Why a pessimistic economic outlook seems likely, and what this means for climate change
Climate adaptation and climate finance challenges might be bigger than we think.
Ryan Langendorf and Ashley Dancer also contributed to this post.
We recently published a study showing that economic trends of the past sixty years suggest a twenty-first-century outlook with slower growth and more inequality than most major economic forecasts and scenarios currently predict. Our study suggests that economic scenarios like Shared Socioeconomic Pathway SSP4—a worst-case scenario for growth and inequality in the Intergovernmental Panel on Climate Change (IPCC) scenario framework—might actually be best-case scenarios for growth and inequality.
What would a slow-growth, high-inequality economic scenario mean for climate change? In short, it would probably mean lower greenhouse-gas emissions in the short term, greater challenges for climate adaptation in both the short term and the long term, and greater challenges for climate financing. The long-term effect on emissions would be more difficult to predict, because slower economic growth would probably translate into both less energy demand and less innovation. Less energy demand would mean lower emissions, all else equal. Less innovation would probably mean higher emissions, all else equal.
Why a pessimistic economic outlook seems likely
The IPCC and the climate science community use economic scenarios to understand possible trajectories of greenhouse gas emissions and climate impacts. The SSPs produce a similar range of economic outlooks as do expert surveys and statistical models. Fast-growth SSP scenarios like SSP5 (“Fossil-fueled development”) and SSP1 (“Sustainability”) assume that all major regions grow to have an inflation-adjusted gross domestic product (GDP) per capita in 2100 that is two-to-five times that of today’s rich regions. Slow-growth SSP scenarios like SSP3 (“Regional rivalry”) and SSP4 (“Inequality”) assume that rich regions double or triple their GDP per capita by 2100. Poor regions increase their GDP per capita by two to five times, but are still substantially poorer than rich countries are today, by 2100. If these all seem like large increases, consider the fact that world GDP per capita nearly quintupled between 1920 and 2000.
In a 2021 study, we showed that historical economic growth since 2005 has been slower than all of the SSP scenarios predicted. This discrepancy was partly caused by the major global recessions of 2008 and 2020, but it was caused in greater part by growth in poorer regions, such as the Middle East and Africa, Latin America and the Caribbean, and the former Soviet Union, being persistently slower than the scenarios expected.
National governments and major international agencies, such as the International Monetary Fund (IMF)—whose forecasts influenced the SSPs—have also tended to make positively biased economic forecasts. There are many reasons for this. Governments do not want to make their current policies look bad or underestimate their ability to spend money. The IMF understandably expects the development projects it funds to work, but sometimes they don’t work. Agencies hope that international development goals will be met and design scenarios reflecting that. Assumptions baked into models—like GDP eventually reaching its theoretical potential—often do not hold. Major recessions tend to produce larger departures from typical years’ growth rates than booms do, which makes forecasts that try to predict a typical year’s growth positively biased, on average. Countries—especially those that are poorer—can experience unexpected negative economic shocks whose consequences last years to decades. The Syrian civil war and ongoing crisis in Venezuela provide two examples of this.
In our new paper, we showed that GDP per capita growth has had a consistent relationship with GDP per capita, for at least the past sixty years. We showed that a simple differential-equation model based on this relationship could have produced more accurate forecasts of GDP per capita growth rates in the 2010s than the IMF produced, even if our model had stopped taking in new data and forecasted out from 1980. Our model would also have produced, since 1980, consistent forecasts of GDP per capita to 2100 similar to SSP4 (“Inequality”). Our colleagues from the University of Denver developed a very different model, called International Futures, which makes a nearly identical prediction. International Futures simulates dozens of sub-models of parts of the economy, based on data from thousands of variables.
Although our model would have historically forecasted GDP per capita growth more accurately than the IMF did overall, our model still would have forecasted higher growth in low-income countries than was observed. This suggests that our model tends to over-predict growth and under-predict inequality. Therefore, our model’s prediction probably represents a best-case scenario, not a most-likely scenario, even though it predicts slower growth and higher inequality than do most other economic scenarios.
What about the possibility of artificial intelligence, nuclear fusion, or some other major technological breakthrough making economic growth much faster than we thought? This is of course possible, but we show that high-growth SSP scenarios would require GDP per capita growth rates to roughly double their recent historical averages, and to do so almost overnight. It is worth remembering that the past 100 years have seen by-far the fastest GDP per capita growth rates in world history. Doubling those growth rates would be quite a feat. There are also several countries, such as the Democratic Republic of Congo, Haiti, Liberia, Madagascar, North Korea, and Sierra Leone, among others, that have not increased their inflation-adjusted GDP per capita at all since at least the 1940s.
Slow growth could mean lower or higher greenhouse-gas emissions
All else equal, richer countries have higher energy demands and more innovation. Energy demands increase greenhouse-gas emissions. Innovation can decrease emissions. Until the early aughts, higher GDP per capita was associated with higher greenhouse-gas emissions. However, most high-income countries have since reversed this pattern, by reducing their greenhouse-gas emissions even as they increased their GDP per capita. Innovation has been key to this success, by driving improvements in energy efficiency, renewable energy, and natural gas, which has displaced more carbon-intensive coal.
A slow-growth economic outlook for the future probably implies both less energy demand and less innovation than we currently expect. Less energy demand means lower greenhouse-gas emissions, in both the short and long term. Less innovation has little effect on short-term emissions, but probably means a slower energy transition, and therefore higher greenhouse-gas emissions, in the long term. It is therefore difficult to predict whether a slow-growth economic outlook means higher or lower long-term emissions than we currently expect.
Slow growth makes climate adaptation and climate finance challenges bigger
A country’s ability to adapt to climate change is strongly correlated with its GDP per capita. Richer countries, on average, have better infrastructure and healthcare systems. They have more resources to invest in natural disaster prevention and recovery, and in resilience measures for agriculture and other climate-vulnerable sectors. On average, richer countries also have more democratic and better-functioning governance institutions, which are associated with lower natural disaster death rates.
Therefore, a slow-growth, high-inequality economic future is one where fewer resources are available than expected for adapting to climate change, especially in poorer countries, who already face the most severe physical risks from climate change. This suggests that climate-adaptation financing may represent a greater need than we currently expect. The IPCC’s latest Synthesis Report notes that climate adaptation is already severely underfunded, and receives much less earmarked international funding than efforts to reduce emissions. To make matters worse, slower economic growth would probably also make debt and deficit problems larger, which would make it harder to invest in climate adaptation.
Despite these challenges, there are also clear signs of progress and hope for climate adaptation. Death rates from natural disasters have fallen by nearly 6.5 times since the late 1980s, globally. Damages as a fraction of GDP exposed to natural disasters have fallen by nearly 5 times over this period. These declines in death and damage rates have been larger in poor countries than in rich countries, on average. Although our recent study suggests a poorer and more unequal outlook than other economic outlooks, our models still predict a world in 2100 that is substantially richer, and more equal, than the world is today.