Five key insights from Capital Economics' Climate Reporting Tools

Our interactive and customisable Climate Reporting Tools are designed to make your climate reporting faster and easier, and to help you build, test, and present your short and long-term climate strategies. This includes our new proprietary Green Transition Scores.Full access to our new data products is available exclusively to CE Advance clients. Contact our sales team to find out how we can help you.

Here we outline just some of the capabilities and features of this powerful new toolkit, as well as five key insights highlighted by these products.

The first key insight is that climate-related facts don’t always match up with perceived wisdom or political rhetoric. For example, despite the vastly different climate stances of the Democrats and Republicans, the US section of our Regional Climate Databank highlights how traditionally red Texas made the biggest contribution to the national increase in renewable capacity between 2012 and 2022, having added more than twice the amount as staunchly Democrat California. (Chart 1.) Renewables' share of total electricity generating capacity in Texas trebled from 11 to 33% over the decade. (Chart 2.)

Second, the familiar mantra that “past performance is not a guide to future results” rings true for climate. This is certainly the case for the tourism industry, with some of the countries that are most reliant on tourism also some of the most exposed to potential climate-related shifts in tourist flows. (See here.)

It is also particularly true when it comes to China, where its well-documented record of surging emissions and reliance on coal stands in stark contrast to its increasing influence over the supply of green technology. That helps explain why China is the biggest climber up the ranks of our new CE Green Transition Scores. (Chart 3.) Amid signs that the peak in Chinese emissions may come as soon as next year, we expect a combination of fast progress on renewables and deindustrialisation to see China overtaken by India as the world’s biggest polluter during the 2040s. (Chart 4.)

​Third, although the macroeconomic headwinds to the green transition have strengthened as interest rates have risen, this will ease in 2024 as loosening cycles gather pace, supporting our view that we are approaching peak pessimism for renewable energy equities. Admittedly, the shift away from the era of ultra-loose policy means that growth in renewables will probably be slower than if financing conditions had remained more favourable. But we think the brutal period of underperformance for clean energy equities relative to their conventional energy counterparts will flip next year. (Chart 5.)  

The fourth takeaway is that we as economists need to be cognisant and open about the sheer amount uncertainty about how things will play out over the longer term. This is particularly the case for the future path of emissions. Our Climate Economics Outlook details our emissions forecasting framework and our base case for greenhouse gas emissions to fall by about 40% by 2050 as global GDP more than doubles. (Our forecasts are integrated into our Global Climate Databank.)

But even small changes in the assumptions for the components of the Kaya framework can translate into appreciable differences in the trajectory of global emissions – particularly for the world’s biggest emitters. For example, as demonstrated in Chart 6, a 1%-pt increase in Chinese GDP growth between now and 2050 would, all else equal, translate into a 40% increase in Chinese emissions in 2050. Explore our Emissions Scenario Generator to see what different scenarios could mean for your asset holdings. (The Generator is available for all Capital Economics clients to explore until 6th December. For ongoing access beyond this date, speak to our sales team about CE Advance, our premium platform.)  

One topical area of uncertainty about the future path of emissions relates to the net impact of the AI revolution. As we argued here, our view that AI will lead to faster productivity growth in the late 2020s and early 2030s implies that greenhouse gas emissions will be higher during this period than we previously expected. But the net impact of AI on emissions and the green transition depends on the extent to which it enables breakthroughs that reduce the energy and emissions intensity of GDP. We will be addressing this when we update our Climate Outlook in Q1 2023.

More generally, uncertainty pervades the potential impact of the green transition on macroeconomic variables too. For example, it is easy to see how the green transition could put upward pressure on relative prices for a range of products and materials, and we have argued that the fiscal costs of achieving “net zero” would be higher than many expect. (See here.) Meanwhile, it’s clear that achieving net zero would require a significant ramp up in investment this decade, which would need to be sustained beyond 2030 – particularly in clean energy. (Chart 7.)

However, the lasting impact of climate-related relative price shocks on inflation would depend on how monetary policymakers react. Similarly, the knock-on impact of additional climate-related fiscal spending on the public finances and debt positions would depend on a variety of other factors including the extent to which policymakers accommodate them through higher taxation and/or lower spending elsewhere.

The final insight to highlight from our Climate Reporting Tools and associated research is that the economic risks from climate change are neither symmetric nor linear. There is a tendency to downplay the risks over the coming decades, largely because economic activity in developed markets that account for the bulk of global activity is the least vulnerable to climate change. However, the out-sized importance of agriculture and tourism – two sectors that are highly exposed to higher temperatures and changing weather patterns climate – in south and south-east Asia means that they are most vulnerable. (See here and Chart 8.)

​Meanwhile, as cyclical warming caused by El Niño leads to the tumbling of global temperature records, the combination of regular natural heating cycles and structural human-driven global warming will throw up all sorts of effects and will pose large and possibly existential risks to certain sectors, commodities, and economies. Our set of CE Climate Reporting Tools and joined-up approach to our research will keep you abreast of what the changing climate landscape means for macroeconomies, commodities, property, and financial markets.