By Peter Öhlinger, RBI |
From politicians to central banks to private individuals – climate change is on everyone’s lips. However, Central & Eastern Europe (CEE) usually do not receive too much attention. We try to fill this gap by taking a closer look at our core region from a risk perspective. Our findings show that the transition towards a green economy will be the major challenge for CEE countries while physical risks are mainly a concern for corporates operating in high-risk areas.
Potential risks of climate change
Before we look at CEE specific risks, we will lay the groundwork by describing the two main risk channels. When it comes to climate change it is commonly distinguished between physical and transition risks. Physical risks are changes in both weather and climate that directly affect the economy such as rising sea level, more severe and regular natural disasters, or food security issues due to decreasing crop yields. On the other hand, transition risks emerge from shifts in policy or regulatory changes e.g. CO2 taxes to achieve emission targets. These risks are expected to increase as time progresses. This is because the longer governments wait the less time they have to achieve their climate targets, which is why stricter regulations need to be implemented more quickly.
The situation in Central & Eastern Europe
In Central and Eastern Europe, the exposure to physical risks is rather limited. Admittedly, the increase in floods and storms in Central Europe or wildfires and droughts in the southern regions are a cause for concern. However, as bad as the human tragedy may be, the economic impact usually remains limited to individual areas of a country. The situation is different when looking at transition risks. We compare both risks by looking at two other factors, namely the vulnerability and preparedness of a country. The left panel of figure 1 illustrates the vulnerability of countries, the right map shows the readiness of countries for the transition towards a green economy.
Figure 1 confirms our first statement and shows that the vulnerability, which covers several kinds of physical climate factors, is of less concern for CEE economies. On the other hand, the right-hand panel shows that readiness, which can be partially translated to transition risks, is more elevated. Additionally, the readiness indices shown above do not cover factors such as coal or oil dependency of a country which are clearly threatening a smooth transition towards a green economy. In our opinion, this is one of the biggest challenges of the future, at least for some CEE countries.
To get a deeper insight into our country universe, we examined several indicators in three dimensions and ranked the countries according to their performance, with 1 being the best and 15 the worst. Figure 2 shows that energy-related transition risks are most pronounced in Russia, the Czech Republic and Poland. In contrast, Albania, Romania, Croatia, and Hungary are leading the way and perform particularly well across all three energy related indicators. In terms of physical risks, countries exposed to forest fires are less affected by floods and vice versa, while food security issues are more of a concern for Belarus and Bosnia and Herzegovina. Among our three preparedness indicators, Ukraine and the Czech Republic score quite well.
The main takeaway from this is that – apart from Bosnia and Herzegovina – a weak ranking in one category is mostly compensated for by a better performance in another. This means that countries can focus on specific areas of the economy, which should make us optimistic that the challenges ahead can be solved if they are addressed appropriately.
Approaching the topic climate change from a risk perspective, we showed that it all comes down to physical and transition risks. The former are the impacts of environmental changes due to climate change on our economy, while the latter refer to the risks of moving towards a green economy. Especially transition risks pose a threat for Central and Eastern Europe over the coming years. However, a successful transition might also reveal new opportunities for these countries. It all depends on when countries start to take action, do they wait and face more severe economic downturns in the future, or do they accept potentially lower growth rates in the short term to benefit later on?
A more extensive report is planned to be published in the week of 20 September. If you are interested have a look at our research platform.