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Assessing Methods to Integrate the Physical Risks and Transition Risks and Opportunities of Climate Change into the President’s Macroeconomic Forecast

The Federal Government has broad exposure to the physical risks of climate change and the transition risks associated with the global shift away from carbon-intensive energy sources. At the same time, the shift to clean energy provides a generational opportunity to create new sources of economic growth. These transitional opportunities and challenges affect future output growth and other economic outcomes and are therefore relevant to the President’s Budget. Building on nearly three years of work completed under Section 6(a) of Executive Order 14030 on Climate-Related Financial Risk, this paper presents a step-by-step methodology for quantifying these risks and opportunities into a macroeconomic forecasting framework with the goal of more accurately projecting near-term macroeconomic outcomes relevant to the President’s Budget. For each step, we assess available tools, methodological tradeoffs, and directions for further research based on the current literature.

This paper builds on prior work responding to the EO by presenting a step-by-step approach to quantifying climate risks in a macroeconomic forecasting framework to inform the President’s Budget. Each step in our approach features important decision points for those engaging in this work. We separate climate risk into two components: (1) the physical risks associated with the effects of climate change on economic outcomes and (2) the transition risks and opportunities associated with the effects of the clean energy transition. Quantifying the economic effects of  physical risks requires estimating changes to environment and weather systems due to GHG emissions. Quantifying the economic effects of transition risks and opportunities requires accounting for both mitigation and adaptation actions as well as individuals’ and firms’ behavioral changes in the face of what potentially could be an historically swift structural transformation.

This paper’s contribution is twofold: (1) to identify key decision points in the process of accounting for climate change in macroeconomic forecasting; and (2) to assess available tools, methodological tradeoffs, and directions for further research based on the current literature. . . .

https://www.whitehouse.gov/cea/written-materials/2024/04/16/assessing-methods-to-integrate-the-physical-risks-and-transition-risks-and-opportunities-of-climate-change-into-the-presidents-macroeconomic-forecast/

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