Does Climate Change Threaten the Global Economy’s Future?

Climate change poses many urgent risks and impacts that are expected to affect the economy negatively. Projections of economic damage underscore the pressing need for climate action to reduce GHG emissions, adapt to climate change, and help vulnerable countries build resilience and adapt to climate change.

An April 2024 study published in Nature, “The economic commitment of climate change,” says that even if the world dramatically slashes its CO2 emissions starting today, the world economy is committed to an income reduction of 19% within the next 26 years.

Researchers at the Potsdam Institute for Climate Impact Research (PIK) based this analysis on empirical data from more than 1,600 regions worldwide over the past 40 years and found that the damages, equivalent to 38 trillion dollars per year, are six times larger than the mitigation costs.

Gradual increase in temperatures is the most significant economic threat

Researchers note that the most significant threat will mainly come from the steady increase in average temperature, which could decrease labour productivity and crop yields, rather than from individual extreme events like wildfires or hurricanes. For example, an average U.S. or German income could drop by 11%, while a French income may drop by 13%.

“Our analysis shows that climate change will cause massive economic damages within the next 25 years in almost all countries around the world, also in highly-developed ones such as Germany, France and the United States,” says PIK scientist Leonie Wenz, who led the study. “These near-term damages are a result of our past emissions. We will need more adaptation efforts if we want to avoid at least some of them. And we have to cut down our emissions drastically and immediately – if not, economic losses will become even bigger in the second half of the century, amounting to up to 60% on the global average by 2100. This clearly shows that protecting our climate is much cheaper than not doing so, and that is without even considering non-economic impacts such as loss of life or biodiversity” (38 trillion dollars, 2024).

The study finds that poorer countries will see more reductions in their average incomes than more affluent countries. Lower latitude countries will be most impacted, but higher latitude countries will see an average benefit from rising average temperatures.

“Our study highlights the considerable inequity of climate impacts: We find damages almost everywhere, but countries in the tropics will suffer the most because they are already warmer. Further temperature increases will, therefore, be most harmful there. The countries least responsible for climate change are predicted to suffer income loss that is 60% greater than the higher-income countries and 40% greater than higher-emission countries. They are also the ones with the least resources to adapt to its impacts. It is on us to decide: structural change towards a renewable energy system is needed for our security and will save us money. Staying on the path we are currently on, will lead to catastrophic consequences. The temperature of the planet can only be stabilized if we stop burning oil, gas, and coal,” says Anders Levermann, Head of the Complexity Science Research Department at the Potsdam Institute and co-author of the study (38 trillion dollars, 2024).