While economists have spent decades refining their models to predict everything from interest rates to unemployment, their tools for understanding climate change remain shockingly inadequate. The fancy DSGE models governments love? They treat banks as simple intermediaries, completely missing how climate shocks ripple through the financial system. No default risks for carbon-intensive companies. No real-world consequences. Just neat little equations that bear little resemblance to our messy reality.
GDP obsession is killing us, literally. These models fixate on annual temperature and output numbers while ignoring small details like human mortality and infrastructure collapse. Linear damage curves? Please. Climate science shows impacts are anything but linear. Tipping points? Not in the model, sorry!
Our obsession with GDP numbers is a death march, blind to the bodies and broken bridges along the way.
The situation with Integrated Assessment Models is even worse. They’re calibrated from limited historical data—not the extreme events we’re already experiencing. The result? Comically low estimates for the social cost of carbon, around $30-50 per ton. What a bargain for destroying the planet!
Central banks and investors rely on these flawed models for climate stress testing. Governments base entire policy frameworks on them. It’s like steering through a hurricane with a broken compass. The models consistently understate risks beyond 1.5°C warming, precisely when things get truly dangerous.
The most glaring omission? Extreme events. Droughts killing crops. Wildfires leveling towns. Sea levels swallowing coastlines. These models see none of it. And forget about tipping points like permafrost thaw or ice sheet collapse. One study suggests a 10% chance these tipping points could double economic costs. But hey, who’s counting?
Perhaps most absurd, these models assign zero probability to low-likelihood, high-impact disasters—you know, the kind that could actually end civilization. These models also fail to account for broader metrics that would give a more comprehensive assessment of climate impacts. Alternative approaches like ecological stock-flow consistent models could provide more realistic analyses by allowing for endogenous money creation and active demand dynamics. They’ve become a hindrance to urgent policy action, allowing governments to keep pretending climate change is just a minor inconvenience rather than the existential crisis staring us in the face.
References
- https://www.ineteconomics.org/perspectives/blog/climate-change-and-macroeconomic-models-why-general-equilibrium-models-do-not-work
- https://greencentralbanking.com/2026/02/05/economic-models-need-to-go-beyond-gdp-to-account-for-climate-change/
- https://cleantechnica.com/2026/02/04/how-climate-economics-got-the-risks-wrong/
- https://www.businessgreen.com/news/4525211/flawed-advice-economic-models-accused-chronically-underpricing-climate-risks
- https://www.cfr.org/articles/climate-change-affecting-economy-proving-so-challenge
- https://news.climate.columbia.edu/2022/10/27/some-of-the-most-drastic-risks-from-climate-change-are-routinely-excluded-from-economic-models-says-study/
- https://www.eesi.org/articles/view/government-economic-models-fail-to-account-for-climate-change-hindering-action
