Fifth National Climate Assessment
19. Economics

Observed Direct Impacts

Direct economic impacts of climate change have been observed in many economic sectors (e.g., Table 19.1a). For example, more frequent extreme events and higher temperatures lead to direct economic losses via infrastructure damage,³ worker injuries,⁴ and crop loss.⁵

Climate change also directly affects valuable resources that are not traded in markets, such as human health and ecosystems. These nonmarket impacts are sometimes difficult to quantify but are nonetheless economically important and represent a substantial fraction of the economic burden of climate change on Americans (Table 19.1c). For example, rising temperatures, extreme weather, wildfires, vector-borne diseases, food insecurity, and knowledge of the threat of climate change itself have all been linked to declines in Americans’ physical and mental health.^6,7,8,9,10 Additionally, changes in ecosystems caused by climate change have impacted food production, water resources, forestry, human health, real estate values, recreation, and tourism (KM 6.1, KM 7.3).^11,12,13

Projected Direct Impacts

While some economic impacts of climate change are already being felt, the impacts of future changes are projected to be more significant and apparent across more sectors of the economy (e.g., Figure 19.1 and Table 19.1b). With every additional degree of warming, the United States is expected to see increasingly adverse consequences. For example, warming global temperatures by 2°F is projected to cause more than twice the economic harm induced by 1°F of warming.^14,15

As climate change advances, economic risks are projected to grow over time. For example, weather-related disasters currently generate at least $150 billion per year (in 2022 dollars) in direct damages to the US,¹⁶ a cost that is projected to increase due to climate change in the near term.^17,18,19 Over the next few decades, climate change is projected to cause ecosystem disruptions,²⁰ water stress,²¹ and agricultural losses.^{22,23,24,25,26,27,28} Over the coming century, the country faces relocation costs and damage to property and infrastructure due to coastal flooding,²⁹ major adverse impacts on ecosystem services,³⁰ substantial and unequal health costs,⁷ large negative impacts on economic production,³¹ and a restructured investment landscape.³²

While many sectors are impacted by changing weather conditions, agriculture is also directly impacted by higher carbon dioxide (CO₂) levels, because plants use CO₂ during photosynthesis. The effect of a CO₂-enriched environment is not well understood and depends on crop types and the availability of water and soil nutrients.³³ In some cases, CO₂ enrichment increases biomass but causes the nutritional value of agricultural output to decline.³⁴ Overall, the risks climate change poses to agriculture are expected to outweigh any potential benefits due to CO₂ fertilization or other factors such as longer growing seasons and expanded crop ranges (KMs 11.1, 21.1, 22.4, 23.3, 24.1, 26.2).

Projected economic impacts are not certain, as they depend on factors that cannot be known precisely. The largest source of uncertainty in projected impacts is the unknown trajectory of future greenhouse gas emissions,³⁵ which depend on mitigation policy, economic development, population growth, and other factors (KM 2.3). The uncertainty caused by climate change is itself an economic burden, since individuals are generally risk averse (Box 19.1).^36,37

Economic impacts of climate change will vary by location due to different hazards, regional climate change patterns, and historical climate (Figure 19.1; KM 3.4). For example, locations that are hot today are generally projected to suffer greater damage because warming from 100°F to 105°F has a larger effect on human health, energy use, labor supply, and crop yields than warming from 60°F to 65°F.^7,26,38,39 Population density also influences the local economic impacts of climate change, since dense populations exacerbate urban heat islands and groundwater drawdown but improve the cost effectiveness of some public adaptation projects, such as seawalls.^40,41

Cold regions may benefit from low levels of warming while temperate and hot regions are generally harmed.¹⁵ Within most sectors that have been studied, more Americans are harmed than are helped by climate change (Figure 19.1b).^{3,7,42,43,44,45,46,47} Estimates of nationwide impacts indicate a net loss in the economic well-being of American society (Figure 19.1c; e.g., Hsiang et al. 2017; Rode et al 2021; Hultgren et al. 2022; Rode et al 2022; Carleton et al 2022; Martinich and Crimmins 2019 ^{7,15,43,44,45,46}).

---

Table 19.1 Example US Economic Impacts of Climate Extremes and Climate Change

Shown are observed and projected impacts of a sample of climate extremes and climate changes on US economic outcomes, as they are estimated in the context of particular studies. Note that only a subset of climate drivers may have been assessed in each study. Panel (a) shows impacts on current economic outcomes. Panel (b) shows projected future impacts. Panel (c) highlights examples of important but unquantified impacts. All impacts are for the US and in 2022 dollars unless otherwise noted. GDP stands for gross domestic product, a standard measure of total domestic economic production. These estimates are illustrative and not comprehensive. See metadata for table credits.

Key:
* indicates an intermediate scenario (e.g., RCP4.5); ** indicates a high scenario (e.g., RCP6.0); *** indicates a very high scenario (e.g., RCP8.5); † indicates 3% discount rate.

 Government     Households     Health     Agriculture     Business

 Infrastructure     Recreation     Labor     Existence/non-use value     Unknown value

a) Sample Current Impact Estimates of Climate Hazards on US Economic Outcomes

Sector		Impact Type	Climate Hazard	Economic Estimate
		Crop insurance payouts	Temperature increases	+19% of federally subsidized payouts48
		Rural outmigration	Warming-linked crop failure	+0.17% for 1% crop yield reduction49
		Commercial mortgage delinquency	Hurricane	+28% per 10% damage increase50
		GDP growth	Hurricane	–0.45 percentage point annual growth rate per hurricane51
		Municipal borrowing costs	Sea level rise	+23.4 basis points annualized bond issuance cost per 1% additional GDP loss due to sea level rise52
		Municipal budgets	Wildfire	+25 percentage point increase in likelihood of budget deficit53
		Social safety net transfers	Hurricane	+$975–$1,440 per capita54
		Housing prices	Flooding	–4.6% (in 100-year floodplain)55
		Student learning	Temperature increases	1% decrease in test scores per 1°F hotter school year (no adaptation)56
		Property values	Sea level rise	–14.7% (1-foot rise)57
		Damage to structures and crops	Flooding	+$235 billion per year58
		Earnings	Wildfire smoke	–$144 billion per year59
		Work injuries	Heat (≥85°F day)	+5%–15% per hot day4
		Wages as adult	Heat (≥90°F day)	–0.1% per hot day in utero60
		Emergency department costs	Heat (≥80°F day)	+$10,600 per 100,000 people aged 80+61
		Mortality	Heat (≥90°F day)	+0.9 deaths per 100,000 people62
		Alaska Native village relocation	Warming-linked erosion	$28–$280 million costs per village (adaptation only)63

b) Sample Future Impact Estimates of Projected Climate Hazards on US Economic Outcomes

Sector		Impact Type	Climate Hazard	Economic Estimate
		Agricultural yields (maize, soybeans, winter wheat, spring wheat, cotton, and sorghum)	Temperature, moisture changes	12%–29%* decrease (2050–2100)21 20%–48%*** decrease (2050–2100)21
		Agricultural yields (maize, soybeans, and cotton)	Temperature, precipitation changes	30%–46%* decrease (2070–2099)26 63%–82%*** decrease (2070−2099)26
		Aggregate multisector impact	Temperature increases	–0.1%–1.7% GDP loss*15 1.5%–5.6% GDP loss***15
		Airline network disruption	Temperature increases	+16%–50% recovery costs (2035, global)***64
		GDP growth	Temperature increases	–0.13 percentage points per year per 1°F warming31
		Income	Temperature increases	–19.6% global GDP per capita (3°C [5.4°F] of warming)31
		Income	Hurricanes	29% GDP loss**†65
		Federal disaster response	Hurricanes	+$5.2 billion* (2050 annual expenditures)66 +$36 billion*** (2050 annual expenditures)66
		National Flood Insurance Program	Flooding	+$3.9 billion annual losses (2050)*66 +$5.1 billion annual losses (2100)*66
		Property tax revenue	Sea level rise	–1.4% (3-foot rise)67
		Public services	Temperature increases	+1.45% costs (2050)***68
		Coastal damages	Sea level rise	+$550 billion (optimal adaptation)***40 +$2.6 trillion (no adaptation)***40
		Electricity outages	Temperature, precipitation changes	+$2.3–$6.8 trillion consumer costs***69
		Flooding costs	Flooding	+61% annual losses (2050)*70
		Railroad disruption	Temperature increases	+$30–$55 billion* costs from network delays71 +$43–$73 billion*** costs from network delays71
		Road degradation	Temperature, precipitation changes	+$116 billion*** costs†29
		Urban drainage degradation	Temperature, precipitation changes	+$29 billion*** costs†29
		Alaska Native village relocation and protection costs	Flooding, erosion, permafrost subsidence	+$3.9 billion over 50 years (adaptation only)72
		Migration from Mexico to US	Temperature, precipitation changes	+0.7 million* migrants73,252,253 +3.2 million*** migrants73,252,253
		Mortality (all causes)	Wildfire	+9–20 deaths per 100,000 people ≥65 years old (for 50% increase in smoke)74
		Suicides	Temperature increases	+5,600–26,000 deaths by 2050***6
		Recreation (boating, cycling, hiking, running, water sports)	Temperature, precipitation, snowfall changes	$11.6 billion (annual welfare gains 2050–2100)***75
		Recreation (fishing, hunting, skiing, ice skating, snowboarding)	Temperature, precipitation, snowfall changes	$4.6 billion (annual welfare losses 2050–2100)***75

c) Sample Impacts That Are Difficult to Quantify in Economic Terms

Sector		Impact Type	Climate Hazard	Economic Estimate
		Happiness
		Preservation of national landmarks
		Loss of cultural heritage and resources
		Subsistence activities

URL

Alternative text

Projected economic impacts of climate change vary by sector and region, with aggregate impacts resulting in net damages nationally.

Figure 19.1. Shown are estimates of annual economic damages in each National Climate Assessment region for several sectors in a scenario where global surface temperature increases 3°F (1.67°C). Positive damages indicate harm and negative damages indicate benefits. Panels (a) and (b) show per capita damages by region broken down by sector. Panel (c) shows summed per capita damages across sectors by region, with bar width corresponding to 2020 population. Most regions experience positive damages in most sectors. In aggregate, nearly all regions and the vast majority of the American population are projected to experience economic harm from climate change. Note that these damages do not account for cross-sector interactions, some sources of uncertainty are not quantified, and the list of sectors is not comprehensive. See Table 19.1 for further examples of sectors impacted by climate change. Citations for each study underpinning these results are available in the figure metadata. Figure credit: See figure metadata for contributors.

Adaptation

Adaptation to climate change can reduce some economic impacts.^38,40 For example, adaptation is expected to reduce storm-related climate damages by approximately one-third.⁷⁶ In some sectors, however, there is limited scope for adaptation (Ch. 31).^77,78 Natural and human systems may not be able to adapt quickly, so gradual warming is expected to be less harmful than rapid warming.⁴⁰ Adaptation can occur when populations have access to technologies or opportunities that lower their vulnerability to harmful conditions at sufficiently low cost.^41,79 Around 1% of the US capital stock is estimated to be adaptation capital.⁷⁶ Some adaptation strategies require new investments, expenditures, or consumption changes that offset or outweigh their benefits.^7,80,81 These adaptation costs may be large enough to prevent existing technologies from being utilized, particularly among low-income communities.^41,46 Adaptation may also face political difficulties, require behavior changes that populations are reticent to adopt,⁸² or depend on technologies that do not yet exist or are in their infancy.⁸³ These factors make the projected timing and effectiveness of adaptations uncertain.⁷⁷

Economic Vulnerability and Inequality

Economic damages from climate change are distributed unevenly across American society, often amplifying existing inequalities (Figure 19.2). Certain communities and individuals are more sensitive to climate impacts, are more exposed to climate hazards, or lack the resources to adapt to climate changes and recover from damages caused by natural hazards.^{18,46,76,84,85,86,87,88,89,90,91,92} For example, people with preexisting health conditions and older adults may be relatively more sensitive to heat or air quality impacts such as wildfire smoke (KMs 14.3, 15.2).^4,93 Families living below the poverty line often live where climatic changes are expected to be the most economically damaging, like the already-hot Southeast (KMs 22.3, 22.4).¹⁵ Climate-driven relocations of Alaska Native communities have already occurred where warming is happening fastest (KMs 16.1, 29.3, 29.5).^94,95 Climatic stressors have also been shown to increase racial segregation,⁹⁶ gentrification,⁹⁷ income inequality,⁹⁸ and low-income communities’ reliance on social safety net programs and credit systems.^54,85,99 Climate change also introduces fiscal risks (Figure 19.3; KM 19.2) that may threaten programs vulnerable communities rely on.¹⁰⁰ Broad research gaps remain about unequal climate change impacts across demographics, health status, and socioeconomic background.

URL

Alternative text

The effects of weather and climate change are often experienced differently by populations according to income, age, access to credit, and race and ethnicity.

Figure 19.2. Each bar plot summarizes findings from a single study with impact estimates for different groups. Whiskers represent 95% confidence intervals, with the exception of the whiskers on the multisector aggregate panel, which are 90% confidence intervals. (a) The first set of estimates show unequal impacts by wealth. (b) The second set of estimates show unequal impacts across age groups. (c) The third set of estimates show unequal impacts by credit access. (d) The fourth set of estimates show unequal impacts by historically advantaged and disadvantaged populations. The citations for each study are available in the metadata. Many of these estimates are uncertain, and differences between groups are often not statistically significant. Further examples of unequal climate impacts within National Climate Assessment regions are available in Figure 22.4 and Key Message 20.1. Figure credit: See figure metadata for contributors.

Close

Markets

Markets aggregate information from many individuals and firms, generating system-level outcomes (e.g., market prices). Prices in well-functioning markets will reflect assets’ exposure to future climate risks and expected adaptation costs. For example, anticipation of future flood risk has begun to reduce the prices of vulnerable properties (Figure 19.3).^57,101 But there are barriers that sometimes prevent market prices from adjusting to reflect climate risks,¹⁰² such as inaccurate information or incomplete understanding of relevant climate risks.^{103,104,105,106} Increasing awareness of climate change is expected to tighten the link between asset prices and climate risks in financial markets and may lead to abrupt price adjustments.^{52,57,107,108,109}

Changes in prices due to climate change can have different impacts on producers and consumers. For example, higher temperatures around the globe are expected to lead to a reduction in global production of corn, wheat, rice, and soybeans.⁴³ This reduction in supply is expected to increase crop prices.¹¹⁰ In some cases, these higher prices could financially offset the reduction in yields for farmers, but US consumers would face the burden of the higher food prices.¹¹¹

Insurance markets are important for financial resilience to changing climate extremes, but insurance coverage is costly, and prices may exceed what households and businesses are willing or able to pay.¹¹² As the risk of climate extremes grows, private insurers are expected to abandon high-hazard areas, as is occurring in some wildfire- and hurricane-prone locations.¹¹³ Uninsured consumers face greater financial distress post-disaster,¹¹⁴ and public-sector insurance programs, such as crop insurance and the National Flood Insurance Program, see increasing demand when private insurance markets contract. To account for the growing risks, fiscal costs of public insurance programs will rise.^66,115

Stock and bond market prices generally reflect anticipated climate risks,¹¹⁶ but pricing can be incomplete or distorted.^102,117 Anticipated policies to curb emissions can impact stock prices of emissions-intensive companies,^108,118 and long-term bonds issued by municipalities exposed to future climate risks tend to have lower prices.^52,119 In the absence of strong global mitigation policies, some forward-looking financial institutions are preemptively responding to potential impacts by restructuring portfolios.^120,121

URL

Alternative text

Exposure to climate hazards has a negative effect on real estate values.

Figure 19.3. Exposure to past climate events and to present and future climate risks affects the values of otherwise identical properties. The market price for real estate is reduced when the property is exposed to adverse climate extremes or risks. Percentages shown are example estimates from studies. Homes located in the present-day 100-year floodplain cost 4.6% less than comparable homes outside the floodplain;⁵⁵ homes projected to be inundated by 1 foot of sea level rise cost 14.7% less;⁵⁷ and homes located near one recent wildfire cost 9.3% less, while those located near two recent wildfires cost 27.7% less.¹²² Note that these are examples from specific studies, some of which are not nationally representative. Other climate hazards including hurricanes,¹²³ droughts,¹²⁴ temperature,¹²⁵ and ecosystem health,¹²⁶ among others, also affect real estate prices. Figure credit: See figure metadata for contributors.

Public Budgets, Healthcare, and Infrastructure

Climate change will affect public budgets at all levels of government through changes in revenues, spending, and borrowing costs (Figure 19.4).^127,128,129 For example, sea level rise, wildfires, and hurricanes can decrease incomes^65,130 and housing values (Figure 19.3),^109,131 and thus tax revenues,¹⁰⁰ while simultaneously increasing public expenditures for healthcare, income support,⁵⁴ disaster assistance,¹³² and defense spending.¹³³ This combination of declining revenue and increasing expenditures increases municipal borrowing costs.^{52,53,100,119}

Climate change is expected to further increase the costs of public programs, such as crop insurance subsidies,^48,115 wildfire suppression,^66,134,135 endangered species protection,¹³⁶ and healthcare provision.^68,137,138 Given these demands, achieving sustainable public budgets in a changing climate is expected to require additional revenues or other expenditure reductions.^68,128

US healthcare is provided by public systems and private markets, both of which will be impacted by climate change. Extreme weather events, such as hurricanes, damage healthcare facilities and impede medical care delivery^139,140,141 and create competition for healthcare services.¹⁴² The direct health impacts of climate change (e.g., Ch. 15; Limaye et al. 2019¹⁴³) are expected to generate higher medical costs, raising health insurance premiums, out-of-pocket spending, and expenditures on prevention efforts.^7,144,145

Essential infrastructure, such as water, energy, communication, and transportation systems, will increasingly be compromised by the compounding effects of climate change impacts (Chs. 4, 5, 12, 13; Focus on Compound Events). Degradation or disruption of these assets, many of which are publicly owned, can have substantial repercussions on other sectors and the well-being of households (Table 19.1).

Migration, Trade, and Growth

Future climate changes are expected to affect migration patterns, although how these shifts will occur is uncertain. Historical events that have shaped migrations include extended droughts, which drove rural populations toward urban centers,¹²⁴ and hurricanes, which have had persistent impacts on where people live.^146,147,148 Projections of increased flood risks due to sea level rise (KM 2.2) are expected to displace substantial populations.^149,150,151 Climate-driven economic changes abroad, including reductions in crop yields, are expected to continue increasing the rate of immigration to the United States.^73,152

Global supply chains can transfer, amplify, or reduce the direct impacts of climate change (Focus on Risks to Supply Chains). Climatic events in other countries impact trade with the United States,¹⁵³ which in turn affects domestic markets (Ch. 17).¹⁵⁴ Climate impacts that affect multiple countries simultaneously amplify costs due to interacting disruptions and linked trade.¹⁵⁵ However, geographic diversification of supply chains would allow for businesses to flexibly adjust supplies to partially reduce their exposure to climate-associated risks.¹⁵⁶

High annual temperatures and tropical cyclones are associated with lower growth in GDP,^{31,65,157,158} with responses from multiple industries contributing to this overall effect. For each 1°F increase in global average surface temperature, annual US GDP growth is projected to slow roughly 0.13 percentage points,^31,157,158 with larger effects for larger temperature changes. These changes in growth rates can in turn affect stock market prices and interest rates.^159,160

Innovation

Economic impacts of climate change will motivate some investments in innovations aimed at reducing or limiting climate damages. For example, development of low-cost air-conditioning³⁸ and arid-tolerant crop varieties reduced the impact of historical climate conditions.¹⁶¹ Future innovations may reduce costs or result in new adaptation technologies. However, some adaptation challenges have proven difficult to overcome,¹⁶² and novel adaptive technologies are sometimes costly, often limiting their accessibility to high-income communities.⁴⁶ Nonetheless, strategic investments in key adaptation technologies have the potential to generate large social and private returns.

URL

Alternative text

Climate change puts pressure on public budgets.

Figure 19.4. Climate change increases demand for government services while also reducing governments’ ability to fund those services, creating new risks for the fiscal sustainability of government budgets at local, state, and federal levels. Tax revenues may fall due to decreased real estate values, household income, and business revenues.^53,100,163 Meanwhile, expenditures on infrastructure,¹⁶⁴ disaster relief,¹³² healthcare,^54,68 and public insurance¹³⁵ are expected to increase. Together, this fiscal risk increases the cost to government for borrowing funds (e.g., the sale of bonds) by reducing the rating of public debt, which in turn further harms the ability of governments to fund services. Figure credit: See figure metadata for contributors.

Close

American Households

Climate change will have different economic implications for American households depending on their occupation and where they live.^84,157 On average, climate change is projected to reduce future income gains compared to what households would achieve in the absence of climate change.¹⁶⁶

Climate change is expected to impact employment by changing demand for workers, reducing worker safety,⁴ altering the location of available jobs,⁴⁹ and changing workplace conditions in heat-exposed jobs.^45,167 Households may also lose wealth through declines in the value of real estate (Figure 19.3).

Climate change will affect household spending,¹⁶⁸ for example, by changing energy use (Ch. 5),¹⁶⁹ increasing medical costs (Ch. 15),¹⁴³ elevating food prices (Ch. 11),¹¹¹ raising insurance premiums, and requiring more frequent repairs and replacement of assets damaged by extreme events.¹⁶

Children’s economic prospects will be affected by climate change. For example, higher temperatures in utero negatively impact adult economic outcomes,⁶⁰ while higher temperatures during childhood reduce learning^56,170 and cognitive performance.^171,172

Climate change is expected to alter the quality of life for American households¹²⁵ by reducing life expectancy,⁷ increasing crime and domestic violence,^15,173 damaging sleep quality,¹⁷⁴ harming mental health,^6,175 reducing happiness,¹⁷⁶ and altering recreation in both positive and negative ways (Table 19.1).^{75,177,178,179}

Adapting to climate change generates new household costs and can alter living and work arrangements. For example, homes may be relocated or retrofitted to withstand weather extremes,^180,181 and consumption patterns may change to offset harms from the climate.⁶² Importantly, lower-income households may face greater risks from climate change and have fewer resources to support the costs of adaptation (KMs 22.3, 22.4).⁹⁸

American Businesses

Climate change is projected to reduce labor productivity and economic output across many sectors—including agriculture, finance, real estate, insurance, and services—and across many regions and states.^15,80,157 Extreme weather events can reduce output for extended periods, altering GDP growth rates.¹⁵⁸ In projections, these effects can compound over time, generating large cumulative losses.^9,31,157,182

Businesses will face increasing exposure to climate-related risks at local, national, and international levels. For example, more intense heatwaves will reduce local productivity, greater wildfire smoke will lower demand for outdoor services, and more frequent extreme events around the world will disrupt international trade, supply chains, and foreign demand for American products (KM 17.3).

Climate change will also affect business investment planning. For example, the location of firm capital investments may change in response to more frequent weather disasters,¹⁸³ and regional adaptation efforts may be funded via corporate taxes or impact the rate of return on other investments.¹⁸⁴ Investment strategies for climate-resilient technologies and the total cost of insurance for capital investments are both expected to be impacted by climate change. In addition, uncertainty in impacts and the effectiveness of adaptation may delay investments (see Box 19.1).

The management of climate-related business risks can draw on established practices for general risk management. For example, regulators and investors are increasingly requiring businesses to disclose climate risks and management strategies. To support this, risk assessment tools for quantifying physical risks are currently being developed in public and private sectors.^185,186

Governments and Institutions

Local, regional, national, and international governments and institutions (e.g., universities, professional associations, nongovernmental organizations) play a major role in facilitating individual and coordinated adaptation responses and enabling cost-effective decisions. Federal agencies are required to develop adaptation plans¹⁸⁷ and assess and mitigate climate-related financial risks,¹⁸⁸ while some states, local governments, and Tribal governments are developing plans varying in scope and complexity (KMs 31.1, 31.3, 31.4, 32.5).

Governments at all levels would benefit from preparing for the fiscal impacts of climate change, considering impacts on revenues, expenditure requirements (e.g., healthcare, income support), and borrowing costs.^53,68,128 Reducing the overall societal cost of extreme events may be possible through investments in public infrastructure, healthcare, and community resilience programs^189,190,191 and through public support for private adaptation, including fiscal support,⁷⁶ updated building codes (Ch. 12),^192,193,194 and better climate-risk information and disclosures.¹⁹⁵ Such public programs also have the potential to reduce the inequitable impacts of climate change.^98,196 Financial preparedness by households and public entities, such as through insurance take-up,^52,197 improved credit,^52,85 and specialized financial instruments,¹⁹⁸ can shift risk or reduce losses. However, public insurance support or provision can decrease incentives for private adaptation.^76,199

It is sometimes important for governments or institutions to quantify the overall economic impact of climate changes caused by certain current activities, for example, in analyses of whether the benefits of a new climate policy exceed its costs. A succinct summary description of the benefits of emissions reductions widely used in economic analyses is the “social cost of greenhouse gases,” defined as the cumulative global economic harm to society caused by additional greenhouse gas emissions (Figure 19.5).²⁰⁰ Institutions and governments considering the economic consequences of emissions may find estimates of this measure helpful, although they should familiarize themselves with the analytical and ethical judgments used in its construction. In 2010, twelve agencies from the Federal Government developed a process for estimating the social cost of greenhouse gases and periodically updated it based on scientific advances.²⁰¹ The current interim estimate used by the Federal Government, adjusted to 2022 dollars, is $57, $1,700, and $20,000 per ton of carbon dioxide, methane, and nitrous oxide, respectively, for 2020 emissions using a 3% discount rate.²⁰¹ There is ongoing research to update these values in accordance with recommendations from the National Academies of Sciences, Engineering, and Medicine.²⁰⁰

There is growing concern that climate change could pose a systemic risk to financial stability.^{202,203,204,205,206,207} Negative economic impacts on even a limited number of entities could, in principle, lead to cascading effects, causing wider failure in the financial system. For example, declines in property values due to climate change could adversely affect mortgage markets and financial institutions’ balance sheets, potentially leading to financial distress, especially if climate risks are imperfectly priced or if they are concentrated in government-sponsored enterprises.^{202,206,207,208,209,210} While more research is needed to understand these systemic effects, some underlying risks can be managed. For example, the risk of future asset price corrections, driven by misalignment between current prices and the expected effects of climate change,^{57,101,102,103,109,211} can be reduced through communication and disclosure of climate risks to market actors.^109,195

Climate change has the potential to undermine conditions that support overall societal stability, which may threaten economic stability, and vice versa. Global warming has the potential to impede the ability of institutions and governmental organizations to function smoothly^175,212 and to increase political turnover,²¹³ and it is directly implicated in increasing rates of violence and unrest.^214,215 Some extreme events have triggered widespread mortgage delinquency,²¹⁶ insurer default,²¹⁷ breakdown in support for leaders,²¹⁸ and the migration of large populations domestically^219,220 and internationally^221,222—which in turn impacts downstream markets.^146,223 Coping with these destabilizing effects may require investment in systems that buffer and stabilize economic and social conditions, such as social safety nets, insurance, defense spending, and confidence-building mechanisms.^54,133,224

URL

Alternative text

The social cost of greenhouse gases is a monetary estimate of the total economic impact of an additional greenhouse gas emission today.

Figure 19.5. The social cost of greenhouse gases provides an estimate of the economic benefits to society of mitigating emissions, which can then be compared against the costs of doing so. This conceptual illustration shows how the social cost of reducing emissions of a particular greenhouse gas is computed. From left to right, the effect of one ton of carbon dioxide (CO₂) emitted into the atmosphere is illustrated in terms of additional warming or other physical impacts like sea level rise; these changes are translated into costs and benefits expected in representative market sectors such as agriculture, energy services, and water and coastal resources, as well as nonmarket impacts to human health and ecosystems; lastly, impacts that occur around the world and into the future are added up into a single measure using weights that reflect preferences around time, risk, and equity. The values shown in the figure are illustrative and may differ from estimates used for regulatory purposes. Figure credit: See figure metadata for contributors.

Close