ASSESSING CLIMATE TRANSITION RISKS USING SCENARIO ANALYSIS AND STRESS TESTING

The document evaluates the suitability of NGFS, IEA, and NITI Aayog scenarios for the Indian context, highlighting that global models often underestimate India's specific macroeconomic risks. It details transmission channels from macro-variables to micro-level financial risks and analyzes case studies from the ECB, Bank of England, Bank Negara Malaysia, and the Central Bank of Colombia. The authors propose a phased roadmap for the Reserve Bank of India, moving from preliminary top-down exercises to the development of in-house macroeconomic models and comprehensive bottom-up stress tests over a long-term horizon.

• The NGFS scenarios may underestimate the adverse macro-financial effects of the green transition in India because they assume that inflationary pressures from high carbon prices are offset by reduced spending or government revenue recycling.
• The NGFS modelling framework is limited for the Indian context as it uses a uniform macro model for all economies, lacks granularity on sectoral impacts, and does not incorporate macro-financial feedback loops.
• IEA scenarios provide a more detailed view of energy system transformations and national policy landscapes than NGFS, but they lack a sufficient number of macroeconomic and financial variables for effective stress testing.
• The Indian Energy Security Scenarios (IESS) by NITI Aayog are highly granular and context-specific regarding energy supply and demand, but they do not provide the macroeconomic or financial system data needed for risk assessment.
• Existing global scenarios fail to account for divergences between Indian and global policy pathways, such as a scenario where the world transitions quickly but India does not, which could lead to substantial risks for carbon-intensive exporting industries via carbon border adjustment mechanisms.
• Climate transition risks translate to micro-level financial risks through four primary channels: revenues (declining demand), carbon and energy costs (increased operational expenses), green investment (increased leverage), and stranded assets (asset write-offs).
• Case studies of central bank stress tests show a variety of approaches: the ECB used both top-down and bottom-up methods with static balance sheets, while the Bank of England focused on bottom-up exercises and qualitative behavioural responses.
• The Reserve Bank of India is advised to adopt a phased approach: short-term focus on preliminary top-down exercises and adjusting NGFS narratives; medium-term focus on bottom-up exercises and improving macro-modelling; and long-term focus on quantifying scenarios using in-house models.

APA

Dafermos, D. Y., & Volz, P. U. (2024). ASSESSING CLIMATE TRANSITION RISKS USING SCENARIO ANALYSIS AND STRESS TESTING. Climate Bonds Initiative. https://www.climatebonds.net/files/documents/publications/Assessing-Climate-Transition-Risks-Using-Scenario-Analysis-and-Stress-Testing-Insights-for-the-Reserve-Bank-of-India.pdf

Chicago

Dafermos, Dr Yannis, and Professor Uli Volz. ASSESSING CLIMATE TRANSITION RISKS USING SCENARIO ANALYSIS AND STRESS TESTING. Climate Bonds Initiative, 2024. https://www.climatebonds.net/files/documents/publications/Assessing-Climate-Transition-Risks-Using-Scenario-Analysis-and-Stress-Testing-Insights-for-the-Reserve-Bank-of-India.pdf.

Wikipedia

{{cite report |last1=Dafermos |first1=Dr Yannis |last2=Volz |first2=Professor Uli |title=ASSESSING CLIMATE TRANSITION RISKS USING SCENARIO ANALYSIS AND STRESS TESTING |publisher=Climate Bonds Initiative |date=September 2024 |url=https://www.climatebonds.net/files/documents/publications/Assessing-Climate-Transition-Risks-Using-Scenario-Analysis-and-Stress-Testing-Insights-for-the-Reserve-Bank-of-India.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{dafermos2024assessing, author = {Dafermos, Dr Yannis and Volz, Professor Uli}, title = {{ASSESSING CLIMATE TRANSITION RISKS USING SCENARIO ANALYSIS AND STRESS TESTING}}, institution = {Climate Bonds Initiative}, year = {2024}, month = sep, url = {https://www.climatebonds.net/files/documents/publications/Assessing-Climate-Transition-Risks-Using-Scenario-Analysis-and-Stress-Testing-Insights-for-the-Reserve-Bank-of-India.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }