Climate Crisis and Economic Collapse: The Failure of Traditional Economic Models
Experts are increasingly warning that current economic models fail to adequately account for the accelerating impacts of the climate crisis, potentially leading to a global financial crash. This failure, they argue, is particularly concerning because recovery from such a collapse would be significantly more difficult than the recovery following the 2008 financial crisis, as the Earth itself cannot be “bailed out” in the same way as banks.
As the world hurtles towards 2 degrees Celsius of global warming, the risks associated with extreme weather events and climate tipping points are escalating rapidly. However, prevailing economic models utilized by governments and financial institutions fundamentally overlook these potential shocks. Instead, these models typically project only gradual economic slowdowns resulting from rising average temperatures. This discrepancy arises from the models' assumption that future conditions will mirror past patterns, despite the significant and unprecedented changes the burning of fossil fuels are inflicting upon the climate system.
Climate tipping points, such as the potential collapse of major Atlantic currents or the Greenland ice sheet, pose profound global consequences for society. While some of these tipping points may be imminent, their precise timing remains uncertain. Furthermore, the combined impact of extreme weather disasters has the potential to cripple national economies. Researchers from the University of Exeter and the Carbon Tracker Initiative contend that governments, regulators, and financial managers must prioritize these high-impact, albeit lower-probability, risks. Preventing irreversible outcomes through carbon emissions reductions is significantly more cost-effective than attempting to mitigate the consequences of a climate-induced collapse.
Dr. Jesse Abrams of the University of Exeter emphasizes the inadequacy of current economic models, stating that they cannot capture the cascading failures and compounding shocks inherent in a warmer world. He warns that this oversight could undermine the very foundations of economic growth. This perspective is echoed by Mark Campanale, CEO of Carbon Tracker, who highlights a widespread complacency among investors and policymakers stemming from flawed economic advice. He argues that a tendency within some government departments to downplay the economic impacts of climate change hinders proactive decision-making, with potentially catastrophic consequences.
Hetal Patel of the Phoenix Group, which manages substantial long-term investments, points out that underestimating physical climate risks not only distorts investment decisions but also downplays the real-world consequences that will ultimately affect society as a whole. A recent projection by actuaries in 2025 indicated that the global economy could face a staggering 50% loss in GDP between 2070 and 2090 due to catastrophic climate shocks – a figure significantly higher than previous estimates.
A key finding from a report drawing on expert judgments from 68 climate scientists across multiple countries is that societies and markets are most vulnerable to extreme weather events – heatwaves, floods, and droughts – rather than simply changes in average temperatures. Additionally, the report notes that GDP figures can mask the true cost of climate damage by failing to account for factors like deaths, ill health, social disruption, and ecosystem degradation. Ironically, GDP can even increase after disasters due to recovery spending.
The experts advocate for a shift in focus from relying solely on perfect risk models to prioritizing extreme weather scenarios and the vulnerability of the entire financial system. Investors are urged to accelerate the transition away from fossil fuels as a matter of fiduciary duty to avoid substantial future losses. Dr. Abrams underscores the significant mismatch between the optimistic projections of current economic models and the reality faced by climate and society, stating that the economy and society could cease to function as we currently know it at 3 to 4 degrees Celsius of global warming. Laurie Laybourn of the Strategic Climate Risks Initiative asserts that current regulations and government actions are dangerously out of step with the rapidly escalating speed, scale, and severity of risks driven by the climate-nature crisis.
Source:
