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World Economic Forum (WEF) designates Climate Change a top Global Systemic Risk

March 31, 2010

In January of this year in the lead-up to Davos,  Global Risks 2010 was released by the Global Risk Network at the World Economic Forum.  The report sought to renew emphasis upon systemic and long-term risks and the need to holistic approaches to perhaps far-off, perhaps ‘low event’, but very high magnitude risks. 

The report kicked up so many interesting facets that I’ve been unable to complete the draft of this post until now (which I only complete reluctantly and inadequately) – it has provided me with a blend of ‘writers block’ and a search for Zola’s ‘mot juste’ in my attempts to discuss some of the climate-pertinent issues that it raises.

The report assesses the problems associated with identifying, and response strategies and implementation of systemic risk – no matter what form.

Underinvestment in infrastructure, with explicit focus on greenhouse gas emissions and adaptation to the effects of climate change, is a leading theme.  It identifies the cross-cutting nature of the phenomenon and suggests that response strategy should be guided by an appreciation of the long-term and complex nature, interconnectedness of , and responses to, these challenges. 

The  analysis serves as a timely reminder, amidst the tasks of financial market reform and post-Copenhagen introspection, of the requirement for policy-makers and business leaders to step outside of the circle in order for the challenges to be met.

 The objective of the Global Risk Network is

To raise awareness of the level of interconnections among risks and the global impact of those interconnections 

The report was undertaken in collaboration with Citi, Marsh & McLennan Companies, Swiss Re, Wharton School Risk Center, and Zurich Financial Services. 

36 key risk indicators are rated according to likelihood and magnitude, and amalgamated into 5 categories: Economic Risks, Geopolitical Risks, Environmental Risks, Societal Risks, and Technological Risks. 

Top risks are identified as: a slowing Chinese economy, fiscal crises, asset price collapse, chronic diseases, and global governance gaps.  Not much to keep us awake then!  The systemic nature of these risks are highlighted. 

The spread of risk is best illustrated in the graph below, taken from the report:

Source:  WEF Global Risks 2010

The WEF report helpfully even gives a definition of ‘systemic risk’ – a term which has become emblematic in discussions related to the global financial crisis; a totem of some hellenic existential threat which mere humans have been helpless to counteract:

A systemic risk is the potential loss or damage to an entire system as contrasted with the loss to a single unit of that system.  Systemic risks are exacerbated by interdependencies among the units often because of weak links in the system.  These risks can be triggered by sudden events or built up over time with the impact often being large and possibly catastrophic  

Concepts being described by (economic) risk specialists should be very familiar to any ecologist.  Concepts of system inter-connectedness, resilience and vulnerability have been prevalent in academic literature for decades (e.g. Holling).  The last part of the definition is evocative of the ‘boiling frog’ analogy.

Efforts (currently fairly incoherent) to address structural change required to tackle systemic and long-term risk at the WEF is being undertaken at the Global Redesign Initiative.  

“To foster a wide-ranging thought process and make systemic recommendations on how international cooperation can be improved”

 – Richard Samans    

The difficulties and issues that the WEF report recognises around key global risks are all very pertinent to climate change.

The biggest risks facing the world today may be from slow failures or creeping risks.  Because these failures and risks emerge over a long period of time, their potentially enormous impact and long-term implications can be vastly underestimated.  These are risks linked to big shifts that are recognized and which roll out over many years, even decades   

The report goes on to note global governance gaps:

In light of ongoing short-term pressures on governments, business and individuals, can the necessary reform of global governance be achieved across the range of issues where it is required?  Improved coordination on macro-prudential supervision, effective climate and energy policies, and new mechanisms to protect resources and security are all key to reducing vulnerability and risk.    

Underinvestement in infrastructure is a main theme of the analysis – in particular agriculture, energy infrastructure – with a particular focus on the nexus with the impacts of climate change, and greenhouse gas emissions – and frameworks to evaluate adaptation to climate change strategies.  On energy infrastructure, the following statements are made:

Given the long-term nature of the industry, companies considering major strategic commitments need an enduring policy framework with appropriate parameters and incentives that can bring some predictability to their planning.  This means clear direction at the international level on climate policy and trade issues, and robust long-term strategies from national governments regarding infrastructure renewal to enhance security of supply, reliability and the reduction of carbon emissions.    

Equally, the report firmly supports investment in climate change adaptation measures asserting that, most measures could deliver economic benefits that far outweigh their costs, as adaptation measures on average cost less than 50% of the economic loss avoided.  This is an investment/return perspective that not all international efforts to understand climate adaptation investment necesesarily share – for example the International Monetary Fund  in their recent staff position note on climate fianncing which is discussed in greater detail in this post.

It seems that the self-same industry leaders and politicians who like to enjoy a week in the Swiss snow in January are, however, missing in action when it comes to addressing the difficult choices and supporting the actions required to fix the problems identified.  They are suffering from communal myopia, a shared snow-blindness.

The US Senate now seems to be making some progress on financial reform with a compromise Bill in the offing that addresses some Republican concerns, and there is increasing momentum to address global economic imbalances.  Economic systemic global risks do have political capital expended on them, despite some differences in ideology that lie in the path.

However, while there is a useful pedigree of bipartisan attempt to shift climate policy through the legislative chambers in the US, it seems that partisanship is slowly eating the life of out the most consequential climate reforms that need to be made.  The same is true in Australia.

This week Robert Stavins at the Belfer Centre at Harvard comments extensively on the waning ambition for climate policy action in the US, as has John Broder at the NYT.  Polls show decline in climate policy action in the face of economic collapse as voter’s heirarchy of needs (Maslow) (such preferences are reflected in the Environmental Kuznets Curve), unsurprisingly show preference for short-term bread over longer-term invisible environmental threats.  Politicians therefore find it all too easy to ignore or reject long-term structural reform.

US climate legislation is still in limbo.  In Australia, the debate on the CPRS (emissions trading) is deafening in its silence, while legislative implemenation seems a far-off and far-fetched possibility.

Equally, the substantial commitments to funding made at Copenhagen do not seem to be going anywhere in a hurry, despite the recent formation of the UN High-Level Advisory Group.  The UN REDD program has only a few notable contributors, while even the coal-industry darling, Carbon Capture and Storage (CCS) is the subject of commentary in the Australian newspaper due to the absence of even public funding committed – irrespective of the hundreds of billions of dollars that will need to be unlocked in order to commercially deploy the technology.  Prospects for CCS are discussed further here.

Our economic and political leaders neglect the hard structural choices.  A major challenge is the tendency to be myopic and to seek short-term reward.   Addressing the risks raised in the report will need a longer-term approach than usually dictated by electoral cycles, financial reporting cycles, and executive tenures.

The actions needed require leadership, far-sightedness, and courage.  Not enough has been forthcoming.

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