The financial cost of climate change has been significantly underestimated, according to new research which says it could cut the world’s GDP by almost half.
The stark warning comes from a team led by Timothy Neal at UNSW Sydney. Their study, which factors in the full global reach of extreme weather, suggests the damage to the world’s economy could be far worse than previously thought.
Until now, economic models predicting the impact of climate change on global GDP have suggested only mild to moderate harm.
However, these models often assume that a country’s economy is only affected by weather events within its borders. The wider consequences—such as how extreme weather in one nation disrupts food supplies, trade and production elsewhere—have largely been ignored.
By correcting these flaws and incorporating global interconnections into their analysis, Neal’s team found that if the planet warms by more than 3°C by 2100, the global economy could shrink by 40%.
Previous models had estimated losses of around 11% under similar warming scenarios. The scale of destruction would devastate economies worldwide, with no country spared.
Colder nations still hit
The study also challenges a long-held belief that colder nations like Russia and Northern Europe could benefit from climate change.
Neal’s research suggests the financial impact will be so severe that all regions will suffer.
The reason lies in how global warming intensifies extreme weather, leading to widespread droughts, storms, floods and heatwaves that disrupt food production, slow trade,and make workers less productive.
As these shocks occur more frequently and across multiple regions at once, the ability of economies to recover will be significantly reduced.
Previous economic modeling has argued that reducing emissions too aggressively could hurt economic growth.
As a result, some policies have targeted a temperature rise of 2.7°C, in line with current projections. However, Neal’s study suggests that keeping warming to 1.7°C—closer to the Paris Agreement’s most ambitious target—would be the optimal balance between short-term economic costs and long-term financial stability.
The findings add to growing evidence that the economic consequences of climate change have been drastically underestimated.
While cutting emissions may come at an initial cost, failing to act could lead to catastrophic financial losses that threaten global stability.
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