April 30, 2024

Evaluating national climate commitments using implied temperature rise

Tracking national greenhouse gas (GHG) reduction commitments is key to enabling alignment with the objectives of the Paris Agreement. The Implied Temperature Rise (ITR) metric, which uses countries’ past and projected future GHG emissions to estimate their contribution to global temperature rise, is an important progress indicator.

We apply the ITR metric to assess and quantify 132 countries’ commitments with respect to global climate goals, and to estimate corresponding transition risks for sovereigns. This paper explores the most recent updates to the robust methodology driving our analysis.

What does our research mean for investors? 

The implications of our research extend beyond academic circles to impact investors and financial stakeholders. By providing a robust methodology for assessing implied temperature rise and climate alignment across countries, our research offers critical insights for investors seeking to incorporate climate risk into their decision-making processes.

Understanding the gap between countries' projected emissions and their commitments can inform climate-focused investment strategies. Investors can harness our ITR data to identify regions that are either leading or lagging on climate action, thus assessing risks and opportunities associated with climate change mitigation and adaptation efforts.

Points of differentiation:

  • Our Implied Temperature Rise methodology relies on calculating a greenhouse gas (GHG) “budget” for each country using a purpose-built LSEG model. This “fair-share” approach allows us to determine the gap between a country's projected emissions and the emission levels required for alignment with the Paris Agreement over varying time horizons
  • The results are then integrated into our final ITR equation, which provides a granular breakdown distinguishing between temperature rise caused by CO2 and non-CO2 emissions
  • As of April 2024, 194 countries and the European Union have ratified the Paris Agreement, committing to limit global temperature rise to ‘well below 2°C’ above pre-industrial levels. Each country is required by agreement to present a greenhouse gas (GHG) emissions reduction strategy and broader climate transition plans, in so-called Nationally Determined Contributions (NDCs). These commitments, submitted to the United Nations Framework Convention on Climate Change (UNFCCC) must be revised every five years, and should include increased ambition compared to the previous commitments.

  • The ITR metric equates a country’s emissions, past and future, with global temperature rise. As shown in our table, it is calculated in five steps:

    1. Project emissions based on policy commitments.
      We project future GHG emissions following three different scenarios that reflect different levels of national commitments and policies. This approach enables us to provide a range of plausible emissions trajectories, from more optimistic net-zero targets to the more pessimistic business-as-usual scenarios.
    2. Estimate a country’s annual ‘carbon budget’ in line with a given temperature rise scenario.
      The global GHG budget is the amount of cumulative GHG emissions that would limit global warming to a given level. Here we use a 2°C carbon budget, resulting in a 2°C global warming by 2100. We estimate each country’s share of this global budget and compare the projected GHG emissions with each national carbon budget.
    3. Calculate the difference between a country’s carbon budget and its projected emissions.
      This difference is referred to as the emissions ‘gap’. We calculate the gap for each of the three projected emissions scenarios.
    4. Assuming that all countries would, in relative terms, overshoot or undershoot their carbon budget to the same extent, calculate the associated end-of-the-century global temperature rise.
      The resulting implied temperature rise, expressed in degrees Celsius (°C), corresponds to the global temperature increase that would result if every country in the world had the same cumulative contribution to GHG emissions as the country being assessed. It is worth noting that the ITR does not correspond to the physical temperature rise within the geographical boundaries of the country, but the country’s impact on global-level increases in temperature by the end of the century.
    5. Aggregate ITR results based on portfolios or benchmarks.
      To estimate the collective ITR for a group of countries, we use an average of individual ITRs weighted by the countries’ respective current emissions.