Blog - Planetrics to add Inevitable Policy Response scenarios to PlanetView

Planetrics to add Inevitable Policy Response scenarios to PlanetView

Author: Charlotte Lovegrove

Planetrics is excited to announce that the new Inevitable Policy Response (IPR) Forecast Policy Scenario (FPS) and Required Policy Scenario (RPS) will be available in PlanetView from the second quarter of 2022. The IPR scenarios will be available to all PlanetView subscribers and will be rolled out through our regular schedule of quarterly updates.

The Forecast Policy Scenario

The FPS is a climate scenario designed to reflect ‘real world’ climate policies. The FPS offers a high conviction forecast of likely policy developments based on a review of key climate policy developments. This enables a detailed, geographically-differentiated bottom-up analysis of how climate policies could impact the economy and energy system. This makes them a useful complement to scenarios such as the NGFS scenario set that is already included in PlanetView, which has been developed for the financial sector using a top-down approach based on economically-optimal climate policies.

The FPS results in an 80% reduction in CO2 emissions by 2050 as two major pressure points converge between 2023 and 2025 to force governments to take meaningful climate action. The FPS policies result in a 50% probability of keeping average global temperature rise to below 2°C. This significant acceleration in climate policy is driven by:

  • Paris ‘ratchet’ mechanism: As part of the 2015 Paris Agreement, countries submit new ‘intended nationally determined contributions’ every 5 years. Governments around the world are required to submit their next (third) round of climate pledges in 2025 following a global stock take of climate pledges in 2023.

  • Increasing societal pressure for climate action: civil society, business and investors are demanding greater climate action as the cost of low-carbon technologies continue to decline and the impacts of climate change are increasingly felt.

The FPS forecasts higher policy ambition across eight key policy levers:

  • Carbon pricing – including carbon taxes, emissions trading systems, and border carbon adjustments

  • Coal phase-out – including prohibiting regulations, emissions performance standards, and electricity market reforms

  • 100% clean power – including 100% clean power targets, renewables capacity auctions and other support policies

  • Zero emission vehicles – including 100% zero emission vehicle (ZEV) sales legislation, manufacturer ZEV obligations, and ZEV consumer subsidies

  • Low-carbon buildings – including prohibitions on fossil fuel heating systems, subsidies for low-carbon heating systems, efficiency regulations for buildings, and energy performance standards for appliances

  • Clean industry – including emissions performance standards for industrial plants, and subsidies for clean industrial processes

  • Low-emission agriculture – including taxes or cap-and-trade systems for methane or nitrous oxide emission and subsidies for low-emissions agriculture

  • Forestry – including strong policy action against deforestation, and incentives for reforestation and afforestation

Key implications of FPS for investors

The implementation of the FPS climate policies results in substantial impacts across the economy. Compared with top-down scenarios designed to decarbonize at least cost that achieve similar temperature outcomes, the FPS climate policies result in differing impacts across sectors and geographies, with implications for investors. These changes are particularly visible in the energy and transport sectors.

Energy impacts

In the FPS, several regions achieve 100% low-carbon power by 2050:

  • 2040 for the United States, with wind and solar providing the majority of power generation.

  • 2045 for the European Union, with hydro and nuclear continuing to play a substantial role in the energy mix.

  • 2050 for China, with carbon capture and storage retrofits used to decarbonize remaining coal generation.

As a result of these changes in the power sector, companies such as wind and solar manufacturers and developers experience substantial demand creation. Wind and solar generation increases to over 30% of electricity generation by 2030, and is the primary source of power generation (accounting for over 60% of the mix) by 2050. In contrast, coal mining companies experience substantial demand destruction as coal demand falls 10% by 2030 and 75% by 2050.

Transport impacts

Internal combustion engine vehicle sales peak in 2025 and fall out of production by 2050 as people switch to zero emission vehicles (ZEVs). By 2030, ZEVs account for 30% of all cars on the road. This results in a rapidly changing product mix for automobile OEMs and an increase in demand for ‘green’ minerals required for ZEVs, including copper, cobalt, and lithium.

The mass transition to ZEVs in the transport sector results in oil demand peaking within the next 5 years. As a result, oil companies experience substantial demand destruction driven by margin impacts and asset stranding after 2026/7.

The Required Policy Scenario and its implications

The FPS is not enough to limit temperature rise to 1.5°C. Accordingly, IPR has developed a second scenario, the Required Policy Scenario (RPS), to highlight the actions required in addition to FPS policies in order to limit temperature rise to 1.5°C.

Additional required policies include a global end to deforestation by 2025; elimination of coal in most advanced economies by 2035 (including China); phasing out new ICE cars in almost all markets by 2040; and a global transition to clean power by 2045. As a result of the stronger policy action, RPS carries additional upside and downside risks for investors relative to the FPS, particularly in the most climate exposed sectors.

Scenarios available in PlanetView

Alongside the IPR scenarios, the six NGFS 2021 REMIND scenarios will continue to be available for PlanetView subscribers. PlanetView enables financial institutions to quantify the impacts of these scenarios on individual counterparties using granular counterparty-level data, for asset classes including equities, corporate debt, sovereign bonds, and real estate. The Planetrics team is constantly evaluating further scenarios for addition into PlanetView, and we also support clients to develop their own bespoke scenarios.

Learn more

Find out more about the IPR scenarios here.

Download the full FPS Energy System results here.

Contact us

To learn more about how investors can use PlanetView to assess the full impact of the forecast and required policy developments on their portfolios, please contact Tommi Oksanen

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