A key-role of central banks is to strive for financial stability. To assess climate destabilization risks, major central banks plan to utilize a new set of climate scenarios developed by an international team of researchers. The set of scenarios will inform the 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 work was led by the Potsdam Institute for Climate Impact Research (PIK), while IIASA was one of the providers of transition scenarios and hosts the Scenario Explorer and database for the many users around the world.
The transition scenarios explore future changes to the energy system and the global economy if climate targets are met or not, and whether the transition to a low-carbon future happens in an orderly or disorderly fashion.
“Climate-related risks are very real to the global economy,” explains Elmar Kriegler, lead coordinator of the project at PIK. “On the one hand, the physical impacts of climate and weather-related events can be very large – think of floods or droughts.
“On the other hand, there are transitional risks and opportunities. These arise for example from policy changes or technological development in the process of adjustment towards a low-carbon economy. Both risk types can heavily impact economies across the globe. But how precisely and under what conditions – that’s what our scenarios will help to illustrate and explore.”
According to the team, this type of information is critical for assessing financial risks, as central banks and supervisors have considerable leverage over the global economy’s future course.
“Science-based information is critical for sound decision making. In the course of the project, we experienced mutual learning between scenario modelers and central bankers. It was thrilling to see that climate change scenarios proved their worth for financial regulators as they have done before for climate policymakers,” Kriegler concludes.
The project was commissioned by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), a group of 66 central banks and supervisors around the globe who take an active interest in advancing the transition toward a sustainable world economy.