The ECB’s climate model is based on outdated scenarios

The author is a professor of environmental studies at the University of Colorado

The late Kenneth Arrow won the Nobel Prize in Economics in 1972, and he served as a long-range weather forecaster in the US Army. When he realized that these weather forecasts were not more accurate than random guesses, Arrow relayed the information to his boss. “The commander knows very well that the forecast is not good,” Arrow was told. “However, he needs them for planning purposes.”

A bit like Arrow’s supreme commander, the European Central Bank is currently conducting a climate stress test on the entire economy. This makes sense, because climate change is real and serious. The ECB test is designed to assess the “eurozone bank’s ability to withstand future climate risks.” . . Under various climate scenarios,” it is also ambitious and broad in scope. As the Deputy Governor of the European Central Bank, Luis de Guindos (Luis de Guindos) write By March, it plans to develop in 30 years, covering about 4 million companies and 2,000 banks around the world-“almost all monetary and financial institutions in the Eurozone.”

Unfortunately, the scenario on which the European Central Bank relies is outdated, which puts the whole activity into question. Although it is somewhat technical, I confuse it with me in this regard, because things will soon become interesting.

The European Central Bank and more than 60 other central banks belong to Greening the financial system network. This voluntary organization covers most economies in the world and advocates climate stress testing to assess financial resilience to “hypothetical, extreme, but possible scenarios.”However, these situations are accompanied by Health warningThat is: the most commonly used “design was about 10 years ago, which is not in line with recent emission trends”.

In fact, as my colleagues and I have record on fileSince 2005, the carbon dioxide emissions of these programs have greatly exceeded expectations. In addition, even the newer scheme of NGFS does not match the actual data. This may lead to wrong decisions and may even lead to higher system risks.

NGFS use Three main situations Guide climate assessments. The “orderly” hypothesis now begins to change policy, leading to net zero emissions by 2070. “Disorderly” assumes that climate policy is postponed to 2030 and requires that net zero be reached more quickly by 2050. The hypothesis of the “greenhouse world” has not changed, and the emissions have increased to 2100, which seriously affects the environment.

NGFS clearly stated that trade-offs need to be made to curb emissions. A carbon tax may accelerate the transition to zero net worth and help promote the development of carbon capture technology. However, at the same time, this will increase the cost of certain raw materials and require companies to overhaul their businesses. This may cause the short-term growth rate to decrease, but the long-term growth rate greatly increases, which is the opposite of the greenhouse effect.

Unfortunately, some of the other assumptions that underpin these three NGFS schemes are not credible.

Climate capital

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For example, they think Global fossil fuel carbon dioxide emissions in 2020 will be approximately 36 gigatons.However, by 2020, these emissions will be close to 33 tonsThe gap is only partly due to the dire economic consequences of the pandemic. By 2040, this small mistake will become very big. The “greenhouse” scenario is expected to produce approximately 45 Gt of fossil fuel emissions.However, even before the commitments made at last month’s climate summit, the International Energy Agency Project By 2040, emissions of about 35 Gt will be reached. This gap will further expand your future.According to recent Analysis in nature, According to hypothetical policies and technologies for 2019, by 2100, fossil fuel emissions will be approximately 25 Gt.However the greenhouse scene Project 81 Gt, three times the original.

Stress testing uses “hypothetical, extreme” solutions, and as NGFS clearly states, these solutions must be “reasonable.” However, this is unbelievable. It will be true that the world will collectively decide to convert most of its energy supply to coal. take By 2100, fossil fuel emissions will exceed 80 Gt.

The European Central Bank’s use of climate scenarios is very similar to the way General Arrow uses his “bad” weather forecast, because there are no other options for planning. Even so, there is still an urgent need for inventory. Because these climate scenarios are usually invisible and technical, people who rely on these scenarios may not know how they differ from the real world. Because they are institutionalized, changing these stress tests will also be difficult.

However, if financial institutions are to conduct meaningful climate stress tests, they must be based on the latest science, not when it is impossible.

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