Stockholm (NordSIP) – The Network for Greening the Financial System (NGFS) published today its first vintage of short-term climate scenarios. This new, publicly and freely available tool provides insights into the potential near-term impacts of climate policies and climate change on financial stability and our economies. It allows analysts to simulate sectoral and macroeconomic pathways up until 2030 and show how climate shocks can impact the economy and the financial system.
“The new NGFS short-term climate scenarios are a milestone in enhancing our understanding of climate-related risks. Extreme weather events and abrupt changes in transition policies can significantly affect our economies and financial sectors in the short run. This new NGFS tool offers the financial community valuable insights into the implications of adverse climate scenarios in the near term, with impressive sectoral and geographical granularity. The results remind us that reducing or delaying climate action will likely worsen future economic damages,” said Sabine Mauderer, Chair of the NGFS and First Deputy Governor of the Deutsche Bundesbank.
The NGFS
NGFS was launched at the Paris One Planet Summit on 12 December 2017 and brings together 145 central banks and supervisors and 22 observers. Its members share best practices and contribute to the development of environment and climate risk management in the financial sector, while mobilising mainstream finance to support the transition toward a sustainable economy.
The NGFS is chaired by Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, with the support of the Vice Chair, Fundi Tshazibana, Deputy Governor of the South African Reserve Bank and Chief Executive Officer of the Prudential Authority. The Secretariat, headed by Yann Marin, is provided by the Banque de France.
The Short-Term Climate Scenarios Tool
The NGFS Short-term scenarios were developed in partnership with an academic consortium including Climate Finance Alpha (CLIMAFIN), E3-Modelling / RICARDO, and the International Institute for Applied Systems Analysis (IIASA).
The release offers four different scenarios to assess the economic and financial impacts of physical and transition shocks. Based on the NGFS conceptual note on short-term scenarios, published in October 2023, these scenarios were developed in collaboration with experts from leading academic institutions.
The short-term climate scenarios were primarily developed as an input for climate stress-testing and macroeconomic risk assessment. The dataset offers a high degree of sectoral granularity, and provides financial metrics that can be directly used for climate risk assessments. The scenarios explored were selected to illustrate the potential impacts of adverse climate tail risks, in order to shed light on their likely effects on the economy and financial system. These results are also particularly useful in understanding the implications of climate risks for monetary policy, macroprudential policy and financial stability.
“The NGFS short-term scenarios represent a key addition to the analytical toolkit for understanding climate-related macroeconomic and financial risks. This new set of scenarios helps to describe the more immediate impacts of climate shocks and policy shifts, in a timeframe and level of detail that is especially relevant for investment decisions, financial supervision, monetary policy, and risk management. The short-term scenarios mark a significant step forward in supporting institutions to prepare for adverse, but plausible, climate developments and policies,” Livio Stracca, Chair of the NGFS workstream “Scenario and Design Analysis” and Deputy Director General Financial Stability at the European Central Bank.
Main Takeaways
The four main scenarios that the NGLS model considers focus on possible avenues for trying to achieve 2030 emission reductions that align with 2050 net-zero targets.
In the Baseline scenario, transition risk is mostly driven by the timing of the policies, level of carbon prices, and the extent to which carbon tax revenues are reinvested into green technologies. The Highway to Paris scenario describes a smooth, technology-driven, and coordinated transition, where carbon taxes increase gradually, leading to steady emission reductions. The revenue from carbon taxes is reinvested in green technologies, facilitating a more cost-effective shift toward net zero.
The Sudden Wake-Up Call scenario depicts a delayed and abrupt transition. Governments postpone action until 2027, then implement steep carbon pricing without reinvesting all revenues in green technologies. While emissions decline sharply by 2030, the transition comes at a higher economic cost. In the Diverging Realities scenario, only advanced economies (i.e.: North America, Europe, Oceania and parts of Asia) follow transition pathways aligned with Highway to Paris, leading to a global reduction in emissions that falls short of net-zero targets.
The model also considers an added type of Disasters and Policy Stagnation scenario, which contemplates six different regional variants, with each variant showing the effect of extreme weather events affecting one region of the world and the global economy through trade and financial linkages. Those six variants are individual and alternative scenarios.
