Beyond Climate Risk: Measuring Climate Uncertainty and Its Macroeconomic and Financial Effects

We study the distributional dynamics of extreme weather in Europe and its macroeconomic and financial consequences, distinguishing climate risk from climate uncertainty. Using a balanced panel of forty European countries over 1981-2024 and the E3CI composite index and its seven hazard components, we condition the distribution of extreme weather on anthropogenic radiative forcing and natural climate oscillators, measuring climate risk by the conditional median and climate uncertainty by the conditional interquartile range. Both moments respond nonlinearly to greenhouse gas concentrations. Still, the contribution of natural forcing is asymmetric: climate risk reflects anthropogenic and natural drivers, whereas climate uncertainty is predominantly anthropogenic, with wildfires as the main exception. The post-2010 acceleration in warming is reflected in both moments, although with distinct spatial patterns. Both risk and uncertainty depress economic activity through a common productivity channel: real wages absorb most of the efficiency loss, consumption contracts by more than output, and labor utilization remains largely unchanged. Uncertainty effects are roughly twice as large as risk effects for a typical annual change, and their incidence is governed more by countries' absorptive capacity than by physical exposure, making climate change a source of economic divergence within Europe. In financial markets, climate exposures are concentrated in the uncertainty measures, with the value factor loading negatively on maximum-temperature and wildfire uncertainty and risk. Overall, the evidence is consistent with irreversibility and precautionary behavior as important mechanisms through which climate uncertainty affects macroeconomic activity and asset prices.