NGFS Scenarios for Central Banks and Supervisors

The Network for the Greening of the Financial System (NGFS) has developed three generations of climate scenarios since June 2020. These scenarios are widely used by central banks and supervisors as a starting point for analysing the impacts of climate change and policy, and preparing the financial system for climate-related shocks.

In September 2022, as part of its Cop26 commitments, NGFS released the third iteration, updating the scenarios with the latest economic and climate data, national policy commitments and physical risk modelling.

A core finding from the report is that, in every scenario and timescale explored, physical risks pose far greater damage to GDP than transition risks. This underscores the central importance of meeting climate goals to tackle climate-related financial risk (CRFR).

The scenarios model six potential climatic and transition pathways. Two of these cover existing policy trajectories, while the remaining four concern orderly and disorderly transitions to either net zero by 2050 or temperature increases below 2°C by 2100.

Currently implemented climate policies place the world on a trajectory for temperature rises above 3°C, resulting in a hothouse world scenario with “severe and irreversible” physical impacts. Due to acute and chronic physical risks alone, global GDP is simulated to fall by approximately 20% by 2100. However, as the scenarios still do not include impacts related to extreme weather, sea level rise or wider social impacts such as conflicts, these figures are likely to underestimate the true magnitude of economic damage.

Increases above 2°C are expected to multiply exposure to crop failures, cyclones, wildfires, droughts and heatwaves five-fold. Even in the scenario in which all nations meet their current commitments under the Paris Agreement, a 2.6°C increase is projected.

In both orderly and disorderly transition scenarios, the most severe CRFRs are avoided by meeting climate targets. Carbon repricing, significant green investment and coordinated transition policies are shown to be indispensable for achieving this. In orderly transitions, a 1.4°C increase is estimated, while in disorderly or delayed transitions 1.6 °C is estimated.

The scenarios show that the rapid pace of carbon repricing required to meet climate goals in disorderly or delayed transitions will result in the highest transition risks, whereas orderly transition pathways, which employ “smooth and immediate” policy reactions, are far less costly in the long run. In orderly transitions, the initially inflationary impact of carbon repricing is managed through gradual repricing structures and appropriate carbon recycling schemes which consistently reinvest revenues into public funds throughout the transition.

Discussing next phases, the authors outline plans to improve the design, transparency, sectoral granularity and geographical coverage (especially in emerging economies) of the scenarios. They also discuss plans to increase the scenarios’ useability, broaden the user base, introduce short-term scenarios and improve assessment of acute physical risk.