The Congressional Budget Office (CBO) released a new working paper this week with its projection of the effects of climate change on the U.S. real gross domestic product (GDP). CBO projects that the effects of climate change will reduce real GDP growth rate by 0.03 percentage points from 2020-2050, relative to the benchmark climate conditions prevailing in a period near the end of the 20th century. With this reduced annual GDP growth rate, the level of real U.S. GDP is projected to be 1.0 percent lower by 2050. This marks the first time that CBO is reporting the size of the effect of climate change on the U.S. economy separately, instead of incorporating climate change factors into its economic projections. 

CBO used two approaches to estimate the impact of climate change on economic outcomes. The top-down methodology was used to look at historical relationships between a region’s temperature patterns and its economic activities. The bottom-up approach analyzed the relationship between specific conditions (such as hurricanes, sea-level rise, etc.) and economic outcomes (such as hurricane damage, etc.) More technical details of these approaches will be released in a follow-up CBO working paper. To generate climate predictions for the next 30 years, CBO took the average of two climate scenarios developed by the Intergovernmental Panel on Climate Change (IPCC): RCP 4.5 and RCP 8.5. Representative concentration pathways (RCPs), refers to a specific trajectory that leads to a certain outcome of concentration levels of GHGs.

CBO’s projection is primarily driven by the effect of changes in temperature and precipitation. Other climate effects include changes in hurricane damage and some of the effects of sea-level rise. Climate change’s effects on GDP are complicated and dynamic. CBO’s projection captures many of the “positive and negative, direct and indirect, and immediate and gradual” effects. 

However, CBO made it very clear that their projection does not “fully capture all aspects of climate change that could affect GDP, and the agency cannot determine whether the net effect of those uncaptured aspects is positive or negative.” The paper lists many examples of climate impacts it didn’t capture, one of which is people moving to places that are less affected by climate change. CBO’s projection is also “subject to a great deal of uncertainty.” 

Another important point worth noting, as stated in the report, is that GDP is not a metric that measures overall well-being. CBO’s projection does not reflect climate effects on different aspects of well-being, such as people’s comfort, health risks, or disproportionate effects on disadvantaged communities. 

While the CBO projection did not capture all the effects of climate change and the projection is highly uncertain, it still provides important insights into the potential climate change effects on the U.S. economy. The actual outcome might be much worse or better than the projection, depending on our responses between now and 2050. The fact that CBO now reports the size of climate effects on the U.S. economy directly is strong evidence for climate change becoming an important consideration for federal revenues, outlays, and the fiscal balance.