Climate Change: When Economic Models Fail Reality

When Economic Models Become Fiction: Why Climate Reality Is Outpacing Our Most Pessimistic Warnings

“Current economic models systematically underestimate climate damages because they can’t capture what matters most – the cascading failures, threshold effects, and compounding shocks that define climate risk in a warmer world and could undermine the very foundations of economic growth.”^[1] . Says lead author Dr Jesse Abrams.

The latest actuarial-style assessment from the University of Exeter’s Green Futures Solutions team and financial think tank Carbon Tracker argues that the tools steering global climate policy are fundamentally misreading the danger ahead. Economic “damage functions” embedded in widely used models treat climate change as a marginal adjustment to an otherwise smoothly growing economy, rather than as a system‑shaping force capable of triggering structural decline. Lead author Dr. Jesse Abrams warns that these models “can’t capture what matters most” about climate risk: cascading failures, threshold effects, and compounding shocks.^[1]

Instead of mapping how heatwaves, floods, droughts, storms and sea‑level rise interact, most models link damages only to changes in average global temperature. That abstraction ignores the lived reality of climate impacts: in Europe, extreme weather in a single summer caused at least €43 billion in short‑term losses, with total costs projected to reach €126 billion by 2029. In Thailand, monsoon flooding alone inflicted about €133 billion in damages. GDP‑based metrics then compound the distortion by counting reconstruction spending as “growth”, masking mortality, displacement, ecosystem collapse and social disruption. The report concludes that policymakers and financial institutions are flying into a turbulent, warming future guided by models that understate both physical impacts and the risk of a climate‑driven financial crash.^[1]

The Canyon Deepens

The most unsettling thing about this new report is not that it contradicts my past climate writing—it confirms it, then drags the timeline forward by decades. When I described the gap between climate promises and implementation as “not merely a gap but a canyon—a vast chasm of broken commitments, abandoned pledges, and policies that exist on paper while fossil fuel expansion continues unabated,” I assumed at least that our economic instruments were roughly calibrated to reality. It now appears even that was too optimistic.^[2]

My earlier “Emissions Unfiltered” analysis argued that the 1.5°C window had effectively closed, with the world on track for roughly 2.7°C by 2100 under current policy and more than 2°C by late century even if net‑zero pledges were honoured. Since then, the “Parasol Lost” findings have revealed that aerosol pollution has been hiding about 0.5°C of warming; as we clean the air, that masked heat emerges into the open. The Met Office now expects 2026 to be around 1.46°C above pre‑industrial levels, likely the fourth consecutive year above 1.4°C, in a streak that marks the last eleven years as the warmest on record. New assessments suggest we may lock in 2°C before mid‑century, not after 2070.^[3][4][5][2]

Layer this physical acceleration onto what Abrams and colleagues expose: models that hard‑code perpetual 3 percent GDP growth and subtract climate damages from a fantasy future, never allowing for structural economic decline. These are the models underpinning stress tests, asset valuations, and sovereign risk assessments. They are, in effect, reassuring the financial system that a destabilised climate will be expensive but manageable—just another line item—at the very moment when heat, floods, fires and crop failures are beginning to redraw the economic map of what is habitable and insurable.^[2][1]

I argued that 2.5°C by 2070 looked increasingly unlikely; the harsher truth emerging now is that our destination is worse, and it is arriving faster, while our instruments still insist the flight is smooth.^[2]