The Inevitable Policy Response
The objective of this project is to investigate the case for incorporating a forceful policy response to the climate transition – the Inevitable Policy Response (IPR)- into strategic and especially financial decision-making. The purpose of this project is to fundamentally re-orientate the expectations, actions and disclosure reporting of both private and public actors toward a business planning world in which the IPR Forecast, which involves significant economic disruption, can replace the IEA New Policies Scenario as the go to base case.
The project does this by:
- making the argument for why the IPR is a rational investor expectation given the various underlying political, environmental, economic and social dynamics;
- laying out the factors determining when this might occur, and motivating a plausible view that it could be within a timeframe relevant to investors (e.g. <7 years);
- detailing precisely what the IPR would look like on the basis of historical evidence and robust political and economic reasoning to help investors build scenarios;
- demonstrating how the IPR might impact the global economy, major regions and sectors, and asset values (upside and downside); and
- examining potential investor strategic asset allocation strategies in light of the possible market responses under uncertainty.
As the realities of climate change become increasingly apparent, it is inevitable that governments will be forced to act more decisively than they have so far.
Markets today lack a strong basis for pricing climate transition risk, and do not seem to have priced in a forceful policy response to climate change within the near-term . But our policy forecast shows this to be a highly likely outcome, leaving portfolios exposed to significant risk.
Falling renewable electricity costs play an important part of “why” a policy response is likely to occur. And the arrival at new tipping points within sectors and countries over the next decade informs “when” this response is likely to materialise.
The concept of a just transition has emerged as a key pillar of climate strategy; it is crucial to understanding ‘ where’ the impact of policies will be felt and ‘ what ’ policies will be used.
Business and investor support for action play an important part of “why” this policy response is likely to emerge over the next 6 years. These give an economic and market mandate to policy makers for action.
The Forecast Policy Scenario (FPS), introduced in this report, models the impact of the forecasted policies on the real economy up to 2050, tracing detailed effects on all emitting sectors, including changes to energy demand (oil, gas, coal), transport, food prices, crop yields, and rates of deforestation.
This work is commissioned by PRI