Flawed economic models could spell disaster for the global economy as the climate crisis intensifies, experts warn. The consequences of this could be far more severe than the 2008 financial crash, they say, because we can't simply 'bail out the Earth' like we did the banks. As global temperatures rise, the risks of extreme weather events and climate tipping points are escalating. However, current economic models used by governments and financial institutions fail to account for these potential shocks, instead predicting steady economic growth despite rising temperatures. This is a critical issue because these models assume the future will mimic the past, even though burning fossil fuels is pushing the climate system into uncharted territory. Climate tipping points, such as the collapse of critical Atlantic currents or the Greenland ice sheet, could have devastating global consequences for society. Some of these tipping points may already be at or very close to their thresholds, according to recent studies. The researchers from the University of Exeter and the Carbon Tracker Initiative warn that combined extreme weather events could decimate national economies. Their report emphasizes the need for governments, regulators, and financial managers to pay closer attention to these high-impact but low-probability risks. Avoiding irreversible outcomes by reducing carbon emissions is far more cost-effective than dealing with the aftermath of climate-related disasters. Dr. Jesse Abrams from the University of Exeter highlights the limitations of current economic models, stating that they fail to capture the cascading failures and compounding shocks that define climate risk in a warming world. This fundamental misreading of risks by financial institutions and policymakers could lead to a situation where recovery from a climate-induced crash is nearly impossible, similar to the aftermath of the 2008 financial crisis. Mark Campanale, CEO of Carbon Tracker, warns of widespread complacency among investors and policymakers due to flawed economic advice. Some government departments, he says, trivialise the economic impacts of climate change to avoid making difficult choices, which could have catastrophic consequences if left unchecked. Hetal Patel from Phoenix Group, a major long-term investor, underscores the importance of accurately assessing physical risks. Underestimating these risks can distort investment decisions and underestimate the real-world consequences that will affect society as a whole. Actuaries have predicted that by 2025, the global economy could face a 50% loss in GDP between 2070 and 2090 due to catastrophic climate shocks, a significantly higher estimate than previously thought. The new report, which draws on expert judgments from 68 climate scientists, reveals that while economic models traditionally link climate damages to average temperature changes, societies and markets suffer most from extreme events like heatwaves, floods, and droughts. Another critical finding is that GDP can mask the true cost of climate damage by not accounting for deaths, ill health, social disruption, and degraded ecosystems. In fact, GDP can increase after disasters due to spending on recovery efforts. The report suggests that instead of waiting for perfect risk models, more emphasis should be placed on extreme events and the vulnerability of the entire financial system. Investors are urged to accelerate the transition away from fossil fuels to avoid large future losses, as a fiduciary duty. Current economic models, despite appearing precise, are described by scientists as wildly optimistic. Dr. Abrams explains that while some models predict a 10% GDP loss at 3-4 degrees of global heating, physical climate scientists warn that the economy and society will cease to function as we know it, indicating a significant mismatch between models and reality. Laurie Laybourn from the Strategic Climate Risks Initiative highlights the urgency of the situation, stating that we are experiencing a paradigm shift in the speed, scale, and severity of climate-driven risks. However, many regulations and government actions are dangerously out of touch with the current reality.
