The financial community has become increasingly concerned with two types of threats to financial and economic systems driven by climate change and efforts to alleviate it: physical risk—exposure to climate and/or weather extremes, and transition risk—the potential for fossil fuel assets to lose value in a rapid transition to a low-carbon economy.

A new study by the Bank of Canada employs the MIT Joint Program on the Science and Policy of Global Change’s Economic Projection & Policy Analysis (EPPA) model to assess these risks under different scenarios defined by variables such as climate policy and the magnitude of the Earth-system response to greenhouse gas emissions. The results show that the physical and transition risks ahead are considerable, and will need to be addressed by multiple stakeholders in both private and public sectors. They also underscore the critical importance of scenario analysis in gauging the financial and economic risks and opportunities of climate change.

“The vast number of regions and economic sectors within the EPPA model allowed us to identify possible risks from a transition to a low-carbon economy,” says Craig Johnston, a senior economist at the Bank of Canada. “Emissions-intensive sectors are represented in detail, which is necessary for identifying stranded assets.”

For more information, see the Bank of Canada’s summary and full report, “Scenario Analysis and the Economic and Financial Risks from Climate Change.”

Photo: The Bank of Canada’s head office (Flickr/Bank of Canada)