Our latest economic modelling suggests that reaching net zero, if the transition is managed well, might have a small or negligible effect on economic aggregates such as GDP, unemployment and inflation [figure 7]. Indeed depending on what investment means for productivity, there is a chance the transition could prove positive overall. However, these costs depend crucially on whether the transition follows an orderly or disorderly path. Emission reductions may not follow a straight line as shown in many scenarios. It takes time for policy to work and policy adjustments will also be needed along the way. There may be higher investment uncertainty. Markets will not allocate capital perfectly, and without certainty about policy and technological outcomes, there may be bumps in the road as they absorb news about our path. In the NGFS we explicitly capture some of these transmission channels in our disorderly scenarios, for example by modelling delays in policy action and policy fragmentation across countries and sectors. They result in much higher impacts, particularly in countries with greater dependence on fossil fuel consumption or exports. This work underlines that central banks and supervisors, and the financial firms and system that we oversee, need to be prepared for a range of outcomes. But it also underlines that early action brings lower risks. 7  Preliminary analysis for the updated NGFS Climate Scenarios. Third, the impacts from physical risks will be significant.
The scenarios the NGFS have produced pull together, for the first time, both transition risks and physical risks, and their economic and financial consequences, in a coherent way. As a result, they are decision-useful, reflecting the totality of risks we will face. A guiding principle has been to try to shine a light on some of the uncertainties that exist. We have focused on multiple scenarios and multiple models to highlight the range of potential outcomes. Since modelling these impacts is subject to significant uncertainty and extensive academic debate, our work is open source and we seek your expertise and challenge. 4  The NGFS was founded by 8 central banks and supervisors including the Bank of England in 2017. Members are committed to sharing best practices, contributing to the development of climate and environment-related risk management in the financial sector and mobilising mainstream finance to support the transition towards a sustainable economy. It is currently comprised of 90 members and 14 observers. The first iteration of these scenarios, published in June 2020, drew from the existing work on mitigation pathways, climate change and adaptation that supported the Intergovernmental Panel on Climate Chance (IPCC) Special Report on Global Warming of 1.5°C.5 The NGFS will next month release an update, which will include bespoke scenarios, detailed macroeconomic modelling and a new online portal that can be used to explore physical risks. Insights from the design of the NGFS climate scenarios I would like to share some of the insights I’ve gleaned from this work.