Quantitative Sustainable Economics and Finance
Time: 11.30 am
Date: 29 th of February 2023
Room 1001

Louis Daumas (CIRED) “Financial transition risks and the multiverse of mitigation pathways: A scenario-exploration exercise with a stock-flow consistent model”

Abstract : This article proposes a novel methodology for forward-looking low-carbon transition risk assessment based on a large set of scenarios. We build upon the IPCC Assessment Report 6 scenario database to explore the types of transition pathways most prone to financial instability. We start by clustering scenarios based on the form of decarbonisation schedules and on the profile of their carbon price trajectories to generate a classification of mitigation pathways. We then select the best representative within each of our 50 clusters, which we simulate with a stock-flow consistent to quantify indicators relevant to low-carbon transition risks. We then tackle uncertainty on future macroeconomic developments by running each scenario on diff erent calibrations corresponding to the five Shared Socioeconomic pathways. We finally deal with uncertainty on model parameters by generating these macroeconomic regimes with an important number of parameter combinations. In the end, we simulate several thousand trajectories that diff er by (i) decarbonisation pathway, (ii) macroeconomic regime and (iii) parameterisation of the macroeconomic regime. We also use scenario dis-covery techniques to explore how low-carbon transition risks vary across decarbonisation pathways, macroeconomic regimes and parameterisations. We find that while most decarbonisation profiles lead to mild transition risks, a handful of scenarios lead to strong instability potentials across states of the world. These scenarios are either delayed-action or deep-decarbonisation pathways featuring steep carbon price schedules.

Organizers:

Peter TANKOV (CREST) – Olivier David ZERBIB (CREST)

Sponsors:
CREST