When Forecasts Meet Reality: Assessing Climate Damage Functions

IMF Working Papers, May 1, 2026

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Canonical URL: When Forecasts Meet Reality: Assessing Climate Damage Functions

This paper assesses estimates of the economic impacts of climate change by leveraging the IMF’s World Economic Outlook (WEO) forecasts (1990-2023) as climate-free counterfactuals.
Placebo tests confirm WEO forecasts do not capture climate effects.
By adding climate damage estimates to forecasts and comparing with actual GDP growth, climate damage functions explain only a small share of forecast errors—reducing mean absolute errors by up to 0.4 percentage points (about 6% of the forecast error).
The most severe damage functions predict contractions in some countries that are inconsistent with observed growth, suggesting overstated near-term climate impacts.

Counterfactual baseline: IMF WEO forecasts, 1990-2023.
Validation approach: placebo tests to check whether WEO forecasts already incorporate climate effects.
Comparison method: augment WEO forecasts with climate damage estimates and compare augmented forecasts with observed GDP growth.

Mean absolute error reduction from including climate damage functions: up to 0.4 percentage points.
Relative improvement in forecast error from including climate damages: about 6% of the forecast error.
Time span of forecasts used as climate-free counterfactual: 1990-2023.
Length of paper: 58 pages.
Series and identifiers:
- Working Paper No. 2026/085
- Volume: 2026
- Issue: 085
- DOI: https://doi.org/10.5089/9798229043823.001
- Stock No: WPIEA2026085
- ISBN: 9798229043823
- ISSN: 1018-5941

WEO forecasts serve as valid climate-free counterfactuals based on placebo-test evidence.
Existing climate damage functions account for only a small portion of near-term forecast errors when evaluated against realized GDP growth.
The most severe damage functions may overstate near-term climate impacts for some countries, as they imply contractions inconsistent with observed positive growth outcomes.

Subjects: Climate change, Economic growth, Economic recession, Environment, Natural disasters, Population and demographics, Population growth.
Keywords include: Africa, Climate change, climate impact, climate impacts, damage function, Economic recession, Europe, forecasts, Global, IMF working papers, IMF's World Economic Outlook, Natural disasters, Northern Europe, placebo test, Population growth, Southern Europe, validation, Weo forecast.

Authored by Johannes Emmerling, Paul Waidelich, Matthieu Bellon, and Emanuele Massetti; published May 1, 2026. IMF Working Papers 2026, 085.