The risks from disorganized climate transitions

Central banks and regulators have attempted to categorize the transition scenarios that can be used to test climate related risks to global and national financial system stability. The main distinction in their scenarios is between organized transitions – where a consistent, well designed transition minimizes the cost and economic inefficiency of the transition – and disorganized transitions.

Disorganized transitions should reflect the potential and likely paths that a transition could take given the uncertainties around, and responses to, politics, policy, technology, and consumer and investor behavior. These scenarios reflect, in effect, the transition path that is most likely given current conditions absent some sort of organizing force. Even though these scenarios appear more likely and more reflective of the real world, we do not yet have scenarios that adequately address the potential sources and magnitudes of risks that could affect financial systems.

With respect to scenarios of disorganized transitions we currently see at least four major issues that need to be addressed to evaluate adequately the potential for financial risk:

See the below paper for further information on each of these issues.