Governments must fix ‘faulty radar’ in economic climate models as storm approaches, scientists warn - Carbon Tracker Initiativehttps://carbontracker.org/governments-must-fix-faulty-radar-in-economic-climate-models-as-storm-approaches-scientists-warn/Flawed economic models mean climate crisis could crash global economy, experts warn | Green economy | The Guardianhttps://www.theguardian.com/environment/2026/feb/05/flawed-economic-models-mean-climate-crisis-could-crash-global-economy-experts-warnThis report by the Carbon Tracker Initiative and the University of Exeter makes clear that the economic modeling currently employed by many governments, regulators, and financial managers greatly underestimates the potential impacts of climate change. What this means is that we are speeding towards Armageddon while wearing rose-tinted glasses.
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"Flawed economic models mean the accelerating impact of the climate crisis could lead to a global financial crash, experts warn.
Recovery would be far harder than after the 2008 financial crash, they said, as “we can’t bail out the Earth like we did the banks”.
As the world speeds towards 2C of global heating, the risks of extreme weather disasters and climate tipping points are increasing fast. But current economic models used by governments and financial institutions entirely miss such shocks, the researchers said, instead forecasting that steady economic growth will be slowed only by gradually rising average temperatures. This is because the models assume the future will behave like the past, despite the burning of fossil fuels pushing the climate system into uncharted territory.
Tipping points, such as the collapse of critical Atlantic currents or the Greenland ice sheet, would have global consequences for society. Some are thought to be at, or very close to, their tipping points but the timing is difficult to predict. Combined extreme weather disasters could wipe out national economies, the researchers, from the University of Exeter and financial thinktank Carbon Tracker Initiative, said.
Their report concludes governments, regulators and financial managers must pay far more attention to these high impact but lower likelihood risks, because avoiding irreversible outcomes by cutting carbon emissions is far cheaper than trying to cope with them.
“We’re not dealing with manageable economic adjustments,” said Dr Jesse Abrams, at the University of Exeter. “The climate scientists we surveyed were unambiguous: current economic models can’t capture what matters most – the cascading failures and compounding shocks that define climate risk in a warmer world – and could undermine the very foundations of economic growth.”
“For financial institutions and policymakers, it’s a fundamental misreading of the risks we face,” he said. “We are thinking about something like a 2008 [crash], but one we can’t recover from as well. Once we have ecosystem breakdown or climate breakdown, we can’t bail out the Earth like we did the banks.”
Mark Campanale, CEO of Carbon Tracker, said: “The net result of flawed economic advice is widespread complacency amongst investors and policymakers. There’s a tendency in certain government departments to trivialise the impacts of climate on the economy so as to avoid making difficult choices today. This is a big problem – the consequences of delay are catastrophic.”
Hetal Patel, at Phoenix Group, which manages about £300bn of long-term investments for its customers, said: “Underestimating physical risk doesn’t just distort investment decisions, it underplays the real‑world consequences that will ultimately affect society as a whole.”
Actuaries predicted in 2025 that the global economy could face a 50% loss in GDP between 2070 and 2090 from catastrophic climate shocks, far higher than previously estimated.
The new report drew on expert judgments from 68 climate scientists from research institutions and government agencies in the UK, US, China and nine other countries. A key finding was that while economic modelling traditionally links climate damages to changes in average temperatures, societies and markets suffer most from extremes, such as heatwaves, floods and droughts.
Another finding was that GDP can mask the full cost of climate damage by failing to account for deaths and ill health, social disruption and degraded ecosystems. GDP can actually increase after disasters owing to spending on recovery, the researchers added.
They said that rather than waiting for perfect models of risk, greater emphasis should be placed on extremes, not just central estimates, and on the vulnerability of the entire financial system. Investors should also speed up the move away from fossil fuels as a fiduciary duty to avoid large future losses, said Campanale.
Current economic models can give estimates of losses that look precise but which the scientists said were wildly optimistic. “Some are saying we’ll have a 10% GDP loss at between 3C and 4C degrees [of global heating], but the physical climate scientists are saying the economy and society will cease to function as we know it. That’s a big mismatch,” Abrams said.
Laurie Laybourn, at the Strategic Climate Risks Initiative, said: “We are currently living through a paradigm shift in the speed, scale and severity of risks driven by the climate-nature crisis. Yet many regulations and government actions are dangerously out of touch with reality.” - Damian Carrington