Managing Climate Risk

Obersteiner, M. ORCID: https://orcid.org/0000-0001-6981-2769, Azar, C., Kossmeier, S., Mechler, R. ORCID: https://orcid.org/0000-0003-2239-1578, Moellersten, K., Nilsson, S., Read, P., Yamagata, Y., & Yan, J. (2001). Managing Climate Risk. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-01-051

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Abstract

At the heart of the traditional approach to strategy in the climate change dilemma lies the assumption that the global community, by applying a set of powerful analytical tools, can predict the future of climate change accurately enough to choose a clear strategic direction for it. We claim that this approach might involve underestimating uncertainty in order to lay out a vision of future events sufficiently precise to be captured in a discounted cost flow analysis in integrated assessment models. However, since the future of climate change is truly uncertain, this approach might at best be marginally helpful and at worst downright dangerous: underestimating uncertainty can lead to strategies that do not defend the world against unexpected and sometimes even catastrophic threats. Another danger lies on the other extreme: if the global community can not find a strategy that works under traditional analysis or if uncertainties are too large that clear messages are absent, they may abandon the analytical rigor of their planning process altogether and base their decisions on good instinct and consensus of some future process that is easy to agree upon.

In this paper, we try to outline a system to derive strategic decisions under uncertainty for the climate change dilemma. What follows is a framework for determining the level of uncertainty surrounding strategic decisions and for tailoring strategy to that uncertainty.

Our core argument is that a robust strategy towards climate change involves the building of a technological portfolio of mitigation and adaptation measures that includes sufficient opposite technological positions to the underlying baseline emission scenarios given the uncertainties of the entire physical and socioeconomic system in place. In the case of mitigation, opposite technological positions with the highest leverage are particular types of sinks. A robust climate risk management portfolio can only work when the opposite technological positions are readily available when needed and therefore have to be prepared in advance. It is precisely the flexibility of these technological options which has to be quantified under the perspective of the uncertain nature of the underlying system and compared to the cost of creating these options, rather than comparing their cost with expected losses in a net present value type analysis. We conclude that climate policy - especially under the consideration of the precautionary principle - would look much different if uncertainties would be taken explicitly into account.

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