Risks around the estimates of climate damage costs

There is a large degree of uncertainty around the estimates of the fiscal costs of climate change presented in this chapter, with both upside and downside risks. This is particularly the case for the estimates of the costs from climate damage, where the risks are skewed to the downside. This box summarises the main sources of these risks and uncertainties.

The main upside risks to estimates of the fiscal costs from climate damage are:

• Accelerated global transition to net zero: The world could significantly invest in and speed up decarbonisation, leading to a faster fall in emissions and lower damage costs. The below 2°C scenario already requires a significant global policy acceleration, so this is a low-probability risk.
• Damage estimates may be too high: It is possible that economies will be more resilient and better able to adapt to climate change than expected, especially as its effects will build up relatively slowly over time. For example, in response to the much more sudden onset of Covid, many aspects of the economy showed high levels of resilience, quickly pivoting to new ways of working, which lowered the economic costs of the shock.^a
• Research and development: new or lower-cost technological solutions to reduce temperatures or remove emissions at scale may be found. For example, research projects are investigating various ways of reducing the solar energy that enters the Earth’s biosphere, and ways to increase carbon sequestration from the atmosphere.^b

The main downside risks to estimates of the fiscal costs from climate damage are:

• Reduced commitment to global transition: Countries could wind back, or reverse, their net zero policies – as we have seen this year with the United States.^c This would result in temperatures rising beyond the below 3°C scenario used in this report.
• Damage estimates may be too low: The damage function used in this report does not model all the potential impacts of climate change on the UK. For example, sea level rise is not included.^d Further, the studies used for these damage estimates are generally based on linear extrapolations of the past. This could underestimate future risks if the impacts of climate change on global weather patterns and economies are not linear.^e
• Tipping points: Some events could cause large, irreversible changes to the Earth’s climatic system and lead to significant economic damage. Such tipping points are not modelled in most economic studies of climate change. The Global Tipping Points Report 2023 concluded that some tipping events are now ‘high-impact, high-probability’,^f a shift from the IPCC’s Sixth Assessment Report, when they were classed as low-likelihood events.^g
• International spillovers: Cross-border spillovers are generally not captured in the damage estimates used in this report. Climate change and extreme weather events could disrupt global supply chains which are essential to much of the UK’s economic activity. Climate change could also result in increasing levels of migration from regions that become uninhabitable or suffer extreme economic damage. Evidence also suggests that the risk of epidemics and pandemics increases significantly with climate change.^h
• Reduction in private sector insurance cover: The mispricing of damage risk by insurance providers, increasingly unaffordable premiums, or lack of coverage options, could see a contraction of insurance services.ⁱ This could require the government to provide additional direct support or to underwrite insurance.^j

A number of these downside risks are very difficult to quantify but have the potential to generate more severe economic damage than we project in the central scenario. This suggests that risks to the climate damage estimates in this report are skewed to the downside.