Climate Models & Scenario Analysis Flashcards
When did scenario analysis originate?
1950s
What are global reference scenarios?
Agreed and widely used projections of future emissions, sometimes with socio-economic narratives
Most universal reference scenarios are from the IPCC, these include _____
Representative concentration pathways (RCPs) & accompanying shared socioeconomic platforms (SSPs)
What are IAMs?
Integrated Assessment Models (IAMs) - economic models that also include representations of societal and environmental phenomena and sector-specific decarbonisation pathways
Scenario analysis is used for…
Strategy and stakeholder communication to investors / regulators Resilience planning Portfolio risk management Stress Testing Pre-emotive portfolio selection
Who is scenario analysis often credited to?
Herman Kahn
What team sent its oil price forecasts to executives, what did this prepare for?
Shell’s ‘Futures’ team 1960s - sent forecasts to executives in early 1970s
Helped prepare for oil crisis of 1973
Reference scenarios are a set of agreed upon projections of emissions trajectories
Because of this, they allow for…
Cross comparability
Combinations of scenarios can be used in tandem to help cover gaps in coverage for a particular time frame
Due to a lag in the global climate system, the physical outcomes of climate change are…
Practically the same for the next few decades (until about 2050) regardless of emissions
When were stress tests widely adopted
In the wake of the financial crisis of 2008 - now increasingly repurposed to examine climate risk
First iteration of climate scenarios was devised…
In the 1990s, with assumptions around population growth, economic growth and emissions
TCFD Recommendations on Scenario Analysis x5
Challenge conventional wisdom about the future, explore alternatives that may significantly alter the basis of BAU assumptions
- Plausible
- Distinctive
- Consistent
- Relevant
- Challenging
Cammy Can Dance Pretty Rubbish
Current IPCC modelling is based on…
These are agreed upon, projected, plausible emissions based on emissions through to ___
Representative Concentration Pathways (RCPs)
Plausible emissions pathways through to 2100
How were RCPs constructed?
By back-calculating the amount of emissions that would result in a given amount of radiative forcing - the difference between solar radiation absorbed by the Earth and energy radiated back into space
RCP names are based on…
The amount of radiative forcing measured in watts / meter squared
RCP 2.6 is often used as shorthand for…
Below 2*c
What are CMIP5 models?
Models used for the 2014 IPCC Report
What proportion of CMIp models found that global temperatures surpassed the 2*c threshold
22% surpassed the 2*c threshold
Meaning there is a 78% probability that global temperature does remain below 2*c
RCP 8.5 is sometimes referred to … and is used as ___
RCP8.5 referred to as BAU - sometimes used as ‘worst case scenario’
Assumes continued rising emissions, leading to much higher levels of warming
Name the RCP Pathways - which are the most popular?
RCP 1.9
RCP 2.6*
RCP 4.5
RCP 6.0
RCP 8.5*
What is the RCP pathway equivalent for ‘current policies’
RCP 6.0
Approx 2.8*c
Why were shared socioeconomic pathways developed?
Developed in conjunction with the RCPs
SSPs intended to provide plausible scenarios for how the world evolves in areas such as population, economic growth, education, level of globalisation, urbanisation etc.
Only some SSPs and compatible with some RCPs.
Which RCP is not feasible with any SSPs?
RCP 8.5
Which two RCPs are both possible to achieve under baseline SSP1 assumptions?
RCP 1.9 and RCP 2.6
RCP 2.6 is a plausible emissions pathway under what SSPs?
Under SSP 1 and SSP 2
SSPs will be included in IPCC reports from ___ onwards
2021
IEA has x2 core reference scenarios - what are these scenarios?
- Stated Policies Scenario - reflects existing policy framework
- Sustainable Development Scenario - combines social & climate targets
IEA’s World Energy Outlook - explain
Considered one of the definitive global assessments of the energy sector
Criticised for excess of caution and friendliness towards FF sector, solar PV capacity annually always underestimated
In 2019, after pressure to include an energy model compatible with 1.5*c included in its 2020 outlook
Explain conditions in the IEA’s Net Zero Scenario (2021)
More ambitious path to achieve net zero to date - far less room for continued FF use than previous IEA models, sets out sector specific milestones
- no new coal power plants / new coal mines
- 60% of vehicles EV by 2030
- 50% of all buildings retrofitted and electricity generation emissions globally net zero by 2040
- no new sales of FF boilers by 2025
Sector specific scenarios include the DDPP - define
Deep Decarbonisation Pathways Project
IEA Stated Policies Scenario
What is the peak, when does the modelling end?
Peak - 2030
Not modelled beyond 2040
IEA Sustainable Development Scenario
When is the peak?
Not modelled beyond what year?
Peak - 2021
Not modelled beyond 2040
IEA Net Zero Scenario (2021)
Peak emissions?
Net Zero by when?
Peak in 2019
Net zero in 2050
Two scenarios by IRENA
When is peak emissions in both?
- Planned Energy Scenario
- 1.5*c Scenario
Both peak in 2021
Name of the Greenpeace scenario
When does it Peak, when is Net Zero?
Advanced Energy Revolution
Peaks in 2020 - net zero in 2050
What does the ISD Deep Decarbonisation Pathways Initiative look at?
When is peak and net zero?
Country level pathways for emissions reductions consistent with global 2*c -
NA Net Zero and NA Peak as differs between countries
What are the x3 NGFS scenarios?
- Orderly Scenario
- Disorderly Transition Scenario
- Hothouse World
NGFS Orderly Scenario
When is peak emissions
When is net zero
2020 peak emissions
Net Zero in 2060
NGFS Disorderly Transition Scenario
When is peak emissions?
When is net zero?
Peak emissions in 2030
Net Zero in 2050
NGFS Hothouse Earth
When is peak emissions?
When is net zero?
Peak emissions in 2080
No net zero
IAMs are grounded in ___ and model what?
Grounded in economic theory
Model how social and economic factors affect each other and the climate
What is radiative forcing?
Proportion of solar radiation reflected back into space and the difference between radiation reflected by sea ice and that absorbed by ocean
Give examples of analytical choices
Qualitative vs Quantitative
Timescales
Choice of climate hazards
Scope of analysis
Scenario Outputs
Earnings / profits
Revenues
Asset Valuations
Investment / capital expenditure
Most basic IAMs compare what..?
Compare the costs and benefits of avoiding a certain level of warming
Sector Decarbonising Pathways are a useful way of gauging transition risk.
They are designed to be…
Compatible with Paris targets and whether it is possible for the firm to align with the trajectory
What does the Transition Pathway Initiative intend to do?
Publicly listed companies on their level of alignment with Paris compliant sector trajectories
What is PACTA?
Paris Alignment Capital Transition Assessment
Who developed PACTA?
2 Degrees Investing Initiative
PACTA for banks starts with…
A bank’s financial exposure to physical assets in the real economy
PACTA output metrics look to control two key climate issues:
- Absolute production output and limits of high carbon technologies
- Identifying the production shift from high carbon to low carbon production needed to be compatible with a Paris aligned world
PACTA for banks currently covers x5 climate-critical sectors
Power Fossil Fuels Automotive Steel Cement
PACTA uses two metrics to measure alignment - these include:
- Production Volume Trajectory - measures alignment of a loan book
- Technology / Fuel Mix - shows sectoral technology
For sectors with clear decarbonisation pathways (i.e. steel and cement) PACTA use what metric?
Emissions Intensity
Shell’s scenarios include a …
Large continued role for oil and gas
Sky & Sky 1.5 - explain these scenarios
Sky = pre-covid 2*c compatible scenario
Sky 1.5 = post-covid 1.5*c compatible scenario
Shell’s WAVE scenario - explain
Disorderly, delayed but quick transition
Shell’s ISLANDS scenario - explain
Late and slow transition
Emissions scenarios have a lower importance for physical risk in what term?
In the short term - meaning that they cannot predict incidence, but can build preparedness and resilience
Name of a model specialising in projecting extreme weather risk
ClimatePREDICT
Transition Risk typically means starting with…
Global reference scenarios and emissions trajectories, but also requires sector-specific pathway and firm specific information
Physical risk scenario analysis mainly looks at what type of risk?
Operational Risk
In May 2021, what vote took place?
Investor Campaign (Engine 1) voted to replace two independent directors on the board of Exxon-Mobil
Example of scenario analysis and Citi
Carried out scenario analysis exercise on extreme weather events on two large employee centres (Florida & New York) due to strategic importance
1/25 Tropical storm - some damage
1/100 Hurricane - facilities left inoperable
1/1000 Hurricane & Storm simultaneously impacts both offices
What was Citi’s conclusion?
Citi concluded there would not be material impact to operational resilience
What is ‘ex ante investment integration’?
Integration as part of the toolkit portfolio managers can use to preempt undue exposure or serve as early indication
Climate scenarios - HSBC Transition Risk, explain:
HSBC stress tested x6 sectors exposed to high transition risk, using NGFS scenarios
Sectors: automotive ; construction ; chemicals ; metals ; oil & gas ; utilities
HSBC Transition Stress Test -
What was the stress to the automotive sector?
Automotive sector - transition to EV’s, high EV adoption expected
HSBC Scenario Analysis
Chemicals - what was the stress?
Carbon pricing impacts chemicals sector, but demand continues to increase as a result of continued economic expansion
What did Legal & General co-found in terms of frameworks?
What did the framework intend to do?
Co-founded Destination@Risk
Intended to quantify physical and transition risks within the portfolio using proprietary scenarios
Degree of aligning to Paris goals
Integrate into ‘Climate Dashboard’
