Climate change presents a complex set of risks and opportunities for policymakers, financial institutions, and businesses alike. The NGFS Climate Scenarios provide a robust framework for analyzing the financial impacts of climate change. These scenarios are mapped into four quadrants, representing varying levels of physical risks (horizontal axis) and transition risks (vertical axis). Within this framework, there are seven distinct scenarios that outline possible climate futures, each reflecting unique combinations of policy ambition, technological advancements, and climate impacts.
In this article, I’ll break down the quadrants and provide practical examples for each of the seven scenarios, helping financial institutions and policymakers navigate the complexities of climate risk.
The Four Quadrants of Risk
- Low Physical and Low Transition Risks (Orderly) Represents scenarios where climate policies are implemented early and smoothly, limiting both physical and transition risks.
- High Transition and Low Physical Risks (Disorderly) Occurs when delayed policy actions lead to abrupt and expensive transitions, increasing economic risks but limiting physical risks.
- High Physical and Low Transition Risks (Hot House World) Represents limited or fragmented climate action, resulting in significant physical risks but minimal economic restructuring.
- High Physical and High Transition Risks Reflects a worst-case scenario where late and inconsistent actions fail to mitigate physical risks, while abrupt transitions amplify economic disruptions.
The Seven NGFS Climate Scenarios
1. Net Zero 2050: The Ideal Path
- Quadrant: Low Physical, High Transition Risks (Orderly)
- Description: Achieves net-zero CO? emissions by 2050 through immediate and smooth policy actions, with significant innovation and moderate use of Carbon Dioxide Removal (CDR).
- Key Highlights:
- Global warming limited to 1.5°C.
- Immediate and smooth implementation of ambitious climate policies.
- High reliance on technology and CDR solutions.
- Physical risks: Low; Transition risks: High.
- Example in Action: Countries like Norway, which aim for carbon neutrality by 2050 through aggressive renewable energy adoption and EV incentives, exemplify this path. Similarly, corporations like Microsoft, pledging to be carbon negative by 2030, align with this scenario's rapid decarbonization goals.
2. Below 2°C: A Gradual Approach
- Quadrant: Low Physical, Moderate Transition Risks (Orderly)
- Description: Targets limiting global warming to below 2°C with slower adoption of climate policies compared to Net Zero 2050.
- Key Highlights:
- Global warming limited to 1.8°C.
- Policies implemented slower than Net Zero 2050 but still effective.
- Balanced use of CDR and gradual technology adoption.
- Physical risks: Moderate; Transition risks: Moderate.
- Example in Action: The European Union’s Green Deal, which aims for climate neutrality by 2050 through gradual shifts in policies and investments, reflects this scenario.
3. Low Demand: Behavioral Shift
- Quadrant: Low Physical, Moderate Transition Risks (Orderly)
- Description: Focuses on reduced energy demand due to behavioral changes, shadow carbon pricing, and moderate technology adoption.
- Key Highlights:
- Warming limited to 1.1°C due to reduced energy demand.
- Driven by significant behavioral changes and energy-saving measures.
- Lower reliance on CDR compared to Net Zero 2050.
- Physical risks: Low; Transition risks: Moderate.
- Example in Action: The behavioral changes during the COVID-19 pandemic, like remote work and reduced consumption, showcased the potential for demand-driven emission reductions.
4. Delayed Transition: Playing Catch-Up
- Quadrant: High Transition, Low Physical Risks (Disorderly)
- Description: Climate policies are delayed, leading to abrupt and costly transitions that minimize physical risks but impose significant economic disruptions.
- Key Highlights:
- Warming limited to 1.7°C.
- Late implementation of policies leads to abrupt and costly transitions.
- Physical risks: Low; Transition risks: High.
- Example in Action: The United States’ Inflation Reduction Act (2022), providing sudden financial incentives for green energy, represents delayed action catching up to meet climate goals.
5. NDCs (Nationally Determined Contributions): Business-As-Usual
- Quadrant: Moderate Physical, Low Transition Risks
- Description: Represents current policies and commitments under the Paris Agreement.
- Key Highlights:Global warming exceeds 2.5°C.Policies align with current pledges but lack ambition.Physical risks: Moderate; Transition risks: Low.
- Example in Action: Countries like Australia, with coal dependency and limited renewable acceleration, exemplify this pathway.
6. Current Policies: Minimal Action
- Quadrant: High Physical, Low Transition Risks (Hot House World)
- Description: Assumes no further action beyond current policies, leading to significant physical risks from unmitigated climate change.
- Key Highlights:
- Warming exceeds 3.0°C.
- No significant changes to existing policies.
- Physical risks: High; Transition risks: Minimal.
- Example in Action: Fossil fuel-driven economies like Russia demonstrate the challenges of sticking to current trajectories, where economic interests outweigh climate urgency.
7. Fragmented World: Divided Efforts
- Quadrant: High Physical, High Transition Risks (Hot House World)
- Description: Limited global cooperation results in region-specific actions, insufficient to limit physical risks.
- Key Highlights:
- Warming exceeds 3.5°C.
- Inconsistent and fragmented policies lead to uneven transitions.
- Physical risks: High; Transition risks: High.
- Example in Action: Geopolitical conflicts, such as disparities in COP commitments between developed and developing nations, exemplify this scenario.
Real-World Implications
For Financial Institutions: Conduct scenario-based stress testing to identify vulnerabilities, such as how "Delayed Transition" could affect high-carbon sectors like steel and cement.
For Policymakers: Focus on early interventions to avoid abrupt and costly transitions, ensuring alignment with pathways like "Net Zero 2050."
For Corporates: Invest in renewable energy and sustainable practices to stay competitive and compliant with emerging regulations.
Conclusion
The NGFS Climate Scenarios provide a powerful framework for envisioning future climate risks. From ideal transitions like Net Zero 2050 to high-risk trajectories like Fragmented World, these scenarios equip stakeholders with the tools to make informed decisions and build resilient strategies.
What steps are you taking to align your strategies with low-risk pathways? Share your thoughts or experiences in the comments below. Together, we can take decisive action to safeguard our planet and financial systems.
References
- NGFS Scenarios Portal: Explore NGFS Scenarios
Disclaimer
This article is for informational purposes only and does not constitute financial or policy advice. The examples mentioned are illustrative and do not imply endorsements or actual outcomes. Please refer to the NGFS portal for detailed scenario data and methodologies.
