The Link Between Physical and Transition Risk

We argue that what is usually referred to as climate ‘transition risk’ can be more
usefully decomposed in an expectation part and a variability around this central value.

We show that there is a strong inverse relationship between the expectation component
of transition costs and the expectation of physical damages, and how this relationship
can be estimated.

Our results indicate that the uncertainty in transition costs decreases
as the abatement policy becomes more aggressive (and physical damage decrease), but
remains large as a fraction of the expectation component.

We also show that, with the
definition we provide, our transition costs match well the corresponding quantities from
the benchmark IPCC scenarios.