Climate Change Economics: Risks and Rewards

Climate change represents one of the most profound challenges and opportunities of our era. As global temperatures climb, the economic fallout could be staggering, yet decisive action also offers pathways to innovation, growth, and resilience.

In this analysis, we explore the mounting economic costs of our warming planet and the transformative potential of a green transition. From job creation to policy innovation, the choices made today will reverberate through generations.

Quantifying the Economic Risks

Recent models forecast that a 2°C rise in global temperature could lead to cumulative global economic losses could amount to 15% of GDP by 2050. If warming reaches 3°C, the price tag soars to 30% of global GDP by 2100, threatening livelihoods and stability across nations.

Current impacts are already manifesting. 2025 is poised to be among the warmest years on record, and climate-driven extreme weather is already reshaping markets. Floods, droughts, and storms inflict billions in damages annually, disrupting supply chains, agriculture, and infrastructure.

Long-term growth projections underscore the urgency. OECD scenarios suggest that without sufficient mitigation, global growth could slow to 1.3% by 2100, with climate damages slashing GDP by 9%. Such deceleration would constrain poverty reduction and widen inequality.

Economic Opportunities: Jobs, Investment, and Innovation

While the risks are grave, decisive climate action unlocks rapid clean energy deployment and infrastructure modernization. The green economy promises new industries, healthier communities, and robust growth.

• Climate-Related Job Creation: Ambitious climate policies could generate millions of jobs across renewables, energy efficiency, and sustainable agriculture.
• Clean Energy Transition: Technological progress and market dynamics are accelerating the shift to solar, wind, and storage solutions, driving down costs and boosting competitiveness.
• Positive Tipping Points: Infrastructure upgrades, smart grids, and carbon removal technologies can catalyze broad economic benefits, especially with targeted policy support.

Investment trends reinforce this potential. Global climate finance reached USD 1.9 trillion in 2023, surpassing USD 2 trillion in early 2024. Notably, private finance now exceeds USD 1 trillion, signaling strong market confidence.

The Finance Gap: Tracking Investments and Flows

Despite record flows, significant disparities persist. In 2023, mitigation finance totaled USD 1,780 billion, dwarfing the USD 65 billion allocated to adaptation—likely an underestimate of needs.

Emerging markets and developing economies received USD 196 billion in international climate finance, 78% from public sources. However, access to affordable private capital remains a barrier for many high-impact projects, hindering resilience and growth in vulnerable regions.

Sectoral roadmaps stress urgent action in power, buildings, industry, transport, land use, and agriculture to align with the Paris Agreement. Closing the finance gap will require innovation in blended finance and risk-sharing mechanisms.

Policy Levers: Carbon Pricing and Incentives

Governments wield powerful tools to steer markets and mobilize resources. Carbon pricing, for example, can reduce emissions and generate revenue for climate solutions.

• Carbon Pricing Models: A US carbon fee starting at $15/ton in 2027 and rising to $65/ton by 2035 could yield hundreds of billions in revenue and drive significant emissions cuts.
• Investment Incentives: Expanding tax credits under the Inflation Reduction Act could reduce emissions further, though fiscal costs may reach up to USD 4 trillion over a decade.
• Public Financing: The World Bank’s USD 50.8 billion in climate-related finance for FY2025 underscores the importance of targeted support for developing countries.

Meeting 1.5°C-aligned targets demands scaling up climate finance by nearly USD 1 trillion annually and boosting CO₂ removal technologies by more than tenfold this decade.

Outlook: Growth, Inflation, and Structural Transformation

The IMF forecasts global growth moderating from 3.3% in 2024 to 3.2% in 2025 and 3.1% in 2026. Advanced economies may hover around 1.5%, while emerging markets exceed 4%.

Inflationary pressures and fiscal health will hinge on policy choices. Tariffs, carbon fees, and sustainable investments could generate USD 2.5–4 trillion over the next decade, reshaping public budgets and priorities.

Meanwhile, the World Economic Forum highlights profound structural shifts driven by AI and cleantech, regional divergence, and evolving trade dynamics as core drivers of the coming era.

Barriers and Uncertainties

Key challenges threaten progress and must be addressed head-on:

• Investment Gaps: Adaptation and resilience funding remains severely underfinanced, particularly in vulnerable regions.
• Policy Gaps: Collective actions lag behind Paris benchmarks, leaving critical sectors exposed.
• Political and Social Challenges: Distributional impacts, competitiveness concerns, and public support are pivotal debates in climate economics.

The Path Forward: Collective Action and Innovation

Confronting climate change is not a zero-sum game. Effective collaboration between governments, businesses, and communities can transform risks into rewards.

By prioritizing early and equitable investment, harnessing market incentives, and championing ingenuity, society can build a resilient, inclusive economy fit for the challenges ahead.

Ultimately, the choices of today define the prosperity of tomorrow. Seizing the moment will require vision, resolve, and a shared commitment to sustainable progress.