For more than three decades, the working assumption in climate economics has been that each additional degree of global warming would cost the world economy between 1 percent and 3 percent of GDP.

The framework goes back to 1992, when William Nordhaus, the Yale economist who would later win a Nobel Prize for this work, first modelled it. The implication was sobering but reassuring: climate change would be serious, but economically manageable.

New research is now making a different case. A landmark paper published as the lead article in the latest edition of the Quarterly Journal of Economics concludes that a permanent 1°C rise in global temperature reduces world GDP by more than 20 percent, comparing the economy we’d have without warming to the economy we’re heading toward.

Under current policy trajectories, the world economy could be more than a third smaller by 2100 than it would have been without warming. And the damage is not confined to some distant future — the authors conclude that world GDP per capita would already be 25 percent higher today had no warming occurred since 1960.

The social cost of carbon

What’s driving these numbers is a major revision to how economists calculate the social cost of carbon — the monetary damage to the global economy from each additional tonne of CO₂ emitted.

The concept may sound abstract, but what it measures is not. It is a monetary quantification of the damage and suffering caused by climate change: destroyed homes and infrastructure, failed crops, broken supply chains, workers unable to function in extreme heat, rising illness and premature deaths, businesses interrupted or closed, insurance markets buckling under uninsurable risk, and communities displaced from places that used to be habitable — all of it converted into a cost per tonne of emissions.

This new study now estimates that the economic damage from every tonne of carbon emitted exceeds $1,200 (USD) — more than eight times the prior established estimate of $149 per tonne.

It is a major revision to the prevailing wisdom that has dominated for over three decades, and it carries implications for policymakers around the world.

What changed?

The major advance in this paper — by Adrien Bilal of Stanford and Harvard and Diego Känzig of Northwestern — is a change in methodology.

Previous work estimated climate damage by measuring how individual national economies perform during relatively hot years. For example, economists compared India’s economic output in a hot year to that in a cool year — and repeated the analysis across 173 countries and decades of data. The damage estimates that anchored climate economics for thirty years came from that approach.

The problem is that national temperature variation fails to capture the full picture. It is global temperature changes that are far more strongly correlated with the extreme weather events that cause the largest economic damage — hurricanes, extreme precipitation, droughts, and extreme wind.

The national temperature approach also underrepresented the effects of ocean warming, a major driver of climate harm that local measurements were not capturing. And the historical approach missed the interconnected nature of climate damage: extreme weather in one part of the world doesn’t just affect local crops and GDP — it ripples through global food prices, supply chains, and trade in ways the old models weren’t designed to see.

Bilal and Känzig addressed these shortcomings by using global temperature as the variable of interest instead of national temperature. The result is a damage estimate an order of magnitude larger than previous work, and an entirely different picture of what each tonne of carbon pollution actually costs.

Global versus national costs

While Bilal and Känzig’s work heightens the economic urgency for global emissions reductions, it also changes the business case for individual countries to act alone.

The social cost of carbon is a measure of global economic damage — the combined cost to all national economies worldwide. Economists use a separate measure — the domestic cost of carbon — to capture the economic damage a country inflicts on itself by emitting, separate from the damage its emissions cause globally.

The domestic cost of carbon is, by definition, always lower than the global social cost of carbon. And historically, the domestic costs for major emitters have been lower than the generally accepted average cost of cutting a tonne of emissions — about $80 per tonne.

That has meant that for a country to economically justify cutting its own emissions, it had to value the harm reduction not just to itself but to all countries — a moral argument, not an economic one. And in an era increasingly characterized by competition among nations rather than cooperation, it’s an argument that has not been very persuasive for some.

The Trump administration illustrated this starkly: to support its policy decisions, it restricted its social cost of carbon analysis to domestic impacts only, arriving at an estimate of $3 to $5 per tonne. At those numbers, almost no climate action passes a cost-benefit test.

Bilal and Känzig’s work didn’t just revise the global social cost of carbon. It changed the domestic costs as well. Their follow-up paper, published in the American Economic Association Papers and Proceedings, applies their new, much higher damage estimates to calculate specific domestic cost of carbon figures: $226 per tonne for the United States and $216 per tonne for the European Union. Both are several times the $80-per-tonne average cost of reducing emissions.

The finding is striking: unilateral decarbonization pays for itself on pure domestic self-interest — before counting any benefits to anyone else.

For the first time, economics says that large-emitting economies don’t need a global agreement to justify aggressive emissions reductions. Acting alone is the rational choice.

Credible work — consistent with other research

Given the magnitude of the departure from prior thinking, it’s worth noting that this work comes from researchers with elite credentials and serious institutional backing.

The paper first circulated in 2024 as a working paper from the National Bureau of Economic Research — a nonpartisan institution affiliated with many of the world’s leading economists, including more than 50 Nobel laureates. It went through two years of public scrutiny, academic seminars, and peer review before being published as the lead article in the Quarterly Journal of Economics, one of the most prestigious economics journals in the world, with an acceptance rate of around 3 percent.

While the findings are dramatic, they are not outliers. Several other recent studies, using different methods, are arriving at consistent conclusions about the magnitude of unaddressed climate change on economies:

• The UK Institute and Faculty of Actuaries projects a 50 percent contraction in global GDP between 2070 and 2090 under current policies.

• Researchers at the University of New South Wales project roughly 40 percent global GDP loss by 2100 under high-emissions scenarios.

• The Grantham Research Institute at the London School of Economics, drawing on nearly 300 studies, estimates a 3 to 15 percent reduction in global GDP per capita by 2050 alone — and warns those figures are “likely to be significant underestimates.”

The economics of climate damage are being revised sharply upward.

Implications for Canada

This research is timely — and directly relevant to the decisions Canadian policymakers are weighing right now.

The federal government is conducting its 2026 interim review of the industrial carbon pricing benchmark — the framework that sets the trajectory for post-2030 carbon prices and assesses whether provincial systems are stringent enough to meet federal standards.

The review will also determine how Canada aligns with the EU’s Carbon Border Adjustment Mechanism — a factor that will directly affect our ability to develop trade with one of our most important economic partners.

Separately, the Canada-Alberta MOU negotiations have set an intention to raise Alberta’s effective industrial carbon price to $130 CAD per tonne. Should an agreement be concluded, it will likely set a standard that other provinces will eventually adopt, potentially superseding the federal pricing framework.

Based on the conclusions of this new economic thinking, the best for Canada’s economy would be to set the price of carbon considerably higher than current targets or intentions.

Canada’s economy is structurally similar to the US and EU — diversified, capital-intensive, deeply integrated into global supply chains, and exposed to climate damage through extreme weather, agricultural disruption, and rising health costs.

If Canada’s domestic cost of carbon is comparable to those in the US and EU, the benchmark price Canada puts on carbon emissions should be in the range of $300 CAD per tonne or higher — a price justified by the economic gains Canada would reap even acting alone.

That couldn’t happen overnight. A transition to a substantially higher carbon price would need to be phased in over time, as the current pricing framework already envisions. And it would need to be the effective price — the price emitters actually pay. Provincial mechanisms that blunt the federal standard and lower the market price below what emitters nominally owe would need to be reformed.

It is clear that current prices are calibrated to a fraction of what the economics now justifies.

Finding new hope in a dismal forecast

The new research is, on one hand, alarming. The economic costs of warming are far larger than the models that have guided policy for thirty years have led us to believe.

But there is a genuinely positive implication. For the first time, there is a clear economic basis that supports independent national action — breaking through the barrier that has stalled climate policy for decades: the perceived need to forge an impossible global consensus before any country can justify acting on its own.

For the first time, the business case is clear. It makes economic sense for individual nations to act alone and invest aggressively in cutting greenhouse gas emissions — regardless of what any other country does. Each tonne of emissions avoided helps our national economy far more than it costs to cut.

Let’s hope our policymakers are staying current on the economics.