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Climate-related risks are an immediate concern for financial stability and economic growth. Yet until very recently, there have been no tools to systematically assess their short-term effects. The innovative short-term scenarios devised by the NGFS – the Network of Central Banks and Supervisors for Greening the Financial System which brings together central bankers and supervisors from around the world to work on climate-related issues – fill this gap. The new scenarios offer financial institutions a comprehensive framework for quantifying the impacts that transition and physical risks could have on the economy by 2030. They reveal that a series of extreme climate events could cause euro area GDP to fall by up to 5% – a downturn similar in magnitude to the economic impact of the Global Financial Crisis. This blog post provides a deep dive into the results of new NGFS short-term scenarios for the euro area.
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The NGFS short-term scenarios focus on a five-year horizon, which aligns closely with the decision-making horizons of central banks, financial institutions and supervisors. The scenarios show how natural hazards and climate policies affect the economy and inflation. They also account for the reaction of the financial system by assessing how financing conditions might change, and which economic sectors could face pressure to adjust to climate shocks.
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A major innovation of the scenarios is their approach to modelling physical risks. For the first time, the NGFS captures the impact of compounding extreme weather events and how they propagate across borders through international supply chains.
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In the Disasters and Policy Stagnation scenario, a series of natural hazards affects all European countries, starting with heatwaves, droughts and wildfires in 2026, followed by a combination of floods and storms in 2027. The compounding effects of these hazards could lead to a decline in euro area annual GDP of up to 4.7% by 2030. As production is disrupted and borrowing gets more expensive for vulnerable industries, inflation increases.
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In the Highway to Paris scenario, carbon tax revenues are invested effectively in green technologies, and euro area GDP and employment slightly increase. The green transition has limited inflationary effects. The euro area position in this scenario stands out because it has previously adopted ambitious climate policies, particularly the European Green Deal, which targets a 55% reduction in greenhouse gas emissions by 2030 compared with 1990 levels.
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I can see much more impact in 4 years time in a worst case.