “Current economic models systematically underestimate climate damages because they cannot capture cascading failures, threshold effects, and compounding shocks. These risks could undermine the foundations of economic growth.”
Financial projections ignore extreme weather
Traditional economic modelling links damages to global average temperatures while ignoring climate-fueled extreme events. Heatwaves, floods, and droughts often cause immediate and lasting economic losses that remain unaccounted for in projections.
Last summer, extreme weather in Europe caused short-term economic losses of at least €43 billion. Experts estimate the total costs could reach €126 billion by 2029. A study led by Dr Sehrish Usman at the University of Mannheim, in collaboration with European Central Bank economists, found that heatwaves, droughts, and floods affected a quarter of EU regions in 2024. Immediate losses accounted for 0.26 per cent of EU economic output, but these figures likely underestimate the true costs. The study excluded compounding events, such as simultaneous heatwaves and droughts, as well as wildfires, hail, and wind damage.
In South and Southeast Asia, monsoon flooding caused losses of 500 billion baht (around €133 billion) in Thailand alone. Scientists attribute the severity to climate-driven tropical storms and widespread deforestation, which worsened destruction.
Climate damages are not marginal
The report emphasizes that most economic models treat climate change as a marginal shock to a stable system. Researchers argue this assumption no longer reflects reality, as climate change disrupts multiple sectors simultaneously.
“Climate change is likely to reshape economic structures themselves,” the report states. “It affects where people live, what can be produced, how infrastructure functions, and which regions remain economically viable.” This distinction matters for policymakers and financial institutions because system-altering risks cannot be measured with models built for small, reversible shocks.
Extreme weather can trigger compounded effects that ripple across food systems, supply chains, and global markets. Many models still treat climate damages as isolated events, ignoring how risks accumulate, reinforce one another, and push systems toward instability.
The problem with GDP
Economic assessments often misrepresent climate-related GDP losses. A projected 20 per cent reduction, for example, does not mean a direct cut to current economic output. Economists assume three per cent annual GDP growth continues indefinitely, then subtract climate-related losses from a hypothetical future total. The models never account for the possibility that economies could shrink structurally.
GDP also fails to reflect broader climate damages. It overlooks human mortality, inequality, cultural losses, displacement, ecosystem degradation, and disruptions to social life. In some cases, GDP may even rise after disasters due to reconstruction activity, masking welfare losses entirely.
As a result, GDP-focused assessments create a false sense of resilience for policymakers and financial institutions. The report recommends complementing GDP with alternative metrics that reflect lived economic reality and long-term stability.
