Lint Barrage, what are the economic consequences of climate change?
Climate change is not just an environmental issue. Lint Barrage examines how it influences the global economy – and argues that the economic risks are already apparent today.
Almost everything we do, produce or consume is affected by the weather and climate. Despite differences in methodology and assumptions about the future, integrated climate-economic models such as the DICE Model, to which I contribute, paint a consistent picture: If the world remains on its current climate policy trajectory, it faces the risk of substantial economic losses. By the end of the century, we estimate average annual losses equivalent to around five percent of global economic output each year. For comparison, the COVID-19 pandemic led to a contraction of three percent of world output. Even our central projections suggest an equivalent scale of losses each year, reducing growth and compounding over time.
The Expert
external page Lint Barrage is Associate Professor for Energy and Climate Economics at ETH Zurich and analyzes climate change from a financial and macroeconomic perspective. She studies how climatic risks, new energy technologies and energy policies affect economic outcomes and human well-being.
This global average hides dramatic differences. While some regions and sectors may see partial benefits – such as reduced heating costs in Switzerland – others face existential risks. Agricultural productivity is projected to decline by 40 percent or more in some parts of Africa. For countries where most of the population depends on agriculture, changes of this magnitude would imply not only economic losses, but also a humanitarian catastrophe.
Standard models have not yet incorporated some key climate change impacts, such as effects on healthcare. In other words, standard health cost estimates reflect only temperature-related mortality and ignore impacts on healthcare utilization and related costs. In new estimates, we are increasingly seeing that the healthcare cost burden of climate change may be substantial, even straining public finances.
Wildfires and their downstream effects are another example of impacts that have been omitted from standard modeling approaches. The smoke and air quality effects of wildfires have been associated with costs ranging from excess mortality to decreased worker productivity. Rising temperatures can increase these risks.
Financial markets are already responding to these projections. For example, bond markets increasingly demand higher yields from municipalities facing rising wildfire risks. However, these risks are not yet reflected in standard models. This means that the actual costs of climate change may still be underestimated.
I frequently hear the claim that Switzerland’s economy is comparatively resilient vis-à-vis physical climate change. However, Switzerland is deeply embedded in global supply chains and financial markets. When coal mines in Australia are flooded or cocoa harvests fail in Africa, markets come under pressure and prices rise globally. Both Swiss firms and households are similarly invested in global assets exposed to climatic risks. Managing climate change’s economic effects on Switzerland requires a comprehensive understanding of these effects on a global scale.
What can be done? One important lever is information, as many people are insufficiently informed about climatic risks. In Rhode Island (USA), we found that around 70 percent of coastal residents underestimate the flood risk of their homes. Bad information leads to bad incentives: Property prices remain high in risky areas, encouraging investment and exposing residents to more flood risk. Information is not a substitute for climate mitigation, but it is a prerequisite for effective adaptation.
Finally, we should be careful not to frame climate change as a binary issue. It is not the case that we either achieve net-zero goals immediately or we fail. This kind of all-or-nothing thinking can make it more difficult to reach compromises that yield progress. Every step towards mitigating the impacts of climate change creates economic value by preventing loss and damage.
Of course, these steps can also involve costs, such as expenses for our energy system – which, just like the climate, affects all parts of the economy. Politically and socially viable climate policy must acknowledge both sides of this trade-off. The key is to move forward with full awareness and to aim to make better decisions – as individuals, businesses and governments and across all levels of society.