Assessing the “Tragedy of the Horizons”: Conceptual underpinnings of the NGFS scenarios and suggestions for improvement

This Policy Brief assesses the strengths and limitations of the climate mitigation scenarios developed by the Network for Greening the Financial System (NGFS) for climate-financial risk analysis. It highlights key uncertainties, model sensitivities, and gaps in current narratives, and compares NGFS results with other scenario providers. The Brief concludes with recommendations to improve relevance for climate finance, including updating socioeconomic pathways, integrating policy trade-offs, strengthening physical risk assessment, and reflecting investor expectations.

Author(s)

Irene Monasterolo (EDHEC Business School, EDHEC-Risk Climate Impact Institute), María J. Nieto (Banco de Espan a), and Edo Schets (Bloomberg)

This Policy Brief provides an analysis and discussion of the main characteristics and limitations of the climate mitigation scenarios co-developed by the Central Banks and Financial Regulators’ Network for Greening the Financial System (NGFS) for climate-financial risk assessment. Our analysis focuses on the following key elements: key uncertainties in NGFS scenarios; the role of Representative Concentration Pathways (RCPs) and Shared Socioeconomic Pathways (SSPs) in shaping the scenario narratives, and their shortcomings; the interpretation and sensitivities of carbon price pathways; the comparison of the results of process-based Integrated Assessment Models (IAM) across NGFS scenarios; and the comparison with other climate mitigation scenario providers (e.g. those of the International Energy Agency). Then, we draw lessons on how to increase the relevance of the NGFS scenarios for climate finance. Our recommendations include: (i) updating the SSP narratives by embedding finance and technology; (ii) considering the potential trade-offs between different types of climate policies; (iii) strengthening the assessment of physical risks and their compounding; (iv) integrating physical risks within transition scenarios; and, (v) embedding the role of investors’ expectations and climate sentiments in the scenarios’ trajectories.