The Network for Greening the Financial System (NGFS) “Scenario Design and Analysis” work stream has just released its update on NGFS scenarios,¹ which includes an overview presentation, technical documentation, a user guide for data access and a paper on the implications for compound (physical) risks.

This is the third ongoing revision and update to the NGFS scenarios, repeating efforts in 2022 and 2021 on the original 2020 scenarios. In this revision, the NGFS:

• Has updated scenarios reflecting new economic and climate data, new policy commitments and model versions.
• Has a particular focus on updating acute physical risks (made more granular and added impacts of droughts and heatwaves).
• Has made the orderly scenarios more disorderly, reflecting the climate policy delays and energy crisis following the war in Ukraine. On the transition impacts, they have also limited the availability of carbon capture and storage (CCS) technologies due to the slower progress and scaling of these efforts.
• Has added two new scenarios: “Fragmented World” reflects delayed and divergent global policy ambitions (to 2050) with a projected temperature rise of 2.3oC by 2100. The “Low Demand” scenario assumes that significant (consumer) behavioural change will accelerate an orderly Paris-aligned transition. The “Divergent Net Zero” scenario has been dropped as it’s no longer considered a viable Paris-aligned pathway.

The aggregate impact of these changes is generally more incremental than radical. The Orderly “Net Zero 2050” and “Below 2oC” have increased transition risks reflecting the more disorderly impacts of recent events. The “Nationally Determined Contributions (NDC)” and “Current Policies” scenarios have slightly reduced transition risk reflecting newly announced policies and commitments.

Two more significant changes which the NGFS highlight are:

• Shifts in the Shadow Carbon Price (SCP),² which helps drive the greenhouse gas (GHG) reductions within the models. In the Net Zero 2050 scenario within the Regional Model of Investments and Development (REMIND), the SCP is around a third higher by 2050 and what’s more continues to rise until 2100, whereas it plateaued from 2050 in the 2022 release. This reflects the need both to reach the same climate goal with a slower (“disorderly”) initial start and, longer-term, the reduced availability from CCS.
• The inclusion of drought and heat waves as hazards, and improved capturing of macroeconomic impacts, has significantly increased acute impacts from 1.4% of gross domestic product (GDP) losses by 2050 to 8% of GDP losses relative to the baseline in the “Current Policies” scenario. On a regional basis, the acute GDP impacts in Africa and the Middle East seem to be less than in Europe. This is not intuitive and suggests taking care on the suitability of these impacts if applying them as regional factors. The impact of chronic physical risk is almost unchanged.

The evolution is an ongoing process. The NGFS provides a general caveat on the uncertainty and limitations of the model, such as tipping points not being included. For physical risks, they highlight the challenges of sufficient granularity and of integrating physical risks with macroeconomic factors, such as the impact of drought on food prices and thus inflation. It has also released a paper on the implications of compound risks, which could be incorporated in future releases.

Whilst considerable work and effort has clearly gone into these scenarios, it seems unlikely this update will appease many of their critics. In particular, none of the scenarios envisage a worse outcome than current policies (2.9OC) with all the other scenarios being 2.3oC or better. There is no discussion of equilibrium climate sensitivity (ECS).³ ECS is the relationship between warming and GHG emissions. In broad terms, an ECS of 3oC means a doubling of GHG emissions since the preindustrial era would lead to a warming of 3OC. The challenge is the ECS range is still hugely uncertain—the sixth assessment report from the Intergovernmental Panel on Climate Change (IPCC) quotes a very likely range of 2.0 oC to 5.0 oC, which is a factor of 2.5 on temperature outcomes. If the ECS is higher than commonly estimated, we are likely to have already exceeded the budget for 1.5oC and have a material chance of 4.0oC or 5.0oC warming on our current pathways. Many critics also say the damage (GDP impact) functions should be much larger, especially at higher temperatures.⁴

The NGFS says it will be changing the pace of its significant revisions moving to a two-year cycle, with an interim annual update that is expected to be more granular. It will be interesting to see how this discussion and these efforts develop alongside its recent paper on short-term climate scenarios.⁵ The short-term scenarios better address some of the critics’ concerns and may become a preferred way to consider stress tests and actionable scenarios.

¹ NGFS (11 July 2023). NGFS Climate Scenarios for Central Banks and Supervisors – Phase IV. Retrieved 21 November 2023 from https://www.ngfs.net/en/ngfs-climate-scenarios-phase-iv-november-2023.

² Shadow Carbon Prices are defined as the marginal abatement cost of an incremental ton of greenhouse gas emissions. Effectively within the models, they act as a pricing mechanism to drive the pace of transition and reduction in emissions. Shadow Carbon Prices are influenced by the stringency of policy as well as how technology costs will evolve.

³ Hausfather, Z. (19 June 2018). Explainer: How scientists estimate “climate sensitivity.” Carbon Brief. Retrieved 21 November 2023 from https://www.carbonbrief.org/explainer-how-scientists-estimate-climate-sensitivity/.

⁴ Trust, S. et al. (July 2023). The Emperor’s New Climate Scenarios. Institute and Faculty of Actuaries & University of Exeter. Retrieved 21 November 2023 from https://actuaries.org.uk/media/qeydewmk/the-emperor-s-new-climate-scenarios.pdf.

⁵ NGFS (3 October 2023). NGFS publishes a conceptual note on short-term climate scenarios. Retrieved 21 November 2023 from https://www.ngfs.net/sites/default/files/medias/documents/press-release_2023-10-3_conceptual-note-on-short-term-climate-scenarios.pdf.