Global GDP could decline by up to 24% by 2100 if fossil fuel pollution continues unabated without significant mitigation and adaptation efforts.

The updated and expanded working paper, based on findings from a 2019 study, incorporates the latest data from the Intergovernmental Panel on Climate Change (IPCC) says.

The study reveals that all countries, regardless of wealth or climate, will face economic setbacks due to the current emissions trajectory, predicting a GDP loss of 10.5% for the US and over 13% for Canada by the century's end.

Central to a new initiative called climaTRACES lab, launched this year by Dr. Kamiar Mohaddes, an Associate Professor at Cambridge Judge Business School and Fellow in Economics at King's College, along with former Cambridge Gates Scholar Dr. Ramit Debnath, is the focus on data-driven analyses aimed at influencing business and policy. Dr. Debnath recently researched the impact of lethal heatwaves on India’s economic growth.

The new report indicates that an initial investment of less than 2% of global GDP in enhanced measures to combat global warming could keep the temperature rise below 2°C. This approach could help avoid an estimated loss of 11% to 13% of cumulative GDP by the year 2100.

Dr. Mohaddes says their work estimates the cost of inaction in the short-term will be 10% to 15% of lost global GDP by the end of the century – wiping out many trillions of dollars of wealth.

“Hesitating to incur the upfront costs of climate mitigation has truly enormous economic implications down the line,” Dr Mohaddes indicates.

ClimaTRACES was launched in May, coinciding with a speech by former US Vice President and renowned environmental advocate Al Gore at King’s College. Gore pointed out that while university research often emphasizes technological solutions to the climate crisis, there is a lack of focus on understanding how to foster the "formation of political will" for action.

Dr. Mohaddes notes that Gore underscored the very gap that ClimaTRACES aims to fill, emphasizing their goal of helping policymakers and businesses better grasp the costs associated with climate change and biodiversity loss.

“We need to take these communities with us through the right communications, and the right policy and product design,” he says.

One of the initial research projects from ClimaTRACES is a collaboration with the Boston Consulting Group (BCG), one of the leading management consulting firms globally.

ClimaTRACES plans to emphasize partnerships with the private sector. Dr. Mohaddes states an organization like BCG has the machinery to take this research to its client base, to the key players in services, manufacturing and agriculture.

“Our work will be to generate the data and help shape the messages needed to address the climate crisis.”

New research reveals urgent economic impacts of Climate Change on political will and private sector engagement

For the private sector, the end of the century may seem far away, especially when focused on the next quarterly report, and policymakers are constantly grappling with economic shocks.

Dr. Mohaddes collaborated with colleagues from the University’s Bennett Institute for Public Policy to illustrate how ecological damage will impact national finances more immediately through sovereign credit ratings.

The economists employed artificial intelligence to simulate the effects of climate change on Standard and Poor’s credit ratings for 108 countries by 2030, as well as projecting into the following decades.

The initial “climate smart” credit ratings indicate that, without action to reduce emissions, up to 63 countries could experience an average downgrade of more than one notch by the end of this decade.

Countries like Germany and Sweden might drop by three notches, while the US and Canada could fall by two. The multinational bank Standard Chartered has begun incorporating this research into their models for assessing sovereign default probabilities.

A team from the Bennett Institute has developed the first biodiversity-adjusted sovereign credit ratings to illustrate how the destruction of natural habitats could impact public finances.

The results are alarming: the loss of plant and animal species is projected to lead to significant sovereign downgrades, with countries like China and Indonesia potentially facing a two-notch drop as soon as 2030.

Beyond its inherent and immeasurable value, biodiversity offers essential natural services, including food supply from fish stocks, pollination by insects, soil regeneration, and the regulation of water and climate.

Research from the Bennett Institute indicates that if certain regions experience "partial ecosystem collapses" in fisheries, tropical timber production, and wild pollination—as simulated by the World Bank—over half of the 26 countries studied could face credit downgrades.

These anticipated downgrades would significantly raise annual debt interest payments by billions of dollars, placing many developing countries at a heightened risk of default, essentially pushing them toward bankruptcy.

Ecosystem services missing from National Balance Sheets

The complete omission of essential ecosystem services from national balance sheets represents a significant blind spot in economic risk assessment and has exacerbated the exploitation of natural resources. Many believe this oversight is no longer sustainable.

Over his forty-year career at Cambridge’s Faculty of Economics, Prof. Sir Partha Dasgupta has pioneered economic models that incorporate nature and human wellbeing, moving beyond the GDP metrics that have prevailed since World War II.

He contends that GDP overlooks vital contributions from ecosystems, such as raw materials and clean air, arguing that it is not fit for purpose due to a “faulty application” that fails to account for “our most precious asset”: nature.

He is supported in this view by other Cambridge economists, including Prof. Dame Diane Coyle, Co-Director of the Bennett Institute. Her team has been involved in the 'Wealth Economy' project, which explores methods for measuring the assets needed for sustainable prosperity.

GDP adds up the value of goods and services produced by a country to create a single figure that ranks national economies.

 “A focus on GDP without proper regard for environmental degradation or inequality has been a disaster for global ecosystems.”

The UK Treasury commissioned a 600-page review on the economics of biodiversity, led by Dasgupta and published in 2021. The report called for urgent increases in global supplies of “natural assets,” advocating for measures like expanding Protected Areas and implementing policies to reduce harmful consumption, such as meat-heavy diets.

Countries are often considered to have thriving economies even as their biological assets face significant erosion. Estimates indicate that between 1992 and 2014, produced capital per person doubled, while natural capital per person declined by nearly 40%.

The report suggested implementing new metrics for economic success, highlighting the inclusion of natural capital in national accounting as a crucial first step.

Prof Dasgupta was one of the Cambridge academics who assisted the United Nations in launching its updated 'Ecosystems Accounting' framework.