Central banks and scientists should collaborate on risk models, says climate expert

August 3, 2023|Written by Moriah Costa

To accurately estimate climate risk models, various financial and scientific sectors need to work together and share data, says climate researcher Tim Lenton. It’s not just the responsibility of central banks but also that of various sectors which need to come together to create accurate models.

“There’s a clear way forward to raise the bar of this kind of risk assessment research, but it needs some sociology and it needs some sort of support or willingness for participants to come together to tackle [accurate climate risk models],” the University of Exeter professor said.

Climate risk scenarios are only as good as the data, he said. For example, he says climate scientists do not have access to the data on who owns fossil fuel debts, just the equity data on fossil fuel assets, but that central banks or other institutions might be able to provide that data. In other words, working together could lead to more accurate scenarios.

Lenton says another way to tackle inaccuracies in climate financial models is for experts from various fields, such as climate scientists, migration specialists, and financial experts, to look at current models from different sectors to see how they can be improved.

Current climate change scenarios used by central banks are “wildly missing or under estimating potential risk,” he said. Lenton was one of the authors of a recent report from the Institute and Faculty of Actuaries and the University of Exeter which found financial models fail to capture the reality of climate risks.

Mainstream macroeconomics in general has a flawed approach to climate risk, with central banks missing out on essential data to tackle the issue of climate risk, he said.

One of the areas in which Lenton says central banks don’t have clear and accurate models is around the rate at which the energy transition can unfold. While financial models usually look at data from the International Energy Agency and other similar sources, Lenton’s research team has found the numbers significantly underestimate the rate of change towards renewable energy, electrification and other similar green energy adaptations.

Other areas where central banks can improve their climate risk models include using different versions of population demographics and various storyline changes for the future, Lenton said.

“Shared socio-economic pathways span a much wider range of the possible space of how things could develop,” he said.

Other areas for improvement include looking at different variants of rising temperatures rather than the standard 1.5ºC that is often used to calculate climate risk. The reality is likely to be closer to 2.5 or 3ºC, he said.

Lenton says the world is passing through climate tipping points which could trigger abrupt and irreversible changes to the climate. It’s “blindingly obvious” that these extreme climate impacts are “increasing non-linearly,” he added. A recent report from two Danish researchers found that ocean currents which regulate the climate could collapse sooner than expected, leading to even more extreme weather events across the globe.

“I hope we’re not, but we could be on the cusp of suddenly much more clear impacts on health, well-being and the labour force in some key cultures and geographies,” Lenton said.

This page was last updated August 3, 2023

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