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 many 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 in the 1960s (see Box 1). For more than a hundred years, each step 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. The information economy is driving energy requirements for data centres and communications systems, while the greater interdependence of global markets within the global economy increases demand for coordination and transport. At the same time, the climate imperative adds parallel transitions – such as those in chemicals and steel – that interact with the energy system and use fossil fuel derived hydrocarbons as inputs to their production processes. Climate also drives changes in other sectors such as agriculture, forestry, and land use that produce their own emissions and can contribute to low carbon solutions that help mitigate climate change. Together, these developments add risks and uncertainty that may result from the evolving interactions between these sectors and the processes and mechanisms in place to manage climate change.
3. Growth and replacement. Previous energy transitions have resulted primarily from the emergence of new energy resources to meet growing sources of energy demand. Often resources created their own demand. If the energy resources did not arrive in time, prices would rise and growth would slow, moderating the need for additional supply. As such, markets have balanced supply and demand, except during times of geopolitical shocks to the energy system. In a climate transition, some existing energy demand is currently met by resources that are being phased out. If that energy cannot be replaced in time, parts of the economy may lack energy resources. Thus, in addition to meeting new sources of energy demand and managing geopolitical shocks, markets must manage replacement of energy resources that are being phased out.