A new report warns that current economic and financial models severely underestimate climate risks from extreme weather and potential tipping points
Researchers say climate change is treated as a marginal shock, despite evidence that impacts can disrupt multiple sectors and regions at once
The study highlights how reliance on average temperature and GDP masks losses from extreme events, inequality and ecosystem damage
Authors urge policymakers and investors to recognise the limits of existing models when assessing climate and financial stability risks
Current economic models and the policy guidance drawn from them are grossly underestimating the compounding risks of climate change, particularly from extreme weather events and the potential crossing of climate tipping points, according to a new report by Green Futures Solutions at the University of Exeter and the independent financial think tank Carbon Tracker.
“For treasuries, regulators, advisory agencies, and institutional investors, this report converges on a single conclusion,” the authors wrote. “Climate change introduces forms of risk that exceed the design assumptions of existing economic and financial frameworks.”
There are various reasons for the underestimation of risks from climate damages being not accounted for properly in economic frameworks and consequently in financial frameworks, according to the report. One of the central problems, the report says, is that most economic frameworks treat global warming as a marginal shock to an otherwise stable economic system.
The authors spoke to 60 climate scientists, who warned that at higher levels of warming, climate impacts do not occur in isolation. Instead, “climate impacts increasingly disrupt multiple sectors at once; interact across regions through trade, finance, migration, and geopolitics; and trigger non-linear responses in environmental and human systems,” the paper said.
This means that the impacts of warming and consequent climate change are not just a ‘marginal shock’ reducing outputs in certain sectors but a reshaping of economic systems themselves. It reshapes entire economic systems — affecting where people can live, what they can produce, how infrastructure is operationalised, and which regions remain economically viable.
A second weakness lies in how economic models assess risk from warming and consequent climate change. Most link damages to changes in global mean surface temperature, even though people and markets experience climate change through extreme events such as heatwaves, floods and droughts. These extremes are generally overlooked, the report said.
One example cited was the Texas winter storm of 2021. While it had little effect on global temperature averages, it caused an estimated $195 billion in losses after grid failures left millions without power.
“These extremes drive mortality, productivity loss, infrastructure failure, and political instability — effects that are poorly captured by mean temperature metrics,” said the report.
In the future as warming increases, the risks from such events become even more crucial. “From a financial stability perspective, it is these extremes — not median outcomes — that dominate systemic risk,” the report added.
The report also questions the reliance on gross domestic product (GDP) as the main measure of economic loss from climate-related damage.
“GDP fails to capture human mortality, distributional impacts and inequality, cultural loss and displacement, ecosystem degradation, and disruption to social life. In some cases, GDP may even rise following disasters due to reconstruction spending, masking welfare losses entirely,” according to the report.
This can give economists and financial analysts a false sense of stability even as vulnerabilities grow. “Among climate experts, there is a strong consensus on the need to complement GDP with metrics that better reflect lived economic reality and long-term societal stability,” wrote the authors.
Another major gap is the failure to account for compounding risks — when regions are hit by repeated extreme events before they have time to recover. Such shocks can weaken food systems, supply chains and infrastructure, with ripple effects across regions and over longer time periods.
The report pointed to Puerto Rico, which was struck by Hurricanes Irma and Maria in 2017 and then Hurricane Fiona in 2022, “with each storm striking before full recovery from the previous one, progressively degrading grid resilience and critical infrastructure,” according to the report.
Standard Integrated Assessment Models (IAM), used by economists and financial analysts to understand interactions between economic systems—including energy and land use—and natural systems such as the climate and the biosphere, have a fundamental problem, according to the report.
These models often assume uncertainty remains constant across temperature ranges. In reality, uncertainty widens with warming. “As the climate system moves further from historical conditions, physical responses become less predictable, social and economic reactions become harder to model, and the likelihood of unprecedented outcomes increases. In short, uncertainty widens with warming,” the report stated.
There is also little accounting for the potentially unprecedented and irreversible impacts of crossing climate tipping points like the collapse of the Antarctic and Greenland ice sheets, changes to boreal forests, or disruption of the Atlantic Meridional Overturning Circulation (AMOC) and others.
“Once triggered, Earth system tipping points may lead to irreversible environmental change, bringing long-lasting economic disruption and impacts that cascade across systems,” according to the report. Such outcomes challenge the core assumptions of conventional economics, which rely on linearity, continuity and stable preferences, it added.
The report advises that policymakers should not consider economic modelling as predictions under maximised warming and the accuracy of the systems should not be interpreted as reliability.
“We would urge institutions to explicitly acknowledge these limits — the tendency to overlook both systemic risks and the upside of clean energy investment — rather than allowing these flawed outputs to guide decision-making by default,” the authors wrote.
Climate scientists were clear that the risks go far beyond manageable adjustments, said Jesse Abrams, lead author of the report and senior impact fellow at Green Futures Solutions. “Our expert elicitation reveals a fundamental disconnect: Climate scientists understand that beyond 2°C, we’re not dealing with manageable economic adjustments,” Abrams stated in a press release.
“The climate scientists we surveyed were unambiguous: 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,” he added.