A climate limit to economic growth

June 30th, the city of Lytton in western Canada broke the record of the highest temperature ever seen in the country: 49,5°C. A record which had already been broken twice in the preceding days with 46,6 et 47,5°C, respectively. The heat wave which struck the northwestern part of the USA and Canada was then followed by massive wildfires. At the same time, Finland had its hottest month of June. Those events would have been impossible in the absence of global warming caused by the massive release of greenhouse gases into the atmosphere by human activities. In 2018, global emissions amounted to 58 billion tons of CO2 equivalent.

Because of its speed and magnitude, climate change could have serious adverse effects, such as excessively high humidity and temperature making large regions on Earth uninhabitable, sea-level rise, more frequent and extreme weather events, and large reductions in biodiversity. It is important to remember that the average global temperature is already 1.2°C higher today than what it was during the preindustrial era, and that current national pledges, assuming they are fulfilled, will induce a warming of at least 2.4°C by the end of the century.

Consequences on the world economy are hard to estimate

While all these effects will certainly have an impact on human societies in one way or another, there is no consensus on what the implications on the world economy will be. To try and estimate those effects, so-called “integrated” models combine an economic framework with a description of the climate evolution: economic activities produce greenhouse gases that affect the global climate, which in turn affects the economy. The most famous of such models was developed by William Nordhaus, the 2018 Nobel Memorial Prize in Economic Science.

They are meant to provide policy-makers with quantitative arguments from cost-benefit analyses of the effect of climate change on the economy, notably to determine what is known as the social cost of carbon. It evaluates the cost, in dollars, of economic damages caused by the emission of one ton of carbon dioxide into the atmosphere and consequently the benefits expected from investment in emission reduction.

The economic impact of global warming is typically described by the response of the Global Domestic Product (GDP) to a climate variable, usually the average global surface temperature change. Several methods exist to estimate this response, in most cases by extrapolating from effects already observed in past decades. Very different extrapolations have been proposed giving strongly differing results for a given level of warming. For example, for a 4°C warming some estimates foresee a global GDP a few percent lower than its expected value without climate change while other models estimate that the GDP will be halved. For 8°C, the most optimistic models foresee an impact of hardly 10% while large regions of the world will become uninhabitable. Such low damage levels are used by climate-deniers to claim that the cost of climate actions is not justified, and that humanity should rather focus on more pressing issues.

A possible climate limit to growth

Most models consider that economic growth will continue, whatever the level of warming. Recent studies have started looking at the possible impact of global warming on economic growth. Our think tank, Zenon Research, recently published a report following this path. It shows that economic growth is slowed down by climate change, to the point that it may cause a structural economic recession. This ‘climate limit’ to economic growth is linked to the existence of climatic tipping points. Once reached, damage on growth suddenly increases so that recession occurs shortly afterwards. Breakpoints are found between 3°C to 5°C, depending on the assumptions.

These results could lead one to think that a warming of a few degrees is acceptable. But our results show that already at +2°C, the global economic growth rate is divided by 2. Consequently, the need to maintain economic growth, for example to finance ambitious energy transition plans, must lead us to act strongly and swiftly to limit climate change. Indeed, if economic growth were to be durably affected by climate damage, one can expect that the immense challenge we are facing will become even more difficult to tackle.

This article is an introduction to the report "Too Hot to Grow:How global warming can make the world enter into structural economic recession", of Zenon Research, co-authored by:

Dimitri Chuard, Jean-Baptiste Rudelle and Greg de Temmerman.

To read the full report, please click here.​

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