A new measure of climate transition risk based on distance to a global emission factor frontier

Targeted financing of a transition to a “net zero” global economy entails climate transition risk. We propose a measure of transition risk at the country-sector dyad level based on an emissions factor (EF), which is a measure of the greenhouse gas emissions intensity of output. Our measure of transition risk is composed of five tiers of risk driven by two elements: (1) the gap between a dyad's existing EF and the ‘global frontier’ sector EF, and (2) a dyad's convergence towards the frontier EF. Dyads that are either close to the frontier or converging towards the frontier carry lower transition risk. Our measure, using 45 sectors across 66 countries, accounts for both direct greenhouse gas emissions as well as those that enter into production through complex supply chains as captured by inter-country, input-output tables, and can be applied at different levels of stringency to high-, middle-, and low-income economies. Our measure thus accounts for, and sheds light on, EF reductions through investment in lower emissions production techniques in own facilities, and sourcing intermediate inputs with lower embodied emissions.