NGFS Scenario Update & Energy Crisis Effects
The Network for Greening the Financial System (NGFS) published its third iteration of climate risk scenarios. It provides a framework to assess climate risks, by analysing the transition and physical long-term effects of climate change. The scenarios were updated by including country-level climate commitments from COP26 in 2021, and the latest GDP and population pathways. Additionally, the scenarios now include forecasts on the potential losses from extreme weather events (floods and tropical cyclones) and the specific impacts of chronic climate changes on the macroeconomy.
The NGFS scenarios are also consistent with the scenarios assessed in the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). Due to time constrains, this version of scenarios could not account for the consequences of the war in Ukraine and the current energy crisis, but work is done on integrating the effects in the next update.
However, the NGFS also provided a paper on the impact of the energy crisis. The current energy price increases are manifesting swifter and more adverse than any of the NGFS scenarios illustrated.
On the one hand, the effects may significantly increase the risk of a disorderly energy transition, or at least a delay, putting the entire transition at risk. The sudden price increases and the resulting shutdown of carbon-intensive energy sources endanger energy security and without readily available green energy
replacements, a 5–10% GDP contraction within five years, might be the result.
Additionally, the renewed demand for coal, due to natural gas shortages, delays the expected carbon emission reduction.
On the other hand, the rise in fossil fuel prices is also an opportunity to speed up the renewable energy transition. Since, the current return on renewable energy is far higher than with low oil/ gas prices.
In summary the focus for the path to net zero should lie in the design of proper pricing mechanisms to encourage the use low-carbon energy sources, but also include schemes to include more vulnerable groups.
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