Climate change does not simply mean rising temperatures. It means changes in the multivariate joint distribution of weather variables, and therefore also changing how often extreme events occur and how intense they become (IPCC, 2022). Heatwaves, heavy rainfall, droughts, and storms are expected to become more frequent and more severe. But whether these events turn into disasters depends on much more than nature alone. It depends on economic response, how we mitigate our emissions, and adapt to a changing climate.
Imagine it rains three days in a row. After getting soaked twice, you will probably bring an umbrella on the third day. The rainfall itself has not changed, but its impact on you has diminished. This simple example, borrowed from Hsiang (2016), captures a core economic insight we all have heard many times: expectations shape behaviour, and behaviour shapes outcomes. Scaled up to society, the same logic applies. If households, firms, and governments expect more frequent floods or heatwaves, they invest in protection. If they do not, damages increase. Climate impact is therefore not determined by nature alone, but by how we anticipate and respond to it. A purely natural-scientific perspective misses this crucial behavioural component. Therefore, as economists, it is our obligation to step up — through interdisciplinary collaborations, we have a unique opportunity to contribute with our tools and knowledge to tackling climate change, one of the most pressing issues of our generation.
How economists can contribute: risk and its dimensions
But in which fields and for what applications are economists equipped to deal with climate change? The current common framework in literature for assessing climate change risk has 4 dimensions (IPCC, 2022): Hazard, Vulnerability, Exposure, and Response. Hazard refers to the natural science component, the risk of occurrence of a climate event. Vulnerability captures how sensitive the system at place is to an impact. Exposure captures the presence of people and environment in the affected region. And last but not least, Response, which refers to the risk that taking action has unintended risk-increasing outcomes.
The latter three are rooted in economic behaviour and mostly represent the economic dimension of climate risk and hence an avenue for economists to contribute. While the first, hazard, is primarily based in natural science, the reduction of hazard can be achieved by the reduction of greenhouse gas (GHG) emissions, targeting the beating heart of our historically fossil-fuel-based economies. Hence, economists can play the role of doctor, pick up their instruments, and perform open-heart surgery on our national economies.
Climate change mitigation: tackling hazards
Coming back to the original umbrella example, addressing the hazard dimension determines not only whether we need an umbrella in the first place, but also whether the rain remains moderate enough for the umbrella to be effective. Therefore, it points towards the most prominent field economists can work on to tackle climate change: climate change mitigation and the reduction of greenhouse gas emissions. A central question in this field is which policy instrument proves most efficient, effective, and just in reducing greenhouse gas emissions? Selecting the "best" policy instrument presents an enormous challenge; it has to balance the achievement of efficiency (i.e. to maximize societal welfare), cost-effectiveness (i.e., which policy achieves a set goal at the lowest cost), distributional concerns, political feasibility, and the ability to address uncertainties (Goulder and Parry, 2008).
What all policy instruments have in common is that they guide human behaviour by shaping expectations. For example, a CO2 tax creates expectations about future decarbonization of the economy and can create an environment in which green innovation becomes profitable. Expectations about future impact, therefore, translate more broadly to expectations about the future economy we live in. This is also highlighted by the two most recent economic Nobel prize laureates, Acemoglu and Aghion, who show the need for directed green technological change by building a theoretical model and finding that even with perfect substitutes, governmental intervention is needed (Acemoglu et al., 2012). So, to conclude, we need to help steer the economy to develop in a direction where we never need the umbrella in the first place.
Climate change adaptation: tackling vulnerability, exposure, and response
Yet even the most ambitious mitigation efforts cannot eliminate climate risks entirely. Most importantly, having already surpassed the 1.5°C target, while things are not irrecoverable if we act quickly, we are already experiencing warming and climate impacts. This makes adaptation not a secondary option, but a parallel economic challenge. Being prepared and having an umbrella reduces the impact significantly. However, as highlighted in the introduction, adaptation behaviour hinges on one's beliefs about the future climate distribution, in other words, expectation. Hsiang (2016) points out that it is exactly these beliefs that prove challenging in econometric quantification, as beliefs can rarely be observed and are correlated to many socio-economic factors.
The modelling approaches that climate economists use to incorporate climate change into economic consideration span fields: from micro-economic models to inform policymaking, to macro-economic models which link simple natural science models to simplified macro-economic models (so-called Integrated Assessment Models (IAMs)), to the slightly more recent focus on econometrics. Within the field of econometrics, there exist two philosophies for empirical quantification of climate economic interactions: the more developed technique of utilizing quasi-experimental setups that analyse the climate impacts on the economy by assuming the Earth's climate to be exogenous, and the newer, more systematic approach of modelling bi-directional feedback effects between the climate and the economy (Pretis, 2021). Bakkensen and Barrage (2025) took this step further by incorporating microeconomics with macroeconomic modelling and econometric estimation, providing an exciting approach for linking theory and empirical estimation.
This research, which originally was conducted with the mentioned IAMs, and more recently incorporated improved models and a greater variety of econometric approaches, estimates that the economic cost per ton of CO2 ranges from $150 to $1,200 per ton of CO2 to the global economy (Bilal and Stock, 2026). This makes it once more clear the need for adaptation to avoid this impact. In other words, the umbrella is often still left at home or cannot be afforded. So, while the role of economics in climate change is often seen in climate mitigation, it is equally important in adaptation, especially for protecting the most vulnerable groups from climate impacts, who at present will be disproportionately impacted by climate change.
Conclusion
All in all, as economists, we provide a crucial component in addressing climate change and its impacts. Economics lies at the heart of both climate mitigation and adaptation, and it is therefore our responsibility to contribute rigorous research and policy guidance to meet this challenge. As a discipline centred around the analysis of incentives, expectations, and complex societal interactions, we are uniquely equipped to operate across all four dimensions of risk: reducing hazards through effective mitigation, while simultaneously lowering vulnerability, limiting exposure, and preventing unintended consequences through well-designed adaptation policies and incentives guiding expectations. Our task is twofold: to shape an economy in which we ultimately no longer need the umbrella by preventing further climate change and, at the same time, to ensure that umbrellas are available, accessible, and effective wherever climate impacts can no longer be avoided.
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