INSIDER: By Stress-Testing with Different Scenarios, Countries’ Long-Term Climate Strategies Can Plan for an Uncertain Future
The Paris Agreement invites countries to communicate long-term, low-emissions development strategies by 2020, which plan out to the middle of the century. Responding to the invitation, 13 countries have communicated their long-term strategies to date. Given the 30-year horizon of these strategies, governments must deal with uncertain factors — such as future technologies or poorly understood natural ecosystems — that may affect whether or not countries achieve their goals. A new WRI working paper takes stock of 11 long-term strategies submitted by the time of the analysis, investigating what uncertainties countries perceive and how they deal with them in their strategies. The research also examines how countries use scenarios to depict uncertain future. By stress-testing a climate strategy against a number of scenarios with different assumptions about key uncertainties, policymakers can identify material uncertainties, as well as robust policy measures that perform well in multiple scenarios.
Uncertainties Identified by Long-Term Strategies
Future greenhouse gas emission reductions depend on what technologies and innovations become available, how quickly they are deployed and scaled, and if they are widely accepted by society. For example, the United Kingdom's long-term strategy sees the future roles of electrification and hydrogen fuel in the building and transport sectors as sources of uncertainty. Similarly, the United States identifies the growth of clean vehicles (e.g., electric vehicles and fuel cell vehicles) as one important uncertainty. Fiji notes uncertainty in the pace of energy storage capacity and cost.
Another source of uncertainty is how much countries will use carbon removal to balance out greenhouse gas emissions. Canada, the United Kingdom and the United States consider the future availability of technology-based carbon removal, such as carbon capture (with either usage and/or storage) as a key uncertainty. For Fiji and the United States, another uncertainty is the carbon removal potential of natural ecosystems, such as forests and wetlands, because this potential affects how much other sectors of the economy must reduce emissions to achieve the targets on balance.
Multiple Scenarios for the Future
Most countries present different scenarios (or pathways) with various underlying assumptions associated with future greenhouse gas emissions in their long-term strategies. Given the impossibility of identifying the single most likely future scenario, analyzing multiple possible pathways reflects countries' perceptions of uncertainties.
The Czech Republic, Fiji and Ukraine present both scenarios that would achieve their national emissions reduction goals, and others that would not achieve them. This approach illustrates that governments may need to apply a range of policies and measures in combination to achieve their emissions reduction goals.
The Marshall Islands presents two scenarios with the same policy package, but in one of the scenarios the country implements those policies 15 years later. This illustrates the differences in emissions trajectories and emission levels in 2050, showing the potential implications of delaying action.
The United Kingdom and the United States construct a set of scenarios that are all projected to achieve the countries' emissions reduction goals in 2050, but with different assumptions about key uncertainties. This approach illustrates the potential impacts of those uncertain factors. It also identifies common policy options applicable across scenarios that are less likely to be affected by those uncertainties. These broadly applicable policies are often called robust or low-regret options.
Stress-testing Identifies Robust Policy Options
Governments can systematically expand this multiple-scenario approach by then "stress-testing" their climate strategies against the different scenarios. This approach is similar to the stress test that banks widely introduced after the 2008 financial crisis to examine their vulnerabilities to external shocks such as a stock market crisis or a severe economic downturn.
The idea is the same. Repeating the stress tests for different strategies will help countries identify the most impactful uncertainties to address, and robust options to include in their long-term strategies that would perform well across many different scenarios. For example, in our working paper we stress-tested three policy packages for a hypothetical country's long-term strategy against 1,000 scenarios with different assumptions of future cost reductions in low-carbon technologies. In this demonstration, the stress test suggested that the cost reduction of electric vehicles was the most critical uncertainty across scenarios, and it indicated that policies to boost electric vehicle sales would reduce uncertainty in the hypothetical country's emissions outcome in 2050. For a real country the most important uncertainties and the most robust policy options may differ, but the stress test process would be similarly useful to identify robust policy options.
Uncertainty is an unavoidable challenge that countries need to face in developing long-term climate strategies. Effective use of future scenarios and stress tests will give policymakers a better understanding of these uncertainties, and more effective ways to cope with them.
Read this WRI commentary to learn how long-term strategies relate to countries' nationally determined contributions to the Paris Agreement.