Climate economics debate underscores rising risks to global growth

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Highlights

Stern’s review redefined climate change as a severe market failure, arguing strong emissions cuts are compatible with sustained economic growth.
Despite scientific advances, most governments and markets still use outdated growth models that underestimate economic risks from climate change and fail to incorporate biodiversity loss.
Persistently weak policy responses, inflated fossil fuel company valuations, and insurer understatements of climate risk indicate markets do not yet price the full threat of climate crisis.

Stern review reshaped climate cost analysis

As argued in The Guardian, Nicholas Stern’s 700-page review marked a turning point in climate economics by framing global warming as a market failure and concluding that cutting emissions is compatible with economic growth.

The article says the report overturned earlier mainstream assumptions that climate damage would be only a limited economic disruption that expanding economies could absorb. Stern’s analysis challenged the widespread use of discount rates that lowered the value of future losses, a method he argued distorted the economic treatment of long-term climate harm and effectively undervalued future lives.

The piece contrasts Stern’s work with the earlier approach associated with Yale economist William Nordhaus, whose models supported tolerating moderate warming because the cost of emissions cuts was seen as higher than the resulting damage. It says Stern’s framework gave governments a stronger basis to defend climate policies to investors, donors and bond markets, while also strengthening political and legal pressure on administrations that delayed action.

Policy and market signals remain misaligned

The article argues that, despite two decades of scientific and market developments, traditional growth models still shape how governments, companies and institutions price climate risk. It notes that Stern now places greater emphasis on nature and biodiversity loss as economic and national security threats that were previously underestimated.

It also highlights continuing influence from older economic assumptions, pointing to Nordhaus’s 2018 work suggesting relatively modest GDP losses even under far higher warming scenarios. The article says such estimates remain at odds with broader warnings from climate science, including risks to food systems, coastal cities and labour productivity.

According to the commentary, the consequences are visible in weak government responses, inflated valuations for fossil fuel companies and investor resistance to businesses preparing for a low-carbon transition. It adds that some insurers are alleged to be understating climate risk, reinforcing the wider claim that markets still fail to fully reflect the economic threat posed by the climate crisis.

In our earlier article on Malaysia’s need to strengthen its fiscal buffers, we highlighted warnings that recurring global shocks—including climate-related disruptions—must be treated as a standard part of budget planning rather than rare “black swan” events. The piece noted that high operating spending, elevated borrowing costs, and rising Budget 2027 commitments could constrain policy space, reinforcing the case for measures such as broadening the tax base and refining targeted fuel subsidies to preserve room to respond when crises hit.

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