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A new study from the EDHEC Climate Institute proposes a model to assign probabilities to climate scenarios―addressing a long-standing limitation in the tools used by financial institutions, regulators, and policymakers to assess climate-related risks. The findings suggest a high chance (35–40%) that global temperatures will exceed 3°C by the end of this century.
The paper, “How to Assign Probabilities to Climate Scenarios”, authored by Riccardo Rebonato, Lionel Melin, and Fangyuan Zhang, introduces a framework for quantifying the likelihood of different climate outcomes. This approach complements existing scenario narratives by adding a probabilistic dimension, which is essential for effective asset pricing, stress testing, and strategic planning.
The analysis draws on a comprehensive dataset comprising 5,905 estimates of the Social Cost of Carbon (SCC), gathered from 207 academic studies. Using two complementary approaches―one grounded in expert estimates of carbon pricing, the other based on a minimum-assumption (maximum-entropy) method―the authors estimate the likelihood of climate outcomes under realistic policy and economic constraints.
Key findings:
- The chance of remaining below the 1.5°C target is very low:
The likelihood of limiting end-of-century temperature increases to 1.5°C is very small. Whilst technologically still achievable, reaching this goal would require a dramatic and sudden alignment of abatement policies with expert views. - The median global temperature rise is found to be around 2.7°C by 2100:
This average temperature anomaly is well above the end-of-century target of 2.0°C, and achieving this target is highly unlikely. - There is a high chance (35–40%) that temperatures will exceed 3°C by 2100:
This is a worrying result, as such high temperatures would push the planet into uncharted territory. This could increase the likelihood of tipping points.
The study also finds that the physical damage caused by higher temperatures may outweigh the economic costs of transition―a key insight for risk planning.
The study also applies its probabilistic model to the Oxford Economics climate scenarios. By aligning its model with the structure of the Oxford framework, the EDHEC team estimates the likelihood of each scenario. More than 90% of the probability is assigned to three scenarios with limited or delayed emissions abatement: Climate Catastrophe, Climate Distress, and Baseline.
“Investors cannot price assets without expectations of future cash flows,” explains Professor Riccardo Rebonato, Senior Advisor of EDHEC Climate Institute. “But expectations require probabilities. Without them, any valuation exercise is, quite literally, stillborn. Our goal is to provide a practical framework to make scenario analysis usable for financial decision-making.”
The proposed methodology offers a tool for decision-makers seeking to incorporate the likelihood of outcomes into climate-related risk analysis, investment strategy, and regulatory planning.
A copy of the full paper can be downloaded via the following link:
How to Assign Probabilities to Climate Scenarios.
