Governing Under Radical Uncertainty: Why Fiscal Authorities Need Climate and Nature Scenarios
How should Ministries of Finance govern in an economy undergoing structural transformation, technological disruption, escalating climate impacts and geopolitical fragmentation?
This is not a peripheral modelling issue. It goes to the core of macroeconomic governance in the twenty-first century. Climate change and biodiversity loss introduce non-linear dynamics, path dependency, tipping points and cascading effects into economic systems. Under such conditions, conventional forecasting frameworks—often built around equilibrium assumptions and normally distributed shocks—offer an increasingly fragile basis for fiscal strategy.
Prof. Jean‑François Mercure and PhD researchers Francisco Amsler and Adrian Baricuatro from Exeter Climate Policy recently took part in the workshop:“Ministries of Finance, Public Development Banks, Financial Authorities and the Legacy of COP30: Towards Just Transition, Climate and Nature Policy Scenarios”.
The event was held in Paris last December and jointly organised by the Agence Française de Dévelopement (AFD) and the Organisation for Economic Co-operation and Development (OECD), in collaboration with the Coalition of Finance Ministers for Climate Action (CFMCA), Finance in Common (FiCS), and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
Exeter Climate Policy contributed to the event’s summary note, reflecting on the growing recognition among fiscal authorities of the need to integrate climate and nature considerations into policy frameworks, as well as outlining guiding principles for the analytical tools required to support this work.
The significance of this discussion lies in a structural shift. Climate and nature risks are no longer environmental externalities; they are macro-critical determinants of fiscal sustainability, public debt trajectories, industrial competitiveness and financial stability. Following COP30, Ministries of Finance are increasingly expected to integrate physical climate risks, transition dynamics and biodiversity loss into budgetary and macro-fiscal frameworks.
While central banks – particularly through the work of the NGFS – have advanced climate stress testing within financial supervision, fiscal authorities face a distinct analytical challenge. They must assess how alternative transition pathways affect tax bases, expenditure pressures, investment requirements, inflation dynamics and distributional outcomes across households and regions. They must do so within short political cycles, constrained fiscal space, and an increasingly fragmented global economy.
Whether or not countries transition towards net-zero emissions, the next two decades are likely to see intensified volatility in a range of domains and variables. We currently see political polarisation and geopolitical tensions globally, much of which related to energy flows or energy technology-related industrial competitiveness. We also see increasing financial and fiscal volatility in relation with climate physical risks, while transition risks are emerging through the rapid diffusion of many low-carbon technologies likely to disrupt conventional energy markets and high-carbon industries. This ‘mid-transition’ period is likely to see great changes at the global scale fraught with emergent domestic and cross-border risks.
Risks also often cascade between one another. Climate physical disasters usually arise via the confluence of several factors leading to extremes, or via large-scale tipping points, and these extremes are not sufficiently rare to be safely ignored. They arise similarly to earthquakes, most of the time they are minor, but we must prepare for the extremes. Transition risks also work like that, since technological change can be abrupt and occur via tipping points, and geopolitical rifts cascade along tit for tat responses between countries. The outcomes can similarly become extreme with a non-negligible likelihood.
In this context, scenario analysis becomes analytically indispensable. Under radical uncertainty, scenarios do not aim to predict a single future. They explore plausible alternative trajectories, stress-test policy strategies under divergent assumptions, and make trade-offs explicit before shocks materialise. They illuminate how early policy decisions create path dependencies that shape future fiscal space and economic resilience.
The workshop discussions highlighted several technical principles consistent with current research on macroeconomic complexity and transition dynamics. Scenarios must be internally coherent across behavioural assumptions and macroeconomic outcomes. They must integrate multiple time horizons, linking near-term fiscal constraints to long-term structural transformation. They must capture cross-border spillovers in an era marked by trade realignment and strategic competition over critical minerals. And they must progressively incorporate adaptation and nature-related risks, which remain insufficiently represented in conventional macro-fiscal models despite their growing macroeconomic relevance.
Equally important, scenarios were framed not only as modelling exercises but as coordination mechanisms. Co-developed across Ministries of Finance, central banks and public development banks, they can create a shared analytical language. In complex transitions, such shared frameworks help reduce fragmentation and improve policy coherence while preserving institutional mandates and independence.
For researchers working on structural transformation and low-carbon transition modelling, these developments reflect a convergence between theory and practice. At Exeter, our work has emphasised that economic transitions unfold through technological diffusion, investment feedbacks and institutional adaptation—often far from equilibrium. The increasing demand from fiscal authorities for tools capable of capturing these dynamics signals a broader evolution in how macroeconomic governance is conceived.
The analytical challenges identified in the workshop align with areas of active dialogue between AFD and researchers at the University of Exeter on macroeconomic modelling of climate and nature transitions. Bridging methodological innovation and institutional application requires sustained engagement between research institutions and public authorities, particularly as fiscal institutions confront systemic risks that extend beyond traditional economic cycles.
As the decade of implementation advances, the credibility of climate and nature commitments will depend less on new announcements and more on the analytical capacity embedded within core economic institutions. For Ministries of Finance, climate and nature scenarios are emerging not as auxiliary environmental tools, but as foundational instruments of fiscal governance in an era defined by structural transformation and deep uncertainty.
Looking ahead to the next phase of international climate negotiations, the question is no longer whether climate and nature considerations should inform fiscal strategy. It is whether fiscal institutions will be equipped with the modelling frameworks and governance structures required to act decisively under uncertainty. COP31 may well test that readiness.
