Commission on climate risk and the Norwegian economy

Mandate

The world's annual greenhouse gas emissions have doubled since 1970, and the stock of such gases in the atmosphere has increased. Norway has ratified the International Climate Change Convention agreed at COP 21 in Paris, whose purpose is to keep the average temperature increase well below 2°C compared with pre-industrial levels, and to strive to limit the temperature increase to 1.5°C.

To support the long-term temperature target, the Paris Agreement set a collective emissions target with the aim of reversing the increase in global greenhouse gas emissions as soon as possible in order to achieve balance between man-made emissions and the absorption of greenhouse gases in forests and seas during the second half of this century (climate neutrality).

Both climate change and measures to counter it affect conditions for and risks associated with economic activity:

1. Higher average temperatures, changes in rainfall patterns, less alkaline seas and higher sea levels may have consequences for water supply, agriculture and settlement, and for production and consumption opportunities in a broader sense. More extreme weather may also alter physical impact patterns.
2. Measures to counter climate change also have consequences. Technological development, carbon pricing and regulation may alter global market conditions for carbon-intensive goods and services. Transitioning away from fossil fuels may trigger a fall in the value of capital and fossil fuel reserves, which in turn may disrupt the activities of enterprises and financial institutions. Revenue and asset valuations may also change in other areas as a result of new policies or the development of new technologies to address climate change. Major changes over a short period of time may present banking and insurance businesses with challenges, and threaten financial stability.

This recognition has led to increased demand for decision-relevant information on the exposure of financial institutions and other businesses to climate-related risk. Among other things, a task force appointed by the Financial Stability Board has made recommendations including voluntary reporting of climate-related financial risk in businesses and measures to strengthen the capacity of investors and others to assess and price climate-related risks and opportunities. G20 has taken note of the report. Increased knowledge about a country's overall exposure to climate risk can support such voluntary assessment and reporting, and strengthen the informational foundation for aligning policy and instruments to reduce national climate-risk vulnerability and safeguard long-term value creation.

Different countries are affected differently by climate risk, reflecting variations in geography, industry structure, consumption patterns and adaptability. Developments in oil and gas prices and demand are important factors for Norway, and great emphasis has therefore been given to the uncertainty of future oil revenues in the formulation of economic policy. This is one reason why the state’s petroleum revenues are channelled directly into the Government Pension Fund Global and invested in a broadly diversified global portfolio of equities, bonds and real estate. Only the expected real return on the fund capital, estimated at 3 per cent, is spent annually through the fiscal budget. This policy increases the robustness of the fiscal budget and welfare-scheme funding in the face of potential falls in oil and gas prices.

The decline in oil prices since the summer of 2014, and the subsequent downturn in the Norwegian economy, illustrate that oil prices also affect the Norwegian economy through demand for products from the supply industry. This issue was analysed in the Government’s white paper on Long-term Perspectives on the Norwegian Economy 2017. An insight gained in recent years is that the adaptive capacity of individual industries has a considerable influence on the socioeconomic consequences of changing market conditions. Nevertheless, further knowledge is needed to enable evaluation of the links between the outlook for petroleum-related and other Norwegian industries and petroleum prices, technological development, climate policy and climate change.

The commission will assess climate-related risk factors and their significance for the Norwegian economy, including financial stability. The commission is asked to:

• Assess how national-level climate risk can be most effectively analysed and described.
• Identify key global climate-related risk factors, and consider their importance for the Norwegian economy and financial stability.
• Consider a possible methodology for giving private and public entities, including financial institutions, a technical basis for analysing and managing climate risk in the best possible way.

In its work, the commission must take into account that the consequences of likely climate change and of the global community's efforts to counteract or adapt to such change may have different timeframes. Where appropriate, the commission should take into account that the Norwegian economy also faces risks linked to factors other than climate change and changes in climate policy. The commission is asked to emphasise the distinctive characteristics of the Norwegian economy and Norway’s industry structure, but also to recognise that such characteristics change over time. It will be natural to investigate how selected other countries approach issues raised by climate-related risk factors. In its work, the commission may also seek specialist input from relevant national and international experts.

The guidelines on fiscal policy and the investment strategy for the Government Pension Fund Global have recently been assessed by other public commissions, and therefore fall outside the scope of this mandate. Further, the commission is not tasked with proposing measures to reduce greenhouse gas emissions, specific measures to facilitate adaptation to climate change, or changes to the petroleum tax system or Norwegian petroleum policy.

The commission is asked to deliver its recommendation by 14 December 2018.