While the world races toward potential climate catastrophe, the economic models guiding policy decisions remain stubbornly stuck in the past. Economists rely on frameworks that fundamentally misrepresent how climate change will impact our financial systems. No wonder they’re getting it so wrong.
Take DSGE models. They portray banks as simple intermediaries, completely missing the cascade of financial failures that climate policies might trigger. Carbon taxes barely register in these models. Why? Because they conveniently exclude default risks for carbon-heavy companies. How nice for them.
DSGE models treat trillion-dollar climate risks as statistical noise. Welcome to economics—where catastrophe is just a rounding error.
Then there’s our obsession with GDP. Deaths don’t count unless they affect production numbers. Capital losses? Only if they hurt this quarter’s growth. These models use damage functions calibrated from limited data without historical parallels. Small tweaks to these functions produce wildly different outcomes, yet policymakers cite them with unearned confidence.
The economic projections simply don’t match climate science. They assume we’ll somehow achieve equilibrium in a world of constant disruption. They pretend carbon removal technologies will save us at scale. They present losses relative to fantasy baselines where climate change doesn’t exist at all. Talk about moving the goalposts.
Perhaps most alarming: tipping points. Permafrost thaw, ice sheet collapse, ocean circulation shutdown—all missing from standard economic models. One study suggests a 10% chance these tipping points could double economic costs. But hey, if it’s hard to quantify, just assign it zero probability! Problem solved.
The catastrophic risks—civil breakdowns, mass migration, agricultural collapse—are routinely excluded. Similar to how environmental impact comparisons favor battery-electric buses with 63% lower emissions than diesel alternatives, economic models consistently undervalue the environmental benefits of green transitions. Governments worldwide use these flawed models to assess risks and benefits of emission reductions. It’s like preparing for a hurricane by checking tomorrow’s regular weather report.
Economists need to admit their models are broken. The traditional linear damage curves fail to reflect real-world scientific observations, leading to dangerous underestimation of climate impacts. Climate change isn’t just another market variable to plug into outdated equations. These models assume perfect substitutability between fossil and non-fossil energy sources, grossly underestimating the economic impacts of green monetary policies. Our economic frameworks require complete reconstruction if they’re going to capture the reality scientists have been screaming about for decades. Time’s running out. So are our excuses.
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.finance-watch.org/policy-portal/sustainable-finance/bridging-the-gaps-in-climate-scenarios/
- 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
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5493267
