CLIMATE RISK MANAGEMENT

CLIMATE CHANGE RISK MANAGEMENT

Climate risk management is becoming the preferred framework for discussion of mitigation of climate-change impacts. Risk management focuses on impacts of potential occurrences of hazardous events. Potential risk management mitigation costs must be weighed against the risk of exposures to impacts of events, for a given strategy of action or non-action on climate. Risk management deals with uncertainty, with event probabilities, with exposure to impacts, quantified as loss or damage, and with actions to mitigate risk and/or adapt to it.

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Introduction

There are three basic aspects of risk management:

  • If possible, estimate the probability P of a hazardous event, or of a class of such events

  • Estimate the event impact I of loss/damage of exposure E, assuming the event occurs

  • Estimate the cost C to reduce the risk of a hazardous event to an acceptable level.

The risk R of a hazardous event depends on the probability P that the event occurs, and the impact I of exposure E, giving the loss/damage if the event occurs. If it is not possible to estimate the event probability P, the event is called a "scenario", and the risk R is simply taken as the impact I of exposure E to the scenario. The impact I of exposure E depends on the vulnerability V of the particular system/people under consideration to the event. The cost C depends on the mitigation action taken to counter the risk, and/or the cost of adaption to the risk.

In assessing risk, it is usual to look at a class of hazardous "tail" events, because that is where the really bad risk R lies with high impact of exposure.  "Non-tail events" are more common, have less impact of exposure and are easier to manage, although with high vulnerability V a non-tail event can still have a high impact of exposure. What we do about these various risks depends on the risk management goals and the costs.

All quantities (P, E, C) are complicated, depend on multiple variables, depend on expert judgment, and have uncertainties. These uncertainties themselves may or may not be estimated. However, uncertainty is no excuse to ignore the problem and to avoid responsibility for action. All human activity has uncertainty. Risk management in a concrete sense is action to deal with uncertainty.

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Some Examples of Risk Management

For example consider car insurance, a common type of risk management. Two basic types of insurance are: 1. accident insurance (tail risk) and 2. comprehensive insurance (non-tail risk). Accident insurance is mandatory because a bad accident is where the really bad risk exists. Even though the probability P of a bad accident for a given driver is small, the impact I of loss/damage due to exposure E (driving) for a bad accident is very high, leading to high risk R. Comprehensive insurance is not mandatory, and the associated non-tail risks have smaller exposure. The policy purchased is the mitigation action, at cost C.

Another example is financial risk management. A tail-risk event here is a turbulent market condition, or in an extreme case a market crash. Usually a turbulent market is defined from a distribution of future modeled events at a specified tail probability P. Sometimes models using historical input provide an estimate of the  probability P of market turbulence or crash. Specific historical market crashes (e.g. 1987) are used as scenarios without any estimate of the probability P for the scenario; the philosophy is that some future crash scenarios may resemble 1987 and we do know what happened in 1987.  Mitigation actions involve capital requirements or hedging, at some cost C. In addition, financial risk management considers non-tail risk events that are not major risks; these quantify day-to-day risks.

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Climate-Change Risk Management

The graph at the top (from a post by Prof. Kerry Emanuel) is an estimate of the probability P distribution of global mean temperature increase resulting from a doubling of CO2, relative to its pre-industrial value, made from 100,000 simulations using an integrated assessment model. This involves running the integrated assessment model many times with many combinations of parameters varied across plausible ranges.

Note first that the model-produced temperature increase has uncertainty, quantified by the graph. The tail of high risk is in the high temperature increase region to the right. The main non-tail risk is in the central region.  The lower-risk region is at the left of the distribution. This is an excellent example of responsible reporting of the probability of events with different risks. We cannot tell what the risks actually are until we estimate the exposure E for a given temperature increase and other attributes of climate change. Global temperature change is the best overall indicator of risk, with the risks of various impacts of climate change generally increasing with global temperature change.

Impacts I of climate change to exposures E are assessed separately, most recently reported in the 2014 IPCC Vol II report. With few exceptions, climate change impacts are negative, are being observed now, and will become far worse in the absence of substantial risk-management climate mitigation. There are actually many exposures with expected increasingly negative climate impacts on food, water, national security, health, economic and financial systems, extreme weather, poverty, drought, fires, species extermination and other effects. Exposures depend on the vulnerabilities of people, which are not uniform; higher vulnerability implies higher exposure and higher impacts.

The cost C of climate risk management includes the cost of climate-change mitigation. A portfolio of mitigation options includes action by individuals, corporations, NGOs, and governments at all levels (local, state, national, and international).  There is also a cost C for adaptation, including reducing vulnerability V. The cost depends on the history of previous mitigation efforts. Thus, the cost that will need to be paid by our descendents is far higher than that we would need to pay now to alleviate the climate change problem. Finally part of a future adaptive cost C cannot be measured in dollars, it will be in human suffering.

The effectiveness of a given mitigation strategy depends on the scientifically well-established attribution to human influence on the changing climate, the global warming trend that has occurred (with fluctuations) since around 1975, and the continuation of these effects into the future.

Here is a graph illustrating all this, from the 2014 IPCC Vol 2 report:

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CLIMATE CHANGE RISK MANAGEMENT VIDEOS

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Climate Risk Denial and Opposition

Climate risk deniers / contrarians / faux-skeptics oppose climate risk management. The typical risk-denier focuses on scenarios where the projected increase in global temperature is small. Risk deniers also minimize impacts of climate change, ignoring evidence and expert reviews. This amounts to grasping at straws and asserting nothing bad happens.

Climate risk deniers also tend to be climate science deniers. Deniers hypocritically over-emphasize uncertainty of mainstream science, ignore the fundamental relationship of risk to uncertainty, and moreover ignore the uncertainty of their own assertions.

Risk deniers refuse to perform responsible mitigation of climate risk, overstating mitigation costs. This is equivalent to advocating driving with no accident insurance. It is similar to banks that wanted to lowball capital requirements before the 2008 crash/recession and to irresponsible traders who oppose responsible risk management, for example the London Whale. Risk-denial and mitigation opposition is the opposite of responsible risk management.

Risk deniers and mitigation opponents are typically supported by, or are part of, libertarian organizations and right-wing media and politicians. Fossil-fuel companies have also participated in climate risk denial and climate science denial.

See HERE for more information.

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Last Edit 5Dec2016

 

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