Is climate change a ‘black swan’?

THE “black swan” concept came from the Western world. For a very long time, the West was of the view that all the swans are white until the discovery of black swans in Australia by Dutch explorer Willem de Vlamingh in 1697.

The “surprise” discovery of black swans subsequently gave rise to the definition of “black swans” or “black swan events” which refer to events that take place unexpectedly or unprecedented at that point in time.

This idea of “black swan” gained strong prominence after the 2008 global financial crisis. The 2008 crisis was unexpected, having somewhat deviated from the normal behaviour or situation. We saw the crash of the US housing market which snowballed into a global downturn. There are other events that can be defined as black swans prior to the 2008 global financial crisis. There was the dot-com bubble in 2001 which shared similari- ties with the 2008 financial crisis. The US was enjoying rapid economic growth and increase in private wealth before the economy catastrophically collapsed. As the Internet was still at its infancy in terms of commercial use, various investment funds were investing in technology companies with inflated valuations and no market traction. When the bubble burst, these companies folded, hitting the funds hard. The downside risk was inevitably passed on to the investors. It was nearly impossible to predict the collapse or even anticipate the trend because the digital frontier was still nascent.

Another example is the previously successful hedge fund Long Term Capital Management that was driven into the ground in 1998 as a result of the ripple effect caused by the Russian government’s debt default, something the company’s computer models could not have predicted. The Asian financial crisis in 1997-1998 is also another classic example.

The list of black swans from the economic perspective is endless.

But now, a perspective is increasingly coming into play – climate change. We need to ask ourselves this unavoidable question. Does change in global climate act as a “black swan”?

We are increasingly witnessing natural disasters which are being cited as due to the growing climatic changes. Since the 2006 World Economic Forum, experts have illustrated the risk analyses that are shaping the global environment. Interestingly, climate change is ranked the highest risk. This is because it is tough to predict the possibility of a climate change happening and if its impacts are accumulated, then it becomes more devastating compared to other global risks such as fiscal crises and wars.

To give a clearer picture of this climate change “black swan”, let us look at the natural disasters that took place in recent times. The list of natural disasters runs long – from the hurricanes across the US to the forest fires in Siberia, Russia and Canada, the massive floods in Pakistan and Australia and the dev- astating earthquake and tsunami in Japan.

These events are far more difficult to predict and can have a terrifying impact on a country.

With global population growing rapidly, household demand will only increase and this means more and more resources are needed to produce goods. All these leads to global warming, which is made worse with the increasing pace of globalisation and the closely interlinked supply chains and markets where each has the potential to impact the world economy.

What we are now experiencing is natural disasters that are occurring more and more frequently. Their impacts are getting more severe, covering a wider region of the planet and affecting a wider number of people.

Could all these happen because of the fact that the cost to address climate change is less attractive compared to the benefits in avoiding the damages? If this is the case, then it will not be surprising if the impact of each “black swan” arising from natural disaster will snowball and eventually affect every person on the planet.

It is a fact that due to climate change, we are seeing the levels of carbon dioxide and other greenhouse gases millions of years ago. What we are witnessing today is a warmer world with rising sea levels and changes in the pattern of rainfall, changing the historical geographical behaviour.

So yes, natural disasters due to climate change appear to a “black swan”. One needs to recognise that the future is somewhat uncertain, especially on how we will eventually experience a different climate. Also, it remains unclear if the changes will be gradual enough to allow the natural ecosystem to adapt and adjust in a timely manner. Or will some of the changes be so abrupt that they may possibly cross the “tipping point”, thus leaving so little time to the point where orderly adaptation is not possible? Only time will tell.