Creating Climate Change Scenarios in a Changing World

Climate change impacts both the natural and social environments significantly. To better predict its potential effects, decision-makers and resource managers need information about future changes in climatic average and variability.

Climate scenarios provide a reasonable picture of the future climate that has been created while examining the probable effects of anthropogenic climate change. Banks and other financial institutions use it to determine the risk of investments made in sectors and business models incompatible with the transition to a zero-carbon economy or major producers of greenhouse gas emissions. A net-zero economy can be achieved by promoting systemic changes with the help of stress testing and climate scenarios.

From high-level climate ‘Pathways’ to policy-based regional ambitions, there is a great deal to take into account in the make-up, including:

• Global climate goals adopted by nations worldwide

• Regional targets are set and monitored by the same governments

• Differential pressures on food and energy security

• Upstream and downstream supply chain effects

• Slower transition rates due to worsening climate outcome predictions

• Splitting of climate investments between adaptation and mitigation

Representative Concentration Pathways (RCPs)

The Intergovernmental Panel on Climate Change (IPCC) develops a variety of Representative Concentration Pathways (RCPs) as part of its mandate from the UN. The eventual increase in the average global surface temperature relative to pre-industrial observations reflects pathways through the century toward outcomes.

The main pathways considered are:

1.9 - Endpoint – An increase of 1.5 degrees or less

2.6 - Endpoint – An increase of 2 degrees or less

4.5 – Endpoint – A 3 to 4-degree rise

8.5 - No action, also called ‘Hot House World’

Network for Greening the Financial System (NGFS)

The NGFS Climate Scenarios have been created to offer a standard place to start when examining climate risks to the financial system and economy. Although they were designed primarily for central banks and supervisors to utilize, they might potentially be helpful to larger financial, academic, and corporate groups.

Several suggestions for the methodological framework have been made based on a preliminary evaluation of the NGFS scenarios, such as:

• Consider tail risks

• Recognize uncertainty in climate sensitivity

• Extend the set of physical risks

• Integrate transition and physical risks

• Improve the representation of technological change

• Improve geographical coverage and sectoral granularity

• Consider alternative policy developments

The NGFS should consider that it is unclear how climate policy will develop in the future and that there are already some fragmented processes around the world that do not fit schematic descriptions provided by the scenarios.

Using a hypothetical carbon price as a stand-in for the cost of scenarios and pathways that are either based on regional plans or global outcomes is one of the most crucial strategies the NGFS employs. This makes it possible to compare regional transition routes uniformly.

• Power

• Fuel Supply

• Industry

• Transport

• Buildings

• Energy Integration

Each of these sectors' progress toward net-zero is monitored and separated into 46 distinct analytic themes. The "Climate Action Tracker" (CAT), which compares country-level promises to the UN-agreed targets of a 2-degree limit with best efforts toward 1.5 degrees, breaks down existing country-level commitments. Each nation presents its local and global results separately.

The final scenario(s) must incorporate modifications to both the speed of transition and the overall economic impact, which is often stated by changes in GDP.

GreenCap can help…

GreenCap is a Risk as a Service (RaaS) solution enabling banks to quantify increased risks they will have to face as the global economy shifts from brown to green. Intuitive scenario building provides economic inputs to sit alongside obligor-specific adaptations to make a rich, multi-dimensional approach to building meaningful, tractable scenarios.