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Will Climate Change Shrink the Global Economy?

That might come as a surprise to many readers, including those who take an active interest in the reporting on climate and the economy that appears in mainstream news media. But the story is more complex than the headlines make it look.

What the media say

Readers may, for example, have seen a 2018 headline on the CNN website read “Climate change will shrink US economy and kill thousands, government report warns.” The report in question was the U.S. government’s just-released Fourth National Climate Assessment. CNN went on to say,

A new US government report delivers a dire warning about climate change and its devastating impacts, saying the economy could lose hundreds of billions of dollars — or, in the worst-case scenario, more than 10% of its GDP — by the end of the century.

Or consider a story in Science Daily based on a 2019 study by Matthew E. Kahn and colleagues, which was published as a working paper by the National Bureau of Economic Research. According to the Science Daily version,

Under a “business as usual” emissions scenario, average global temperatures are projected to rise over four degrees Celsius by the end of the century. This would cause the United States to lose 10.5% of its GDP by 2100 — a substantial economic hit, say researchers.

Perhaps readers also remember a widely publicized 2017 article by David Wallace-Wells in New York Magazine, which described an uninhabitable earth and a devastated global economy by the end of the century. According to Wallace-Wells,

The most exciting research on the economics of warming has also come from [Solomon] Hsiang and his colleagues, who are not historians of fossil capitalism but who offer some very bleak analysis of their own: Every degree Celsius of warming costs, on average, 1.2 percent of GDP (an enormous number, considering we count growth in the low single digits as “strong”). This is the sterling work in the field, and their median projection is for a 23 percent loss in per capita earning globally by the end of this century (resulting from changes in agriculture, crime, storms, energy, mortality, and labor.)

Tracing the shape of the probability curve is even scarier: There is a 12 percent chance that climate change will reduce global output by more than 50 percent by 2100, they say, and a 51 percent chance that it lowers per capita GDP by 20 percent or more by then, unless emissions decline. By comparison, the Great Recession lowered global GDP by about 6 percent, in a one-time shock; Hsiang and his colleagues estimate a one-in-eight chance of an ongoing and irreversible effect by the end of the century that is eight times worse.

The scale of that economic devastation is hard to comprehend, but you can start by imagining what the world would look like today with an economy half as big, which would produce only half as much value, generating only half as much to offer the workers of the world.

(The research attributed to Hsiang was published by Marshall Burke, Solomon Hsiang, and Edward Miguel in Nature in 2015.)

What the research actually says

The problem is, none of these stories accurately represent the research on which they are supposedly based. None of that research projects that the global economy at the end of the century will be smaller than it is now. Instead, what it actually says is that the economy will be smaller than it would be without climate change, or with less climate change. But according to the standard models, world GDP will be a lot bigger than it is today.

When you think about it, the forecasts of continued global warming and continued economic growth are hardly surprising. After all, there is a fundamental causal relationship between the two. In the standard models, economic activity is the principle source of the carbon emissions that drive climate change to begin with. Given the structure of those models, if the economy were to begin shrinking rather than growing, then other things equal, climate change itself would slow.

Just how large would we expect the economy be by the end of the century if we were to ignore the effects of climate change? That depends on a number of assumptions about technology, population, and economic policies. For example, the OECD thinks the total output of the global economy will grow at three percent for the next 50 years. Projecting that rate to the end of the century would make global real GDP about fourteen times higher in 2099 than in 2010.

Burke et al. assume, somewhat more conservatively, that without climate effects, per capita GDP in each country would grow from 2010 to 2099 at the same rate it grew from 1980 to 2010. That implies an unweighted average annual growth rate of 2.35 percent, which would make per capita global GDP about eight times higher in 2099 than in 2010. If, as they estimate, climate change were to cut real GDP by 23 percent relative to what it otherwise would be, total output of the global economy would still be six times higher in 2099 than in 2010. If we instead use the OECD growth estimate as our baseline, it would be eleven times higher, even after deducting a 23-percent climate penalty.

In their NBER paper, Kahn et al. compare the impact on global GDP of a scenario in which global temperatures increase by 4⁰ C between 2019 and 2100, rather than the 2⁰ C called for by the Paris Agreement. Their estimate is that the higher rate of warming would reduce global GDP by 7.22 percent relative to the value it would reach under the lower rate. Applying the OECD growth estimate, that would mean that with 4⁰ of warming, world GDP would be about 13 times higher in 2100 than it is now, rather than 14 times higher. Under the lower growth rate baseline used by the Burke team, global GDP would be about 7.4 times larger in 2100 than it is now rather than 8 times larger.

Kahn et al. provide the following chart, which compares estimates of the economic impact of climate change from a number of previous studies. Their own estimate is given as a range shown by the gray wedge in the diagram. Note that the estimate by Burke et al. is the most pessimistic among the studies included in the chart.

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A country-by-country perspective

Global averages do not tell the whole story. Some countries will be impacted much more strongly by climate change than others. Data that Burke has posted online allow a complete country-by-country comparison of growth with higher and lower degrees of global warming. The following chart, based on those data, shows the ratio of estimated 2099 GDP per capita to 2010 GDP per capita for 165 countries with less climate change (blue dots) and with more severe climate change (red dots). The points are arranged along the horizontal axis according to 2010 GDP per capita, so for each country, the blue dot lies directly above or below that same country’s red dot.

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Although most countries experience slower growth under greater warming, the methods used by the Burke team suggest that some countries would actually grow faster. Those countries are shown in the diagram by the red dots that lie above their corresponding blue dots. The biggest winners would be countries that were both cold to begin with and grew rapidly in the base period, with Mongolia, Finland, Iceland, and Russia at the top of the list. (It is worth noting that although the Kahn team project higher average growth rates, they doubt that any countries would actually grow faster with warming than they would otherwise.)

At the other extreme of the scale, some countries (those red dots below the horizontal “1” line) would experience absolute declines income. The biggest losers are countries that were hot to begin with and grew slowly in the base period. Saudi Arabia, Kuwait, Oman, and the United Arab Emirates are projected to have the largest losses from climate change. According to Burke’s projections, India, despite its fast growth early in the twenty-first century, would also suffer an absolute loss of income by 2099. Under a scenario of 4⁰ warming, it would have the lowest per capita income of any country by the end of the century.

As Burke and colleagues put it,

[O]ur findings indicate that if climate change proceeds unmitigated, many people in the future will actually be poorer than they are today . . . we can’t just assume that everyone will keep getting richer.

Still, to say that some people in some countries will be poorer than they are today is a lot different from saying that climate change will devastate the global economy as a whole. It also assumes that rich, fast-growing countries will block immigration from poorer, hotter countries. That is certainly a possibility, but one that is driven by politics, not by science or economics.

What does it all mean?

So, does all this mean that we can complacently look forward to a world that is warm but rich ? That our journey to the future will be as comfortable as that of an upstate New Yorker of today who decides to spend the winter in Florida? Not so fast. Three major caveats stand in the way of complacency.

The first caveat is that the standard models only promise us a future with a higher GDP — not necessarily a future with a higher standard of living. GDP, after all, stands for gross domestic product. It is called “gross” because it includes investment in new buildings, factories, and infrastructure, but does not subtract the depreciation or premature destruction of investments made previously.

  • If a hurricane washes away a thousand homes, and those homes are rebuilt on higher grounds, GDP counts the value of the new homes built but does not subtract the value of those that were destroyed.
  • If a coastal city has to spend a billion dollars to build massive seawalls to keep out the ocean, the seawalls count as an addition to GDP, even though, without warming, the same capital could have built enough low-income housing to end homelessness.
  • If, to slow but still not stop global warming, we shut down coal- and gas-fired power plants that, technically speaking, have years of service life remaining, and spend billions on a crash program to replace them with wind turbines, GDP counts the turbines as a plus but deducts nothing for the usable, but abandoned, fossil fuel plants.

In short, to the extent that we will have to spend a big chunk of our future, larger, GDP playing defense against a warming climate, there will be that much less left over to fund a higher standard of living.

The second caveat is that a warmer but wealthier world is only the most likely outcome — not the only possible one. There are many low-probability but really scary scenarios that could make things much worse than the standard models used by the Burke or Kahn teams envision. Those include the “methane gun” hypothesis , which foresees a massive release of greenhouse gases from the deep oceans or Arctic permafrost. They include a catastrophic collapse of the Greenland icecap, instead of the slow drip-drip that standard models predict. A new study of “missing economic risks” by a large international team of researchers provides a sobering catalog of things the standard models leave out.

That is why serious economists view the problem of climate change as one of risk management. Among the best-known advocates of that approach are Gernot Wagner of the Environmental Defense Fund and the late Martin Weitzman of Harvard. A website that provides numerous links to their books and articles summarizes their thinking this way:

If you had a 10 percent chance of having a fatal car accident, you’d take necessary precautions. If your finances had a 10 percent chance of suffering a severe loss, you’d reevaluate your assets. So if we know the world is warming and there’s a 10 percent chance this might eventually lead to a catastrophe beyond anything we could imagine, why aren’t we doing more about climate change right now? We insure our lives against an uncertain future–why not our planet?

In their view, measures to mitigate and adapt to climate change policies are worth the costs they entail now in order to avoid small risks of large future losses. They point out that prudent business firms pursue such risk management strategies all the time, diverting resources from short-term profits to increase the chance of long-term survival. Farmers insure their barns, bankers set aside a cushion of capital against loan losses, hospitals install backup generators in case the power goes out in the middle of someone’s open-heart surgery.

Finally, there is a third, purely subjective caveat: We simply might not like a future world with great wealth but widespread environmental devastation. To me, such a future sounds uncomfortably like life in, say, today’s United Arab Emirates — a world where you can ski, but only on artificial snow sprinkled on artificial indoor mountains; where you can smell the flowers, but only in a garden; and where you can see exotic animals, but only in a zoo.

Economics is supposed to be about trade offs. Personally, I’d be happy to trade some future GDP for a greener, healthier planet. It has always seemed strange to me that opponents of action on climate change should think that the goal of government should be to maximize GDP without considering other values.

The bottom line

So, what is the answer to our question? Will climate change shrink the global economy?

Probably not, at least not in this century and not according the models used most widely in economics and climate science. If we pursue business as usual, a world of greater economic wealth amid a severely degraded environment is the most likely outcome.

Those of us who favor action on climate change need to remember that our credibility rests, in large part, on our intellectual honesty. We love to repeat the mantra that “the vast majority of actively publishing climate scientists — 97 percent — agree that humans are causing global warming and climate change.” But we should be honest — 97 percent do not support the methane gun hypothesis, a near-term collapse of the Greenland ice cap, or other events sufficiently catastrophic to send the entire global economy into a nosedive. Such tail risks may well be worth thinking about — but we should be careful to distinguish worrisome tail risks from the predictions of mainstream, peer-reviewed science.

At the same time, we should not succumb to complacency. If we don’t like the warmer, wealthier, stormier, and less environmentally diverse future that the standard models predict, we can do something about it. Neither economics nor climate science actually doom us to such a future. Instead, we are choosing to be doomed. We could instead choose to invest now in measures to mitigate and adapt to climate change.

Or not.

This story is adapted from an earlier commentary published at Photo courtesy of

Addendum (11/04/19): In a more recent publication (Business Insider, Feb. 2019) Wallace-Wells offers a revised interpretation of research done by Hsiang, Burke, and colleagues, making it clear that they are warning that climate change will make the future economy smaller than it would be without climate change, not smaller than it is now.

Written by

Economist, Senior Fellow at Niskanen Center, Yale Ph.D. Interests include environment, health care policy, social safety net, economic freedom.

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