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Global exposures driving the damage

Traditionally, economic climate models only used local weather data. Dr Neal added global weather patterns and combined multiple models to build a fuller picture of how climate change affects the economy.

“Including global weather, not just local conditions, produces a closer fit with the observed economic growth data,” Dr Neal says.

He says the analysis also highlights how globally interconnected climate risk has become.

Global temperature trends account for 17.6 percentage points of the estimated 18.1% loss in NSW economic output.

“What happens overseas affects NSW because economies are deeply interconnected,” Dr Neal says.

“NSW does not trade with itself. It buys and sells goods across borders.

“If crops fail overseas, or ports shut during heatwaves, then prices shift, supply chains tighten – and businesses and consumers in NSW feel the effects.”

Strength in numbers

Dr Neal’s analysis combines three major economic models that use different methods to estimate how weather affects economic output.

One assumes economic productivity peaks at around 20°C, with performance declining as temperatures move further from that level.

Another measures how unusual temperatures are compared with a long-term average, based on the idea that unexpected heat or cold is more economically disruptive.

This “ensemble” approach combines multiple models to try and produce a more reliable estimate than relying on any single model alone.

“One key challenge we had was deciding when to start comparing against a counterfactual,” he says.

“We only have data on NSW Gross Product from 1990, but if we started to run the modelling then, we would miss too much anthropogenic climate change.

“We had to project NSW’s GDP backwards to 1975 using data like global GDP, as well as population statistics before we could run the counterfactual.”

Dr Neal is now refining the approach to analyse historical climate costs around the world.

“There’s some additional work to do for a global analysis, particularly in expanding the suite of models for the ensemble and how we weight results across models, but the findings for NSW will likely change little.”

He says the results also align with a broader trend in research suggesting we have systematically underestimated the scale and cost of climate change.

“Economics helps policymakers weigh the costs of transition against the damage expected under different climate pathways,” he says.

“There is growing concern that the major models underpinning climate policy have not fully captured the cascading risks now emerging.

“If we continue to make decisions based on underestimated climate costs, we’re short-changing ourselves and future generations.”

Climate's cascading costs

While the models don’t examine how hotter or unusual weather hurts the economy, a growing body of research shows heat can slow brain functions and be a health risk.

91ɫ��Ƭ climate scientist Professor Lisa Alexander contributed to a that showed worker productivity drops by 2–3% for every degree above 20°C.

She says extreme heat, which already poses severe health risks for 2.4 billion workers globally, is going to become a greater threat in the future.

“There are really so many ways heat can impact the body, and productivity, and have these have flow on effects.”

Some estimates suggest heat may have contributed to as much as $US1 trillion in lost income globally in 2024 alone.

“At each step in these systems, you add another layer of uncertainty, making it hard to get a full picture of the risk,” she says.

“But a certain degree of global warming is locked in, even if we stopped burning fossil fuels tomorrow, so we need to find ways to adapt.”

Professor Maggie Dong, a supply-chain expert at the 91ɫ��Ƭ Business School, says storms can rapidly create “a domino effect”, disrupting business.

“A flood doesn’t only cause delays in flooded areas, it delays the whole logistics network,” Prof. Dong says.

“Rerouting freight creates bottlenecks. Firms need to reallocate vehicles and labour at short notice. Goods arrive late or damaged.”

Prof. Dong is developing a way to measure how extreme weather disrupts logistics networks, with the hope of improving coordination and resilience.

“We’re learning new lessons about how important it is to identify and respond to supply-chain crises if we’re to build resilience into our financial system.”

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