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ESG Economist - The macroeconomic impact of transition
- Sustainability
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The fight against global warming and severe weather impacts requires a global shift from fossil-fueled economic activities to a clean energy-powered and energy-efficient economy. This transition towards achieving Net Zero emissions has significant economic implications. These implications become more apparent when examining specific components of GDP rather than just the overall macroeconomic numbers. Research and models consistently indicate that the negative economic impact of physical risks in a "hot house world" scenario is far greater and more permanent than any potential negative effects of transitioning, even if the transition is disorderly. Thus, there is a strong economic incentive to mitigate global warming as much as possible. This note explores the key transmission mechanisms of transition risk into the economy, aiming to clarify its effects on different parts of the economy.
ESG Economist - Adapting to the heat: on climate resilience and adaptation finance
- Sustainability
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As the world warms, adapting to climate change has become a necessity. The IPCC defines climate adaptation as the adjustment of natural or human systems in response to actual or expected climate change. As global emissions continue to rise, the need for countries, businesses and households to adapt continues to increase. Adaptation, and adaptation finance needs to progress at the same pace as impacts continue to escalate. Current adaptation efforts are insufficient. Many countries are already experiencing negative impacts from acute or chronic physical risk. This lends urgency to the need for climate adaptation. This note discusses what climate adaptation is and what the challenges financing climate adaptation are.
ESG Economist - New NGFS scenarios: more damage, less time
- Sustainability
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In November, the Network for Greening Financial Services (NGFS) published the fifth vintage of its climate scenarios. The new NGFS scenarios have been updated taking into account the most recent developments and the country-level commitments as they stood in March 2024. A new damage function has been applied incorporating the most recent insights into physical risk damages.
What to look for at COP29: the cost of delay and the Trump victory
- Sustainability
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Over the past year, very little progress was made in the ambition and implementation of policies to reduce greenhouse gas emissions globally. At the beginning of next year, countries have to submit their new national commitments to reduce emissions according to the global targets set out in the Paris Agreement (NDCs), with the end-point of the targets extended to 2035, from 2030 . To keep the Paris goals within reach all countries, in particular the G20, have to overperform on their current 2030 climate targets. The new quantifiable goal for climate finance will need to be vastly more ambitious as well as more concrete. The Trump victory in the US could have significant consequences for global climate policy, which could already have an impact on progress at COP29.
ESG Economist - Economic impact of carbon price sensitive to how revenue is spent
- Sustainability
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Carbon pricing is the main economic policy driver of the speed of transition in climate scenarios. By making emitting carbon more costly, it provides a financial incentive to decarbonise. However, it also has effects on the general economy. By putting a price on something that was previously cheaper or free, inflation can increase. Depending on whether or not the costs are passed on to consumers, it affects either purchasing power of households, or profitability of companies. This carbon pricing can take the form of an actual government-revenue generating price, such as is the case in cap-and-trade systems (such as the EU ETS), or carbon taxes. It can also take the form of other measures that discourage emitting carbon, such as policies limiting emissions or strict rules (“shadow price of carbon”). In the case of carbon pricing that generates government revenue, the economic impact varies depending on how these carbon revenues are used. In this note we look into the economic impact of different uses of carbon revenues.
ESG Economist - How big is the impact of a Hot-House World scenario on Europe’s GDP?
- Sustainability
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Climate scenarios provide insights into the potential economic impact of transition and physical risks. The impact depends on the nature of the scenario. In addition, the characteristics of geographies and starting points play a significant role. Also, the impacts differ depending on how they are modelled. In this note, we explore two different worlds in terms of climate for Europe: Net Zero and a Hot-House World scenario.
ESG - Compound risks in climate scenarios: is the impact greater than the sum of the parts?
- Sustainability
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When using climate scenarios, it is important to be aware of the assumptions underlying, and limitations of, these scenarios. One of the limitations of current climate scenarios and models is that they do not incorporate compound risks. Compound risk can occur when more than one shock or hazard occurs in combination. The impacts on the economy and society can be non-linear, complex and the total impact may be more than the sum of the individual parts due to interactions between the shocks within for instance the environment, firms, households, and/or the economy at large. In this note, we explore compound risk and its potential drivers/transmission mechanisms. We find that these risks can be material and relevant.
ESG Economist - How big is the impact of extreme weather on GDP?
- Sustainability
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The fourth vintage NGFS scenarios incorporate four acute physical risk hazards: heatwaves, drought, flooding and tropical cyclones. The frequency of these hazards under different scenarios are combined with location characteristics to produce impacts. These are then translated to the broader economy using transmission mechanisms. Globally, GDP impact from drought is largest, while in Europe the impact from heatwaves is largest. The impacts are dependent on how the hazard is defined and on the transmission mechanisms. Acute physical risk damages are significantly more sizeable in the fourth vintage, with GDP losses at 8% by 2050 in Current Policies, against 1.4% in the previous version. Still, it is clear that this is still an underestimation of physical risk as not all hazards and impacts are taken into account.
ESG Economist - COP28’s mixed bag
- Sustainability
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During COP28 little progress was made in increasing the ambition of the 2030 targets. No “phase-out” but “transitioning away” from fossil fuels: significant but insufficient step. Countries pledged to triple renewables capacity. No deal on international framework for carbon credit markets. The loss and damage fund saw pledges (though falling short of what is needed) and concrete steps.
SustainaWeekly - Acute physical risks have larger impact in the new NGFS scenarios
- Sustainability
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In November, the fourth vintage Network for Greening Financial Services (NGFS) climate scenarios were published. In this week’s SustainaWeekly, we compare these scenarios to the previous set. Orderly scenarios now include disorderly elements. New scenarios communicate the risks of lack of coordination, and role of behaviour adaptation. Acute physical risk estimates are larger and more granular. In our next note, we turn to the revised and recast Energy Performance of Buildings Directive (EPBD) to evaluate the potential impact it can have in the European building sector and more specifically, for green bond issuers. Our final note continues where our carbon capture note in the SustainaWeekly of 20 November left off: how to transport the captured CO2.
