Hurricane Milton in the Gulf of Mexico, October 2024. © Nasa
The economic impact of climate change could be two-to-four times greater than previously estimated, the Network for Greening the Financial System (NGFS) found in its updated climate change scenarios. But critics say the models don’t consider tipping points and other key data, and the actual economic impact is likely to be far worse than projected.
In its fifth macro-financial scenario assessment of climate risk, the NGFS found that global economic growth could slow down by 30% by 2100 due to climate change. It updated its risk modelling methodologies to include a new damage function that it says better captures the economic effects of climate change.
The scenarios show that insufficient ambition will make the transition to a green economy more challenging, said Livio Stracca, chair of scenario and design analysis at the NGFS and deputy director general of financial stability at the European Central Bank.
“The lack of policy ambition creates a vicious circle; increasing costs of mitigation policies complicate their implementation, resulting in further unabated emissions, climate damage and thus necessitate more ambitious future policies. Hence, this further increases economic losses stemming from a warming climate,” he said.
The NGFS climate scenarios are often used by policymakers, regulators and investors to assess climate change risk.
The report was released as devastating flooding in the US and Spain cost business losses in the tens of billions. Meanwhile, 2024 is on track to be the warmest year on record, after the record was broken in 2023.
The updated scenarios are largely based on research from a joint study from climate scientists published in April which found climate change could increase food inflation by as much as 4% in some parts of the world by 2060.
While the new projections are higher than those in its previous scenarios, the NGFS said it does not foresee a global economic recession, even in worst-case scenarios. There would be no sudden shock, but instead a gradual decline in long-term growth.
“These 30% losses should not be compared with the current GDP, but vis-à-vis a baseline projection that assumes no climate change,” the NGFS explanatory paper says.
But some experts say the NGFS scenarios undermine the impact that climate change is likely to have as they do not consider tipping points – collapses across a critical threshold that would have catastrophic consequences on the planet.
Steve Keen, an economist and research fellow at University College London, said the NGFS scenarios are misleading and give “a false sense of accuracy”.
“These predictions are so far from what climate science is talking about that they are an excuse for politicians not to do anything,” he said.
According to Keen, this is largely because the scenarios look at historical data and do not account for the unpredictability of climate change.
“It’s as if the iceberg the Titanic hit was actually an ice cube dropped by a previous ship, and it might slow them down a couple of meters per second, but when, in fact, it’s going to sink a ship,” he said.
Keen said their predictions “are trivial” as it would only equate to a slight slowdown in GDP.
“They’re still assuming we can continue growing despite three degrees of global warming, whereas, according to scientists, that’s catastrophic,” he said.
Instead, Keen recommends that regulators work with climate scientists and find out more about global tipping points or account for things in their models like trade, which will likely shift due to changes in the weather.
In its explanatory paper, the NGFS acknowledges that there is a high degree of uncertainty when it comes to climate change and that users should be aware and explore all potential futures.
Thierry Philipponnat, chief economist at nonprofit Finance Watch, said while he appreciated the transparency and leadership of the NGFS, they still need to account for sea level rises and other risks to ensure policymakers “have a clear view of the cost of climate inaction”.
Mark Campanale, founder and director at Carbon Tracker, said the NGFS was “still behind the curve” when it comes to estimating the cost of climate change.
“Unless the NGFS does more to alert governments and financial markets to these growing risks, the possibility of a wealth-destroying ‘Minsky moment’ will continue to grow,” he said.
Update, 14 November 2024: this article was amended to correct Steve Keen’s current position.
This page was last updated November 14, 2024
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
