Time, Space, and Climate Damages

Does the way we look at a problem – over time or across an ensemble – change what we see? The main insight from Ergodicity Economics is that when ergodicity is broken, it does. But asking the ergodicity question is not only a great starting point for solving formal problems in economics; it can also shed light on differences in the way problems of the real world are perceived. An example is the issue of “damages” from climate change. When climate economists talk about the “damages”, they do not mean destruction or loss over time in the way most people imagine. Instead, they are comparing two hypothetical futures – one with climate change, one without. This blogpost unpacks why that matters.

What is damage?

In everyday language, “damage” is a temporal concept in the following sense: We use it to describe the harm done to something over time – a harm that lowers the value or usefulness of a thing between one point in time and another. I may say “my boat was damaged in a storm.” By this, I mean that I used to have a functioning boat in the past, but now there’s a hole in it! The conventional meaning of the word “damage” contains a temporal aspect – you compare the state of something at two points in time (Fig.1).

Fig 1: Conventional meaning of the word “damage”. The usefulness of a boat declines over time because the boat was damaged in a storm.

Damage from climate change

In the context of the physical impact of climate change, we usually think of “damage” in this conventional way. For example, climate scientists would find that rising water temperatures have damaged the Great Barrier Reef referring to the difference between how the reef used to be and how it is now.

While the current global climate supports the production of food and goods that humans need, disruptions caused by climate change may reduce its ability to do so in the future. Climate economics attempts to incorporate these possible damages from climate change into economic models. But in this process, something happens to the concept of damages:

Instead of comparing economic situations between two points in time, climate economists usually compare two scenarios of imagined futures. This is an ensemble-perspective on the damages. Effectively, “damage” here refers to the difference between two parallel worlds at some future point in time: in one world climate change doesn’t have any effect on the economy and in the other it does.

Growing at different rates

Let me explain how this shift happens: A key indicator of the state of the global economy is the global GDP, which is the monetary value of all final goods and services produced in the world in a given year. Historically, global GDP has shown consistent year-on-year growth with only a few exceptions (e.g. the global financial crisis in 2008-2009 and the COVID-19 recession in 2020).

In neo-classical macroeconomic models, GDP growth is assumed to continue due to a growing capital stock, population, and productivity. Forecasts based on past observations are used to make baseline projections of the future global GDP. In the baseline world, there are no damages from climate change.

Climate economists add to the baseline projection another projection which accounts for effects of climate change on GDP. Because climate change may negatively affect GDP, climate economic models introduce a damage function that simply removes a share of GDP in each modelled period so that the economic “damages” accumulate over time. In this way, an adjusted model world appears: In this world there is climate change, which makes global GDP grow at a lower-than-baseline rate.

The difference between global GDP in the baseline world and that of the world with climate change is what economists would refer to as “GDP damage from climate change” or “GDP losses”. That is, GDP “damage” is the result of comparing two different model worlds projected into the future. Typically in these models, the growth rate experiences a temporal shift – a damage in the conventional sense of the word – but not the GDP, which will grow compared to today in both model worlds. This is illustrated in Fig. 2 below:

Fig 2: Global GDP per capita growth (top) and corresponding total GDP in constant 2015-USD (bottom). The baseline GDP per capita growth rate for 2024-2100 is set to the average observed growth rate in the period 1960-2023. Total GDP projections are obtained by multiplying GDP per capita by the global population projections. In this illustrations, the projection with damages from climate change assumes a sigmoidal impact of climate change on the growth rate over time. It is calibrated such that the “GDP damage” is 23 percent by 2100, as estimated by [1]. While growth is damaged by climate change in the conventional meaning of the word (comparing two points in time), the GDP “damage” appears from comparing two projections at one point in time. Observations (in grey) are from the World Bank [2, 3]. The population projection used for the GDP projection is taken from the IPCC SSP5 [4].

What’s the problem?

The comparison of different worlds is not really wrong or problematic per se, and thinking of the future in terms of “scenarios” is indeed very common in economics. But there is a problem with the use of the term “damage” or “losses” in this context, because it gives the impression that GDP damage appears in the models in the conventional, temporal sense of the word, but really it doesn’t.

For example, an often-cited paper by Burke and co-authors [1] suggests that climate change may cause a “GDP damage” of up to 23 percent by 2100. This estimate is significantly higher than those of other studies and regarded as an extreme outcome. But what does it mean? This does not mean that GDP will be 23 percent lower than it is today. Instead, it means that GDP will be 23 percent lower than GDP in the baseline world that doesn’t have any damage from climate change. As such, the 23 percent damage corresponds to a world in which GDP is much greater than today.

We can get a feeling for the magnitudes involved by looking at the GDP projections of the models used in the latest IPPC assessment report, AR6: Under the assumption that climate change has no effect on the economy, the 2100-projections of the baseline SSP5 scenario, which is the scenario compatible with 4 degrees global warming, indicate that global GDP will be around 1000 trillion USD (measured in PPP-adjusted 2010 international USD) [5, Fig. 3.9c]. In rough figures, this means the global economy will be 1000 percent its current size (see footnote for the calculation).

If climate change reduces this baseline GDP projection by 23 percent, the global GDP will instead be “only” about 800 percent of its current size (eight times larger than today). In other words, even if accounting for the “damage” from extreme global warming, the projection suggests that we will be much richer in the future! This seems drastically inconsistent with the effects of climate change that climate scientists are concerned about: A permanent disruption to global food production and the possibility of societal collapse [8]. Thus, under 4 degrees of global warming, the economic projection suggests a world that is much wealthier; under the same conditions, climate scientists suggest a world potentially unable to meet humans’ basic needs like food and shelter from extreme weather.

Communicating clearly

While papers estimating the economic damage from climate change generally explain how these “damages” should be interpreted, the estimates are sometimes conveyed in muddled ways, making their implications hard to grasp for the uninitiated. For example, consider this sentence in the IPCC AR6 WGII report discussing the “damage” estimates:

“Under high warming (>4°C) and limited adaptation, the magnitude of decline in annual global GDP in 2100 relative to a non-global-warming scenario could exceed economic losses during the Great Recession in 2008–2009 and the COVID-19 pandemic in 2020.” [9, page 67]

To an economist, the meaning of the sentence may be clear: “the magnitude of decline in annual global GDP” refers to the difference in GDP between two scenarios – one with climate change and one without. This difference across the scenarios is then compared to “economic losses during the Great Recession in 2008–2009 and the COVID-19 pandemic”, which are also differences between scenarios: The baseline scenarios are the projected worlds had the crises not occurred, and these baselines are compared to what actually happened. For example, if global GDP was projected to grow by 2 percent in 2020 but instead shrank by 3 percent due to COVID-19, the “economic loss” would be 5 percent that year. The sentence in the IPCC report implies that climate-related inter-scenario “losses” accumulated until 2100 could exceed the COVID-19 related inter-scenario “losses” of 2020.

But the readers of the IPCC report are not necessarily economists and likely unfamiliar with the concept of “losses” across scenarios. Moreover, during the Great Recession and the COVID-19 pandemic, global GDP losses were truly experienced over time: There was negative growth, recessions, actual year-on-year declines in global GDP.

If the readers think of damages in the conventional, temporal sense of the word, there are several ways of understanding the sentence in the IPCC report. For example, given that global GDP dropped 3 percent during the COVID-19 crisis, perhaps GDP will be more than 3 percent lower by 2100 than it is today. Or worse, perhaps climate change will cause global GDP to diminish at a rate exceeding the 3 percent per year observed during the pandemic. Both of these temporal interpretations describe a future that looks very different from the one imagined by economists, who expect the economy to grow many times larger than it is today and continue growing, even with the effects of climate change.

Perspective matters

The terminology used in economics can be confusing, or even misleading. The concept of “damages” caused by climate change is an example of a disconnect between conventional meaning and economic terminology. Rather than describing an actual loss or deterioration over time, economists see climate “damages” as the difference between two modelled futures in both of which the economy is growing healthily – one with climate change, one without. In this way, even with substantial “damage”, the global economy of the future is projected to be vastly greater than today.

Whether including climate change or not, both model worlds can have unbounded economic growth, while in the real world we live in, the economy is constrained by the planetary resources. Climate scientists are increasingly concerned that these resources will be irreversibly damaged or lost entirely. Using “damages” to refer to a difference across an ensemble – rather than over time – makes it harder to spot the gaping disagreement between the risks perceived by the two communities. A productive conversation about the possible futures of the planet starts with clear communication.

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Footnote:

From [6], we get 2010-GDP = 111 trillion [ppp-2021 intUSD], 2023-GDP = 166 trillion [ppp-2021 intUSD], and 166 trillion [ppp-2021 intUSD]. From [7], we get 2100-GDP = 1000 trillion [ppp-2010 intUSD] and 2010-GDP = 71 trillion [ppp-2010 intUSD]. This gives the unit correction factor: 111 [ppp-2021 intUSD] / 71 [ppp-2010 intUSD] = 1.563 [ppp-2021 intUSD]/[ppp-2010 intUSD]. Correcting the projected 2100-GDP: 1000 trillion [ppp-2010 intUSD] *1.546 [ppp-2021 intUSD]/[ppp-2010 intUSD] = 1546 trillion [ppp-2021 intUSD], which is approximately 10 times the current 166 trillion [ppp-2021 intUSD].

References:

[1] Burke, M., Hsiang, S. & Miguel, E. (2015) Global non-linear effect of temperature on economic production. Nature 527, 235–239 doi: https://doi.org/10.1038/nature15725 https://www.nature.com/articles/nature15725.

[2] World Bank, Global GDP per capita, constant 2015 USD: https://data.worldbank.org/indicator/NY.GDP.PCAP.KD (accessed 25.06.2025)

[3] World Bank, Global GDP, constant 2015 USD USD:https://data.worldbank.org/indicator/NY.GDP.MKTP.KD (accessed 25.06.2025)

[4] KC, S., Moradhvaj, Potancokova, M., Adhikari, S., Yildiz, D., Mamolo, M., Sobotka, T., Zeman, K., Abel, G., Lutz, W., & Goujon, A. (2024). Wittgenstein Center (WIC) Population and Human Capital Projections – 2023 (Version V13) [Data set]. Zenodo. https://doi.org/10.5281/zenodo.10618931

[5] Riahi, K., R. Schaeffer, J. Arango, K. Calvin, C. Guivarch, T. Hasegawa, K. Jiang, E. Kriegler, R. Matthews, G.P. Peters, A. Rao, S. Robertson, A.M. Sebbit, J. Steinberger, M. Tavoni, D.P. van Vuuren (2022). Mitigation pathways compatible with long-term goals. In IPCC, 2022: Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [P.R. Shukla, J. Skea, R. Slade, A. Al Khourdajie, R. van Diemen, D. McCollum, M. Pathak, S. Some, P. Vyas, R. Fradera, M. Belkacemi, A. Hasija, G. Lisboa, S. Luz, J. Malley, (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA. doi: 10.1017/9781009157926.005 https://www.ipcc.ch/report/ar6/wg3/downloads/report/IPCC_AR6_WGIII_Chapter03.pdf?utm_source=chatgpt.com

[6] World Bank, Global GDP, PPP constant 2021 international USD: https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.KD (accessed 25.06.2025)

[7] Byers, E., Krey, V., Kriegler, E., Riahi, K., Schaeffer, R., Kikstra, J., Lamboll, R., Nicholls, Z., Sandstad, M., Smith, C., van der Wijst, K., Lecocq, F., Portugal-Pereira, J., Saheb, Y., Stromann, A., Winkler, H., Auer, C., Brutschin, E., Lepault, C., … Skeie, R. (2022). AR6 Scenarios Database (1.0) [Data set]. Zenodo. https://doi.org/10.5281/zenodo.5886912 (accessed 25.06.2025)

[8] L. Kemp, C. Xu, J. Depledge, K.L. Ebi, G. Gibbins, T.A. Kohler, J. Rockström, M. Scheffer, H.J. Schellnhuber, W. Steffen, & T.M. Lenton (2022). Climate Endgame: Exploring catastrophic climate change scenarios, Proc. Natl. Acad. Sci. U.S.A. 119 (34) e2108146119, https://doi.org/10.1073/pnas.2108146119.

[9] IPCC (2022) Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press. Cambridge University Press, Cambridge, UK and New York, NY, USA, 3056 pp., doi: 10.1017/9781009325844 https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_FullReport.pdf

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