Responsibly navigating shifts toward renewable energy requires financial institutions to anticipate abrupt systemic changes that could accompany an energy transition. This report describes three scenarios that incorporate socioeconomic tipping points into simulations of transition risks. These scenarios could prove more stressing for financial institutions and could be used to build resiliency to a broader variety of uncertain conditions.

Socioeconomic Tipping Points in the Energy Transition

Expanding Climate Transition Risk Scenarios for Financial Stress Testing

Flannery C. Dolan, Susan A. Resetar, Anujin Nergui, Robert J. Lempert, James Syme

ResearchPublished Sep 25, 2025

In the 2020s, regulations have been passed that instruct financial institutions to assess the risks that might accompany the ongoing energy transition, known as transition risk. To do this, financial institutions often use standard scenarios of transition risk to stress test their resiliency to an energy transition. However, existing scenarios do not represent abrupt, foundational, and lasting changes in the socioeconomic system, known as socioeconomic tipping points, that are made possible through complex interactions between social, political, and technological factors. The possibility of such events, combined with the ever-present need to critically examine modeling assumptions, motivates the use of socioeconomic tipping point scenarios in stress tests of the financial system.

In this report, the authors describe scenario narratives in which reactions to the energy transition—which occur through reactionary policy, shifting consumer preferences, or technological innovation—initiate socioeconomic tipping points. In turn, these tipping points manifest as abrupt and enduring departures from established socioeconomic patterns or equilibria. After discussing the relevant positive feedbacks (i.e., self-reinforcing processes) contributing to the tipping point, the authors supplement each narrative with references to supporting research, indicators of early warning signs to monitor, and suggestions for modeling tools that can quantify the scenario effects. This report introduces a method of developing scenarios of transition risk that could prove more stressing for financial institutions and thus be used to build resilience to a broader variety of uncertain conditions.

Key Findings

  • The uncertain effects of decarbonizing the energy system, known as transition risk, could be substantial, depending on the state of policy, technology, and consumer preferences.
  • Climate stress tests of the financial system that measure transition risk are increasingly being mandated by state and national governments around the world.
  • The Network for Greening the Financial System (NGFS) recently released short-term scenarios to improve climate stress tests beyond the commonly used long-term scenarios. Although the modeling approach improves on that of the long-term scenarios due to its ability to represent nonlinearity, heterogeneous agents, uncertainty, and bounded rationality, these newer scenarios do not represent fundamental socioeconomic changes (i.e., socioeconomic tipping points) that could result from the energy transition.
  • Socioeconomic tipping points, including the breakdown of democratic processes, increasingly future-oriented consumer behavior, or the transition to a circular rather than linear economic mode of production, might have substantial effects on the financial system and thus constitute major sources of either upside (i.e., economic benefits) or downside (i.e., economic damages) transition risk.
  • Existing models that represent tipping dynamics can be used to supplement the NGFS short- and long-term scenarios to quantify transition risk resulting from a socioeconomic tipping point. This could enable analysts to create more stressing scenarios that can test the resilience of the financial system.

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Dolan, Flannery C., Susan A. Resetar, Anujin Nergui, Robert J. Lempert, and James Syme, Socioeconomic Tipping Points in the Energy Transition: Expanding Climate Transition Risk Scenarios for Financial Stress Testing. Santa Monica, CA: RAND Corporation, 2025. https://www.rand.org/pubs/research_reports/RRA3856-1.html.
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This research was funded through income from RAND operations, and conducted within the RAND Center for Climate and Energy Futures, a collaboration between RAND Global and Emerging Risks and RAND Social and Economic Well-Being.

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