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METHODOLOGIES AND CONSIDERATIONS FOR INTEGRATING THE PHYSICAL AND TRANSITION RISKS OF CLIMATE CHANGE INTO MACROECONOMIC FORECASTING FOR THE PRESIDENT’S BUDGET [48 pages]

SUMMARY: The changing climate, and the rapid transformation of energy systems—including electricity generation, as well as energy used in buildings, transportation, and industrial uses—required to mitigate climate change, will have widespread and long-lasting economic effects. These present risks and opportunities for the U.S. economy, financial system, and fiscal position, particularly if these effects are unexpected and not integrated into institutional planning. In May 2021, the Executive Order (EO) on Climate-Related Financial Risk (EO 14030) directed agencies across the Federal government to begin addressing these risks. Climate change—and the energy-system transition required to address it—present a number of risks relevant to the President’s Budget, including effects operating via impacts to future GDP growth and other economic outcomes. Under Section 6(a) of the EO, the Council of Economic Advisers (CEA), Office of Management and Budget (OMB), and an Inter-Agency Technical Working Group (ITWG) have been working to develop methodologies to assess these risks and integrate them into the macroeconomic forecast of the President’s Budget.
 
This White Paper describes how physical climate risks have been assessed for the Long-Term Budget Outlook for Fiscal Year 2024 and considerations for more fully integrating climate risks into future Budget forecasts. This integration will require a triangulation that accounts for 1) requirements and constraints of the current macroeconomic forecasting performed by Treasury, CEA, and OMB; 2) the ways in which climate change and the energy transition could affect macroeconomic outcomes; and 3) the ability of existing climate-energy–economy models to capture these effects. The second part of this paper describes these three considerations in more detail and develops a two-track plan to quantify the macroeconomic risks of climate change in future Budgets.
 
Paper: https://www.whitehouse.gov/cea/written-materials/2023/03/14/methodologies-and-considerations-for-integrating-the-physical-and-transition-risks-of-climate-change-into-macroeconomic-forecasting-for-the-presidents-budget/  
Blog: https://www.whitehouse.gov/omb/briefing-room/2023/03/14/the-importance-of-measuring-the-fiscal-and-economic-costs-of-climate-change/

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