Chapter 7 Flashcards
Scenario Analysis
enables all relevant issues, risks, and their interrelationships to be brought together in one approach
TCFD 5 scenario characteristics
- Plausible (events should be possible and narrative credible)
- Distinctive (each scenario should focus on different combos of key factors)
- Consistent (each scenario should have strong internal logic)
- Relevant (Should contribute insights that relate to strategy and financial implications
- Challenging (Should challenge conventional wisdom and assumptions about the future)
Reference Scenarios
Agreed upon projections of global emissions trajectories (these scenarios can sometimes include sector-specific pathways)
IPCC Reference scenarios
most widely used and accepted reference scenarios - allows for cross comparability across 1. firm types 2. use cases
–> all scenarios have a net-zero result and use C removal to achieve net zero
SA varies significantly between TR and PR
TR: emission trajectories make significant difference on short timescale
1. FI and non FI examine whether their (facilities, strategies, portfolios) align with a global projected emissions trajectory
2. they examine potential effects of climate policy tightening (ex: increase in C tax) on their operations and plans
PR: Emission trajectories only make difference on long timescale
1. emissions trajectories plugged into physical climate models enable estimates of temp rise, precipitation, weather extremes, etc. Due to lag in global climate system, physical outcomes of climate change are relatively stable for next few decades
therefore, to improve a firm’s resilience, SA is more about using physical climate impacts that are already occuring
Cl SA for Non Financial firms
Climate SA can allow for concrete preparedness actions to be taken with regard to specific facilities (factories, etc.) and can be used for capital expenditure investment decisions
Cl. SA for F firms can be used to
can be used to gauge portfolio alignment with goals (2 degree); to pre-empt or shape new investment decisions by portfolio managers; or to provide “top-down” stress-test approach (portfolio is tested under certain assumptions and conditions)
Stress tests
model reaction of F system as a whole and an individual institution’s balance sheet to a hypothetical shock (relies on SA - as it models outcomes based on different scenarios)
Most important aspect to model and predict in simulations
concentration of GHG in the atmosphere
IPCC modeling is based on
Representative concentration pathways (RCPs)
RCP
agreed upon projected, plausible emission pathways through 2100
They represent different emissions projections under basic, plausible economic and social assumptions and are constructed by back-calculating amount of emissions that would result in a given amount of radiative forcing
initially RCPs were only emission trajectories calculated using certain assumption about E use (then intro of SSPs)
RCP 5 pathways
RCP 1.9: 1.5 Celsius
RCP 2.6: 2.0 Celsius
RCP 4.5: 2.4 C
RCP 6.0: 2.8 C (current policies)
RCP 8.5: 4.3 C (business as usual)
SSPs
Shared socio-economic pathways: have been developed to be used in conjuction with RCPs
are intended to provide plausible scenarios for how world evolves in areash soch as population, economic growth, education, level of globalization, level of urbanization, rate of technological development
5 SSP scenarios
range from better to worse climate change outcomes - deliberately do NOT include climate policies (so that they can be combined with different RCPs to explore climate policy options)
SSP1 - Significant focus on S
SSP 2 - business as usual
SSP 3 - regional rivalry
SPP 4 - high degree inequality
SSP 5 - fossil fuel development
Not all RCPs are achievable under all SSPs
SSP1 + RCP 2.6 and RCP 1.9 –> possible to achieve outcome
SPP2 + RCP 2.6 –? plausible but different outcome than with SSP1
SSP3 not plausible with RCP 1.9
International E Agency 2 core scenarios
- stated policies scenario (reflects existing policy frameworks and announced policy intentions)
- the sustainable development scenarios (SDS) (combines climate and social targets and limits warming to 2C)
Climate SA parameters
parameters: assumptions built into to scenario analysis
ex: discount rates, C price, E demand and mix; commodity price, macro-econ variable, geo variation, demographics and employment, technology, policy, climate system activity
Climate SA Analytical choices
analytical choices on scope and method
ex: quantitative vs qualitative, timescale, scope of analysis, data availability, choice of climate hazards, extent of supply chain inclusions, balance of physical, economic and social analysis
Climate SA Outputs
earn/profit. revenue, cost, asset valuation, investment/capital expenditures, asset allocation, potential impact on productivity, business interruption from hazard
TR SA
closely tied to emissions scenarios - TR results directly from: speed, pace and scale of low c transition
TR increases when emissions are cut more drastically and abruptly (net zero vs business as usual scenario)
TR for corp or FI involves evaluating whether its own operations, supply chains and portfolios are aligned with sector-specific and / or global macro-economic emissions trajectories
IAM
Integrated assessment models: economic models incorporating climate change and climate policy -
broad spectrum models designed to allow analysis of how societal and economic choices affect each other and the natural world (including climate change) – used extensively by the IPCC
Basic IAM
compare costs and benefits of avoiding certain level of warming
Most (more complex) IAMs
represent relevant interactions both among number of important human systems (E use, agriculture, trade) and physical processes (C cycle)).
Can answer questions like:
1. what will world look like with no climate policy action?
2. What will world look life if all countries impose a $200 tax/tonCO2 emission in 2025?
Sector decarbonization pathways
highly useful way of gauging transition risk (compatible with Paris agreement) for any sector – dome by commercial data providers, or others will build fully original emission trajectories (but typically only makes sense to do this for FF and large commodity firms whose fortune is tied to global changes in E mix)
