Climate change may have many economic impacts, including loss of crops, changes in water supply, increased incidence of natural disaster, and spikes in health care costs related to infectious diseases and temperature-related illnesses. However, hard evidence about the effects of climate change on economic activity has been inconsistent.

A new paper published in Nature takes on the ambitious task of connecting micro- and macro-level estimates of climate costs. The study finds that climate change can be expected to reshape the global economy by reducing average global incomes roughly 23 percent by the year 2100. This study is important because it solves a problem that has existed in prior models of climate change effects on economics: discrepancies between macro- and micro-level observations. This study presents the first evidence that economic activity in all regions is coupled in some way to global climate. The study also sets up a new empirical paradigm for modeling economic loss in response to climate change.

The study uses data from the years 1960 to 2010 to analyze what’s clearly a complex relationship between temperature and economic productivity. The authors’ analysis uses a novel approach to dealing with confounding variables, which allowed them to account for four important factors: (1) constant differences between countries, such as cultural differences, (2) common contemporaneous shocks, such as global price changes, (3) country-specific trends in growth rates, and (4) non-linear effects of annual average temperature and rainfall.

This modeling allowed them to examine whether country-specific deviations from growth trends were related to country-specific differences in temperature and precipitation trends, while accounting for any global shifts that would be experienced to affect all countries.

The main results from this analysis show that there is an overall non-linear pattern in the relationship between temperature and economic development. Instead of a linear relationship, the productivity rises steadily and slowly until it reaches a peak at the ideal average annual temperature for productivity (55 degrees Fahrenheit or 15 degrees Celsius). Then, past this peak ideal temperature, there is a very sharp and steady decline in productivity as temperatures continue to rise. This relationship is partially due to geographic effects, as most low-income countries are in warmer regions and therefore likely to suffer stronger effects from climate change. By contrast, richer and more industrialized countries tend to be in more temperate areas, so climate change will have a less severe effect on their economies.

This finding does bring an important historical question to mind: are wealthy countries wealthier because they’re in regions that are less susceptible to climate-related economic variability? Unfortunately, answering that question goes beyond the scope of this study, but it could be a compelling direction for future research.

The study suggests that overall economic productivity reaches its peak at an annual average temperature of 55 degrees Fahrenheit (or 15 degrees Celsius) and declines sharply at both higher and lower temperatures. It appears that this finding applies to all countries included in the study and has been constant since 1960, which suggests that it is applicable to all types of economic activities, including agricultural and industrial, and in all types of countries, including richer and poorer nations. However, the countries that exist closest to this ideal temperature for productivity tend to be more industrialized countries, which raises a question about the existence of a causal relationship for this finding. Did the ideal temperature allow these countries to become more productive, or did their high productivity bias the findings such that their average temperatures were found to be the most productive?

The most striking finding of the study, however, is that continued global warming will cause average global incomes to fall by approximately 23 percent from where we'd expect them to be in the year 2100 (meaning they'd still grow, but climate change will cut into that growth). In addition, as global incomes fall, global income inequality will continue to widen. Scenarios in which climate change is limited don’t see similar decreases in global incomes.

The take home message of this article is that climate change has serious economic consequences, especially in lower-income countries, which are the most likely to suffer adverse economic consequences. If there’s one thing everyone responds to, it’s a hit to their wallets, and this study demonstrates that unless we take steps to rein in climate change, we’ll all be taking that hit in the later decades of this century.

Nature, 2015. DOI: 10.1038/nature15643 (About DOIs).

Correction: the sentence regarding growth expectations in the year 2100 did not specify that this was relative to expected growth rates, rather than relative to today's economies.