18 November 2022

ECB: From “orderly transition” to “hot house world” – how climate scenarios can facilitate action

A shared understanding of how climate change affects the economy can be the basis for global action. To help inform and guide policy across the globe central bankers and supervisors have developed climate scenarios. This is the final post in a series on the occasion of COP27.

Climate change is happening right now, and is already having an impact on us all, though not everywhere in the same way. But do we share a common understanding of how climate change affects our economies and our financial systems? And what impact it has on growth, inflation or unemployment? Without a common language for climate risks it will be difficult to agree on urgently needed common policy responses. To help build such understanding, central bankers and supervisors have joined forces as the Network for Greening the Financial System (NGFS)^[1].

While the ECB and other central banks and supervisors from around the world are not in the driver’s seat to implement climate policies, they should play an important role to address climate change within their mandates, rigorous analysis being a key tool. The NGFS has thus developed, together with leading academic climate institutions^[2], a common picture of what our economies might look like under different assumptions. These are called “climate scenarios”.

The NGFS climate scenarios combine, for the first time, the analysis of transition, physical and macro-financial risks. We describe how these climate scenarios can help policy-makers, financial institutions and the public to deal with the uncertainty ahead.

Shedding light on plausible futures ahead

Put simply, climate scenarios ask crucial questions like ‘what can happen?’ and ‘what should happen?’ The scenarios are like key pieces of a mosaic that offer glimpses into possible futures. In this way, it is possible to look up the expected economic loss for a specific country – let’s say Spain or Morocco in any year between now and 2100 – under different assumptions. The scenarios are available through an online public platform, free of charge. Check them out on the NGFS Scenario Portal^[3].

Importantly, the NGFS scenarios are not forecasts. Instead, they aim at exploring a range of plausible futures for financial risk assessment in an environment of radical uncertainty...

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