NGFS short-term climate scenarios
The NGFS's first set of five-year macro-financial climate scenarios, published May 7, 2025, built for stress tests and planning, whereas the long-term scenarios describe paths out to 2100.
The NGFS, the Network for Greening the Financial System that groups central banks and supervisors, has published long-term scenarios running to 2100 since 2020 (see NGFS scenarios). They are used to discuss temperature and carbon price paths. For a stress test they are too slow: the economy adjusts smoothly, with no crash and no business cycle. On May 7, 2025, the NGFS published its first set of short-term scenarios, over five years, out to 2030, with sector and regional detail. There are four narratives, around a baseline that reflects the climate commitments known as of January 2023. Highway to Paris is the orderly, coordinated transition: global GDP is 0.4% below baseline in 2030. Sudden Wake-Up Call lets the years go by until 2027 with no new policy, then switches abruptly. In the year of the switch, global GDP falls by 1.2% and unemployment rises by 1.3 points; the loss reaches 1.3% in 2030. Disasters and Policy Stagnation keeps only physical risk, a series of regional disasters; for the euro area, the ECB cites a fall in annual GDP of up to 4.7% by 2030. Diverging Realities combines the two: disasters hit emerging economies rich in the raw materials of the transition, and broken supply chains make the transition more expensive for advanced economies. European GDP is 1.7% lower in 2030. The basic difference from the long-term set lies in the question asked. The long term asks where a climate policy leads. The short term asks what breaks in a balance sheet over the life of a strategic plan or an ORSA, which is why supervisors were waiting for it. Criticism came quickly: BBVA Research finds the orderly narrative hard to believe given recent policy reversals.
Textbook case: a bank models a 5,000 million euro loan book with an average probability of default of 1.5% and a loss given default of 40%. Its baseline expected loss is 5,000 × 1.5% × 40% = 30 million. Its satellite model, fitted on history, adds 0.3 points of default probability per point of GDP lost. Under Sudden Wake-Up Call, global GDP is 1.3% below baseline in 2030: the default probability rises to 1.5 + 0.3 × 1.3 = 1.89%. Expected loss becomes 5,000 × 1.89% × 40% = 37.8 million, 7.8 million more, 26% above baseline. Under Highway to Paris, with GDP 0.4% lower, the probability rises to 1.62% and the loss to 32.4 million.
NGFS short-term scenarios, NGFS short-term climate scenarios, NGFS five-year scenarios, Highway to Paris scenario, Sudden Wake-Up Call scenario, Disasters and Policy Stagnation, Diverging Realities scenario, short-term climate stress scenarios
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