NEW YORK: Scenarios used by the financial system to assess climate risk need updating to account for growing economic uncertainty and setbacks to the green transition from the COVID-19 pandemic and Ukraine war, the International Monetary Fund said on Tuesday.
It said many governments had prioritised post-pandemic recovery over carbon emission targets while Russia’s invasion of Ukraine in February 2022 had caused widespread “carbon lock-in” as countries rushed to secure fossil fuel sources.
Higher borrowing costs and possible supply snags for critical minerals posed risks for future take-up of renewable technology, while a spike in public debt levels could lead to low-carbon projects being downsized, an IMF staff note warned.
“While the climate scenarios currently used in climate risk analyses already include the possibility of a ‘disorderly’ transition, the short- and long-term implications of the current state of things have not been fully incorporated,” it said.
It said that was true of the latest scenarios issued by the Network for Greening the Financial System (NGFS) - a grouping of central banks - despite the broad scope of their exercise.
The most recent NGFS scenario foresees an 8% loss to global output from extreme weather hazards by 2050 if the world continues with current policies that put the planet on a path 2.9 degrees Celsius (5.2 degrees Fahrenheit) of warming (over pre-industrial levels).
NGFS Secretary General Jean Boissinot welcomed “a very valuable contribution” to discussions on how to improve the scenarios, noting the IMF was closely involved in that work.
“There are a lot of interesting things in the paper that speak to the design of the short-term scenarios and the kind of shocks we may want to put in,” he told Reuters, citing also the IMF’s point about the long-term implications of carbon lock-in, in which inertia favours the continues use of fossil fuels.
The IMF proposed that existing scenarios not only be updated to reflect mounting challenges to the low-carbon transition but that technical work be done to ensure that the impact of jointly occurring shocks could be adequately modelled.
It said those models should also attempt to capture possible feedback loops - for example if climate damages started to derail efforts to use less energy - and to account for the accelerating impacts seen from climate “tipping points”.