New data modelling by UNSW Sydney’s Dr Timothy Neal – commissioned and released today by the NSW Net Zero Commission – suggests just 1.2 degrees of global warming has already shaved between 4% and 33% off the state's economic output.

“Most economic models of climate change look forward – towards potential impacts of different warming scenarios in 2050 or even 2100,” Dr Neal says. “Instead, we used the same type of models to ask how much richer we would be today if the CO₂ created by human activity didn’t make the planet warmer. In this way, we consider a hypothetical reality without anthropogenic warming.”

Dr Neal modelled real weather and temperature records from 1975 to 2024 across the world against economic growth. He then compared the historical data with a “counterfactual” world in which greenhouse gases from human activity did not drive climate change.

“There are still hot years and cold years, floods and droughts in our counterfactual climate,” says Dr Neal, who is a Scientia Senior Lecturer in the School of Economics and the UNSW Institute for Climate Risk & Response. “What disappears in the counterfactual is the long, upward trend in temperature driven by greenhouse gases.”

He says this shows how a small difference in annual growth in our hotter reality can compound into large differences in living standards over time. “The gap between the real economy and the hypothetical widens steadily from the mid-1990s,” he says.

By 2024, global warming had reduced NSW economic output by an average 18.1%. That is equivalent to $21,288 in lost annual economic output per person across the state.

“There is considerable uncertainty in the estimates across models, with losses between 4% at the low end and 33% at the upper end of current state output,” Dr Neal says. “But even the lower-bound estimate of 4% represents a meaningful loss in economic output each year. We don’t get to observe the world without anthropogenic warming – but the best guess from the data we have is that we would be meaningfully richer today if it didn’t exist.”

Global exposures are 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,” says Dr Neal, who notes that 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 produce a more reliable estimate than relying on a single model.

Subscribe for the latest research, analysis and insights from UNSW Business School

“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 analysing historical climate costs worldwide. “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 more extreme weather harms the economy, a growing body of research shows that heat can impair brain function and pose a health risk.

UNSW climate scientist Professor Lisa Alexander contributed to a major report that showed worker productivity drops by 2–3% for every degree above 20°C. Extreme heat, which already poses severe health risks for 2.4 billion workers globally, is going to become a greater threat in the future, she says: “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.”

Learn more: The heat injury crisis hidden in workers' compensation data

Professor Maggie Dong, a supply-chain expert at the UNSW Business School, says storms can rapidly trigger a “domino effect” that disrupts 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.”