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Introduction

Understanding the intricate interplay between climate dynamics and the macroeconomy is pivotal for informed policy, risk assessments, and long-term planning. Despite the significant strides economists have made in developing tools and analyses to comprehend the economic impacts of climate change, a disconnect remains between climate modeling and the potential effects on macroeconomic indicators. This may be in part due to the challenges posed by the nonlinear dynamics and feedback loops of physical climate risks, including cascading and compounding risks, and their potential impact on the macroeconomy in an interrelated and globally engaged economy, the long time horizon of greenhouse gases and climate-related temporal dynamics, and the heterogeneous character of climate impacts across spatial, temporal, and sectoral scales. For example, climate shifts may decrease agricultural productivity in one region but increase it in another; lead to or happen in tandem with economic impacts related to water, energy, and transportation; and overlay historical patterns of economic inequities.

Macroeconomic analyses, although diverse and employed to support federal budgeting, can be constrained in fully considering climate-related impacts on the economy. Although some of these analyses consider some such impacts, scientific understanding of climate change dynamics has outpaced economic understanding of climate change. Moreover, limitations and challenges often arise in attempting to build one all-inclusive model, with tradeoffs to adding complexity to economic models. This workshop explored possible avenues to inform macroeconomic modeling by considering the cascading and compounding risks, nonlinearities, and complexity of the climate system and diverse and potentially complementary economic

modeling approaches, thereby better capturing the potential amplification effects, feedback loops, and systemic risks that may arise.

WORKSHOP DESCRIPTION

The National Academies of Sciences, Engineering, and Medicine convened a workshop on November 1–2, 2023, in Washington, DC and virtually to consider the state of knowledge on cascading, compounding, and nonlinear physical climate risks and their implications for the macroeconomy. The workshop was the second organized under the auspices of the Roundtable on Macroeconomics and Climate-Related Risks and Opportunities. The first covered the extent to which federal macroeconomic models consider climate change, methods employed by the research community to forecast climate change’s physical and transition risks, and public and financial sector risk management responses to physical climate risks (NASEM, 2024).

The second workshop¹ focused on physical climate risks and explored how different disciplines assess and model impacts, with a focus on collaboration and considering opportunities for research. The discussions explored current and historical examples of shocks² to the macroeconomy and how those have been modeled, and experts shared some of the lessons they have learned that may be relevant to policy makers today. The workshop ended with an interactive breakout session where participants discussed challenges and opportunities to advance research on systemic risk assessment.

BACKGROUND AND MOTIVATION FOR WORKSHOP

The workshop planning committee co-chairs Eric Kemp-Benedict from U.S. Stockholm Environment Institute and Tim Lenton from Exeter University provided opening remarks. Kemp-Benedict explained that the goal of the workshop was to improve understanding of how different disciplines approach nonlinear, cascading, and compounding risks. Lenton said that an understanding of systemic risks related to climate change and the economy can be important as the world proceeds into an uncertain future. He challenged participants to consider the worst-case scenario and how to mitigate or reduce that risk from the perspective of a risk assessor or risk manager. Risk has many definitions, and different disciplines often understand it dif-

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¹ This proceedings has been prepared by the workshop rapporteur as a factual summary of what occurred at the workshop. The planning committee’s role was limited to planning and convening the workshop. The views contained in the proceedings are those of individual workshop participants and do not necessarily represent the views of all workshop participants, the planning committee, or the National Academies of Sciences, Engineering, and Medicine.

² A shock is an unexpected or sudden event with large-scale, unexpected impacts.

ferently, so Lenton clarified that he was using the term as the combination of the likelihood of something bad happening (i.e., hazard) multiplied by the exposure of people principally to that hazard multiplied by the vulnerability of those people to it.

As the world is entering unprecedented territory, Lenton explained that very few historical reference points exist. He noted that the Earth, climate, and economic systems are complex and called for a greater understanding of their role and function. He emphasized that recent shocks in society and the economy (e.g., the COVID-19 pandemic, 2008 global financial crisis) may be an opportunity to learn how risk may propagate through the economy. Similarly, increasing numbers of humans are experiencing drastic climate shocks. Lenton used recent examples to demonstrate this, including anomalies in the sea surface temperatures in the North Atlantic, unprecedented wildfires across Canada, record-breaking heatwaves in Asia, and devastating heat events in North America.

Whether the shocks stem from the climate or economic system, Lenton noted the importance of discussing how they might interact. For example, he shared an example of one Caribbean country whose gross domestic product (GDP) had been severely impacted by a single hurricane event. He explained that insurers are withdrawing insurance from people in some areas because of escalating climate damages. In another example, evidence shows that heat extremes are starting to trigger political unrest, if not direct economic consequences. Lenton explained that there are likely to be complex causal chains between factors occurring in the climate and those in the economy, but the interdisciplinary discussions about how to assess and understand nonlinear, cascading, and compounding risks can help better prepare for hard-to-foresee systemic risks. He encouraged participants to explore the models and tools to help understand these dynamics.

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