By Ben Kerrigan-
Governments, financial institutions and global regulators may be woefully unprepared for the true scale of the economic threat posed by climate change because they are relying on flawed economic models that systematically underestimate the risks, it has been revealed.
Leading experts have warned of the potential for a global economic crisis unlike anything seen since the Great Depression.
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According to a major report by researchers from the University of Exeter and the Carbon Tracker Initiative, the economic frameworks policymakers have used for decades simply assume that the future will behave like the past an assumption that climate scientists and economists alike now say is dangerously outdated.
Central to the criticism is the fact that traditional economic models often treat climate impacts as smooth, linear adjustments to growth, rather than acknowledging the non-linear, cascading shocks from extreme weather, tipping points and systemic disruptions that climate change is likely to trigger.
These models forecast gradual reductions in growth yet fail to capture the full scale of damage wrought by extreme events such as major floods, heatwaves or the collapse of critical ecosystems.
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Climate scientists across more than a dozen countries, including the UK, US and China, contributed expert judgment to the Exeter/Carbon Tracker analysis.
They found that current models used by governments and financial managers largely link climate damage to average temperature increases, while societies and markets actually suffer most from extremes sudden, compound climate shocks that ripple through supply chains, production systems, trade networks and financial markets.
“We’re not dealing with manageable economic adjustments,” said Dr. Jesse Abrams, lead author of the report. “The climate scientists we surveyed were unambiguous: current economic models can’t capture what matters most the cascading failures and compounding shocks that define climate risk in a warmer world and could undermine the very foundations of economic growth.”
Policy analysts argue that this misalignment between climate science and economic modelling has profound policy and investment implications. Because models underestimate the severity of damages, investors and policymakers may be lulled into a dangerous complacency, delaying climate mitigation and adaptation efforts that could substantially reduce risk.
The scale of the disconnect is startling. Some influential models suggest that even with significant warming 3°C to 4°C above pre-industrial levels global GDP losses might only be in the low single digits. Yet many climate scientists warn that society and economy could “cease to function as we know it” under such conditions.
This mismatch highlights a fundamental flaw: the models on which much climate policy is based were never designed to capture tipping points or systemic collapse.
The concern is not merely theoretical. Actuarial analyses published in 2025 suggested that global GDP could fall by as much as 50 % between 2070 and 2090 if climate shocks materialise and continue to compound. That is far higher than traditional models have predicted and would imply an economic crisis of unprecedented depth and duration.
These warnings arrive amid broader questioning of integrated assessment models (IAMs) such as those developed by leading economists, which have historically been used to balance the costs of emissions reduction against projected climate damages.
Emerging critiques argue that IAMs build in normative assumptions about discounting future harm, meaning later generations are weighed less heavily in policy decisions a design choice that tends to understate long-term risks.
Adding to the alarm, emerging research suggests that if models were corrected to include the effects of weather extremes, cascading economic impacts and thresholds, estimated global GDP losses by century’s end could grow dramatically with some projections indicating losses of dozens of percentage points, even under moderate warming scenarios.
The ramifications spill into public policy, corporate strategy, and financial regulation. Financial watchdogs and central banks have long used economic damage projections to stress-test portfolios, shape fiscal policy and guide investor disclosures.
If these foundational models are biased toward optimism, regulators could be underestimating the systemic risks climate change poses to financial stability. Advocates for reform argue this disconnect must be addressed with urgency to prevent insufficient preparedness.
New Models for a Warmer World
The growing body of evidence pointing to flawed economic modelling is prompting calls from experts for a fundamental rethinking of how climate risk is quantified and incorporated into economic forecasts.
Analysts argue that models must shift from predictable curves to frameworks that better reflect tipping points, threshold effects, feedback loops and compounding damages that are inherent in physical climate systems.
One major criticism is that many economic models are built around concepts of optimal growth and adaptation essentially assuming societies can engineer their way out of climate risks given enough time and investment.
However, climate scientists warn that this assumption breaks down in the face of irreversible changes such as the collapse of polar ice sheets, disruptions in ocean circulation or the loss of key ecosystems, which could cause rapid, nonlinear economic and social upheaval.
Indeed, critics contend that economic models often treat climate damages as a percentage of GDP loss tied to average temperature increases, but this approach fails to account for complex socio-economic interactions and real-world shocks.
For instance, a single extreme event, such as a mega-drought or megastorm, can disrupt food production, displace millions, strain public finances and disrupt trade far beyond what “average damage” figures would imply.
These limitations are not new. Earlier independent analyses dating back years have shown that economists’ damage estimates some suggesting warming would only marginally affect GDP are inconsistent with physical science and historical experience.
One academic review concluded that traditional models can produce implausibly low estimates of climate damages because they neglect tipping points and real economic interconnectedness.
Policy experts argue that addressing these shortcomings is not merely an academic exercise. If governments and financial institutions continue to base decisions on overly optimistic economic models, they risk locking in insufficient climate action, leaving economies vulnerable to shocks that could be far more severe than anticipated.
Reforming modelling frameworks could help shift policy toward precautionary strategies that prioritise rapid emissions reduction and resilience building.
In practical terms, this means integrating climate extremes, network effects and nonlinear damages into economic risk assessment tools a task that will require closer collaboration between climate scientists, economists, statisticians and policymakers.
Some research institutions are already working on enhanced models that attempt to capture a broader range of climate economy feedbacks, including supply chain disruptions and social displacement effects.
But so far, mainstream models lag behind the science. The widespread use of these outdated tools has implications not only for climate policy but for the financial markets, pension funds, asset managers and insurers that rely on economic scenarios to make long-term decisions.
If such stakeholders continue to underestimate systemic climate risk, they may be vulnerable to sudden shocks that could cascade through global markets, sparking broader financial instability.
The consequences of delay are clear: misjudging the economic impacts of climate change could lead not just to slower policy responses, but to fundamental economic fragility, with GDP contraction, cascading business failures, and public finance stress emerging as tangible outcomes.
In this sense, experts argue, improving economic modelling is both a technical and an existential imperative for 21st-century economic planning.
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