Norway’s Climate Risk Commission: Better climate risk management

These are the views of the Commission which has studied how climate risk may affect the Norwegian economy. The Commission submitted its report to the Ministry of Finance today.

– Even if the global community meets the targets under the Paris Agreement, the climate will continue to change for several decades. We therefore need to prepare for both climate change and the economic effects of the transition to a low-emission society, says the Commission Chair, Martin Skancke.

Climate change has global ramifications
The risk of political instability, humanitarian disaster and violent conflict will increase in the event of major climate change, especially in and between vulnerable states. In addition to the possibility that war and conflict may inhibit global economic growth, a world in which climate change spins out of control may be characterised by increased migration flows, unstable food prices, supply disruption and changing production and trading patterns.

– With well-functioning political institutions, a high income level and an adaptable economy, Norway is well placed to manage climate risk. But the effects of climate change in other countries can in a closely interwoven international community also have a noticeable impact on Norway, says Mr Skancke.

Better risk decisions
In addition to assessing how climate risk may affect society and the economy, the Commission has proposed a set of general principles for improved climate risk management in both the private and the public sector.

– There is a need for more knowledge, improved reporting and more systematic analyses of such risk. It is our hope that this report can establish a sound basis for more systematic thinking on climate risk in both the private and the public sector, says Mr Skancke.

The Commission is of the view that central government should establish, maintain and publish a set of scenarios for oil prices, gas prices and CO₂ prices, including a scenario reflecting the ambitions under the Paris Agreement. This can lay the foundations for better climate risk assessment both at the national level and in individual sectors of the economy. The Commission has in this context highlighted the importance of thorough analyses of climate risk in the petroleum sector.

 

Contact person: Martin Skancke (Commission Chair), tel. +47 9188 1776, martin.skancke@gmail.com.

A brief summary of the report is attached. The original report in Norwegian and a summary version in English are available on the Commission’s website and the Ministry of Finance’s website.

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Attachment: Brief summary of the Climate Risk Commission’s report

The Commission’s report addresses the following main topics:

• Assessment of climate risk: The Commission describes the climate challenge, discusses what is meant by climate risk and assesses climate risk factors for the Norwegian economy.
• Framework for ongoing monitoring of climate risk: The Commission recommends a reporting framework for maintaining and accumulating knowledge on climate risk faced by the Norwegian economy.
• Climate risk management principles: The Commission recommends a set of general climate risk management principles for both the private and the public sector.
• Sound decision-making processes that integrate climate risk: The Commission recommends 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: The Commission proposes 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.

Population growth and economic development based on fossil energy have caused increased greenhouse gas emissions. This affects Earth’s climate and ecosystems. Some geographical areas will probably experience a combination of reduced precipitation levels and steep warming, whilst others will experience increased and more intense precipitation. The frequency and intensity of extreme weather and climate events is likely to increase. It would appear that the climate in Norway is becoming warmer, wetter and wilder.

Climate change has given rise to climate policy measures to reduce greenhouse gas emissions and adapt societies to such change. Since we do not have full knowledge of the various consequences of climate change, climate policy or climate-related technological developments, we are faced with climate risk. The Commission defines climate risk as potential negative and positive implications associated with physical climate changes (physical climate risk), as well as potential implications associated with transition to a low-emissions society (transition risk). The magnitude of the risk depends on how large the potential implications are, how likely it is – under available estimates – that these will occur, and the strength of the knowledge supporting the judgments.

Climate change affects different parts of the world differently, in terms of both intensity and direction. Rich countries in the Northern Hemisphere are generally less exposed to direct negative effects of climate change than are poorer countries in the South, whilst having at the same time better capacity to absorb transition costs incurred in moving to a low-emissions society. Norway seems less vulnerable to physical climate changes and transition challenges than most other countries, and is also held to be one of the best placed countries with regard to adaptability. However, as a small, open economy holding considerable net financial wealth, Norway is highly dependent on what happens in the wider world. It is therefore necessary to adopt a global perspective in addition to the national one.

It is difficult to analyse economic implications of climate change. Climate risk assessments should therefore be based on various future scenarios:

• In a scenario involving a successful climate policy and moderate climate change, the worldwide economic implications are relatively minor. However, the transition to a low-emission society with radically reduced use of fossil fuels may pose challenges, and not only for producers of fossil fuels.
• In a scenario involving somewhat more climate change, the risk of political instability, humanitarian disaster and violent conflict will increase, especially in and between vulnerable states. In addition to the possibility that war and conflict may inhibit global economic growth, it is quite conceivable that important characteristics of an ever more closely interwoven international community may be increased migration flows, unstable food prices, supply disruption and changing production and trading patterns. Regional crises may have greater ripple effects, and events far away can hit harder, faster and in new ways. A belated and forceful climate policy may reduce the physical risk, but involve higher costs and risks in the transition phase than an effective and predictable climate policy launched early.
• In scenarios in which self-reinforcing mechanisms in the climate system are triggered and the world experiences dramatic climate change, there is reason to expect even greater and more dramatic societal implications in large parts of the world.

Even if the global community succeeds in reducing emissions in line with what we currently believe to be sufficient to limit global warming, there is a significant probability that warming will be higher or that the effects on society and the economy will be more severe than assumed under such a scenario. Hence, there will in any circumstance be significant climate risk that needs to be managed.

The Commission recommends a set of general climate risk management principles for both the private and the public sector. The principles also form the basis for recommendations to contribute to better decisions. Sound decisions can be said to be based on the following three elements:

• Thorough analysis: Global appreciation of climate risk is emerging, so more information, improved reporting and an expanded knowledge base are necessary. A comprehensive risk analysis considers various risk factors in context and sheds light on uncertainty, thus implying that the perspective must be expanded from unbiased forecasts with partial sensitivities to using scenario analyses in which several elements are changed simultaneously. For Norway it is of particular relevance to perform stress testing of fiscal policy and the petroleum sector.
• Appropriate incentives: A key role for policy is to correct market failure and create appropriate incentives, and a predictable and effective climate policy makes an important contribution to reducing climate risk. It provides public and private sector enterprises with a better basis for establishing their future plans and investment decisions, and facilitates corporate governance that addresses the long-term nature of climate risk. Furthermore, it gives the financial sector a better basis for performing its important role in channelling loans and equity to businesses in the transition to a low-emissions society in a sound manner, thereby averting misguided investments, weak returns and financial instability.
• Integrated process: A sound decision-making process adopts an integrated perspective in which climate risk assessments are conducted as similarly as possible across various fields, climate risk is considered in relation to other risk factors, and climate risk management is integrated into existing risk management frameworks in which the peculiarities of climate risk have been taken into consideration.