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Transition Scenarios for Analyzing Climate-Related Financial Risk

Abstract: In November 2020, the Bank of Canada launched a pilot project with the Office of the Superintendent of Financial Institutions aimed at better understanding risks to the economy and the financial system related to climate change. Part of this work included developing a set of Canada-relevant climate transition scenarios that explore pathways consistent with achieving certain climate targets. The scenarios vary in terms of two key drivers of climate transition risk: (i) the ambition and timing of climate policy and (ii) the pace of technological change and availability of advanced technologies. To develop the scenarios, we used a suite-of-models approach that linked a computable general equilibrium energy-economy model with two macroeconomic models. The scenarios focus on Canada and the United States because of the material exposure of the Canadian financial sector to these regions. They capture the evolution of the global economy, summarized across 10 emissions-intensive sectors of the economy and across 8 distinct regions of the world. The analysis illustrated the important sectoral restructuring the Canadian and global economies may need to undertake to meet climate targets. The analysis showed that every sector contributes to the transition and that the financial impacts vary across sectors. These impacts depend on how the sectors are impacted by emissions and capital expenditures costs and on how the demand for their products is affected by decarbonizing of economies. The scenarios also shed light on the risks of significant macroeconomic impacts, in particular for commodity-exporting countries like Canada. The economic impacts for Canada are driven mostly by declines in global prices of commodities rather than by domestic policy decisions. Finally, the analysis showed that delaying climate policy action increases the overall economic impacts and risks to financial stability.

This report is also available at the Bank of Canada website.

On January 12, 2022, MIT Joint Program Research Scientist Kenneth Strzepek presented a talk entitled "The role of Nile water resources in the economic development of Egypt and Ethiopia, and the potential impacts of the GERD filling policies." The talk was part of "The Nile River Basin in Crisis: Water Sharing and Transboundary Conflict or Cooperation" Webinar Series, presented by the UCLA African Studies Center. 

Oultine:

The role of Nile water resources in the economic development of Egypt and Ethiopia, and the potential impacts of the GERD filling policies
Testing the skill of a species distribution model using a 21st century virtual ecosystem

Authors' Summary: Marine plankton communities play a central role within Earth's climate system, with important processes often divided among different “functional groups.” Changes in the relative abundance of these groups can therefore impact on ecosystem function. However, the oceans are vast, and samples are sparse, so global distributions are not well known. Statistical species distribution models (SDM's) have been developed that predict global distributions based on their relationships with observed environmental variables. They appear to perform well at summarizing present day distributions, and are increasingly being used to predict ecosystem changes throughout the 21st century. But it is not guaranteed that such models remain valid over time.

Rather than wait 100 years to find out, we applied a statistical SDM to a complex virtual ocean, and trained it using virtual observations that match real-world ocean samples. This allows us to jump forward to the end-of-century to test the accuracy of our predictions. The SDM performed well at qualitatively predicting “present day” plankton distributions but yielded poor end-of-century predictions. Our case study emphasizes both the importance of environmental variable selection, and of changes in the underlying relationships between environmental variables and plankton distributions, in terms of model validity over time.

Hydrogen powered cars and trucks: Is there a role for them in the electrified U.S. future?

Abstract: Climate change is a systemic risk to the world’s economy. Significant and rapid cuts in carbon emissions are needed to limit global warming. Fuel Cell Electric Vehicles (FCEV) offer an attractive alternative for decarbonizing the transportation sector for both Light Duty and Heavy Duty categories. The cost of hydrogen fuel cell-related technologies are decreasing rapidly and FCEVs may provide an alternative to electric vehicles in decarbonization.  

This thesis provides a fresh look at economics of FCEVs and competing alternatives for decarbonizing transportation and their long-term trends in the US. Based on the recent data, the total cost of ownership (TCO) models are developed for three types of drive train Internal Combustion Engine Vehicles (ICEV), Battery Electric Vehicles (BEV) and FCEV for both Light Duty Vehicle (LDV) and Heavy Duty Vehicle (HDV) categories. A hydrogen retail cost model is developed to provide a detailed understanding of the cost components. The fleet dynamics of Light Duty vehicles (LDV), including ICEV, BEV and FCEV, are modeled using MIT Economic Projection and Policy Analysis (EPPA) model to understand the characteristics of long-term trajectories for the LDV fleet growth in the US.  

The TCO for BEV and FCEV are higher than ICEV in the LDV sector in the absence of carbon abatement credits or other government support. This implies that FCEVs are about 10% more expensive than BEVs on a cost-per-mile basis. However, there are cost reduction pathways that might make FCEVs competitive in the next 10 years and n the scenarios of accelerated actions. The percentage of FCEVs in total vehicle stock in the US might grow to more than 14% by 2050. The growth is contingent upon the TCO reduction pathways. The TCO of BEV and FCEV Class 8 type trucks are 24% and 40% higher than ICEV trucks, respectively. The fuel cost for FCEV is 2.4 times of BEV’s fuel cost and the retail price of FCEV Class 8 type truck is 1.5 times that of BEV truck. A 40% reduction in hydrogen retail price or a 70% reduction in FCEV truck retail price would make FCEV trucks cheaper than BEV trucks. In all scenarios, substantial government support is needed in the forms of R&D, infrastructure development and financial incentives to realize the potential of hydrogen based transportation.  

Future energy: In search of a scenario reflecting current and future pressures and trends

Abstract: Growing societal pressures, technological trends and government and industry actions are moving the world toward decarbonization and away from “business-as-usual.” As such, the concept of a single/obvious “business as usual” or “reference” scenario is no longer relevant. Instead, there are multiple plausible futures that should be explored. We contribute one such scenario that carefully considers emissions-reduction trends and actions that are likely in the future, absent a globally coordinated mitigation effort. We explore the long-term implications for energy, emissions and temperature outcomes if the world continues to address climate change in the way it has so far—through piecemeal actions and growing social and technological pressures.

This Growing Pressures scenario results in a central scenario outcome of about 3°C of surface temperature warming, which is higher than the “well below 2°C” level aspired to by the Paris Agreement, but lower than many widely used “no-policy” scenarios. Ongoing and growing pressures of change, the roots of which are clearly visible today, could deliver a plausible energy transition scenario to near-zero emissions that plays out over the coming century.

While a more aggressive transition is clearly required, this finding highlights the need to bring actions forward in time to achieve an improved outcome making use of clearly identifiable policies and technologies.

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