Economic models have consistently underestimated the true impact of global heating on human wealth, according to a new study by Australian scientists.

The research reveals that if the planet warms by 4°C, the average person could become 40% poorer—nearly four times higher than some previous estimates.

The study, published in Environmental Research Letters, highlights that even if warming is limited to 2°C above pre-industrial levels, global average GDP per person is still projected to fall by 16%. This stands in stark contrast to earlier economic forecasts, which predicted a much smaller decline of just 1.4%.

Alarmingly, scientists now estimate global temperatures will rise by 2.1C, even if countries meet both their short- and long-term climate commitments.

One of the central criticisms addressed by the study is that traditional economic tools—specifically, Integrated Assessment Models (IAMs)—have not fully accounted for the risks posed by climate change, particularly the growing threat of extreme weather events. IAMs have long guided government policies on climate investment, but their limitations have increasingly come under scrutiny.

Dr. Timothy Neal, lead author of the study and a researcher at the University of New South Wales’s Institute for Climate Risk and Response, explained that his team adapted a widely used economic model by integrating detailed climate forecasts. This allowed them to include the far-reaching effects of extreme weather on global supply chains—an aspect often overlooked in earlier models.

Their findings suggest that under a 4°C warming scenario, individuals would be 40% poorer on average, compared to only 11% when using the standard model.

Neal noted that earlier models had “inadvertently concluded” that even severe climate change would have only mild economic consequences. This, he said, has had “profound implications for climate policy,” as it underestimated the urgency and scale of response needed.

“In a hotter future, we can expect cascading supply chain disruptions triggered by extreme weather events worldwide,” Neal said.

Prof Andy Pitman, a climate scientist at UNSW and co-author of the research, said: “It’s in the extremes when the rubber hits the road. It isn’t about average temperatures”

“Retooling economic models to account for extremes in your part of the world and its impact on supply chains feels like a very urgent thing to do so countries can fully cost their economic vulnerabilities to climate change and then do the obvious thing – cut emissions.”

A common assumption in traditional models is that global losses can be offset—if agriculture becomes unviable in one region, for example, it’s assumed another region will compensate. However, Neal argues that this overlooks the interconnectedness of global economies. A drought in one region can disrupt entire supply chains, affecting economies worldwide.

Supporting this view, Professor Frank Jotzo of the Australian National University pointed out that IAMs often oversimplify real-world complexities. He emphasised that such models fail to reflect how damage in one area ripples across borders through trade and economic ties.

“The result is that the models say that climate change makes little difference to the future world economy, which is contrary to what physical impact science and a nuanced understanding of interdependencies in the economy would suggest.”

Further credibility for the study comes from Mark Lawrence, a professor of practice in climate risk at the University of Adelaide and a former financial risk executive. He said the findings were consistent with what financial institutions are beginning to understand about climate-related risks.

A report in January by the Institute and Faculty of Actuaries also warned that previous economic assessments had not factored in critical real-world elements such as tipping points, forced migration, sea-level rise, health impacts, and geopolitical instability.

“The benign but flawed results may reinforce the narrative that these are slow-moving risks with limited impacts, rather than severe risks requiring immediate action,” the report said.

Taken together, the new research paints a stark picture: the economic fallout from climate change may be far more severe than previously thought, with no country immune to its global consequences.

“If anything, I believe the economic impacts [of climate change] could be even worse,” he said.

A consequence of the disconnect between modelling and real-world climate impacts, Lawrence said, was that “the potential economic benefits of urgent climate policy action have also been significantly understated”.

 

 

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