Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design

Staff Climate Notes, November 28, 2023

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Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design

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Bibliographic details

• Authors: Charlotte Gardes-Landolfini, Pierpaolo Grippa, William Oman, Sha Yu
• Published: November 28, 2023
• Series: Staff Climate Notes
• DOI: https://doi.org/10.5089/9798400258220.066

Key findings on how the “polycrisis” affects the energy transition

• The transition to a low-carbon economy has been affected by supply chain and energy supply disruptions originating during the COVID-19 pandemic, the Russian invasion of Ukraine, and the subsequent energy crisis and exacerbation of geopolitical tensions.
• Three main factors reflect how these developments can affect future decarbonization scenarios:
  • (1) Pullbacks in climate mitigation policies and increased carbon lock-in in fossil fuel infrastructure and policymaking.
  • (2) The decreasing likelihood of continuous cost reduction in renewable energy technologies.
  • (3) The likely intensification of macroeconomic shocks amid increasing geoeconomic fragmentation, and the associated policy responses.

Implications for climate-related financial risk assessment and scenario design

• The note assesses implications of the polycrisis for hypothetical scenarios used to assess climate-related financial risks.
• It analyzes channels through which the three main factors are likely to materialize over short- and long-term horizons.
• It proposes potential adjustments to the design of climate scenarios used by financial institutions, central banks, and financial sector supervisors and regulators within their risk management frameworks.

Analytical focus and scope

• Focus: implications of recent supply chain, energy supply, and geopolitical disruptions for decarbonization scenarios and climate-related financial risk assessment.
• Emphasis on how policy pullbacks, technology-cost trends, and geoeconomic fragmentation interact with macroeconomic shocks to change the probabilities and characteristics of transition pathways.

Policy implications and recommended adjustments (summary)

• Consider scenario designs that reflect:
  • Increased probability of delayed or weaker mitigation policy implementation and associated carbon lock-in risks.
  • Slower-than-expected cost declines in renewable energy technologies.
  • Greater incidence and intensity of macroeconomic shocks tied to geoeconomic fragmentation, and the consequences for policy responses and financial stability.
• Adapt risk management frameworks of financial institutions, central banks, and supervisors to incorporate these altered transition dynamics and shock channels.

Content in this bundle

• Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design
  • Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design (Markdown version)
  • Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design (PDF)