No. 2026-10-B - Policy Discussion Paper: Management and Analysis of Disorderly Climate Transitions - Defining, measuring, and managing financial and economic risk from climate related economic transitions

Abstract:

The global energy supply industry has experienced transitions since energy resources became an important driver of economic growth during the industrial revolution. Several of these transitions have occurred in the last 60 years since oil replaced coal as the largest source of energy for the global economy. For more than a hundred years, each transition has led to investment, growth, and significant development of the economy, including the move from traditional biomass to coal, from coal to oil, from oil to increased electrification and a more diversified supply of energy resources, and now from fossil fuels to low carbon energy resources. 

The current climate and energy transition holds the promise of more potential economic development and growth. Yet this version differs from previous transitions in at least three important ways:

1. Climate Change. Whereas earlier transitions were primarily driven by economic growth and then energy security, the scientific consensus regarding climate change, and the widespread understanding of the contribution of greenhouse gas emissions from the burning of fossil fuels, has added a third driver that is altering the trajectory of the next transition while accelerating its pace.
2. Breadth of the transition. While energy has been central to the economy for over a century, energy’s role in the economy continues to expand, including to power the growth of the information economy and globalization. Climate concerns also drive simultaneous transitions in sectors such steel, cement, chemicals, agriculture, forestry, and land use that produce their own emissions, and are intertwined with energy demand and supply.
3. Growth and replacement. Whereas previous energy transitions resulted primarily from the emergence of new energy resources to meet growing sources of energy demand, in the current transition, there is also existing energy demand that is currently being met by resources that are being phased out. If that energy cannot be replaced in time, parts of the economy may lack energy resources. 

The phasing out of existing resources, including repurposing or retiring the infrastructure and market systems developed to support those resources, adds an element of potential mismatch in timing that has the potential to amplify uncertainty and risk. This mismatch – often characterized as a disorderly transition - could lead to price spikes, shortages, rationing or alternatively excess capacity, price crashes and defaults. Shortages or defaults might then feed through the supply chain, causing inflation or recession across the economy. The economic impact of this disorder could be several times greater than any negative economic impact of the transition itself. 

Understanding the implications disorderly transitions is critical to minimizing the macroeconomic impact of disorder. In this paper, we will look at the issues facing the scenario-based tools currently available to study transitions and measure the impact of disorder and uncertainty. We will then identify the sources of potential disorder as a first step in defining disorder in a fashion that can be analysed and managed more usefully and appropriately. We then propose a framework for building assessment and management tools for transition management.