Chapter 7

Question 1

Scenario Analysis

Answer 1

enables all relevant issues, risks, and their interrelationships to be brought together in one approach

Question 2

TCFD 5 scenario characteristics

Answer 2

1. Plausible (events should be possible and narrative credible)
2. Distinctive (each scenario should focus on different combos of key factors)
3. Consistent (each scenario should have strong internal logic)
4. Relevant (Should contribute insights that relate to strategy and financial implications
5. Challenging (Should challenge conventional wisdom and assumptions about the future)

Question 3

Reference Scenarios

Answer 3

Agreed upon projections of global emissions trajectories (these scenarios can sometimes include sector-specific pathways)

Question 4

IPCC Reference scenarios

Answer 4

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

Question 5

SA varies significantly between TR and PR

Answer 5

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

Question 6

Cl SA for Non Financial firms

Answer 6

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

Question 7

Cl. SA for F firms can be used to

Answer 7

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)

Question 8

Stress tests

Answer 8

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)

Question 9

Most important aspect to model and predict in simulations

Answer 9

concentration of GHG in the atmosphere

Question 10

IPCC modeling is based on

Answer 10

Representative concentration pathways (RCPs)

Question 11

RCP

Answer 11

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)

Question 12

RCP 5 pathways

Answer 12

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)

Question 13

SSPs

Answer 13

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

Question 14

5 SSP scenarios

Answer 14

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

Question 15

Not all RCPs are achievable under all SSPs

Answer 15

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

Question 16

International E Agency 2 core scenarios

Answer 16

1. stated policies scenario (reflects existing policy frameworks and announced policy intentions)
2. the sustainable development scenarios (SDS) (combines climate and social targets and limits warming to 2C)

Question 17

Climate SA parameters

Answer 17

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

Question 18

Climate SA Analytical choices

Answer 18

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

Question 19

Climate SA Outputs

Answer 19

earn/profit. revenue, cost, asset valuation, investment/capital expenditures, asset allocation, potential impact on productivity, business interruption from hazard

Question 20

TR SA

Answer 20

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

Question 21

IAM

Answer 21

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

Question 22

Basic IAM

Answer 22

compare costs and benefits of avoiding certain level of warming

Question 23

Most (more complex) IAMs

Answer 23

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?

Question 24

Sector decarbonization pathways

Answer 24

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)

Question 25

Top down

Answer 25

top down: 1. work backwards from net-zero globally
2. allocate emissions across sectors and regions
3. consider interlinkage across sectors and structural shifts (ex: demographics)

Approach used by: NGFS, OECM, IEA

Question 26

Bottom up approach

Answer 26

1. work forward from where sector is today
2. focus on commercially feasible scalable action
3. identify technology and policy step changes

Approach used by: WBCSD, Climate champions, MPP

Question 27

PR SA

Answer 27

different than TR SA :
1. physical climate models are required as a first step to translate trajectories into physical impacts
2. climate lag

as a result a different sort of SA is more useful for PR: physical climate models

Question 28

Physical climate models

Answer 28

operational preparedness - used to calibrate emissions scenarios to make sure that the amount of radiative forcing resulting from posited emissions correspond to temperature targets for global average temperature rise

emission trajectories can then be reinputted into models to gain an estimate of various hazards – provide best accuracy on decadal timescale

– PR always starts at facility level