Climate policy challenges from conflicting models

𝗠𝗼𝘀𝘁 𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗺𝗼𝗱𝗲𝗹𝘀 𝘂𝘀𝗲𝗱 𝗶𝗻 𝗳𝗶𝘀𝗰𝗮𝗹 𝗽𝗼𝗹𝗶𝗰𝘆𝗺𝗮𝗸𝗶𝗻𝗴 𝘀𝘁𝗶𝗹𝗹 𝘂𝗻𝗱𝗲𝗿𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗲 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗱𝗮𝗺𝗮𝗴𝗲𝘀 - 𝗯𝘆 𝗮 𝗳𝗮𝗰𝘁𝗼𝗿 𝗼𝗳 3 𝗼𝗿 𝗺𝗼𝗿𝗲 or ignore them all-together. This shapes decisions on public investment, debt sustainability, and our collective ability to transition in time. I recently looked into how deep the modelling gap runs: 🔹 Global income losses from climate change 𝗺𝗮𝘆 𝗿𝗲𝗮𝗰𝗵 19% 𝗯𝘆 2050, with a likely range of 11–29%, according to the latest empirical studies. Yet widely used models like 𝗗𝗜𝗖𝗘-2024 𝘀𝘁𝗶𝗹𝗹 𝗽𝗿𝗼𝗷𝗲𝗰𝘁 𝗼𝗻𝗹𝘆 3.1% output loss at 3°C warming and 7% at 4.5°C - a dramatic underestimation. 🔹 $2.86 trillion in historical climate damages (2000–2019) are recorded empirically, versus just $0.8 trillion in DICE estimates - 𝗮 𝗳𝗮𝗰𝘁𝗼𝗿 𝗼𝗳 3.5 𝗹𝗼𝘄𝗲𝗿. 🔹 𝗧𝗵𝗲 𝗳𝗶𝘀𝗰𝗮𝗹 𝗶𝗺𝗽𝗹𝗶𝗰𝗮𝘁𝗶𝗼𝗻𝘀 𝗮𝗿𝗲 𝗲𝗾𝘂𝗮𝗹𝗹𝘆 𝘂𝗻𝗱𝗲𝗿-𝗮𝗰𝗸𝗻𝗼𝘄𝗹𝗲𝗱𝗴𝗲𝗱. The UK Office for Budget Responsibility projects that delaying decarbonisation could increase the national debt-to-GDP ratio by 10–100 percentage points by 2050. Yet mainstream Debt Sustainability Assessments (𝗗𝗦𝗔𝘀) 𝗶𝗻 𝘁𝗵𝗲 𝗘𝗨 𝗶𝗴𝗻𝗼𝗿𝗲 𝘀𝘂𝗰𝗵 𝗿𝗶𝘀𝗸𝘀 𝗲𝗻𝘁𝗶𝗿𝗲𝗹𝘆. 🔹 Perhaps most concerning: 𝗮𝗰𝘁𝗶𝗻𝗴 𝗻𝗼𝘄 𝗶𝘀 𝗮𝗹𝗺𝗼𝘀𝘁 50% 𝗰𝗵𝗲𝗮𝗽𝗲𝗿 𝘁𝗵𝗮𝗻 𝘄𝗮𝗶𝘁𝗶𝗻𝗴. Climate damages by 2050 outweigh the combined GDP losses from mitigation and impacts by a factor of 1.8 - yet our economic models still bias us toward delay. 𝗧𝗵𝗲𝘀𝗲 𝗯𝗹𝗶𝗻𝗱 𝘀𝗽𝗼𝘁𝘀 𝗮𝗿𝗲𝗻’𝘁 𝗷𝘂𝘀𝘁 𝗮𝗰𝗮𝗱𝗲𝗺𝗶𝗰. 𝗧𝗵𝗲𝘆 𝗰𝗼𝗻𝘀𝘁𝗿𝗮𝗶𝗻 𝘄𝗵𝗮𝘁 𝗽𝗼𝗹𝗶𝗰𝘆𝗺𝗮𝗸𝗲𝗿𝘀 𝘃𝗶𝗲𝘄 𝗮𝘀 𝗳𝗶𝘀𝗰𝗮𝗹𝗹𝘆 𝘀𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗹𝗲 𝗼𝗿 𝗽𝗼𝗹𝗶𝘁𝗶𝗰𝗮𝗹𝗹𝘆 𝗳𝗲𝗮𝘀𝗶𝗯𝗹𝗲 - especially in EU settings where fiscal rules and DSAs are central tools of economic governance. 📌 𝗙𝗼𝗿𝘁𝘂𝗻𝗮𝘁𝗲𝗹𝘆, 𝘁𝗵𝗲𝗿𝗲 𝗮𝗿𝗲 𝗲𝗳𝗳𝗼𝗿𝘁𝘀 𝘂𝗻𝗱𝗲𝗿𝘄𝗮𝘆 𝘁𝗼 𝗰𝗹𝗼𝘀𝗲 𝘁𝗵𝗶𝘀 𝗴𝗮𝗽. I want to highlight the excellent work by Dezernat Zukunft - Institut für Makrofinanzen, who recently reviewed how to integrate climate risk and transition investment into EU DSAs. Their proposals offer a crucial pathway to update the way we think about debt, risk, and climate. Another leader is Network for Greening the Financial System (NGFS), who brings together the climate with the fiscal and monetary policy community. 🛠️ Finance ministries need to work on approaches that merge macroeconomic and climate science insights and use them! 🧠 𝗪𝗲 𝗸𝗻𝗼𝘄 𝗯𝗲𝘁𝘁𝗲𝗿 𝗺𝗼𝗱𝗲𝗹𝘀 𝗮𝗿𝗲 𝗽𝗼𝘀𝘀𝗶𝗯𝗹𝗲. 𝗟𝗲𝘁’𝘀 𝗺𝗮𝗸𝗲 𝘀𝘂𝗿𝗲 𝘁𝗵𝗲𝘆’𝗿𝗲 𝘂𝘀𝗲𝗱! Peter Handley Ursula Woodburn Philippa Sigl-Glöckner Ludovic Suttor-Sorel Leslie Johnston, M.Sc. Jo Swinson Rosa Klitgaard Andersen Ida Lærke Holm Olivia Lazard Linda Zeilina-Cross Pascal Canfin Karl Pincherelle Philippe Lamberts Radan Kanev Alexander Reitzenstein Brian Kettenring Daniel Valenzuela Apratim (Tim) Sahay Adam Tooze Rana Foroohar

Climate models rely on weak data for durable #CarbonRemoval, yet these same models shape today’s climate policy Most climate policy experts tend to focus on the #NDCs as the fundamental tool for creating political buy-in to scale up durable removals. But what informs the NDCs? The #IPCC reports. What informs the IPCC reports? The Integrated Assessment Models (IAMs). The IPCC’s Sixth Assessment Report (AR6) illustrates the problem well. Of the 121 model runs in AR6 scenarios aligned with “well below 2°C” and “above 1.5°C” pathways: 120 deployed BECCS, 28 (!) deployed DACCS None (!) represented biochar or ERW. Carbon Direct has just published an in-depth analysis of the problem and potential solutions. The narrow scope of novel and durable carbon removals in IAMs also shapes many countries' NDCs and long-term strategies. I'd add that there is another important element - the IPCC guidelines for the national greenhouse gas inventories (the GHG accounting rules for the governments), which have also suffered from the same shortcomings. It's great to learn that Carbon Direct is collaborating with three leading research institutions with well-established IAMs: Pacific Northwest National Laboratory, Utrecht University, and the International Institute for Applied Systems Analysis, to close this gap and represent removals more accurately in climate modelling: updating the latest cost assumptions, learning curves, and growth constraints for existing carbon removal technologies, while adding new representations of DACCS, biochar, and ERW. Have a look at their short blog post laying out the key issues: https://lnkd.in/eEczTaW2 There's a link to a longer white paper at the end of the blog. It's well worth the read!

Happy to share a recent working paper, "Impact of Climate Scenario Choices on Climate Financial Risk Assessment," with colleagues at the Oxford Sustainable Finance Group, UK Centre for Greening Finance and Investment (CGFI), and Theia Finance Labs. Key takeaways: 1.    Widespread heterogeneity in climate scenario providers and trajectories indicate large uncertainty for financial institutions in assessing corporate climate transition scenario pathways. 2.    This has significant implications for climate financial stress testing that are premised on climate scenario pathways to meet certain temperature targets and policy ambitions. 3.    A consistent, bottom–up, climate financial stress test is applied to 3,419 power companies using different scenario trajectories and provides two main impacts: net present value (NPV) and probability of default (PD). 4.    Five scenarios are compared under a goal of reaching a global average surface temperature increase of below 2°C, and four scenarios are compared under a goal of reaching global Net Zero by 2050. 5.    Distribution of NPV changes under the stress test show that there are significant differences based on the climate scenario. This can impact the assessment of market and credit risk for companies. 6.    Analysis of individual power technologies indicate that the heterogeneity in company performance is technology specific and likely driven by assumptions in Integrated Assessment Models. 7.    Renewable power companies show improvement in NPV under any stress scenario, but there is some disagreement on the extent to which coal, gas, and oil companies show reduction in NPV. 8.    Hydro and nuclear technology power companies show the greatest uncertainty in financial performance (i.e., NPV) depending on the climate scenario being used. 9.    Results of probability of default (PD) change show similarly conflicting results with high variation in a company’s PD, however we observe higher levels of agreement between scenarios compared to NPV change. 10. Further research is needed to address both the uncertainty and assumptions in climate scenario trajectories as they are applied to financial climate risk analysis. #climaterisk #transitionrisk #stresstests #scenarioanalysis #integratedassessmentmodel #powergeneration #netpresentvalue #probabilityofdefault https://lnkd.in/gV2swsNr

The IPCC process is failing us all Most scientists involved hesitate to speak out publicly due to concerns about their careers. However, without addressing the flaws in the IPCC process, we cannot effectively tackle the climate crisis. Here are the key issues: 1. Flawed Economic Assumptions: Most climate models are built on the assumption of continued economic growth, despite lacking evidence that GDP growth can be decoupled from environmental harm. Scientists argue that to meet the Paris Accord goals, we must adopt a comprehensive planetary boundary framework. Merely phasing out fossil fuels won't suffice. “We cannot succeed in delivering on the Paris Accord unless we take a full planetary boundary framework. We need to come back into the safe operating space, and it won’t be enough to just phase out coal, oil, and gas.” - Johan Rockström, Director of the Potsdam Institute for Climate Impact Research 2. Dismissal of New Science: The IPCC has been slow to acknowledge new scientific findings, especially those that challenge established views. For example, evidence that global warming is accelerating and the exclusion of sulfur cooling effects are being ignored, potentially due to the reluctance of some scientists to admit previous errors. https://lnkd.in/dWAnsTvu https://lnkd.in/d93mBBWu 3. Unequal Responsibility: The IPCC has not adequately addressed the unequal distribution of responsibility for climate change. The Global North is responsible for 92% of excess emissions, yet the burden of emission reductions is unfairly shared with the Global South, which is less to blame. The IPCC's failure to advocate for fair and just emission reduction strategies is a serious oversight. Compensation for atmospheric appropriation | Nature Sustainability National responsibility for ecological breakdown: a fair-shares assessment of resource use, 1970–2017 - ScienceDirect 4. Over Reliance on Technocratic Solutions: The IPCC’s reliance on technocratic solutions and price adjustment mechanisms is overly optimistic and unrealistic given the scale and urgency of the climate crisis. This approach risks gambling with our future rather than securing it. To meet even the lower end of the 2030 target with current carbon capture and storage (CCS) projects, we'd need a 65-fold increase in removal rates—a nearly impossible leap. The IPCC base their models on  the deployment of highly speculative negative emissions technologies, a gamble described by economist Jason Hickel as "Jumping off a cliff while hoping someone at the bottom will figure out how to build a device to catch you before you crash into the rocks below." Without addressing these critical issues, the IPCC will continue to fall short in guiding the world toward effective climate action.

Is this honestly a surprise to anyone?! "#Financial #institutions #often #did #not #understand the models they were using to predict the #economic #cost #of #climatechange and were #underestimating the #risks of temperature rises, research led by a professional body of #actuaries shows Many of the results emerging from the models were “implausible,” with a serious “disconnect” between climate scientists, economists, the people building the models and the financial institutions using them, a report by the Institute and Faculty of Actuaries and the University of Exeter finds Companies are increasingly required to report on the climate-related risks they face, using mathematical models to estimate how resilient their assets and businesses might be at different levels of warming The International Sustainability Standards Board last week launched long-awaited guidance for companies to inform investors about sustainability-related risks, including the climate scenarios chosen in their calculations... Some models were likely to have “limited use as they do not adequately communicate the level of risk we are likely to face if we fail to decarbonise quickly enough" It also found that significant factors were sometimes missing from models ***For eg, an assessment of global gross domestic product loss in a so-called “hothouse” world of 3C higher temperatures by a group of 114 central banks and financial supervisors, known as the Network for Greening the Financial System, did not include “impacts related to extreme weather, sea-level rise or wider societal impacts from migration or conflict”*** As a result of such overly “benign” models, large financial institutions had reported that they would suffer minimal economic impacts if the world warmed by significantly more than 1.5C higher than pre-industrial levels, it said The #ParisAgreement commits countries to strive to limit warming to 1.5C by 2100, though policies in place now put the world on track for a rise of between 2.4C and 2.6C, say the UN body of scientists In Task Force on Climate-Related Financial Disclosures reports, several large UK financial institutions had reported that they would fare equally well or better economically in a hothouse scenario compared with more moderate warming scenarios, the researchers found, without naming the institutions Some #economists had even predicted “relatively low economic damage” from high levels of warming, said Tim Lenton, a co-author of the report who holds the chair in climate change at Exeter It was “concerning” to see those models being used by financial institutions to estimate their risks, Lenton said. The consequences of passing climate “tipping points” — self-reinforcing & irreversible negative planetary changes — were often not captured by the models... Financial institutions often did not understand the assumptions baked into the models and their limitations, they added." https://lnkd.in/es__W69d