Climate change means climate risk. Climate change presents not only physical risk but also transition risk – the risk associated with economic impacts of the transition to a low carbon economy.
It is impossible to fully predict the effects of global warming. The impact of climate change will depend on how rapidly the changes occur, how large the changes are, as well as the adaptability of societies and ecosystems.
The possibility of catastrophic climate change cannot be excluded – even if we manage to limit carbon emissions. If critical tipping points are crossed, this may trigger self-reinforcing processes that cause more warming. From a risk prospective, it is important to consider all possible outcomes, not just the most likely.
The only relevant tool for reducing the risk of catastrophic climate change is effective climate policy. This, together with technology development, is critical to eliminate carbon emissions.
The Norwegian economy is highly integrated into the global economy and directly exposed to developments elsewhere. If already vulnerable states experience major negative effects from climate change, there will be an increased risk of political instability, humanitarian disaster and violent conflict in and between states. Increased migration flows, unstable food prices, supply disruption and changing production and trading patterns will affect both the global and the Norwegian economy. In addition, Norway is exposed through the large international financial holdings of its sovereign wealth fund.
An overall assessment of key risk factors indicates that the Norwegian economy is relatively resilient in a scenario with moderate climate change. Rich countries in the Northern Hemisphere are generally less exposed to the direct negative effects of climate change than poorer countries in the South.
Compared to the physical risk of climate change, transition risk is manageable. Effective global climate policy will reduce the value of Norway’s remaining petroleum reserves, but this risk is manageable from a national wealth perspective. As a risk-management tool, the Norwegian government should establish scenarios with price trajectories for oil, gas and CO2, including a scenario reflecting the ambitions under the Paris Agreement. Such scenarios will facilitate better decision making in the public sector, and can be used to stress test Norway’s exposure to transition risk.
For individual companies, transition risk could be significant and should be better understood and managed. An increased focus on knowledge, scenario analysis and corporate governance is important for private sector climate risk management.
The financial market is a key climate risk management arena. The transition to a low carbon economy requires large investments, and will thus represent both risks and opportunities to companies. To properly manage downside risks as well as exploit opportunities, financial market participants need to have a proper understanding of climate risk and better reporting is an essential tool.
The government should endorse the principles on disclosure and reporting recommended by the Task Force on Climate-related Financial Disclosures (TCFD). Such reporting will enhance the understanding of climate risk – both within companies and at the investor level.
A TCFD-inspired framework for climate risk disclosure should also be implemented at the national level. Such reporting will serve to enhance transparency and be a basis for better climate risk management and improved decision-making. A potential framework for such reporting is presented in the report.