A look at the climate change and the financial risks as the world transitions to cleaner energy

Yahoo Finance's Brian Cheung spoke with Sergey Paltsev of MIT's Joint Program on Science and Policy of Global Change about the financial risks associated with transitioning to cleaner energy.

Video transcript

BRIAN CHEUNG: Now the shift to net zero is going to be a pretty dramatic shift, is it not? Is there a risk of disruption at a macro scale, not just to financial markets, but to the global economy with a big turn like that?

SERGEY PALTSEV: Exactly, and that's why I'm really happy that you are bringing this point. So we at MIT at the joint program are currently exploring these financial risks. And so while there are two sides of these risks, there are physical risks, so what is going to happen when we see more and more extreme events, when we will see extreme temperature, fires, droughts, flooding. So these need to be taken into consideration and how they might affect the financial stability.

But on the other side, as you have correctly mentioned, there are transition risks. And so those are even more important because we currently don't have a clear understanding what exactly the pathway which the world is going to choose to get to those targets.

So just to give you one example, the International Energy Agency has done an assessment where we are currently with all pledges and where we need to be in 2030 in order to reach 1.5 degree. And there is the gap. There is so-called ambition gap of about 12 gigatons. So we are short of 12 gigatons of needed reduction currently. And that's comparing with the pledges.

And if you're going to take a look at the pledges and the actual policies, which are on the Balkan countries, well, that's another gap of about 2.6 gigatons. So we are nowhere near where we need to be on the trajectory for 1.5. And that is going to bring a lot of attention from the financial community to try to understand, well, what is for real? Where we are going to get-- if we are not going to reach 1.5, what is the probability, what are the actions from that?

Or if we are going to reach that, at what date? And so, the way how we see that, there is another danger that if we are going to overshoot that 1.5 target, we need to make sure that we can wait, that this is not that we are going to lose all the battles. Every emission counts. Every emission reduction counts. And so we need to make sure that whatever companies are doing, still trying to push as aggressively as possible, even though currently we are far from reaching those targets.