NOU 2018: 17

Climate risk and the Norwegian economy

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1 Priorities of the Commission

The global climate is changing, and climate change entails climate risk. Increased climate change awareness has resulted in climate policy measures to reduce greenhouse gas emissions and to help societies adapt to climate change. Since we do not have complete knowledge of the various consequences of climate change, climate policy and climate-related technological developments, we are therefore faced with climate risk. This constitutes the backdrop to the appointment of the Commission, which has been tasked with assessing climate-related risk factors and their significance for the Norwegian economy. Box 1.1 summarises the key features of the report.

The Commission was asked to describe climate risk. The Commission has been instructed to assess:

  • Climate-related risk factors and their significance for the Norwegian economy

  • How climate risk can be analysed and presented most appropriately

  • How private and public sector entities can be provided with an analytical framework for analysing and managing climate risk in the best possible way

The Commission was also asked to propose measures for improved management of such risk. The Commission’s report shall serve to advance knowledge of climate risk, but an improved understanding of risk is only of value if it results in better decisions. We have therefore focused on shedding light on how climate risk assessments can be better integrated into existing decision-making processes in the private and the public sector, thus making Norway better prepared for managing climate risk.

The climate is changing and will keep changing. It will take time for temperature increases to stabilise, and it will also take time for the effects of increased temperatures to manifest themselves. Even if greenhouse gas emissions are reduced in line with the Paris Agreement, we will still have to manage the effects of gradual climate change for a long time. Instead of providing only a snapshot of selected aspects of Norway’s climate risk in 2018, the Commission has focused on highlighting key climate risk developments and mechanisms over time.

An economics perspective provides important insights. We have primarily applied the tool of economics in our analysis, as indicated in the mandate of the Commission. This analytical framework provides a good basis for understanding the significance of the climate challenge for political prioritisations, economic development and climate-related risk.

In addition, the Commission has attached considerable weight to adding a risk perspective to its discussions. This implies that key terms, theories and principles from risk theory have been applied both in the Commission’s description of climate risk and in its proposals for improved risk management. In particular, we are focusing on tools such as scenario analysis and assessment of vulnerability and resilience. This approach is well in line with international climate risk management developments, in which the use of scenarios and stress testing play a key role.

However, the report does not provide all the answers. The Commission acknowledges, at the same time, that an economics-led approach has its limitations and cannot on its own fully address all climate risk management issues. The climate challenge also raises fundamental ethical issues, such as for example climate burden and climate risk sharing between countries and across generations, including the risk of current generations causing irreversible changes that will make parts of the globe uninhabitable for subsequent generations. Such ethical perspectives are important, and deserve attention in political debate and policy development. These are issues that cannot be resolved from a purely economic theory or risk theory perspective, and therefore fall outside the scope of the discussions and recommendations of the Commission. However, we note that an improved understanding of how climate risk may manifest itself and affect economic relationships can have a major impact on the national and international debate on addressing the climate challenge.

There are positive interactions between climate policy and climate risk management. The mandate stipulates that the Commission’s focus shall be on climate risk, and the recommendations in the report are therefore centred on the understanding and management of such risk. Although it is not within the mandate of the Commission to propose measures that reduce greenhouse gas emissions, an improved understanding of climate risk may indirectly serve to reduce emissions. An improved understanding of threats and opportunities relating to climate change and climate policy provides a better basis for sound decisions on investments in both the public and the private sector. This may pave the way for a swifter and smoother transition to a low-emission society. In addition to a better understanding of risk being of potential benefit to the climate, a successful climate policy will both benefit the climate and reduce climate risk. An ambitious and effective climate policy is not only the sole tool for alleviating the risk of catastrophic climate change, but may also reduce the uncertainty associated with the transition to a low-emission society.

The Commission has given priority to a broad and general perspective. Climate risk may in principle affect the Norwegian economy in numerous ways. The Commission has chosen to focus primarily on an assessment of potential long-term effects of climate risk on Norway’s overall economic prosperity over time, as expressed by its national wealth. This offers the best indication of the long-term effects of climate risk on the basis for welfare. This implies, however, that there has been less scope for detailed risk assessment of various industries, as well as for in-depth discussion of how climate risk may entail economic risk in the context of the many different roles of the State.

Global appreciation of climate risk is emerging. In some areas, access to and use of climate-related knowledge has advanced relatively far, but the Commission has seen a need for establishing a basis for a shared understanding of climate risk at a general level. We emphasise the need for more information, improved reporting and a stronger knowledge base, and we have focused on conveying general and universal insights, principles and recommendations. The report does not seek to provide detailed answers to all questions, but adopts a general perspective to establish a solid foundation for enabling both the private and the public sector to pursue a more systematic approach to climate risk. This includes climate risk assessment and reporting on an ongoing basis.

Textbox 1.1 Key elements of the report

  • Assessment of climate risk: We describe the climate challenge, discuss what we mean by climate risk and assess climate risk factors for the Norwegian economy.

  • Framework for ongoing monitoring of climate risk: We recommend a reporting framework for maintaining and accumulating knowledge of climate risk faced by the Norwegian economy.

  • Climate risk management principles: We recommend a set of general climate risk management principles for both the private and the public sector.

  • Sound decision-making processes that integrate climate risk: We recommend that a proper understanding of climate risk be better integrated into decision-making processes in both the private and the public sector, with expanded use of scenario analyses as a key measure.

  • Appropriate incentives: We propose measures to improve the ability of the market to address climate risk, including improved awareness of the link between prevention and the risk of damage.