Module 2: Transition Risks
Overview
Unlike physical risks that arise from direct and indirect exposures to climate-related hazards, transition risks arise from human responses to climate change. In particular, as humans recognize the imperative of shifting to a low-carbon economy, and as policies, consumer choices, investment, and innovation pathways reorient toward decarbonization, large-scale changes will occur in the economy. The low-carbon economy will produce new winners and new losers, and—for those on the loss side (including their investors, suppliers, customers and employees)—the transition will produce serious and perhaps insurmountable challenges.
Energy is at the core of our modern economy. Over the past 3 – 4 decades, we have made significant progress reducing the energy intensity of the goods and services we consume (either as businesses, as public bodies, or as consumers). Nevertheless, our dependence on energy remains. Eighty-one percent of our energy comes from fossil fuels and, thus, fossil fuels are deeply embedded within our current economic system.
However, if we are to achieve the global warming target of the Paris Agreement (2.0C), a dramatic shift away from our carbon-based economy is necessary. And decarbonization will inevitably disrupt the status quo, along with those sectors with business models that depend on the status quo for its success.
Transitions like the ones necessitated by climate change have happened throughout the history of market economies (for example, as disruptive, game-changing innovations arise). When those transitions are disorderly and abrupt, the consequences can be far reaching. However, it is possible to manage the necessary transition to a low-carbon economy in a manner that is orderly and predictable, and that minimizes the worst outcomes.
But only if we start soon!…
This module explores transition risks that arise from the low-carbon transition.