Lloyd’s emerging risk report 2022

Shifting powers:
Climate cooperation,chaos or competition?
Managing geopolitical risk from the climate transition

In association with

Contents

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Contents
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1.

Executive summary

2.

Introduction: the geopolitics of climate change

3.

The role of the insurer: innovations for geopolitical transition

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4.

Scenarios for geopolitical risk in the global climate transition 
Scenario 1 – Coordinated transition: “Green Globalisation”
Scenario 2 – Chaotic/fragmented transition: “Climate Anarchy”
Scenario 3 – Confrontational transition: “Green Cold War”

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5.

Conclusion

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6.

About the authors

7.

References

8.

Contributors

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1. Executive summary

1. Executive summary
There's significant overlap between geopolitical movements andclimate change – yet few organisations or models would say they are
actively monitoring, or aware of, this intersection in risk management.
Climate diplomacy – the strategic cooperation or competition of states towards climate-related
goals – is anticipated to drive global political developments in the coming century, as it has formuch of the last century. The nature of these volatile relationships will decide the scale, speed andfinal form of the transition to net zero – with far-reaching political, environmental and economic
consequences along the way.
This report explores those risks, based on potential but plausible scenarios in global climate
politics. The intention is to help insurers, risk managers and contingency planners build models
and organisational strategies to mitigate this emerging and influential risk.
A mindset shift is required that sees the race to net zero not as an inevitable, linear drift to carbon
neutrality – but an uncertain and pliable journey, influenced by human behaviour and promising
twists and turns throughout the century.
The three scenarios used to analyse geopolitical climate risks are:
1. ‘Green Globalisation’ (Cooperation) which sees world leaders collaborate towards a stableand global transition driven by a shared belief that decisive and focused action is needed totackle climate change. Geopolitical frictions are reduced; short-term transition risks increase.
2. ‘Climate Anarchy’ (Chaos) on the other hand, sees state interests prevail as actors struggle tomobilise on the scale and speed needed to shift the dial on climate change. A slow and uneventransition emerges, causing transition risks to stay low in the short-term but environmental andeconomic risks to skyrocket in the long-term.
3. ‘Green Cold War’ (Competition) sees like-minded states coalesce around major powers toform ‘climate blocs’, with competition between blocs for energy, technology, and market
dominance. The competition drives investment and innovation, but considerably raises thelong-term environmental and geopolitical stakes.
This report identifies Green Cold War as the most likely scenario, based on current levels ofcooperation – although the reality is likely to mirror two or more scenarios, and to fluctuate asstates and societies shift throughout the 21st Century.
The analysis signals an opportunity for the insurance sector to take the initiative. COP26 revealeda shift in agency over climate change, from governments and NGOs (the traditional activists) tobusinesses and private individuals (the emerging activists).
Lloyd’s has stepped into the space between geopolitics and environmental action by:
1. Convening the industry – through its leadership of the Insurance Task Force of HRH The Princeof Wales’s Sustainable Markets Initiative and other industry initiatives.
2. Insuring the transition – targeting a net zero investment strategy for Lloyd’s £3 billion Central
Fund and a net zero underwriting position for the Lloyd’s market by 2050, through the Net Zero
Insurance Alliance – at the same time as working with market participants to phase out coverfor high-impact energy sources by 2022.
3. Building climate resilience – developing products and solutions to help countries of all
sizes respond to natural disasters and climate-related threats.
Lloyd’s research community alongside Lloyd’s Futureset is also pooling expertise from across theindustry to provide cutting edge risk insight on systemic risks from climate change to cyber security.
Lloyd’’s website.
You can find more research on the impact of systemic risks on the Lloyd
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2. Introduction: the geopolitics of climate change

2. Introduction: the geopolitics ofclimate change

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2. Introduction: the geopolitics of climate change

2. Introduction: the geopolitics of climate change
The COP26 Summit, staged in Glasgow in November 2021, wasthe latest global initiative aimed at striking an international consensus
on how to curb the warming of our planet. The underlying ambition –to reach net zero carbon emissions as early in the 21st Century as
possible – was premised on the ability of states and civil society todefine their collective environmental interests, before taking decisive
action on the scale needed to address the challenge.
Progress against this goal hinges on some level of disruption. To shift the dial, changes in political,
technological and consumer behaviour are required on a sschedule running counter to natural
timelines or economic cycles.
Many believe the action taken by world leaders to date has not been disruptive enough to achieve
genuine decarbonisation worldwide. While climate diplomacy since the mid-1980s has raised the
profile of environmental issues, levels of human-emitted carbon dioxide in the atmosphere havemore than doubled in that time. It is not surprising, therefore, that expectations for climate change
have only risen through the years.
A brief summary of this diplomacy is listed below, but much of the discussion has centred aroundthe flagpole set by the Paris Agreement in 2015: to limit warming to 1.5°C. Whether COP26 didenough to channel renewed political and societal will into concrete and decisive action in pursuit ofthis goal is still unclear; many say it failed to introduce the legally-binding change needed, whileothers point to progressive commitments around coal, deforestation and electric vehicles.
Whatever the case, the clearer message is that climate change – and climate diplomacy – are here
to stay; and will continue to be a defining feature of global geopolitics in the 21st Century.
A brief history of climate diplomacy
An understanding of the discussions to date is therefore essential for any individual or organisation
seeking to assess – or respond to – the potential risks of climate geopolitics. Since the late 20th
Century, intense and continuous international negotiations on climate change have performed thevital function, albeit incrementally, of laying the foundations of today’s climate diplomacy.
– Montreal Protocol, 1987. Though not directly intended to address climate change, the Montreal
Protocol was a landmark environmental accord that offered a model for future diplomacy on theissue. The treaty, which was eventually ratified by all countries in the world, required signatories
to halt production of ozone-depleting substances and, through the years, has succeeded ineliminating nearly 99% of them.
– Rio (UNFCCC), 1992. Ratified by 197 countries, the historic accord was the first global treaty
explicitly aimed at tackling climate change. As part of the agreement, the annual forum known
as the Conference of the Parties (COP) for international discussions aimed at stabilizing theconcentration of greenhouse gases in the atmosphere was established. These meetings produced
the Kyoto Protocol, the Paris Agreement, and the recent COP26 Climate Summit in Glasgow.

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2. Introduction: the geopolitics of climate change

2. Introduction: the geopolitics of climate change– Kyoto, 1997. The Kyoto Protocol, adopted in 1997 and entered into force in 2005, was the firstlegally binding global climate treaty. It required developed countries to reduce emissions by anaverage of 5% below 1990 levels and established a system to monitor their progress. The treaty
excluded developing countries, including major carbon emitters, from such obligations.
– Copenhagen, 2009. Despite the huge expectations for COP15 in 2009, the Copenhagenconference was substantively a failure, marking the first serious blow to climate diplomacy. New
quantitative commitments were expected to ensure an agreement moving seamlessly on from the
Kyoto Protocol, but divisions between developing and developed countries crippled negotiations.
The agreement recognized the scientific case for keeping temperature rises below 2°C but did
not contain binding targets and a weak voluntary commitment approach was adopted. Only 122,
subsequently rising to 139 countries, eventually agreed to the Accord.
– Paris, 2015. The most significant global climate agreement to date, the Paris Agreement required
all countries to set emissions-reduction pledges. Governments set targets with the goals of
preventing the global average temperature from rising 2°C above pre-industrial levels andpursuing efforts to keep it below 1.5°C. The Agreement also aims to reach global net zero
emissions in the second half of the century. Equity and the principle of common but differentiatedresponsibilities and respective capabilities are also important defining features. However,countries set their own emissions targets, and there is presently no enforcement mechanism toensure they meet them.
– Glasgow, 2021. 151 countries submitted new climate plans to cut emissions by 2030. Such plans,
however, put the world on track for 2.5°C of warming by the end of the century – still far from thegoal of limiting temperature rise to 1.5°C set in Paris, for which global emissions would need to be
cut in half by the end of this decade. Significantly stronger commitments from governments areneeded – and expected – from COP 27, which will take place at Sharm El-Sheikh, Egypt, in 2022.
Can political actors be predicted?
States – the primary drivers of international politics – have always alternated between cooperationand competition in shaping the norms, rules, and institutions of the international order. One schoolof political thought ('realist') says this cooperation is driven primarily by a state’s interests andfears. 'Liberal' scholars might point to moral values that transcend state interests; 'constructivists'
might emphasise inherent features in the state’s national identity or mindset that dictate its
behaviour. In all likelihood, climate diplomacy reflects elements of all three: interest-driven statesand organisations, driven by their distinct psyches, in pursuit of a challenge that transcends
national boundaries. This theoretical founding has been used to predict – to varying degrees ofaccuracy – the behaviour of states in global politics.
In light of the political wrangling seen at the COP26 Summit, and a watered-down resolution thatmost would say reflects the triumph of national interests over global considerations, this report
assumes narrowly-defined interests are the primary driver of state behaviour in geopolitics, withloose cooperation on the premise of shared values and identities. However, climate change
poses a unique conundrum in that it is not an isolated area of strategic concern; rather a pervasive
condition with implications for most other areas of interstate competition and cooperation, fromglobal trade to regulatory standards. In this sense, actors have climate-related incentives andimperatives to either cooperate or compete according to specific issue areas such as the economy
or national security. Assessing how these considerations interact with each other to form a
coherent climate strategy for every state is a complicated exercise, especially in an increasinglyinterdependent and multipolar world – but an essential one to assess and mitigate climate risk.

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2. Introduction: the geopolitics of climate change

2. Introduction: the geopolitics of climate change
In a post-carbon economy, a new set of winners and losers may emerge depending on how
different countries chose – or are forced – to approach the transition to net zero. Whether throughcooperation or competition, the stakes are such that the transition has the potential to significantly
redesign the geopolitical map over the rest of the 21st Century. Transformations as deep andfar-reaching as the global energy transition have occurred only a handful of times in history; andnever without friction. Rather, they are characterised by tensions, non-linear developments, andunintended consequences. The rapid industrialization of Europe and North America following theadvent of steam power in the 18th Century as well as the sudden transition from a planned
to a market economy of the post-Soviet space in the 1990s are just two examples. Such atransformation has never occurred on a global scale, and never as the result of a collective
conscious willing of systemic change.
Report goals & methodology
The following report seeks to offer a guide on the global race to net zero for insurers and riskowners, focusing on the geopolitical scenarios that could surround and dictate the climatetransition. Our approach is to offer a broad insight on how sectors are adapting to the energy
transition already underway, and the short-term implications for insurance that will arise as a resultof these trends. In order to analyse the short, medium, and long terms, however, three different
geopolitical scenarios – based on three different main assumptions on actors’ behaviour – aredescribed and analysed: cooperation (I. Green Globalisation), chaos (II. Climate Anarchy), andcompetition (III. Green Cold War).
In each section of the report, the possible resulting geopolitical consequences and related risks
for society and the private sector over the next decade are described for the benefit of thoseseeking to mitigate those threats. Scenarios, while hypothetical, provide a useful tool to cope withmanaging uncertainty, especially regarding risks that are newly emerging or difficult to quantify.
They provide a systematic method for exploring how a complex and diverse array of risks may
impact an organisation, sector, or economy; and how resilient these systems are to potential
disruptions. This understanding can be applied to support and rationalise decision making about
the future, and facilitate reporting, management, and mitigation of risks. In simple terms, scenarios
are valued for supporting creative thinking about plausible futures, rather than accurately
forecasting specific outcomes.
For the insurance industry, these tools continue to evolve in response to advancing consideration
and regulation of enterprise risk management, both within the industry and for those insured by it.
Scenarios are increasingly being used by underwriters, analysts, risk managers, actuaries, andother stakeholders in the (re)insurance community to better understand the characteristics andconsequences of unknown, uncertain, or unexpected future events.

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2. Introduction: the geopolitics of climate change

2. Introduction: the geopolitics of climate change
Report goals & methodology (continued)
Different narratives of socio-political, economic, technological, and governance development
explore plausible evolutions of the world in the absence of decisive technological breakthroughs(e.g., in geoengineering or carbon capture and storage technologies) that would limit global
warming. Each scenario is associated with a trajectory of changes in energy and land use, carbon
emissions, and geopolitical relations to assess the possible transition and geopolitical risks foreach pathway. Not unlike previous studies that pioneered the use of scenario-building and foresightmethodologies for the study of the socio-economic implications of energy transformations, thisreport offers different scenarios based on current geopolitical trends and imagines how these may
evolve over the next decade and play out in the global transition to low-carbon economies 1. Whatfollows, however, is a unique exercise in risk analysis built on each of these scenarios – thereby
drawing a clear link between geopolitics, global business, and insurance.
As a ten-year timeframe is too short to effectively capture variance in physical risk for eachscenario, the analysis focuses on transition and geopolitical risks – with the former indicating theknock-on effects of states’ policies aimed at curbing global emissions and the latter referring to theindirect, sometimes unintended, geopolitical consequences of such policies. The assumptions
made for each scenario are the result of qualitative observations further substantiated by a series
of interviews held with subject experts from academia, private sector, and public sector. This
analysis is provided to help insurers understand how the demands of existing policies may change
and what new products businesses will need as priorities change.

1

 azilian, M., Bradshaw, M., Gabriel, J., Goldthau, A., & Westphal, K. (2020). Four scenarios of the energy transition:
B
Drivers, consequences, and implications for geopolitics. WIREs Climate Change, 11(2), e625; International Renewable
Energy Agency. (2019). A new world. The geopolitics of the energy transformation. Masdar City: IRENA; Hafner, M., &Tagliapietra, S. (2020). The geopolitics of the global energy transition (p. 381). Springer Nature.

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2. Introduction: the geopolitics of climate change

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2. Introduction: the geopolitics of climate change
Scenario summary table
A summary of the three geopolitical transition scenarios is broken down below according to threemain categories: actors (capturing the main behavioural assumptions behind each scenario),
structure (describing what business environment companies may find themselves operating in),and market (defining some of the main characteristics of the future clean tech and energy
markets). The descriptors listed below are the main features of what the world may look like at theend of the decade should the transition to net zero unfold in a coordinated, chaotic, or openly
confrontational way.
Narrative elements

I. Green Globalisation

II. Climate Anarchy

III. Green Cold War

Behavioural assumptions

Cooperation

Short-term self-interest

Polarized confrontation

Geopolitical architecture

Multilateralism

Unilateralism, anarchy

Bipolarity/Tripolarity

Assistance to developing
nations

Thorough and coordinated

Minimal and exploitative

Inadequate, politicallymotivated

Trade system

Rule-based, open
international system

Protectionism/Mercantilism

Regional free trade agreementswith external barriers

Regulatory landscape

Coordinated and consistent

Fragmented and contradictory

Unified within blocs,
conflictual between blocs

Carbon pricing

Multilaterally negotiated global
pricing regime

Unilateral taxes in flexible
global pricing regime

Regional border adjustments
mechanisms

Supply chains

Internationally regulated,
globally stretched

Unregulated, fragile,
globally stretched

Decoupled, intercontinental,
intra-bloc supply chains

Power grid connectivity

Transcontinental,
global power grids

Independent national/
sub-regional gridsInterconnected grids inregional systems

Fossil fuels demand

Fast, steady decline

Stagnant, but solid

Gradual steady decline

Commodity prices

Low fossil fuel prices,
relatively high prices fortransition metals

Stable fossil fuelprices, volatile prices
for transition metals

Low fossil fuel prices,very high prices fortransition metals

Cleantech development

Fast and cheap, driven
by competition

Slow, priority given to
short-term gains

Fast but expensive,
driven by politics

Global cleantech market

Open, competitive

Underdeveloped

Decoupled, redundant

Actors

Structure

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2. Introduction: the geopolitics of climate change

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2. Introduction: the geopolitics of climate change
Risk table – variation in risk
The table below summarizes the observations made under each scenario’s ‘Impact and variations inrisk’ section. The upward or downward variation in risk is expressed through five possible values:
high increase, modest increase, stable, modest decrease, high decrease. The ten year time
horizon is broken down into short-term, medium-term, and long-term – each represented by oneof the three consecutive arrows in this order. Variations in climate risk are only indicative of the
impact each scenario may have on global warming well beyond the considered timeframe due tothe latter being too narrow to effectively capture any significant impact on environmental
degradation that is directly attributable to emission reduction efforts.
Risk categories

Variation in risk compared to present
I. Green Globalisation

Transition

II. Climate Anarchy

III. Green Cold War

Short term

Mid term

Long term

Short term

Mid term

Long term

Short term

Mid term

Long term

Short term

Mid term

Long term

Short term

Mid term

Long term

Short term

Mid term

Long term

Short term

Mid term

Long term

Short term

Mid term

Long term

Short term

Mid term

Long term

Carbon pricing
Change in assets value
Liquidity
Litigation liability
Technology
MarketReputational
Carbon tariffs
Geopolitical
Regulatory
Sovereign
Protectionism
Supply chain
Political violence
Humanitarian crises
Resource-driven conflict
Macroeconomic
Trade dispute
Sanctions
Destabilization of petrostates
ClimateGeneral environmental degradation
beyond scenario time horizon
Key:
increasestabledecrease

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2. Introduction: the geopolitics of climate change
Risk summary table – variation in risk and likelihood
Variation in:Green Globalisation

Climate Anarchy

Green Cold War

Climate Risk*

High decrease

High increase

Modest decrease

Transition Risk

High increase

Modest increase

Modest increase

Geopolitical Risk

High decrease

High increase

Modest increase

Likelihood

Unlikely

Very unlikely

Likely* Beyond scenario time horizon

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3. The role of the insurer: innovations for geopolitical transition

3. T he role of the insurer:
innovations for geopoliticaltransition

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3. The role of the insurer: innovations for geopolitical transition

3. The role of the insurer: innovations for geopolitical transition
The geopolitical changes in the risk landscape arising frominternational attempts at energy transition present a myriad ofrisks and opportunities for the insurance sector.
While there is no guarantee of any of the scenarios detailed coming to fruition, all three – Green
Globalisation, Climate Anarchy and Green Cold War – provide detailed analysis into expectedchanges in risks, geopolitical and otherwise, that may result from various outcomes of the global
energy transition process. Insurers must monitor these changes in exposure and demand closely
as the transition gains momentum.
Insurance opportunities associated with changes in geopolitical postures, affecting elections,
popular movements, insurgency, and demographic shifts have been covered extensively in thereport Shifting powers: Meeting the challenges of the geopolitical risk landscape. These include:
1. I mproving the understanding of policy clash events associated with geopolitical conflicts,
and to pursue novel methods for sharing ‘uninsurable’ risks of the future before disasters occur;
2. C losing the “geopolitical protection gap” in immature markets, providing much needed
coverage to developing economic powerhouses where political institutions may behistorically insecure;
3. E
 xploring parametric solutions to address periods of increased vulnerability, particularly
for supply chains, while limiting capital exposure;
4. A dapting the role of the insurer to one of vital data stewardship for understanding supply
chain exposure.
These recommendations remain entirely relevant in the face of the geopolitical response to
the challenges of climate change and the energy revolution that will occur in the coming
decades, though additional themes and opportunities for the industry should also be noted inthis specific regard.
Multinational exposure to energy transition risks
The Task Force on Climate-related Financial Disclosures (TCFD) explicitly calls attention to fourclasses of energy transition risks to business: market and technology risks, policy and legal risks,
reputation risks, and physical risks. TCFD estimates the value of these energy transition risks to
be around $1.6 trillion over the period of 2018-2025 2. Regulation and litigation measures acrossdifferent regional markets will change the shape of demand for insurance protections across thesefour major classes. It can be expected, then, that different regions – the so-called “leaders” and“laggards” – will introduce penalties and incentives for transitions at different rates. Suitable
frameworks for managing coverage demand dynamics across a variety of regulatory environment
types are necessary for matching suitable products to businesses undergoing transition.

2‘Mind The Gap: The $1.6 Trillion Energy Transition Risk’, Carbon Tracker Initiative, 6, accessed 1 November 2021,
https://carbontracker.org/reports/mind-the-gap/.

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3. The role of the insurer: innovations for geopolitical transition

3. The role of the insurer: innovations for geopolitical transition
In as much as these risks affect major multinationals – who often represent national interests
overseas and stand in as proxies for foreign governments – they are also risks to geopoliticalstability and continuity. These risks apply particularly to energy firms, food processing entities,
and other major community employers whose continuity forms a critical element of national
infrastructure and, thus, have the potential to become quasi-political actors on theinternational stage.
Safeguarding transition
Despite its mixed outputs, COP26 did signal a clear shift – even, a consensus – in the business
community’s approach to transition, in favour of climate action and sustainable business practices.
Recent decisions by insurers to limit coverage of fossil fuels, has signalled a proactive change in
the industry’s approach to ushering in energy transition innovations, and may be seen as an
inflection point in the international pursuit of a less carbon-intensive economy. For now, it may beargued, this change in commercial policy is simply good business; investments in renewable energy
presents huge untapped growth potential for insurance bodies. The green economy as a whole isexpected to grow at four times the rate of the underlying economy. However, beyond thecommercial benefits, the industry also has an important role to play in de-risking the transition
process to encourage economic and geopolitical stability. These benefits apply largely to thesphere of international collaboration on renewable energy technology and infrastructure projects.
A myriad of international projects associated with energy transition have been developed, withmore ambitious projects announced. The United Kingdom’s established and proposed turbine sites
at Hornsea, Dogger Bank and East Anglia will generate a potential 18GW in renewable energy. In
October 2021, the North Sea Link established a subsea cable between the UK and Norway,
exporting hydropower from the Scandinavian state to mainland Britain’s electricity grid. The Link is
Norway’s seventh such project, transporting green energy around Europe.
The Australia-Asia Power Link project recently announced by the governments of Australia andSingapore is a $22 billion USD infrastructure investment which will see solar energy captured inAustralia transported to Singapore, and later Indonesia, via the world’s longest high-voltage
undersea ‘Sun Cable’ by 2027.3 Similar clean-energy export projects are expected in the coming
years, particularly in parts of the world where expensive infrastructure innovation is untenable ata national level. The ’One Sun, One World, One Grid’ initiative floated by India’s government, forexample, sets an ambitious goal of uniting Middle East, South Asian, and South East Asianelectricity grids – at the very least – in order to transfer solar power drawn from farms throughout
the region.4

3 euters, ‘Bechtel, Hatch among Firms to Work on Australia-Asia PowerLink’, Reuters, 20 October 2021, sec. Asia Pacific,
Rhttps://www.reuters.com/world/asia-pacific/bechtel-hatch-among-firms-work-australia-asia-powerlink-2021-10-20/.

4

 reen Grids Initiative-One Sun One World One Grid Northwest Europe Cooperative Event’, accessed 30 October 2021,
G
https://pib.gov.in/pib.gov.in/Pressreleaseshare.aspx?PRID=1763712.

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3. The role of the insurer: innovations for geopolitical transition

3. The role of the insurer: innovations for geopolitical transition
Figure 1: A selection of major international sustainable energy projects and statuses in 2021.
The size of each bubble indicates the green megawattage (MW) generated per project.

Project status
Complete
Under construction
Proposed

Ambitious ideas are necessary to supercharge the energy transition process to meet with set
climate goals, and investment in these ambitions can be better guaranteed with appropriate andinclusive insurance policies which provide protection for such variables as technology failures(Hornsea 1 Wind Farm has been taken offline by lightning strikes and software failure, contributing
to significant power disruption on the mainland), political and security risks, third-party
compensation, etc.5 There is significant opportunity, therefore, for international and domestic
insurers to continue to pursue expansion into policies which de-risk renewable engineering
infrastructure in order to drive continuous protected investment.
Perhaps more importantly, these projects, if and once successful, will become vital nodes in global
business as well as symbols of influential international partnerships. They will, therefore, be highly
exposed to the disruption and damage posed by geophysical threats, industrial accidents, cyberthreats, terrorism, and traditional military conflict, and require the protection of suitable long-termcoverages in order to safeguard systemically important assets throughout and following global
energy transition. In this regard, the insurance industry also has a vital role to play in underwriting
the continued operations of such projects, which provide a not insignificant basis for futureinternational friendship, collaboration, and regional peace.

5‘The Critical Role of Insurance in the Transition to Clean Energy’, Development Asia, 15 June 2021, https://development.
asia/insight/critical-role-insurance-transition-clean-energy.

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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical riskin the global climate transition

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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
The following sections detail three broadly separate scenarios –introduced in the executive summary – for global climate transition,
each of which assumes a different direction for geopoliticaldevelopments.
For much of the 20th century, energy and productivity norms dictated by a reliance on fossil fuels
have determined a significant portion of the international power structure. Transition to a green
energy industry, therefore, will undoubtedly change both the script and the cast of geopoliticalactors and methods of risk transference through the global trade network.
The three scenarios unearth the need for innovation in the insurance industry, providing qualitative
blueprints for changes in geopolitical and transition risk landscapes which will challenge the current
state of the policy market.
Scenario 1 – Coordinated transition: “Green Globalisation”
This scenario sees the global transition to clean energy resources driven by consensus amongworld leaders recognising the need for concerted action in tackling climate change. Characterizedby cooperative dynamics and a united international policy drive, coordinated efforts lead to a deep
and accelerated decarbonisation against the backdrop of increasingly ambitious global emission
reduction targets, the formulation of compatible policy signals from major powers and the creationof a coherent global regulatory framework.
ActorsWorld leaders reiterate that climate talks can and must be separated from other issues of national
concern, bypassing great power politics and fundamental divisions between major powers
concerning other issues. Political leaders and influential figures at home set politics aside and holdto this line as pressure from public opinion and civil society groups compels them to maintain aninternationally united front to face the global challenge of climate change. The ensuing wave ofgreen globalisation allows all countries to share the benefits of decarbonisation. A comprehensive
global green finance package assists developing countries in their transition efforts while
incentivizing hydrocarbon-exporters to diversify their economy and move away from a societal
model based on the redistribution of fossil-fuel rents, thereby transitioning smoothly to a postcarbon society – which, in turn, resists the temptation to flood the market with cheap oil and gas.
MarketWhile the COVID-19 pandemic represents a temporary setback for growth in energy transition
projects, the crisis also serves as a powerful reminder of the urgency of adopting and implementing
more effective transition policies as well as a unique opportunity to do so as part of the economic
recovery effort. The idea of a “green recovery” drives post-pandemic recovery and stimulus
policies, directly borrowing from Green New Deal initiatives, prompting a strong capitalization ofcleantech start-ups in parallel with a quick divestment from carbon-intensive assets. Within arelatively short time, low-carbon tech companies supplant the largest oil and gas firms on theworld’s stock markets, with some of the early movers in the petroleum industry managing to ride
the waves of disruption instead of being crushed under them and successfully reinventing theirbusiness models.

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
On the commodities side, a new supercycle sees fossil fuels traded at lower prices and costs
for key industrial metals needed to electrify society such as cobalt, lithium, copper, nickel, andaluminium pushed up by green investment. Winners and losers among oil and gas producers arelargely determined by the cost-competitiveness of their fossil fuel resources, including the carbon
intensity of both products and production as an ever-decreasing demand becomes increasingly
sensitive to rising carbon prices.
Policy coordination across all parts of the global economy creates the conditions for a purpose-led,comprehensive increase in public investment. This, accompanied by redistribution measures,financial reform, and specific industrial policies, succeeds in lifting supply constraints andchannelling private investment toward profitable green projects in rapidly urbanising developing
countries that successfully manage to resume growth while leapfrogging carbon-intensive
technologies. To facilitate this process, a multilateral mechanism for restructuring sovereign debt iscreated to help countries identify and finance low-carbon high-productivity activities and design
appropriate industrial policies to scale up their resources in sustainable infrastructure. A globally
negotiated minimum carbon tax which varies according to GDP is introduced as a fairer alternative
to carbon tariffs.
Structure
With the fight against climate change being an outspoken shared goal that can only be pursued
through cooperation between states, no major power seeks renewable-energy dominance. Instead,global coordination and countries’ interdependency spark an era of positive competition among
advanced economies in which the world’s most important energy producers and consumers try
to develop the best technologies, drive down their costs, and deploy them as far and wide andquickly as possible – giving new stamina to pro-globalisation arguments and policies. International
cooperation between government and the private sector strengthens the resilience of global
supply chains of critical technologies and raw materials.
Finally, improving grid connectivity and dispatching electricity over wide areas emerges as a
key goal of international cooperation as the role of power grids as the main platform for energy
allocation becomes increasingly essential with the development of green and electrified energy
systems. Multilateral agreements for the improvement of energy interconnection regionally andglobally lead to the realisation of optimal large-scale transnational, trans-regional, crosscontinental, and global allocation of clean energy which improve mutual energy support
between regions for security of supply.
OverallThe “Green Globalisation” scenario represents the ideal case from all perspectives. Here, mitigatingclimate change is seen by most as a shared goal that can only be achieved through joint action, so
states initiate an era of positive, open competition in which the world’s most important energy
producers and consumers – in a regulated yet open trade environment – rival to develop the best
technologies, drive down their costs, and deploy them as wide and fast as possible while reducing
environmental and social impacts. This scenario is a win–win for climate and the global economy,
and the only one that fully achieves current climate targets while keeping trade disruptions to aminimum. Geopolitical friction is low since energy security concerns decrease alongside relianceon fossil fuels.

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4. Scenarios for geopolitical risk in the global climate transition
Impact and variations in risk
The globally coordinated transition produces a stable pattern of public expenditure that leads to a
general expansion of economic activity and to a crowd-in of private investment while clear policy
signals and a coherent global regulatory landscape support cross-border activities. The resulting
new green globalisation wave supports employment creation, boosting wages and prompting
technological advances. Income distribution also improves with many of the jobs created by green
investment being inherently local and joblessness in “brown” sectors being partially offset by
effective policy action.
A coordinated transition scenario thus entails little variation in geopolitical risks, but a modest
increase in transition risks in the short term. These, however, decrease over time as decisive early
action, while indeed producing rapid policy changes, does so in a gradual and orderly way. Bothcosts and opportunities of carbon are unevenly distributed, and competitive shifts are largely basedon changes in technology and regulation. The distance between high carbon business and their
low-carbon competitors widens, leading to an enormous reallocation of capital across industries
and borders. On the upside, the clear and consistent policy signals at the international level coupledwith increased government support reduce risks and their impact.
Geopolitical risk
Regulatory and compliance risk: Markets are global and open, yet more regulated. Regulatory andlegal hurdles make investing in fossil-fuel projects as well as carbon-intensive industries too risky.
Moreover, the ambitious multilateral project requires states to cede portions of their sovereignty tointernational bodies in order to establish international regulations and forge collective action, which
implies a rolling back of free trade agreements and bilateral investment treaties that have so far
regulated trade restricting policy space.
Sovereign risk: As financing needs keep rising to sustain ambitious efforts to transition while
simultaneously mitigating the effects of climate change, higher debt stocks hit government budget
constraint and larger flows cause demands on liquidity that markets cannot finance. Many
countries’ sovereign debt may thus become unsustainable as transition risks are transmitted to
public finance through fiscal expenditures, drags on economic growth, and repricing of sovereign
assets. Contingent liabilities are likely to materialise on public balance sheets where private
investment falls short of the targets while carbon-intensive assets in public ownership may become
stranded assets that are no longer economically viable given rising carbon prices. This may causesovereign wealth to be repriced, impacting credit quality and debt financing rates.
Transition risks
Carbon pricing: Risks associated with fast changing technologies, markets, policies, and social
norms increase substantially and rapidly. National policy makers adopt stringent regulation andcarbon pricing mechanisms to keep up with the ratcheting of climate targets and incentivise orforce businesses to reduce their carbon footprint and positively contribute to cleaner growth. Given
scale and timing of the policy changes assumed in this scenario, the associated risks and impact
are very significant for the highest CO2-emitting sectors.

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Change in assets value: Physical assets are rendered redundant or stranded at a higher rate,
sometimes leading to premature write-downs and bankruptcies. Human capital – as people needretraining and reskilling for the new economy – and intangible capital, which increasingly forms thebulk of company’s wealth and that will need to become net zero consistent, are also affected. The
value of investments held by banks and insurers in carbon-intensive companies experience a rapid
and steep reduction.
Liquidity risk: In response, companies may keep increasing emissions and decide not to invest
in greener technology – but have to sustain higher carbon taxes on their emissions. Alternatively,
they may invest in greener technology, thus paying lower carbon taxes – but incur higher operating
costs. Either way, aggressive climate mitigation policies affect both net profit margins and therequired rate of capital expenditure, leading to higher liquidity risks.
Litigation liability: Legal risks are set to increase alongside the awareness around the impact ofclimate change. On the back of more stringent obligations for both private and public entities,
failure of organisations to mitigate and/or adapt to climate change and the insufficiency inassessing and disclosing the associated material financial risks and their impacts on company
performance may lead to greater legal liabilities, thus undermining business viability andcompromising shareholder value on account of inadequate commitment to sustainability.
Governments are also exposed to increased litigation and liability risks.
Technology risk: As another consequence to these policies, improving technologies and more
efficient sustainable processes begin to outcompete old ones in terms of costs and productivity,
dealing a significant impact on a number of organizations. Companies see their competitiveness,
production and distribution costs, and ultimately the demand for their products and services
decrease dependent on pace and scale of the uptake of new technologies such as battery storage,energy efficiency, and carbon capture and storage.
Market risk: Disruptive developments – which obviously have both winners and losers – areenormously amplified in this scenario as international cooperation accelerates the development ofa fully competitive global market for green tech. Moreover, while globally stretched supply chains
keep costs of technologies and raw materials comparatively lower than in other scenarios, thetightening of supply chain regulation needed to reduce vulnerability and geopolitical risks require
more scrutiny, thus pushing prices up.
Reputational risk: Finally, an overall increase in climate ambition among governments and public
opinions sees a potential source of reputational risk in the changing customer or community
perceptions of an organistion’s contribution in curbing global carbon emissions and fighting climatechange. This becomes an increasingly important risk factor across sectors while entire industries
will get increasingly stigmatized.

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4. Scenarios for geopolitical risk in the global climate transition
Likelihood
This is not the most likely scenario. Climate change is an exemplary collective action problem,as the global goal to curb green-house gas emissions relies on the critical contributions of single
nation-state actors. Collectively, all countries want to limit climate change. Individually, though,each country may be willing to contribute only as long as other countries do the same. Therefore,
the mere possibility that a country may freeride on other countries’ efforts may stall cooperation.
In game theory, this situation is known as the prisoner’s dilemma: while in the collective interestof parties, cooperation is difficult to achieve due to parties’ mistrust that others will cooperate
towards the mutually beneficial outcome.
The failure of past climate treaties has already illustrated the limits of international diplomacy
in producing effective results in the fight against climate change, and even the Paris Agreement– which formalises today’s framework for international cooperation on climate action – does
not address this underlying tension. While cooperation on climate is likely to continue in the
coming years, this will hardly evolve into a policy area free from any form of competition
between states.
Scenario summary – Green Globalisation
ActorsBehavioural assumptions
Geopolitical architecture
Assistance to developing nations

Cooperation
Multilateralism
Thorough and coordinatedStructure
Trade system
Regulatory landscape
Carbon pricing
Supply chains
Power grid connectivity

Rule-based, open international system
Coordinated and consistentMultilaterally negotiated global pricing regime
Internationally regulated, globally stretchedTranscontinental, global power grids

MarketFossil fuels demand
Commodity prices
Cleantech development
Global cleantech market

Fast, steady decline
Low fossil fuel prices, high prices for transition metals
Fast and cheap, driven by competition
Open, competitive

Variation in risk
Climate Risk*

High decrease

Transition Risk

High increase

Geopolitical Risk

High decrease

Likelihood

Unlikely* Beyond scenario time horizon

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Scenario 2 – Chaotic/fragmented transition: “Climate Anarchy”
In this scenario, while many promise to ‘build back better’, states build back as fast as possible –doing whatever it takes to revive growth, including financing high-emitting infrastructure projects andsubsidising carbon intensive industries. Change is slow and uneven, actors move on their own or
through ad hoc opportunistic coalitions, and mitigation efforts are too narrow and too slow to meetclimate targets. Responses are characterised by improvisation and compromise, prioritising shortterm gains over long-due structural changes.
The primary drivers behind this scenario are states’ self-interest and mistrust, both reinforced by the
recent failure in finding a truly multilateral solution to the global health crisis and, most importantly, by
the lack of a solid leadership behind global efforts in climate change mitigation. Compared to theGreen Globalisation scenario, Climate Anarchy is closer to a ‘business-as-usual’ scenario; how thetransition could look if global cooperation fails to materialise.
ActorsMost political leaders around the world do acknowledge the importance of fighting climatechange, yet it proves impossible to reach a global consensus on how this should be done. Climate
diplomacy falls short as national energy security goals and short-term political interests outweighclimate concerns and the Paris Agreement breaks apart in the absence of incentives and penalties
forcing countries into doing their part. In this context, investment in renewable energy projects
make slow progress, mostly driven by states’ interest in increasing their energy self-sufficiency
and reducing import dependence, while governments keep investing in existing energy reserves
through renewed state subsidy for home-grown oil and gas companies and shielding carbonintensive domestic industries through protectionist policies.
MarketAlthough investment in green technologies build up over time, with national governments going
their own way on climate change, increasingly fragmented global markets prevent the scaling up of
low-carbon technologies that would be needed to drive down costs, prompt innovation, and boost
sustainable growth.
Green expenditure remains almost entirely concentrated in advanced economies, as wealthy
countries either fail or refuse to meet their long-standing commitment to help poorer states inthe transition, and the clean energy investment gap between developed and developing markets
widens. This deprives the Global South of a concrete sustainable growth perspective, thus
cementing inequality within and between countries and weakening resilience to climate change.
International efforts to mitigate global warming are significantly hindered as developing countries– which had stressed how funding was key to their ability and willingness to commit to ambitious
climate targets – continue to rely heavily on hydrocarbon to fuel growth. The resulting supply crises,
water shortages, extreme weather conditions, and migratory pressure only exacerbate populist
trends in a vicious circle.

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Structure
Countries increasingly rely on their own electricity grids for the sake of energy independence,
avoiding reliance on neighbouring states and prioritising security over the benefits provided by amore interconnected grid in lack of sufficient political will, solidarity, and mutual trust. Multilateralgovernance enters a new crisis as energy markets become more heterogenous and fragmented.
Sub-regional energy blocs emerge relying on ad-hoc coalitions focused on specific energy
sources, carriers, and technologies. However, this scattered governance of energy on a regional
level does not provide a steppingstone to more integrated regional governance – let alone a global
one – which would result in competitive and well-functioning new markets. Instead, competitive
regional governance intensifies rivalry and fragmentation, with single states increasingly controlling
key technologies and value chains.
Hydrocarbon exporting countries have more time to diversify their economies away from adependency on fossil fuel revenues. A handful of states enjoy a sufficient institutional stability andfinancial/technological resources to successfully leverage solid oil prices and demand to boost
green investment and maintain their energy leadership. Most countries continue to export oil.
OverallIn the absence of multilateral coordination, attempts to introduce tighter regulation to ensuresustainable and fair supply chains and avoid an excessive number of bottlenecks along the value
chain fall short, leaving states vulnerable to a series of supply risks including disruptions, conflict,
export restrictions, labour unrest, transportation delays, and many others. Prices for key transition
minerals are highly volatile.
Impact and variations in risk
As the bidding war for green credentials wears off in the aftermath of COP26 – with climate issues
no longer dominating the media – and it finally comes to complying with targets through policy
action, governments radically resize their commitment to climate change prioritising short-term
self-interest. Global action against climate change thus becomes a chaotic collection ofdisharmonious, inward-looking, and sometimes conflicting policy measures taken at the national
level, which results in only a modest increase in transition risks – as climate policies are not as
ambitious as in other scenarios – but a significant increase in geopolitical risks – spanning fromprotectionism and regulatory uncertainty to widespread instability and social unrest.
The low-carbon transition eventually takes place in this scenario, whether states cooperate ornot. The late response from national leaders only delays the inevitable, with governments rushing
through regulations later on and leaving businesses and investors little time to adapt. Transition
risks eventually rise in the long term, as delayed and disorderly climate policies come into effect,
while the poorly managed transition on the international level increases geopolitical risks alreadyin the short term.

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Geopolitical risk
Protectionism: States’ self-interest leads to phenomena such as resource nationalism, whereby
countries focus on creating and protecting domestic cleantech supply chains to build resilience or
to use raw materials as a bargaining chip to renegotiate other geopolitical objectives, and green
protectionism, for which environmental aims are used to enact damaging policies that curtail
foreign investment by taxing imports. Both restrict access to key metals for clean technologies,
pushing prices up while dramatically slowing down the transition process. Heavier trade policies,
such as carbon tariffs, are neither harmonised nor consistent across jurisdictions thus, instead ofcontributing towards emissions reduction, only end up affecting trade.
Supply chain risk: Quotas, tariffs, and other trade restrictions on strategic minerals are used bysource countries as political assets, not unlike from fossil fuels, while competition between green
tech manufacturers from advanced markets makes it hard to enter long-term contracts with
suppliers, preventing effective monitoring and regulation of supply chains. Moreover, excessive
market concentration resting on globally stretched, yet unregulated supply chains represents a
serious supply risk for companies that produce solar panels, wind turbines, and batteries using
imported minerals. Trade restrictions, regulatory changes, or any number of bottlenecks that mightarise among suppliers, such as shortages of power, equipment, or skilled workforce, labour unrest,and delays could very easily raise costs and exacerbate tightness of supplies.
Political violence: International divisions over the net zero transition impact national domestic
politics, and climate change becomes a polarizing political issue once more. Political support
for introducing new or expanding existing green tax policies varies across and within countries,
causing a greater risk of protests from both those who want less and those who want moregovernment action against climate change. While a rejection of climate science is no longer amainstream position, populist parties make climate change a divisive issue across party lines,
pushing the idea of climate policies – especially those adopted at the international level – asunfair for common citizens. On the other hand, climate activism also becomes more aggressive
against what is substantially perceived as government inaction. Risk of social unrest increases
on both sides of the ideological spectrum, possibly leading to a surge in both eco-fascism andeco-terrorism.
Humanitarian crises: In the absence of a multilateral strategy – which would provide effective
assistance to emerging economies that are most exposed to the effects of climate change in theform of limited access to clean water, food scarcity, agricultural degradation, and violent conflict– climate change intensifies underlying issues acting as a significant push factor in humanitariancrises and migration patterns.
Resource-driven conflict: Wars for the control, transportation, regulation of hydrocarbon
resources remain a lingering threat in oil-rich regions on the back of a plateauing, yet solid, demandfor oil and gas. At the same time, advanced economies applying unilateral carbon pricing put severe
financial pressure on the most fragile, least competitive oil-producer economies, some of which
may experience domestic political turmoil as a result.
Other macroeconomic effects: The uncoordinated low-carbon transition at the global level leads
to changes in inflation, trade balances, and exchange rates, which in turn generate dynamics tore-assess existing international economic agreements. These impacts are, as of now, still difficult toadequately quantify.

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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Regulatory and compliance risk: Diverse growth models for green technologies between
countries and limited global cooperation inevitably lead to an increasingly heterogeneous
regulatory landscape. The resulting patchwork of inconsistent environmental policies complicates
regulatory compliance creating accidental barriers for businesses and discouraging investment as
it drives operating costs up and ultimately hurts business margins. Regulatory uncertainty andcomplexity also impede the ability of the financial sector to mobilize effectively to provide thenecessary investment and insurance underwriting for the transition.
Transition risk
Market risk: Contrary to the coordinated transition scenario, green companies are not sufficiently
supported throughout the transition. Markets do not grow fast enough to sustain technologicaladvancements whereas a large local market would be needed to realise the necessary economy ofscale and vertical integration opportunities to remain competitive. Overall, the chaotic transition
creates mismatches between investment in renewables and divestment in fossil fuels.
Change in assets value: As pandemic relief programmes of most countries double down on fossil
fuels, a rise in asset stranding once carbon restrictions will inevitably tighten emerges as a key riskover time, creating uncertainty for sovereign credit and governments’ ability to raise finance forclimate mitigation and adaptation measures.
Likelihood
This is perhaps the least likely among the proposed scenarios. The spread of COVID-19 and thefailure in providing a truly global solution to the health crisis showed the fragility of international
cooperation in facing common challenges, making countries ever more reluctant to rely on one
another in the face of an existential crisis. In this sense, the pandemic experience will likely
influence future developments in the global efforts to mitigate climate change. Nonetheless, anearly total break-up of international cooperation regarding climate change – as assumed in this
scenario – is far from being the likely outcome for the next decade.
Climate has now become a mainstay across countries as well as political parties – and both public
opinions and political leaders in most countries understand meaningful results on such front cannot
be attained unilaterally. While underlying, fundamental divisions between states are likely to persist
in the foreseeable future and self-interest will hardly be replaced by solidarity as the basic motives
behind states’ action, governments’ climate change mitigation efforts will continue to becoordinated through some form of international cooperation for the years to come.

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4. Scenarios for geopolitical risk in the global climate transition
Scenario summary – Climate Anarchy
ActorsBehavioural assumptions
Geopolitical architecture
Assistance to developing nations

Short-term self-interest
Unilateralism, anarchy
Minimal, exploitative

Structure
Trade system
Regulatory landscape
Carbon pricing
Supply chains
Power grid connectivity

Protectionism/Mercantilism
Fragmented and contradictory
Unilateral taxes in flexible global pricing regime
Unregulated, fragile, globally stretched
Independent national/sub-regional grids

MarketFossil fuels demand
Commodity prices
Cleantech development
Global cleantech market

Stagnant, but solid
Stable fossil fuel prices, volatile prices for transition metals
Slow, priority given to short-term gains
Underdeveloped

Variation in risk
Climate Risk*

High increase

Transition Risk

Modest increase

Geopolitical Risk

High increase

Likelihood

Very unlikely* Beyond scenario time horizon

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Scenario 3 – Confrontational transition: “Green Cold War”
In this scenario, also driven by an interest-centric approach to geopolitics, major powers compete in
the development, production, and deployment of critical technologies for the low-carbon transition of
the global economy. The competition goes beyond leadership in technology manufacturing and trade,and quickly extends to geopolitics. Major powers fail to compartmentalise climate cooperation, as
political leaders refuse to separate an otherwise mutually beneficial collaboration to slow global
warming from confrontational relations on other fronts. The energy transition becomes yet anotherarena for great power competition and the world fractures into regional blocs, with countries
gravitating around technology leaders and regional alliances forming around their respective
integrated energy systems. Within these blocs, access to critical raw materials such as rare-earth
metals, cobalt, and lithium as well as clean energy technologies such as batteries, photovoltaics,
wind turbines, and electric vehicles is facilitated through integrated supply chains and free-trade
agreements. Access to these same goods is restricted for countries outside of the bloc.
ActorsThe openly confrontational energy transition sees major powers seeking to reduce their reliance on
fossil fuels without excessively disadvantaging their own economies. In this scenario, the main goalof these actors is to assert renewable energy dominance and gain a leadership position in a postcarbon global economy. Therefore, leading powers do not abandon the sentiments and ambitionsof the UNFCCC process. Rather, they strive to take the leadership within multilateral fora and build
a coalition of like-minded partners as a way to establishing the critical mass needed to pressure theother bloc while building around them a large enough market to sustain innovation, economies ofscale, infrastructure development, and eventually obtain technological self-sufficiency. To compete
against the rival bloc, the more industrialised side makes use of countries’ domestic carbon taxes
benchmarked to negotiated regional standards and border adjustment mechanisms for imported
goods. On the other side – where manufacturing is cheaper, but significantly more carbon intensive
and carbon tariffs deal a heavy blow to industrial players and exporters – countries respond with
export restrictions on critical raw materials and cheap components for green technology.
MarketWhile decoupling from each other, the two blocs work to achieve a coupling market within theirsphere of influence integrating electricity and carbon trading and to realise large-scale optimal
allocation of renewable resources improving mutual energy support across and between regions.
Improved grid connectivity infrastructure becomes the basic way to tie countries together in a
post-carbon world, all the while reducing emissions and mitigation costs. Through the financing ofsuper-grid projects and the dispatching of electricity over wide areas, leading powers in both blocs
remap the energy landscape around them and reshape alliances within regions having centres andperipheries according to specific political arrangements, all resting on the commitment to provide
for the energy security of the newly created energy communities.
With the quest for energy and technological dominance taking on a strategic dimension, major
powers try to gain control of cleantech manufacturing and of the necessary critical mineral byousting strategic rivals from their supply chains or simply creating new ones. The global cleantech‘arms race’ thus sees states vying for dominance in global solar modules and wind turbine
manufacturing capacity, electric vehicles production and of the lithium-ion battery supply chain.
Above all, access to lithium-ion battery cell manufacturing facilities and the mineral supply chains to
support them becomes a key element of modern industrial power, and investment to control
intellectual property along this value chain acquires strategic priority. Systemic supply uncertainty
for both blocs and ensuing price pressures encourage innovation and disruptive new technologies
such as next generation electrofuels, polymeric energy storage, and cobalt free batteries.
Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Structure
Winners and losers of this scenario are determined by the development of and access to green
supply chains, which are partly predetermined by geology but also by the ability to harness
intellectual and financial capital. This means that low-income countries are set to be left behind in
the transition process. However, differently from the “chaotic transition scenario” – where states are
entirely driven by self-interest and self-preservation – in a confrontational transition scenario actors
value alliances and long-term strategic advantage above short-term gains. With winners having aclear stake in the overall success of the process, rival blocs will compete to get on board as many
countries as possible among the losers – although, to a lesser extent than compared to the“coordinated transition scenario”. This translates to a balancing of climate priorities that considers
fairness and development needs. When measures such as carbon pricing, border adjustments or
waivers for countries with ongoing hydrocarbon dependencies persist, green investment inemerging markets is not successful without proper global coordination.
Among the winners of this scenario are large oil and gas exporting countries, even if demand
for fossil fuels gradually declines over time, as states reduce but do not abandon reliance onhydrocarbon – especially as prices decrease due to weaker demand. Low-cost, low-carbon
producers maintain their profitability in a low-price environment and even grow their market
share in a shrinking market driving out higher cost producers. With no multilateral support
scheme for vulnerable oil and gas exporters, low-income petrostates get destabilised as theresulting austerity leads to a fracture in rentier states’ legitimacy.
Overall
In such a cold war-like scenario, soft power competition also features alongside economic
competition as one of the dimensions of the broader geopolitical confrontation. Which system
can transition faster and better into a more competitive post-carbon economy is the ultimate goal.
Here, similarly to the “chaotic transition scenario” the trigger for change lies in self-interest – justthe stakes are much higher.
Economic partition and decoupling between blocs as they rival over access to critical materials
needed to develop low carbon tech and the associated refining and manufacturing industries
disrupts international trade and global supply chains. Yet, their competition over technological,
political, and business leadership on climate also proves a powerful spur for green investment
domestically and within their blocs, inspiring a “race to the top” that ultimately encourages boldclimate action. This is neither the worst, nor the best scenario – change is fast, but uneven.
Impact and variations in risk
The progressive decoupling between the world’s leading economic and technological powers
and their respective geopolitical systems inevitably obstructs the spread of green innovations,significantly slowing down the decarbonisation process of the global economy. Yet, although lessthan in a globally coordinated transition scenario, change is fast and transition risks increasesignificantly. Moreover, as major powers remain part of the same multilateral fora but withconflicting agendas, such change is erratic – and winners and losers are determined more bypolitical factors than market forces. In terms of geopolitical risks, a “Green Cold War” scenario finds
itself in between the coordinated and the chaotic transition scenarios: while certainly riskier than apeaceful cooperation between nations, Cold War – as history shows – is the realm of predictability,
which lowers risks and simplifies decision-making.

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4. Scenarios for geopolitical risk in the global climate transition

4. Scenarios for geopolitical risk in the global climate transition
Geopolitical risk
Trade war: Alongside decoupling for most materials and components, green tech producers willcontinue to face supply chain cost increases and disruptions for goods they are not able to securefrom domestic or allied suppliers and that need to be sourced from the rival bloc. Trade andinvestment barriers mean that companies that continue to export inputs or products between thetwo blocs are subject to extraordinary tariffs. Firms seeking to invest in the rival bloc’s green techsector are likely to face greater regulatory scrutiny when they do not have their transactions simply
rejected altogether.
Sanctions: Further complicating the situation are sanctions on specific green energy and techcompanies from each market, which directly affect access to capital and valuations. With leading
powers imposing financial sanctions on access to their capital markets, firms may have toraise capital in domestic financial markets, with systemic effects reverberating in the overall
valuation of companies.
Destabilisation of petrostates: Like in the coordinated transition scenario, falling oil demand
coupled with cheaper green energy slashes oil and gas prices. In both scenarios, the cartel of oil
producers breaks up and low-cost, large-reserve, lower-carbon fossil fuel exporters increase their
margins by maintaining and growing their market share in a shrinking market at a price level thatdrives out higher cost producers. Differently from the green globalisation scenario, however, amuch weaker safety net is offered to high-cost, politically unstable oil producers in the absence of amultilaterally orchestrated assistance package to financially support them throughout thetransition. Social unrest, regime change, and political violence may ensue.
Humanitarian crises: As lower-for-longer oil prices cut into hydrocarbon producers’ social
spending, rents-based political stability in fragile political systems falters leading to a break-up of
traditional petrostate social contracts and ultimately to civil conflict, which could also escalate into
wider regional crises.
Resource-driven conflict: The growing importance of transition minerals gives rise to newstrategic rivalries and geopolitical vulnerabilities as competition over new resources intensifies. As
critical raw materials for renewable technologies such as copper, graphite, lithium, and cobalt areoften concentrated in countries lacking effective governance, new countries may be condemned tothe ‘resource curse’ driving widespread political instability as rival parties seek access to resource
rents, echoing today’s petroleum-based conflicts.

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4. Scenarios for geopolitical risk in the global climate transition
Transition risksMarket risk: As both blocs develop and produce clean energy within a highly integrated global
market and with many of the advanced low-carbon technologies they produce consisting in largepart of components that are cheaper to import than to purchase domestically, their progressive
decoupling ends up hurting their own industries. In the chaotic transition scenario, complex supply
chains that go into producing these technologies remain globally stretched, which makes themvulnerable to disruption but also keeps costs down. Here supply chains of key raw materials andcomponents for green technologies are decoupled along geopolitical divides and only extend toallied nations outside of domestic borders. Green technology manufacturers may thus end up
paying more for some of their parts and will be required to build up and maintain stockpiles of key
minerals, which will drive operating costs up and hurt their margins.
Technological risk: Greentech competition may complicate long-term planning and investment.
The efforts of leading technological powers to establish and impose competing product design andenvironmental standards around the world, risk making cross-border trade more difficult andlong-term investment much riskier for green tech companies. Companies may face higher costs ifthey operate in both spheres, but also risk losing access to some very lucrative markets if they failto adopt both sets of standards.
Carbon tariffs: Leading economic powers – which are at the same time the highest carbon emitters– release border tax proposals as part of their green initiatives with the primary goal of preventing
carbon leakage. As emissions pricing systems and related border adjustment mechanisms differ
between major markets due to the lack of a shared global emissions trading system, differently
designed and openly confrontational carbon tariffs lead to severe disruptions in international trade
while achieving little in terms of emissions reduction.
Likelihood
Despite the more cooperative ambitions displayed at COP 26, the world’s major powers are
already on course for unconstrained geostrategic competition. Given how an “unconstrained
geostrategic competition” – by definition – negates the possibility of compartmentalising eventhose issues against which competing powers would have a mutual interest in joining efforts,
there is no reason to believe that climate change will not end up caught in great power politics.
Today’s geopolitics are not driven by Cold War ideology, yet contemporary great powers’ pursuitof strategic stability is indeed characterised by traditional Cold War dynamics, whereby everythingis captured within the broader confrontation between rival powers. Issues concerning the supply
chains for the upcoming post-carbon global economy have long been framed as a matter ofnational security on all sides and a partial decoupling between the world’s major economies isalready underway. Climate change is set to become the ultimate test of whether competition forpolitical and economic dominance and cooperation for the pursuit of collective interest cancoexist in the face of a common challenge. Nevertheless, a “Green Cold War” scenario must
be considered a concrete possibility.

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
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4. Scenarios for geopolitical risk in the global climate transition31

4. Scenarios for geopolitical risk in the global climate transition
Scenario summary – Green Cold War
ActorsBehavioural assumptions
Geopolitical architecture
Assistance to developing nations

Polarized confrontation
Bipolarity/Tripolarity
Inadequate and strategically motivated

Structure
Trade system
Regulatory landscape
Carbon pricing
Supply chains
Power grid connectivity

Regional free trade agreements with external barriers
Unified within blocs, conflictual between blocs
Regional border adjustments mechanisms
Decoupled, intercontinental, intra-bloc supply chains
Interconnected grids in regional systems

MarketFossil fuels demand
Commodity prices
Cleantech development
Global cleantech market

Gradual steady decline
Low fossil fuel prices, very high prices for transition metals
Fast but expensive, driven by politics
Decoupled, redundant

Variation in risk
Climate Risk*

Modest decrease

Transition Risk

Modest increase

Geopolitical Risk

Modest increase

Likelihood

Likely* Beyond scenario time horizon

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
Lloyd’s. Shifting powers: Climate cooperation, chaos or competition?

5. Conclusion

5. Conclusion

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5. Conclusion

33

5. Conclusion
Building on the conclusions of the Shifting Powers research, assummarised in the introduction, this report reinforces the need toseek innovative solutions to mitigating geopolitical risks aroundclimate challenge.
These should be carefully tailored depending on the transition scenario deemed most likely by
the risk manager involved. This report thus aims to serve as a tool for business and insurance
to develop strategies against several possible competing futures and to develop products
covering the broader range of associated threats.
The three scenarios described in this report aim to provide a representation of what the world may
look like at the end of the decade, depending on the pathways major powers take in pursuing net
zero by 2050. They are summarised in [Fig X / the below graphic].

Geopolitical Risk

ClimateAnarchy

Geopolitical Risk

Less cooperation

Green Cold
War

Transition Risk (short term)

More cooperation

Green
Globalisation

Transition Risk (short term)

In a Green Cold War – the scenario most likely to resemble the real-world global transition –sustainability transformations are significant, though slow and unevenly applied as competition
between leading economic, political, and technological powers spurs investment and innovation.
The cost of this, however, is a considerable increase in current geopolitical and transition risks, as
competition drives change while considerably raising the geopolitical stakes.
Climate anarchy – possibly the least likely scenario – would see a slow and uneven transition thatcreates greater volatility in the risk landscape. In the short term, transition risks would stay low as
the climate efforts of this scenario are not nearly as ambitious as in the other hypotheticalcircumstances described, but delays to transition policy roll-outs mean that an increased risk
environment will emerge in the medium to long term. Throughout this development, geopoliticalrisks would remain high with a likelihood of rapid escalation.
Finally, Green Globalisation – assessed as the most environmentally desirable, but not the most
likely outcome if state self-interest continues to dominate climate negotiations – entails a fast andjust transition which places emphasis on transition risks, at least in the short term due to the quick
scale-up of increasingly stringent climate policies, while geopolitical risks remain low as geopolitical
frictions are reduced to a minimum.

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
Lloyd’s. Shifting powers: Climate cooperation, chaos or competition?

5. Conclusion

5. Conclusion
The likelihood assessments proposed under each scenario help estimating the odds, but thereality will fall somewhere on the continuum stretching between the two extreme scenarios – most
likely featuring a blend of more than one scenario’s characteristics. The benefit of this report istherefore in aiding insurers and risk managers in their assessment of which scenario is closest to
the feasible outcome, while providing useful guidance on all geopolitical eventualities.
An understanding of these three scenarios, outlining an extreme and simplified version ofplausible events across the spectrum of cooperation, should underpin attempts by individuals
and organisations to assess geopolitical risks around climate change and develop products andsolutions to mitigate those impacts.
As outlined in Chapter 3 (‘The role of the insurer’), the insurance industry has a key role to play. Not
only in helping multinationals manage their increased exposure to political risk through the largest
energy transition in history, but also in providing suitably available capital to underpin confidence intransition projects and ease construction woes which could strain geopolitical relations andinterdependencies. The implications for insurers are therefore magnified: they must respond to thephysical and transition risks surrounding climate change, the scale of which will be determined by
the level of political cooperation or competition; while also considering how their actions inthemselves can influence those geopolitical movements and the severity of climate change.
The role of geopolitics in the race to net zero can therefore not be ignored; and the intersection
between the two forms of risk should not be overlooked by those seeking to effectively prepare for
their political, environmental and economic impacts. Those risk owners and purchasers able toprepare for all or some eventualities – while recognising a non-linear, human behaviour-centric
approach to climate change – will set themselves up for sustained success as the world transitions
to a low carbon consensus.

Geopolitical climate risk scenarios: Green Globalisation (Cooperation) Climate Anarchy (Chaos) Green Cold War (Competition)
Lloyd’s. Shifting powers: Climate cooperation, chaos or competition?

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6. About the authors

6. A bout the authors

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35

6. About the authors

36

6. About the authors
Andrew Coburn is Chief Scientist at the Cambridge
Centre for Risk Studies. Andrew is one of the leading
contributors to the creation of the class of catastrophe
models that over the past 20 years has come to be an
accepted part both of business management infinancial services and of public policy making forsocietal risk. He has extensive experience indeveloping models and using them for businessdecision support. Andrew has also provided research
inputs into government policy, such as House ofCongress legislation on terrorism risk management
policy and urban planning for disaster mitigation in
Mexico, Metro Manila, and Southern Italy.

Rosie Denée is the Innovation and Thought LeadershipManager at Lloyd’s. Working closely with the Lloyd's
Product Launchpad, she is responsible for productdevelopment relating to forward thinking andleadership innovation in the insurance sector andchanging needs of Lloyd's customers. Rosie has over
10 years’ of experience within the international
insurance market. She brings with her a breadth ofknowledge and understanding of market dynamics andrisk management. She graduated from Oxford Brookes
University with a degree in Environmental Science
before studying International Studies at the Diplomatic
Academy of Vienna.

Tamara Evan is the Lead for Business Intelligence, at
the Cambridge Centre for Risk Studies. With abackground in history and social sciences, Tamara has
managed the research relationship with Pool Re and all
research into cyber terrorism since it began in 2016.
She has led the Cambridge Global Risk Index teamsince 2019 and has contributed to UK policy
discussions as part of the Centre for Risk Studies. She
oversees the Centre’s work into political, geopolitical,
social, and territorial conflict risks, and leads research
into the development of indicator trackers pegged tomajor geopolitical events for use by major corporates.

Pauline Giorgini is an Associate in the Innovation teamat Lloyd’s. Prior to joining the organisation, Pauline
worked at Ardian, a private equity firm where she
focused on the investment side, the Fund of Funds
division of the company. She has also taken care of thelong-term relationships with investors and partners.
Pauline has a background in Politics, Public Policy andEconomics from several work experiences in public
administrations and institutions. Pauline holds a BA in
International Relations from L'Institut d'Etude desRelations Internationales (ILERI). In 2018 she obtained
an MSc in Public Policy and Administration specialisedin Public Management from the London School of
Economics and Political Science (LSE).

Mateo Ilardo is a geopolitical risk researcher at the
Cambridge Centre for Risk Studies where hespecializes on the analysis of geopolitical trends andsystemic risks to identify the strategic implications for
global business and insurance. His research includes
the evolving geopolitical landscape of cyber warfare
and terrorism, the geopolitics of climate change andthe energy transition, and the impact of systemic risks
on business and society. Prior to joining the Centre, heinterned at IHS Markit and Oxford Analytica. Matteo
holds a BA in Political Science from the University of
Milan and an MA in International Relations from theCentral European University

Lloyd’s. Shifting powers: Climate cooperation, chaos or competition?

Ben Rogers is Speechwriter and Editor at Lloyd’s,
helping shape its leadership voice alongside its
contribution to the public discourse. He arrived withfour years’ experience in financial services
communications, having worked at Lloyds Banking
Group since 2017 supporting the Group’s executive
communications and political engagement. Ben is amember of the Professional Speechwriters’ Associationand holds a first-class MA(Hons) in International
Relations from the University of Edinburgh, including ayear studying political speechwriting and security
studies at the American University in Washington D.C.

7. References

7. References
Bazilian, M., Bradshaw, M., Gabriel, J., Goldthau, A., & Westphal, K. (2020). Four scenarios of theenergy transition: Drivers, consequences, and implications for geopolitics. WIREs Climate Change,
11(2), e625.
International Renewable Energy Agency. (2019). A new world. The geopolitics of the energy
transformation. Masdar City: IRENA.
Hafner, M., & Tagliapietra, S. (2020). The geopolitics of the global energy transition (p. 381).
Springer Nature.
‘Green Grids Initiative-One Sun One World One Grid Northwest Europe Cooperative Event’.
Accessed 30 October 2021. https://pib.gov.in/pib.gov.in/Pressreleaseshare.aspx?PRID=1763712.
Carbon Tracker Initiative. ‘Mind The Gap: The $1.6 Trillion Energy Transition Risk’. Accessed 1
November 2021. https://carbontracker.org/reports/mind-the-gap/.
Reuters. ‘Bechtel, Hatch among Firms to Work on Australia-Asia PowerLink’. Reuters, 20 October
2021, sec. Asia Pacific. https://www.reuters.com/world/asia-pacific/bechtel-hatch-among-firmswork-australia-asia-powerlink-2021-10-20/.
Development Asia. ‘The Critical Role of Insurance in the Transition to Clean Energy’, 15 June 2021.
https://development.asia/insight/critical-role-insurance-transition-clean-energy.

Lloyd’s. Shifting powers: Climate cooperation, chaos or competition?

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7. References38

About Lloyd’s

About Cambridge Centre for Risk Studies

Lloyd’s is the world’s leading insurance and reinsurance
marketplace. Through the collective intelligence andrisk-sharing expertise of the market’s underwriters andbrokers, Lloyd’s helps to create a braver world.

The Centre for Risk Studies is a research group at
the University of Cambridge’s Judge Business School.
The Centre provides frameworks for recognising,assessing and managing the impacts of systemic
threats. The research programme is concernedwith catastrophes and how their impacts ripple acrossan increasingly connected world with consequenteffects on the international economy, financial markets,
firms in the financial sectors and global corporations.
To test our research outputs and guide our research
agenda, the Centre engages with the business
community, government policy makers, regulatorsand industry bodies.

The Lloyd’s market provides the leadership andinsight to anticipate and understand risk, and theknowledge to develop relevant, new and innovative
forms of insurance for customers globally. It offers
the efficiencies of shared resources and services ina marketplace that covers and shares risks from morethan 200 territories, in any industry, at any scale.
And it promises a trusted, enduring partnership built
on the confidence that Lloyd’s protects what mattersmost: helping people, businesses and communities
to recover in times of need. Lloyd’s began with a few
courageous entrepreneurs in a coffeeshop. Three
centuries later, the Lloyd’s market continues thatproud tradition, sharing risk in order to protect,build resilience and inspire courage everywhere.
Disclaimer
This report has been co-produced by Lloyd's,
Cambridge Centre for Risk Studies for general
information purposes only. While care has been taken
in gathering the data and preparing the report Lloyd's,
Cambridge Centre for Risk Studies do not make any
representations or warranties as to its accuracy orcompleteness and expressly excludes to the maximum
extent permitted by law all those that might otherwise
be implied.
Lloyd's and Cambridge Centre for Risk Studies
accept no responsibility or liability for any loss ordamage of any nature occasioned to any person asa result of acting or refraining from acting as a resultof, or in reliance on, any statement, fact, figure or
expression of opinion or belief contained in this report.
This report does not constitute advice of any kind.
© Lloyd’s 2022
All rights reserved

Lloyd’s. Shifting powers: Climate cooperation, chaos or competition?

Key contacts
Rosie Denee
Innovation and Thought Leadership Manager at Lloyd’s
rosie.denee@lloyds.com
Andrew Coburn
Chief Scientist, Cambridge Centre for Risk Studies
andrew.coburn@jbs.cam.ac.uk
For general enquiries about this report and
Lloyd’s work on innovation, please contact
innovation@lloyds.com

8. Contributors

8. Contributors
Chris Midgley, Global Director of Analytics, S&P Global Platts
Pierre Schellekens, Head of Unit, Energy policy: Strategy and Coordination, European Commission
Sorana Parvulescu, Head of EMEA geopolitical risk analysis, Partner, Control Risks
Professor Helen Thompson, Department of Politics and International Studies, University of Cambridge
Moritz Nikolaus Nebe, Sector Manager in the Economics and Sustainability Department, Multilateral Investment
Guarantee Agency
Katie Lennon, Head of ESG, UK & Lloyd's, AXA XLNeil Hudson, Business Analyst, AXA XLMichael Delia, Senior Underwriter, Global Political Risk, Credit & Bond, AXA XL
Chris Illman, Head of Responsible Business, Beazley
Neil Kempston, Incubation underwriter, BeazleyDavid Langran, Underwriter, Atrium
Alex Curtis, Catastrophe & Exposure Risk Analyst, Atrium
David Franco, Head of Market Intelligence, Lloyd's
Alain Caplan, Head of Futureset, Lloyd’s
Tom Hazzard, Futureset Communications & Engagement Lead, Lloyd’s
Jack Phillips, Futureset Associate, Lloyd’s
Ben Rogers, Senior Manager, Speeches and Editorial, Lloyd’s
Mateo Rubio, Research Associate, Underwriting, Lloyd’s
Ed Gaze, Senior Manager, Innovation Lab, Lloyd’s

Lloyd’s. Shifting powers: Climate cooperation, chaos or competition?

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