Central banks are increasingly focused on the risks from climate change for the economy and financial system. Two sets of risks are of particular concern: physical risks from more frequent and severe weather events, and transition risks from the move toward a lower-carbon intensive economy.
This paper adapts climate-economy models that have been applied in other contexts for use in climate-related scenario analysis. It considers illustrative scenarios for the global economy that could generate economic and financial system risks by varying assumptions on key variables such as climate policy in plausible ways.
The results show significant economic implications from climate change and the transition to a low-carbon economy. The timing and magnitude of global GDP and sectoral impacts, among other outcomes, vary considerably under the mix of scenarios. These risks touch on the interests of a broad range of stakeholders across the private and public sectors. In addition to central banks and governments, these risks could affect financial institutions, resource-intensive industries and other private sector firms. Further improvements in scenario analysis, as well as wider-spread use across the public and private sectors, could lead to a better understanding of the risks and opportunities of climate change.
The paper is structured as follows. In the first section, it provides an overview of the literature assessing the economic impacts of climate change and climate mitigation, including past studies using scenario analysis. Next, it describes the main model used in this paper, the MIT Economic Projection and Policy Analysis (EPPA) model, and then outline a set of illustrative scenarios used in this study. In the remaining sections, it shares illustrative results before concluding with a discussion of the implications for future work.
Ho Chi Minh City faces significant and growing flood risk. Recent risk reduction efforts may be insufficient as climate and socio-economic conditions diverge from projections made when those efforts were initially planned.
Sea-level rise threatens low-lying areas around the world’s coasts with increased coastal flooding during extreme sea level events during storms.