The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has unveiled its first set of short-term climate scenarios, aimed at financial policymakers.
The scenarios have been developed to enable policymakers to assess the near-term impacts of climate change on economic resilience and financial stability over the next five years.
The scenarios explore four sets of assumptions about climate policy and physical risks – firstly, a ‘physical risk only’ scenario, two scenarios linked to ‘transition risks only’, and a fourth scenario, which combines both transition and physical risks. These scenarios also have the potential to overlap and influence each other, the NGFS noted.
‘The main takeaways of the short-term scenarios are: i) regional extreme weather events generate temporary but material GDP losses, with effect on the global economy, and could increase the cost of the transition; and ii) delaying transition efforts increase the economic costs of transitioning and could cause additional financial stress,’ it noted.
Climate disasters and extreme weather
As the report notes, regional climate disasters could have a severe impact on GDP in certain areas, ranging from 6% in Asia to as much as 12.5% in Africa.
Sectors like agriculture, coal production, and energy supply are particularly vulnerable to such situations, while extreme weather events can also impact trade and financial linkages, the report notes.
Extreme weather events also have the potential to impact supply chain disruptions, which in turn inflates costs associated with the environmental transition.
Delaying climate action can also generate a net economic loss, according to the study. In a situation where climate policies are postponed until 2027, the global economy incurs a net loss of 1.3% of GDP by 2030. At the same time, if policies are accelerated – in what the NGFS calls its ‘Highway To Paris’ scenario – global GDP losses would be kept at 0.4%.
Short-term scenarios
As the NGFS noted, its short-term scenarios enable modelling of compound climate hazards such as simultaneous droughts and floods; enable the monitoring the cross-border transmission of economic shocks; and provide a framework to assess the interplay between climate policy and business cycle dynamics.
‘These features make the short-term scenarios particularly well-suited for climate stress-testing exercises and for analysing financial risks that may materialise within a business-planning, policy-relevant timeframe,’ it stated. ‘The NGFS long-term scenarios remain more appropriate for strategic longer term risk assessments, to analyse structural changes in the economy or to assess how strategic policy or business decisions could affect the risks for financial institutions in the longer term.’ Read more here.
