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The world has “seriously underestimated” the rate of global warmingand its impact on the economy, as scientists call for an urgent “recovery plan”.
A new report from the Institute and Faculty of Actuaries (IFoA) and the University of Exeter warns that global temperatures are accelerating faster than previously predicted. It means that without immediate measures, the Earth is now likely to reach 2℃ above pre-industrial levels before 2050.
This rate of warming has been linked to “catastrophic” impacts on societies and economies worldwide, risking major disruption to water and food systems, migration and human health.
Why is the world warming faster than we thought?
The Parasol Lost report suggests this increased rate of heating is due to a loss of “aerosol cooling”, a hidden sunshade effect created by air pollution. Aerosol cooling has offset around 0.5℃ of warming, but as the world cuts sources of pollution, this hidden sunshade is now receding.
Researchers say the faster rate of warming is also explained by Earth’s sensitivity to greenhouse gases. This refers to how much the Earth’s average surface temperature will rise in response to a doubling of emissions compared to pre-industrial amounts.
The study warns that this means policymakers and financial institutions are “underestimating” climate risks that could undermine the global financial system, climate-driven inflation, financial “shocks”, and insurance companies withdrawing from high-risk areas much sooner than many expect.
Global warming’s risk to the economy
Previous estimates predicted that climate-fuelled damages would be as low as 2.1 per cent of global GDP for a 3℃ rise in temperatures, and less than eight per cent of global GDP for a rise of 6℃.
However, recent analysis from the UK’s Climate Financial Risk Forum suggests that firms could consider a severe climate and nature shock scenario that causes a 15 to 20 per cent contraction in global GDP over a five-year period “plausible”.
Researchers say the huge spike is because many economic forecasts do not include risks that scientists are now anticipating, such as sea-level rise, ocean acidification and nature degradation.
A recovery plan for the planet
Sandy Trust, lead author and sustainability board member of IFoA, says the world now needs an “urgent” recovery plan.
“Unless we rapidly change course, climate damages will start to impact growth and future prosperity,” she warns. “The parallels between the risk management failure of the Global Financial Crisis and inaction on the major systemic risk posed by climate change are clear. Both feature an over-reliance on benign risk model results and a failure to understand systemic risk.”
In Europe, experts warn that 2025’s extreme summer weather sparked short-term economic losses of at least €43 billion, with total costs slated to hit a staggering €126 billion by 2029.
The immediate losses amount to 0.26 per cent of the EU’s economic output in 2024, but the study’s authors stress that these estimates are likely conservative as they don’t include compound impacts when extreme events occur simultaneously, such as heatwaves and droughts.
They also don’t include the cost of hazards like wildfires, which broke records across Europe this year, or hail and wind damage from storms.
“We are entering a new reality of a 1.5° world, where intense physical risks are now threatening economies, living costs, and financial systems, and catastrophic tipping points are on the horizon,” Dr Jesse Abrams from the University of Exeter says.
“Today, we can already observe the economic cost of these climate impacts. As the rate of warming accelerates, these climate shocks are now likely to arrive faster, bringing more immediate and intense impacts to our economies that policymakers and markets must be prepared for.”