The economic impact of climate change
Climate change is getting expensive. As the planet warms and weather patterns become more erratic and extreme, many of the systems that underpin the global economy are experiencing huge and costly disruptions. Consumers are already feeling the squeeze: Economists say climate change is costing US households somewhere between $500 and $900 every year on average—and that’s a conservative estimate. “Climate change has become a major cost-of-living issue for families across the country,” the Senate Budget Committee wrote in a December report.
To get to the root of how and why the climate crisis is making life more expensive, we need to go back to economics 101: supply and demand. Basic economics says that when an item or service is in high demand (a lot of people want or need it) but supply is low (the item or service is hard to access), prices go up. When demand is low but supply is high, prices go down. When supply matches demand, we find equilibrium and prices tend to stabilize. The global disruptions caused by extreme weather events are destabilizing both sides of this equation and increasing the cost of some of our most important goods and services. Globalization exacerbates these effects: States and countries depend on one another for production and distribution of goods. This interdependence means a faraway weather disaster can impact economies and increase prices on the other side of the world.
Take food and drink, for example. Extreme heat and floods make it harder to grow crops, while warmer temperatures make it easier for pests and diseases to thrive. Prolonged drought can also dry up waterways that are essential for transporting food. So, we have smaller harvests (in some cases, literally smaller produce) and disrupted supply chains at a time when global demand for food remains high. The result is inflated prices, which disproportionately burden lower-income households, which spend a larger share of their earnings on food.
We can see this phenomenon—which some are calling climateflation—happening with coffee, the price of which has risen by 47% over the last five years in the US, thanks in part to drought in coffee-producing countries like Brazil. Other factors, such as tariffs on imported goods, contribute to rising prices, too. But domestically produced foods aren’t immune: In recent years, the price of American beef has climbed to a record high of nearly $7 per pound, in part because worsening drought has made it harder for ranchers to feed and water their cattle. As of September 2026, some 60% of America’s cattle area was experiencing drought conditions. And recent studies (such as these from 2022 and 2026) how that global warming from rising greenhouse gas emissions is making such droughts in the American West more likely and more severe.
The climate crisis is also contributing to rising energy costs. According to economists, climate change is adding on average $35 to US households’ electricity bills per year. That’s partly because people are using more air conditioning to stay cool during heatwaves. But it’s also because utility companies are hiking their rates so they can pay to expand their infrastructure to meet rising energy demands, and to make repairs after fires and storms. In Florida, for example, one utility charged customers $12.02 more per month over 12 months to help pay to repair their infrastructure damaged by hurricanes.
Another place we see prices rising is in housing, as climate change makes homes more expensive to build, more vulnerable to extreme weather, and more difficult to insure. Construction materials like cement require large amounts of energy to manufacture, and usually that energy is generated from fossil fuels. So, when geopolitical upheaval—such as the war in the Middle East—restricts oil and gas supply, the costs of these building materials (and so many other goods and services) rise. Other geopolitical pressures, such as import tariffs, compound the problem. Plus, more frequent and intense heatwaves are taking a toll on outdoor laborers, including construction workers, limiting the amount of time they can spend working without being exposed to dangerously high temperatures. So, construction slows.
At the same time, homeowners are spending significantly more on home insurance as insurers pay out more in damages from recurring floods, fires, and storms. This is especially the case in the regions most vulnerable to extreme weather, such as the coasts. According to the National Association of Insurance Commissioners, average home insurance premiums rose by 43% between 2018 and 2024.
In some disaster-prone areas, insurers are retreating entirely: Allstate and State Farm, two of the largest providers in the country, recently stopped selling new home insurance in California, citing wildfires and “rapidly growing catastrophe exposure.” By one estimate, the share of uninsured homes in America jumped from 5% in 2019 to 12% in 2025. Of course, homeowners need insurance in order to obtain and keep their mortgages, so when homes become uninsurable, their value plummets. Research suggests that if a US county’s insurance nonrenewals rise by just one percentage point, home values in that county fall by 8.3%.
You might think falling house prices would be good for cash-strapped buyers. But in reality, this pattern can have a disastrous effect on the economy. House prices influence how much money consumers spend on everything else—from food to clothing to travel. Generally, when home values are high and stable, people feel more confident spending their money, which keeps the economy running. On the flipside, when values fall, consumer spending follows. “Climate-related extreme weather events will become both more frequent and more violent, resulting in ever-scarcer insurance and ever-higher premiums,” the Senate Budget Committee said in its December report, adding that climate-linked insurance pullbacks and plunging property values could “trigger a full-scale financial crisis.”
Small businesses are feeling the climate crunch, too. Flooding and wildfires can spell ruin for local shopkeepers and tradespeople. Even if these businesses emerge from natural disasters physically unscathed, their customer base will likely shrink. One study found the 2025 wildfires in Los Angeles resulted in wage losses of nearly $300 million for the region’s businesses and employees. According to CalMatters, approximately 35,000 jobs could be lost permanently due to the fires.
This doesn’t just affect those local workers, because wage losses have a trickle-down effect: Workers lose income, and businesses sell fewer goods and services, which means those businesses have less money to pay their workers. This cycle is called the demand-side spiral. Indeed a separate study found that the majority of the economic impacts from California wildfires in 2018 were indirect and felt outside of the state. “Climate change operates through the whole economy," explains Derek Lemoine, a professor of economics at the University of Arizona. "Places are linked through trade [...] Those cross-state connections turn local weather changes into nationwide economic impacts.’ Lemoine estimates that climate change has already cut incomes in the US by around 12% since 2000.
Some climate-related cost increases might not be permanent. A bad harvest one year could be followed by a bumper crop the next. But the overall trend is clear: Climate change is making a lot of things more expensive.
However, just because prices are going up doesn’t mean we have to shrug our shoulders and fork out more money. Let’s look at the demand side of the supply/demand equation. Ideally, we would—as a global society—reduce our reliance on fossil fuels. That perfect world aside, there are still things individuals can do to make a difference and directly impact that delicate supply/demand balance:
- Look for goods that are made from recycled materials.
- Fall in love with thrifting (it’s all the rage among young people today!), which reduces both the production and shipping costs that are baked into today’s fast fashion.
- If you buy things online, try to make bulk orders as opposed to many smaller orders.
- Buy local produce, meats, and products from small businesses. This helps support your local economy, ensures that your items are fresher, and cuts down on storage, shipping, and packaging costs.
- Take the bus—or better, bike or walk—instead of driving.
Share these ideas with friends, family, and your wider social circles. Keep advocating for green policies in your schools, communities, and governments for a more-sustainable future. While they may seem like minor changes in the scheme of things, in time, these demand-side changes will help drive supply-side adjustments.
About the author: Jessica Hullinger is a freelance journalist writing about science and sustainability. She has written for some of the world’s leading publications, including Time, Scientific American, and Popular Science. Jessica helped create Heatmap News’ popular Heatmap AM climate newsletter, and she edits Time magazine’s annual TIME100 Climate list, which highlights the world’s most-innovative business leaders creating climate action.
Header image: Illustration: Global warming stripes data visualization, by Professor Ed Hawkins, University of Reading, CC BY 4.0 and Federal Reserve Notes one-dollar bill, by US Federal Reserve, public domain.