Climate models are built on the assumption that the future will mirror the past, a premise that is increasingly flawed as the burning of fossil fuels propels the Earth into uncharted environmental territory. This critical oversight is now raising alarms among experts who caution that flawed economic models could lead to a devastating global financial crash, driven by the accelerating impacts of the climate crisis.
Economic Models Ignore Climate Shocks
Governments and financial institutions currently rely on economic models that forecast steady growth, only slightly hampered by gradually rising average temperatures. However, these models entirely fail to account for the risks posed by extreme weather disasters and climate tipping points, such as the collapse of critical Atlantic currents or the Greenland ice sheet. According to a new report from researchers at the University of Exeter and the financial thinktank Carbon Tracker Initiative, this omission is a fundamental misreading of the risks we face.
Unprecedented Financial Risks
Dr Jesse Abrams from the University of Exeter emphasised the severity of the situation, stating that current economic models cannot capture the cascading failures and compounding shocks that define climate risk in a warmer world. He warned that a potential financial crash triggered by climate breakdown would be far harder to recover from than the 2008 crisis, as we can’t bail out the Earth like we did the banks. The report highlights that combined extreme weather events could wipe out national economies, with tipping points having global consequences for society.
Widespread Complacency and Delay
Mark Campanale, CEO of Carbon Tracker, pointed out that flawed economic advice has led to widespread complacency among investors and policymakers. He criticised certain government departments for trivialising the economic impacts of climate change to avoid making difficult decisions today, noting that the consequences of such delays could be catastrophic. Hetal Patel of Phoenix Group, which manages around £300 billion in investments, added that underestimating physical risks distorts investment decisions and underplays the real-world consequences for society.
Key Findings from Climate Scientists
The report drew on expert judgments from 68 climate scientists across the UK, US, China, and nine other countries. Key findings include:
- Economic modelling traditionally links climate damages to average temperature changes, but societies suffer most from extremes like heatwaves, floods, and droughts.
- GDP can mask the full cost of climate damage by failing to account for deaths, ill health, social disruption, and degraded ecosystems.
- GDP might even increase after disasters due to recovery spending, misleadingly suggesting economic resilience.
Urgent Calls for Action
Rather than waiting for perfect risk models, the researchers advocate for a greater emphasis on extremes and the vulnerability of the entire financial system. They urge investors to accelerate the move away from fossil fuels as a fiduciary duty to avoid large future losses. Actuaries have predicted that the global economy could face a 50% loss in GDP between 2070 and 2090 from catastrophic climate shocks, a figure far higher than previous estimates.
Laurie Laybourn from the Strategic Climate Risks Initiative highlighted that we are living through a paradigm shift in the speed, scale, and severity of risks driven by the climate-nature crisis, yet many regulations remain dangerously out of touch with reality. The report concludes that avoiding irreversible outcomes through carbon emission cuts is far cheaper than trying to cope with them, urging governments, regulators, and financial managers to pay more attention to these high-impact risks.
