Quantifying the cost of climate change impacts: Limitations and frontiers of economic models

Preprint on SSRN: 10.2139/ssrn.5493267

Abstract
The economic costs of climate change remain highly uncertain. Beyond uncertainties related to future climate change and its biophysical impacts, economic models face several key limitations. This paper reviews the main types of economic models used to quantify climate-related costs, revealing strengths and limitations of each approach. We find that the coarse spatiotemporal resolution of economic models poses significant challenges for accurately assessing the costs of climate change, particularly those related to climate extremes. It also limits the usefulness of model outputs for adaptation decision-making. Additionally, none of the current economic models provides a comprehensive cost assessment due to methodological trade-offs between regional and sectoral coverage and granularity. Future research should focus on: (1) reconciling statistical and structural models; (2) validating structural models; (3) improving the temporal extrapolation validity of economic models; (4) improving quantification of the growth effect of climate change on economic output; (5) integrating often-omitted climate hazards and human capital impacts; and (6) addressing deep structural uncertainties arising from the complex climate-socioeconomic-sociopolitical interactions. A multi-model approach is needed to effectively address both the direct and indirect costs across scales. Developing hybrid models that combine the strengths of both statistical and structural approaches could bridge the gap in cost estimates. Enhancing economic models to assess asset-level impacts is crucial for increasing their usefulness in adaptation decision-making.

Recommended citation: Orlov, A., Avakumović, J., Blanz, A., Borchert, L., Drupp, M.A., Schaumann, F., Waidelich, P., Sillmann, J. (under review). "Quantifying the cost of climate change impacts: Limitations and frontiers of economic models."