07 June 2021

Limiting climate risks for finance: Central banks and science publish scenarios

To improve climate related risk management in the financial sector and facilitate a smooth transition toward a sustainable economy, IIASA researchers joined forces with other scientists and a network of over 60 central banks and financial market supervisors to publish an updated set of scenarios. They show early greenhouse gas emissions reductions can minimize both physical and financial risk - in contrast, delayed action or no action would drive up costs.

© Swanomurphy | Dreamstime.com

© Swanomurphy | Dreamstime.com

The newly developed scenarios explore future changes to the energy system and the global economy in terms of an orderly transition, delayed transition, and climate policy failure. The analysis will inform climate stress tests that key central banks like the Bank of England or the Banque de France are planning to apply to the financial institutions they regulate. The project was commissioned by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), a group of central banks and supervisors around the globe who take an active interest in advancing the transition toward a sustainable world economy.

“Climate scenarios are a crucial tool in assessing the risks of the future,” says Sarah Breeden, Executive Director at the Bank of England and chair of the scenario process within the NGFS. “But they are so much more. Because when we better understand the risks of tomorrow, we take more informed action today, and in doing so support an orderly transition to net zero.”

For an orderly transition towards net zero emissions by mid-century, investments into renewable energy would have to double to quadruple in the next ten years compared to continuing current trends. The analysis assumes that the revenue is returned to the economy through a mix of government investments, debt paydown, and tax cuts. If meaningful action is delayed more severe policies must be introduced later in the horizon to compensate. If the transition fails, analysis from the NGFS scenarios suggest that up to 13% of global GDP would be at risk by the end of the century, even before accounting for the potential consequences of severe weather events.

The work was led by the Potsdam Institute for Climate Impact Research (PIK), while the IIASA Energy, Climate, and Environment Program was one of the providers of transition scenarios and hosts the Scenario Explorer and database for the many users around the world.

“IIASA applied a novel downscaling methodology to translate Integrated Assessment Model (AM) outputs, such as energy use and CO2 emissions, to the national level,” explains Bas van Ruijven, Sustainable Service Systems Research Group leader in the IIASA Energy, Climate, and Environment Program. “This allows us to bridge the gap to the users, who are often interested in developments in specific countries or sectors”. 

The academic consortium that developed the scenarios with the NGFS includes the University of Maryland (UMD), Climate Analytics (CA), the Swiss Federal Institute of Technology in Zurich (ETHZ), and the National Institute of Economic and Social Research (NIESR). The financial institutions involved in the NGFS include the central banks of Brazil, China, the EU, Great Britain, India, Japan, Russia, and the US, as well as observers such as the International Monetary Fund and the World Bank. 

Adapted from a press release prepared by the Potsdam Institute for Climate Impact Research (PIK).



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Last edited: 08 June 2021

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