The document discusses the Office for Budget Responsibility's (OBR) analysis of climate change risks and long-term fiscal sustainability. It outlines the OBR's previous publications on fiscal risks from climate change and transition. It also discusses the Bank of England framework for assessing climate risks and the Network for Greening the Financial System scenario matrix. Next steps include the Bank of England publishing climate change scenarios in 2020 for the OBR to use in examining the size and order of magnitude of fiscal risks from climate change scenarios in 2021.

1. Climate Change and
Long-Term Fiscal Sustainability
Jim Ebdon
March 2020

2. OBR publications so far
• First biennial Fiscal risks report in July 2017:
– recognised climate change risks as ‘potentially huge’
– with fiscal risks from both sudden shocks and slower-building
pressures, but
– we lacked a framework to analyse the risks
• Second FRR in July 2019:
– developments in qualitative analysis
– a Bank of England framework for assessing climate change risks
– nature and relative scale of the fiscal risks
– next steps towards quantitative analysis

3. Bank of England framework
From extreme
weather events
From gradual
global warming
Investment
Uncertainty about climate
events
'Crowding out' from climate
policies
Consumption
Increased risk of flooding
to residential property
'Crowding out' from climate
policies
Trade
Disruption to import/export
flows
Distortions from
asymmetric climate policies
Labour supply
Loss of hours worked due
to natural disasters
Loss of hours worked due
to extreme heat
Energy, food and
other inputs
Food and other input
shortages
Risks to energy supply
Capital stock
Damage due to extreme
weather
Diversion of resources from
productive investment to
adaptation capital
Diversion of resources from
productive investment to
mitigation activities
Technology
Diversion of resources from
innovation to
reconstruction and
replacement
Diversion of resources from
innovation to adaptation
capital
Uncertainty about the rate
of innovation and
adoption of clean energy
technologies
Demand
Supply
Type of shock/impact
Physical risks
Transition risks
From: Bank of England Staff Working Paper: Climate change and the macro-economy: a critical review, Jan 2018

4. NGFS scenario matrix
Network for Greening the Financial System, First comprehensive report, A call for action: Climate change as a source of
financial risk, April 2019

5. BoE exploratory scenario:
illustrative pathways
Bank of England, Discussion paper: The 2021 biennial exploratory scenario on the financial risks from climate change,
December 2019

6. Likely OBR fiscal analysis
• Scenario projections:
– impacts of economy on fiscal position
– not fiscal/policy impacts on the economy
• Size of the fiscal risks from the scenarios:
– order of magnitude
– relative to other risks e.g. demography, recessions
– relative to each other

7. Next steps
• March 18 2020. BoE consultation closes
• April 2020, NGFS publish global scenarios
• July 2020, OBR progress update in Fiscal sustainability
report
• 2nd half 2020 BoE publish scenarios
• Summer 2021, OBR examine fiscal risks using BoE
scenarios