Climate Change and the Cost of Inaction

Economists Rio Colacito, Bridget Hoffmann, and Toan Phan posit that we may be underestimating the future costs of climate change inaction because we aren’t fully recognizing how climate change affects business-as-usual. In a column published on, they point to our methods of aggregating data as the potential culprit, as it masks seasonal and geographical nuances, skewing our financial estimates downward.

In examining the growth rate of gross state product (GSP) and average seasonal temperatures for each U.S. state, they found that summer and autumn temperatures have opposite effects on economic growth. An increase in the average summer temperature negatively affects the growth rate of GSP. An increase in the autumn temperature positively affects this growth rate, although to a lesser extent. This suggests that previous studies’ aggregation of temperature data into annual temperature averages may mask the heterogeneous effects of different seasons. By combining state data into national averages, previous studies may also mask regional variations—for example, rising temperatures have a bigger financial impact on states with already high average summer temperatures, most of which are in the south.

The study also looked at the effect of rising temperatures across different sectors of the U.S. economy, and it found that an increase in average summer temperature has a pervasive effect on all industries, not just the sectors that are traditionally assumed to be vulnerable to climate change. An increase in the average summer temperature has a negative effect on the growth rate of output of many industries, including finance, services, retail, wholesale, and construction that represent more than a third of gross domestic product (GDP). Only a few sectors such as utilities (1.8% of GDP) benefit from an increase in the average summer temperature. Like with the state data, the sector data showed summer and autumn to have opposite effects on labor productivity.

By splitting the summer and autumn data and weighting them appropriately, the economists put forth three long-term projections on how climate change inaction will affect U.S. GDP, using low, medium, and high greenhouse gas emissions. Even in the most conservative scenario, the U.S. could see a GDP reduction of up to 10%. In the high emissions scenario, the U.S.’s economy could be reduced by 1/3. Colacito, Hoffmann, and Phan hope their research and work my other economists will lead to more ambitious climate initiatives.

In this video, Bridget Hoffmann discusses the economic thread of climate change.

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