Climate scientists warn of disastrous consequences if global temperatures continue to rise. However, macroeconomists paint a less alarming picture: They predict moderate declines in productivity and spending as a result of global warming.

“The discrepancy was always surprising,” said Adrien Bilal, assistant professor of economics.

For a recent working paper, Bilal teamed up with colleague Diego R. Känzig, an assistant professor at Northwestern University, to rethink their field’s approach to climate forecasting. In the end, the pair came up with an economic forecast that is even more troubling than previous predictions. The world is already 1°C warmer than in pre-industrial times. The new analysis shows that each additional 1°C increase represents a 12 percent decline in global GDP, with losses peaking just six years after the higher temperatures began.

“In terms of scale,” Bilal noted, “this is six times larger than previous estimates.”

At a conference last year, Bilal and Känzig began thinking about the challenges of estimating the economic impacts of climate change. “It’s really difficult because the economy is constantly growing due to other factors,” Känzig said, citing technological innovation as an example. “At the same time, emissions that fuel temperature change are a byproduct of this growth.”

A number of influential studies conducted over the past 15 years have circumvented this complexity by using formulas based on temperature variations at the national level. “With this approach, you can control for many of these confounding factors,” Känzig explained.

But local temperature is not the only reason for the increase in extreme weather events in the 21st century, with their devastating effects on capital and productivity. “When it gets a little hotter in Germany, there tends to be more heat waves, but not more wind or precipitation,” says Bilal. “But when the temperature rises worldwide, there is more of all three factors. Global temperature is simply much more strongly correlated with extreme weather events.”

The co-authors wanted to use the global temperature variable – “an approach that is consistent with geoscience,” Bilal said – to predict GDP damage in 173 countries starting in 2024. To do this, they assembled a dataset that integrates weather and economic records from the past 120 years. Then they began modeling the economic consequences under the sustained warming expected through 2100.

“You can look at our results another way: What would happen if global temperatures rose another 2°C by the end of the century?” Bilal said. “We found that this would reduce production and consumption by 50 percent. That’s a huge reduction. It’s twice the size of the Great Depression, but it lasts forever.”

Economic growth will continue. “We could still be richer in 2100 than we are today,” Bilal clarified. “But if there were no climate change, we would be twice as rich in 2100.”

To understand the implications of these results for decarbonization policy, the co-authors applied global temperature to “the social cost of carbon,” a model developed in the 1990s by Nobel laureate William D. Nordhaus.

Overall, Bilal and Känzig estimated social costs of $1,056 per ton, while another recent estimate (which again took local temperature fluctuations into account) estimated global costs of only $185 per ton.

Using their new method, the co-authors calculated the social costs for the United States alone and arrived at $211 per ton. For comparison, one study estimates the cost of federal decarbonization measures included in the Inflation Reduction Act of 2022 at $95 per ton.

“The silver lining of our results,” said Bilal, “is that decarbonization easily passes the cost-benefit analysis for large economies such as the United States and the European Union.”