1. Motivation and Context

The recent proliferation of research from late October to late November 2025 constitutes a seminal contribution to the discourse on environmental and energy economics.

Against the backdrop of the COP30 summit in Belém, Brazil ^[10], the discipline finds itself at a critical juncture. For decades, the debate regarding climate mitigation has often generated more heat than light, oscillating between theoretical optimization paths and the political realities of implementation.

However, the latest body of work from institutions such as the NBER, CEPR,ZEW Mannheim, and PIK reveals a fundamental dichotomy: while the physical and macroeconomic determinants of climate damages are accelerating beyond previous estimation, the microeconomic machinery required for the transition remains plagued by structural rigidities and regulatory distortions.

Whether through "zombie plants" in the US electricity sector ^[5] or industrial "reshuffling" in German manufacturing ^[6], economic agents are evading the intended technique effects of policy. This paper argues that without addressing these structural frictions, the global economy risks a"transition trap" where the marginal cost of abatement rises while the social cost of carbon creates systemic insolvency risks.

2. Data and Methodological Framework

The research analyzed here relies on a diverse architecture of data, marking a methodological shift from theoretical integrated assessment models (IAMs) to rigorous empirical identification strategies.

2.1 Macroeconomic Damage Functions

The contribution by Bilal and Känzig ^[1] utilizes a novel identification strategy that exploitsglobal temperature variability rather than local deviations. This approach allows for the estimation of general equilibrium effects in a closed system, overcoming the limitations of previous panel data studies that implicitly assumed trade could smooth consumption shocks.

2.2 Financial Valuation Metrics

Pastor, Stambaugh, and Taylor ^[7] construct a new metric, the "Carbon Burden", defined as the present value of the social costs of a firm's future emissions. This is calculated using forward-looking emission projections and social cost of carbon (SCC) estimates, providing a measure of latent liability relative to corporate equity.

2.3 Administrative Micro-Data

The ZEW Mannheim study ^[6] employs granular administrative data from the German manufacturing sector. This allows for the decomposition of energy consumption responses into technique effects (efficiency improvements) and composition effects (product mix changes)—a crucial distinction for evaluating policy effectiveness.

2.4 Generator-Level Operations Data

Davis et al. ^[5] utilize generator-level data from 2010–2023 to analyze exit decisions in the US electricity market, controlling for age, profitability, and fuel type to isolate the causal impact of regulatory status.

3. Empirical Findings

The stylized facts emerging from this period indicate that the magnitude of climate risks has been historically underestimated, while the elasticity of the economic response has been overestimated.

3.1 Macroeconomic Damages and Planetary Limits

The empirical consensus regarding damage functions is shifting. Bilal and Känzig ^[1] find that a 1°C increase in global temperature reduces world GDP by over 20% in the long run. This magnitude is significantly larger than previous estimates derived from local temperature variations.

The mechanism driving this result is the synchronization of shocks: when the global system heats up, trade and finance cannot act as insurers. Concurrently, PIK research indicates that seven of nine planetary boundaries have been breached, necessitating a policy framework that includes Carbon Dioxide Removal (CDR) to manage inevitable overshoot ^[2][4].

3.2 Distortions in Energy and Industry

In the energy sector, Davis et al. ^[5] provide robust evidence of regulatory failure. They find that regulated power plants are 45% less likely to exit the market than unregulated units, ceteris paribus. This suggests that rate-of-return regulation creates a perverse incentive to maintain capital-intensive "zombie plants" in the rate base, regardless of their economic inefficiency relative to renewables.

In the industrial sector, the ZEW study ^[6] reveals a concerning response to rising energy prices. Rather than investing in energy efficiency (the technique effect), multi-product firms in Germany engaged in "reshuffling"—shifting their product mix towards less energy-intensive downstream goods and importing energy-intensive intermediates. While this reduces domestic energy intensity, it likely results in internal carbon leakage, leaving global emissions unaffected.

3.3 The Inadequacy of Autonomous Adaptation

Regarding adaptation, the Ifo Institute ^[9] finds that autonomous adaptation in land use (e.g., relocating development away from flood zones) has reduced damages by only approximately 5%over 45 years. This low elasticity suggests that market signals regarding physical risk are being dampened by informational inefficiencies or moral hazard inherent in insurance markets.

4. Theoretical Implications

The empirical deficits highlighted above necessitate a reconsideration of the theoretical frameworks guiding climate policy.

4.1 The General Equilibrium of Global Risk

The divergence between local and global damage estimates ^[1] challenges the standard welfare economics assumption that external shocks can be smoothed via trade. Theoretical models must now account for global synchronization, where the global economy is treated as a closed system with no external insurer.

4.2 Regulatory Capture and Investment Incentives

The findings on "zombie plants" ^[5] highlight a classic principal-agent problemin regulated monopolies. The regulatory structure, designed to ensure reliability and fair returns, has become a barrier to technological change.

Theoretically, this suggests that pricing externalities (Pigouvian taxes) is insufficient if the capital stock is insulated from market forces by rate-of-return guarantees. Policy must therefore decouple asset recovery from physical operation (e.g., via securitization).

4.3 Institutional Mandates and Market Neutrality

The comparison between Western central banks and the People's Bank of China ^[8] instigates a critical discourse on the concept of "market neutrality". In the presence of a massive negative externality (carbon), a market-neutral asset purchase program creates a bias towards carbon-intensive sectors (the "Carbon Bias").

Theoretical considerations suggest that correcting this market failure may require central banks toabandon neutrality in favor of "market making" for green assets, despite the risks to independence.

5. Conclusion

The research output from late 2025 provides a sobering assessment of the state of climate economics. The "missed decade" has locked in a trajectory of temperature overshoot, increasing the necessity for both rapid mitigation and carbon removal.

However, the economic system is exhibiting significant rigidities. Regulatory frameworks in the US arepreserving fossil capital, while industrial responses in Europe are characterized byevasion (reshuffling) rather than innovation.

Without these structural reforms, the global economy will remain trapped in a high-damage equilibrium.