Minor decrease of Sweden's GDP in NGFS climate scenarios

Economic Commentaries, News In 2021, the global sustainability network known as the Network for Greening the Financial System (NGFS) published a number of scenarios for climate change and economic developments. Among other things, the scenarios show that the economic cost in terms of reduced GDP is relatively small at a global level. This also applies to Sweden, where the cost is even smaller.

Limiting climate change and global warming to a maximum of 1.5–2 degrees compared to the pre-industrial period will be one of the most important tasks for society in the coming decades. If society fails in this, it will have serious consequences for biodiversity and natural ecosystems, as well as for economic developments and welfare.

In the international network NGFS, central banks and financial supervisory authorities cooperate to help develop the analysis of environmental and climate-related risks in the financial sector. In an Economic Commentary, two employees at the Riksbank present an overview of the economic consequences of the NGFS climate scenarios. According to the scenarios, the effects on GDP will be relatively minor. The scenarios also show that Swedish inflation may increase under certain conditions.

The calculations for the scenarios include so-called physical and transition risks. The former are risks arising due to extreme weather conditions. Transition risks concern the changeover to a less fossil-based economy. This could include political decisions to raise taxes on CO₂ emissions, higher prices for emission rights or changed patterns of consumption.

However, the NGFS has not included the risk of threshold effects in its scenarios. These are effects that are hardly noticeable at the beginning of the process, but that at a certain dividing line – at a so-called threshold value – lead to major and often irreversible changes. These effects may entail high costs for both nature and economy if they occur.

The authors, Emma Bylund and Magnus Jonsson, both work in the Riksbank’s Monetary Policy Department.

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Updated 03/12/2021