NGFS GDP Losses & Benefits

Potential national income loss from climate risks can be computed using simple damage functions that estimate damages based on the temperature outcomes inferred from the emissions trajectories projected by the transition scenarios. Potential national income benefit from avoided climate damages can be computed by contrasting the damages estimates based on the temperature outcomes from the transition scenarios with the policy, or mitigation, costs from climate action needed to meet a particular temperature outcome. Sources: Network for Greening the Financial System (2023), [Scenarios Portal]; and International Institute for Applied Systems Analysis (2023), [NGFS Phase 4 Scenario Explorer]; IMF Staff Calculations. Category: Transition to a Low-Carbon Economy Metadata The framework of the Network of Central Banks and Supervisors for Greening the Financial System ([NGFS]) allows to simulate, in a forward-looking fashion, the dynamics within and between the energy, land-use, economy, and climate systems. Consistent with that framework, the NGFS explores a set of seven climate scenarios, which are characterized by their overall level of physical and transition risk. The scenarios in the current Phase IV ([NGFS climate scenarios data set]) are Low Demand, Net Zero 2050, Below 2°C, Delayed Transition, Nationally Determined Contributions (NDCs), Current Policies, and Fragmented World. Each NGFS scenario explores a different set of assumptions for how climate policy, emissions, and temperatures evolve. To reflect the uncertainty inherent to modeling climate-related macroeconomic and financial risks, the NGFS scenarios use different models, over and above the range of scenarios. These integrated assessment models (IAMs) are, by their acronyms: GCAM, MESSAGEix-GLOBIOM, and REMIND-MAgPIE. GDP losses and benefits are derived based on the National Institute Global Econometric Model (NiGEM). NiGEM consists of individual country models for the major economies, which are linked together through trade in goods and services and integrated capital markets. Country level data (or country aggregates, whenever country level disaggregation is not present) for GDP, population, primary energy consumption by fuel type, useful energy and carbon taxes from the IAM output is used as an input into the NiGEM scenarios. Climate scenarios within NiGEM can be broadly categorized into physical and transition events. While the effects of physical and transition shocks alongside policy decisions are contemporaneous, the scenarios in NiGEM can be run in a “stacked” manner, where each scenario uses the information provided by the previous scenario as its starting point. This allows for decomposition of shocks and their effects. Results are available for three scenarios: Net Zero 2050, Delayed Transition, and Current Policies. For details please see the [NGFS climate scenarios presentation], the [Climate scenarios technical documentation], and the [User guide for data access]. Methodology The NGFS climate scenarios database contains information on mitigation policy costs, business confidence losses, chronic climate damages, and acute climate damages. Mitigation policy costs reflect transition risk in a narrow sense and is measured against the Current Policies scenario (for which it is zero). Business confidence losses result from unanticipated policy changes, and only in the Delayed Transition scenario. GDP losses from chronic risks arise from an increase in global mean temperature. Estimates of the macroeconomic impact of acute risks are based on physical risk modelling covering different hazards. Acute risks are modeled independent of the input IAM. Results are available at the original sources for four hazards: droughts impacting on crop yields, tropical cyclones directly damaging assets, heatwaves affecting productivity and demand, and riverine floods directly damaging assets too. Apart from floods acute risks are the result of randomized stochastic output, yielding 60th to 99th percentile GDP impacts. In accordance with the presentation of the scenario results by the NGFS, the 90th percentile has been chosen as the representative confidence bound. That way, the results are focusing on tail risk. While the choice of the percentile will lead to marked differences for the GDP losses indicator, its influence on the GDP benefits indicator is muted due to comparing like-with-like. Further, the sum of the impacts from the four hazards is taken as the acute physical risk measure; see what follows for the methodology in deriving the net benefits. Net benefits can be calculated by comparing the impact of stronger climate action to the reference scenario, the Current Policies scenario: Net Benefit = 100 * (GDP[Policy scenario] / GDP[Current Policies] – 1). GDP in either scenario can be inferred from the hypothetical baseline with no transition nor physical risk and the percentage losses due to mitigation policy (MP), business confidence (BC), chronic climate (CC), and acute climate (AC): GDP = Baseline * (1 + (MP + BC + CC + AC) / 100). Plugging this into the above equation one finds after some algebra: Net Benefit = (MP[Policy scenario] – MP[Current Policies] + BC[Policy scenario] – BC[Current Policies] + CC[Policy scenario] – CC[Current Policies] + AC[Policy scenario] – AC[Current Policies]) / (1 + (MP + BC + CC + AC)[Current Policies] / 100). Obviously, MP[Current Policies] = BC[Current Policies] = BC[Net Zero 2050] = 0. In order to achieve consistency in aggregation of the four components to the total benefit, the denominator is kept fixed, while for the individual contributions only one component at a time, MP, BC, CC, or AC, is used in the numerator. Results are presented for the 49 countries, five geographic regions covering the remainder of countries, and a global and European total. The coverage of the five remainder regions refers to the country classification of emerging market and developing economies in the [IMF’s World Economic Outlook]. Data series: * Potential National Income Loss From Climate Risks * Potential National Income Benefit From Avoided Climate Damages