In November 2020, the Bank of Canada launched a pilot project with the Office of the Superintendent of Financial Institutions aimed at better understanding risks to the economy and the financial system related to climate change. Part of this work included developing a set of Canada-relevant climate transition scenarios that explore pathways consistent with achieving certain climate targets.
The climate scenarios are not meant to be forecasts or comprehensive. Instead, they explore different plausible but intentionally adverse transition pathways required to achieve specific climate targets. The scenarios focus exclusively on the transition risk of climate change and are designed to capture a range of risk outcomes that could be stressful to the economy and the financial system. While assessing the physical risks of climate change and exploring the interaction between physical and transition risks are equally important, these have been left to future work.
The four climate scenarios are the following (Chart 1):
- baseline (2019 policies)—a baseline scenario consistent with climate policies in place at the end of 2019
- below 2°C immediate—an immediate policy action scenario to limit average global warming to below 2°C
- below 2°C delayed—a delayed policy action scenario to limit average global warming to below 2°C
- net-zero 2050 (1.5°C)—a more ambitious immediate policy action scenario to limit average global warming to 1.5°C that includes current net-zero commitments by some countries
Chart 1: Global greenhouse gas emissions
The scenarios describe the evolution of the global economy along these plausible transition pathways, summarized across eight regions of the world and 10 emissions-intensive sectors (Table 1). The database presents important sectoral-level information, including economic activity, energy use and emissions.
Table 1: Geographic and sectoral coverage of scenarios
|Rest of world||Livestock|
An estimate of the shadow price of carbon captures implicit government climate policy in line with the level of mitigation in the scenarios (Chart 2). Each scenario’s carbon price path may differ from that stated by the government.
Chart 2: Global GDP-weighted shadow carbon price
Chart 3 presents global primary energy by source in each scenario. Two important patterns emerge in the mitigation scenarios:
- Sectors invest in becoming more energy efficient, helping to lower the overall demand for energy through mid-century.
- The composition of energy demand changes to help facilitate the transition.
Chart 4 presents global electricity generation by source for each scenario. Two patterns are notable:
- The composition of electricity generation evolves along the transition pathway as climate policy encourages investment in lower emissions-intensive technologies.
- As the electricity sector becomes less emissions intensive, other sectors demand more of its output—a process referred to as electrification.
Chart 5 presents global emissions across sectors and scenarios, highlighting the fact that every sector contributes to reducing emissions to meet climate targets.
To facilitate the assessment of financial risk, scenarios’ outputs are translated into sectoral-level financial impacts. The scenarios measure different components of net income, reflecting changes in direct emissions costs, indirect costs, capital expenditures and revenues (Chart 6). The combined effect on the components of net income illustrates how each sector as a whole may be affected along the transition pathway.
Chart 6: Illustrative evolution of the components of net income, percent change from baseline
Net income = Revenues – direct emissions costs – indirect costs – capital expenditures
In addition to the sectoral-level information, the scenarios provide important macroeconomic information related to these transition pathways. The focus of this information is on Canada and the United States given the Canadian financial system’s material exposure to these regions.