## Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design

_Staff Climate Notes, November 28, 2023_

## Source details

**Canonical URL:** [Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design](https://www.imf.org/en/publications/staff-climate-notes/issues/2023/11/16/energy-transition-and-geoeconomic-fragmentation-implications-for-climate-scenario-design-541097)

## Other formats

- [Markdown version](/en/publications/staff-climate-notes/issues/2023/11/16/energy-transition-and-geoeconomic-fragmentation-implications-for-climate-scenario-design-541097/index.md)
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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

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### 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.

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## Content in this bundle

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_Source: https://www.imf.org/en/publications/staff-climate-notes/issues/2023/11/16/energy-transition-and-geoeconomic-fragmentation-implications-for-climate-scenario-design-541097_