The Unpaid Bills of the Carbon Economy: Why Loss and Damage is a Finance Question
May 2026
By Daniel Klingenberg, CSF, based on the paper by Burke, M., Zahid, M., Diffenbaugh, N. S., & Hsiang, S. “Quantifying climate loss and damage consistent with a social cost of carbon.”
For decades, the concept of "Loss and Damage" (L&D) has been a fixture of international climate diplomacy, a broad and often contentious call for equity between high-emitting nations and those bearing the brunt of a changing climate. However, a landmark study published in Nature by Marshall Burke, Mustafa Zahid, Noah Diffenbaugh, and Solomon Hsiang has moved this conversation from the realm of political rhetoric into the world of rigorous, albeit complex, financial accounting. By providing a quantitative framework to link specific emissions to monetized, location-specific damages, the research suggests that carbon footprints are no longer just environmental metrics; they are latent economic liabilities.
For the sustainable finance community, this research marks a critical pivot. It shifts the discussion of climate responsibility toward a measurable framework of economic exposure. By treating greenhouse gas emissions as the creation of a "negative asset," the authors demonstrate that the financial relevance of carbon is far more persistent and compounding than many previous models suggested.
The Accounting of a "Negative Asset"
A central conceptual breakthrough of the paper is the treatment of a unit of CO2 as an asset that produces a subsequent stream of value. Unlike typical investments, this value is negative and its flow accrues to individuals and economies who did not create the asset. The authors compare this to unpaid garbage collection bills: just as households normally pay someone to manage their waste, much of the carbon economy has historically "dumped" CO2 into the atmosphere without settling the full cost of that disposal.
To make this "unpaid bill" measurable, the framework separates climate Loss and Damage into three distinct financial components:
Historical Damages (HD-CO2): The discounted economic harm that has already occurred due to past emissions.
Future Damages from Historical Emissions (FD-CO2): The harm expected to occur in the future from gases already in the atmosphere.
The Social Cost of Carbon (SC-CO2): The projected future damages from present or future emissions.
The distinction between these categories is vital for finance. One tonne of CO2 emitted in 1990 is estimated to have caused approximately US$180 in global damages by 2020, yet that same tonne is expected to cause a further US$1,840 in damages through 2100. This implies that simply compensating for damages already incurred leaves the vast majority of the economic harm from past emissions unaddressed.
Re-evaluating the Social Cost of Carbon
One of the most discussed figures in the study is the updated Social Cost of Carbon. While a median estimate of approximately US$1,013 per tonne is provided under relatively conservative assumptions, the headline for financial professionals is not the specific dollar amount but the direction of travel. This value is significantly higher than many recent estimates, including those previously used by the US Federal Government, suggesting that the true economic cost of emissions may have been vastly underestimated in earlier studies.
However, it is essential to view these figures with appropriate nuance. The study does not claim that US$1,000 is a fixed "price" of carbon. Instead, it demonstrates that when we account for the long-term, compounding effects of warming on economic growth, the cost of each tonne emitted rises exponentially. These metrics are inherently difficult to calculate, relying on a vast array of variables including discount rates, future economic growth scenarios, and the sensitivity of the global climate system. As such, these values should be interpreted as indicators of scale and risk rather than absolute, static invoices.
The Mathematics of Persistent Harm and Calculation Complexity
The magnitude of these damage estimates is driven by a fundamental shift in how warming is modeled. Rather than viewing climate damages as one-off "shocks" that disappear after a difficult year, the researchers find evidence that temperature changes can fundamentally reduce the growth rate of GDP. Even a small reduction in a country's growth rate, when compounded over decades, results in a massive long-term loss of economic output.
This complexity is why the metrics require cautious interpretation. Calculating the "economic wedge" created by a single year of warming involves modeling how that temperature change ripples through every sector of an economy over decades. Earlier emissions pulses are especially costly because they act on the economy for more years, allowing growth effects to compound. For banks, insurers, and investors, this implies that climate exposure cannot be assessed solely through current decarbonization plans; historical emissions carry a "long financial shadow" that current risk frameworks are only beginning to acknowledge.
Mapping Bilateral Debt Between Nations
A critical contribution of this framework is its ability to estimate "bilateral" damages, the harm caused by one country’s emissions to another’s economy. The study estimates that CO2 emissions from the United States between 1990 and 2020 caused US$10.2 trillion in cumulative global damages by 2020. While 30% of this harm occurred within the US itself, US emissions were responsible for an estimated US$500 billion in damages in India and US$330 billion in Brazil over that same period.
Across the globe, the largest sources of historical damages were the US, China (US$8.7 trillion), and the EU (US$6.42 trillion). While relative damages - the percentage of GDP lost - are often most severe in lower-income and warmer countries, absolute damages are often largest in major economies because even a small percentage loss applies to a much larger GDP base. This complexity complicates the climate finance debate, as any future discussion of compensation must balance responsibility, vulnerability, and the sheer scale of measured harm.
Corporate Responsibility and Litigation Risk
The same logic can be applied to firms. For major fossil fuel producers, the framework estimates damages associated with both the production and use of their products (Scope 1 and Scope 3 emissions). Emissions linked to Saudi Aramco between 1988 and 2015 are estimated to have caused around US$3 trillion in global damages by 2020, while the estimate for ExxonMobil is approximately US$1.6 trillion.
These figures do not imply that companies currently owe these amounts under existing law. However, they reveal the scale of damages that attribution science can now associate with specific firms. As courts and regulators increasingly explore "polluter-pays" principles, historical emissions could shift from being a reputational concern to a significant "responsibility risk" on corporate balance sheets.
The Myth of the Future Technological Fix
The study’s findings also serve as a vital warning for net-zero transition planning. Many corporate strategies rely heavily on future Carbon Dioxide Removal (CDR) to offset current emissions. However, the timing of these removals is decisive. An emission begins causing economic damage as soon as it contributes to warming. Removing that tonne of CO2 decades later can reduce future warming, but it cannot undo the economic growth that has already been lost in the interim.
In an illustrative scenario, a 25-year delay in capturing a tonne of CO2 reduces the damages through 2100 by only about 50% compared with no removal at all. This suggests that a tonne avoided today is not economically equivalent to a tonne removed in the future. Sustainable transition plans must, therefore, be judged by when reductions occur, not just the final quantity.
Interpreting the Framework with Caution
As with any model of long-term economic and climatic systems, these estimates are inherently uncertain. Results shift based on assumptions about adaptation, discount rates, and the time horizons chosen. Furthermore, because the analysis focuses primarily on GDP, it likely understates total climate harm. Impacts on health, biodiversity, sea-level rise, and cultural heritage are not fully captured in these financial figures.
However, uncertainty is a core element of financial decision-making, from credit losses to sovereign risk. The value of this framework is not in providing a single, perfect number, but in offering a structured way to measure, update, and incorporate climate risk into financial models.
For the Portuguese and global financial community, the era of treating carbon as a mere environmental metric is ending. As attribution science advances, we are entering the age of climate liability accounting. Understanding how the unpaid bills of the carbon economy may reshape capital allocation and accountability will be the next great frontier in sustainable finance.
Source: Burke, M., Zahid, M., Diffenbaugh, N. S., & Hsiang, S. “Quantifying climate loss and damage consistent with a social cost of carbon.” Nature, 651, 959–966, 2026.
