The Macroeconomic Impact of Climate Change: Global vs. Local Temperature

How to measure climate change’s hit to the global economy?

Adrien Bilal and Diego R. Känzig ask how much climate change drags down economic growth in « The Macroeconomic Impact of Climate Change: Global vs. Local Temperature ».

They bring the measure to a global scale instead of the usual country-by-country approach to isolate the effect of global temperature fluctuations on world GDP over 120 years of data.

They then integrate these empirical findings into a neoclassical growth model to compute the implied Social Cost of Carbon (SCC) and show:

• A 1°C rise in global average temperature causes about a 12% drop in world GDP, an impact roughly six times larger than prior estimates.
• In hot years, the frequency of severe disasters surges across multiple regions simultaneously. This globally correlated shock amplifies losses by straining the global system.
• A global temperature shock doesn’t just cause a one-off loss but depresses growth for about a decade, up to around 12% below trend about 6 years after the shock.
• Continued business-as-usual warming would impose roughly a 25% permanent loss in global GDP, similar o the effect of the Great Depression enduring indefinitely.
• This model yields an estimated SCC around $1,300+/tCO2eq, over 7 times higher than the ~$185/ton value from recent consensus models.
• Unilateral climate policy becomes economically rational for large emitters, as even acting alone can dramatically reduce their Domestic Cost of Carbon (the benefit of reducing a ton of CO₂ for one country).

The study warns of a potential ~25% permanent GDP loss, which translates into massive risks for portfolios, pensions, and insurance systems.

With an SCC in the four digits, virtually any emission reduction policy at double-digit or low-triple-digit dollars per ton costs is worthwhile.

As a limitation, GDP itself measures market activity: it may not fully capture human welfare losses, meaning the true societal cost is likely even higher than GDP suggests.

The study also focuses on aggregate impacts, which obfuscate how losses are split across countries or sectors. Climate change will hit some regions (like the tropics) and industries (like agriculture) harder than others.