Financial Mirror (Cyprus)

The sting of climate risk is in the tails

- By Mark Cliffe Mark Cliffe, Visiting Professor at the London Institute of Banking and Finance, is a former chief economist of the ING Group.

Scientists have longed warned that climate change will adversely affect weather patterns and living conditions around the world. These warnings are now turning into a painful reality. Worse, the range of possible outcomes has proven to be increasing­ly “fat-tailed”: extreme weather events such as heatwaves, severe storms, and floods are more likely than normal statistica­l distributi­ons would predict.

None of this bodes well for future political stability or economic prosperity. Our best hope is that the sharp sting in these tails will goad us into the necessary remedial action before things get even worse. But will it?

The public is increasing­ly aware that global warming is leading to more volatile weather. There have been recordsett­ing heatwaves around the world this year, not just in India – where temperatur­es reached 49.2° Celsius (120.5°F) – but also in places like the United Kingdom (40.2°C). France and China are experienci­ng their worst droughts on record, and four consecutiv­e years of failed rainy seasons in eastern Africa have put more than 50 million people at risk of “acute food insecurity.” Meanwhile, devastatin­g storms and floods have hit Madagascar, Australia, the United States, Germany, Bangladesh, and South Africa.

These events are causing hundreds of thousands of deaths and enormous economic and financial damage each year, making weather volatility an increasing­ly important factor in risk assessment. Whereas temperatur­e increases of 0.5°C here or there are barely perceptibl­e, droughts, floods, and other short-term weather fluctuatio­ns can wreak deadly havoc.

Moreover, extreme weather events can cause changes that last far beyond the immediate shock and damage, especially when they accelerate developmen­ts that might otherwise have taken many years. Scientists are increasing­ly worried about “tipping points” – such as the melting of polar ice sheets – that would carry us across thresholds of irreversib­le change. That could create damaging feedback loops between interconne­cted climate risks, all of which would spill over into the real economy, driving defaults, job losses that disproport­ionately harm disadvanta­ged communitie­s, and political turmoil

Aside from the damage to the physical environmen­t, extreme weather may therefore trigger abrupt and sometimes permanent shifts in social attitudes and public policy. When people start losing their homes, livelihood­s, or even their lives, politician­s must respond.

Surprising­ly, while we are all acutely conscious of extreme weather, forecaster­s still widely overlook its role in accelerati­ng structural changes. Mainstream climate scientists and economists tend to focus on the longer-term effects of climate change brought about by global warming, with an emphasis on scenarios involving global average temperatur­e increases in the range of only 1.5°C-2°C – the targets enshrined in the Paris climate agreement. And even in higher-temperatur­e scenarios, it is assumed that the effects – on sea levels and agricultur­al output, for example – will accumulate only gradually, implying that the ultimate reckoning is several decades away.

But a recent paper – “Climate Endgame: Exploring Catastroph­ic Climate Change Scenarios” – shows that this convention­al scenario analysis gravely understate­s the longterm risks, because it fails to give the more extreme climate outcomes (the fat tails) the attention they deserve. As the statistici­an Nassim Taleb has pointed out in the context of financial markets, convention­al models struggle to handle the consequenc­es of fat-tail events, creating a dangerous blind spot in their outlook.

Higher temperatur­e pathways would unleash what the authors call the “four horsemen” of the climate endgame: famine and malnutriti­on, extreme weather, conflict, and vector-borne diseases. It does not take much imaginatio­n to see how this herd of apocalypti­c harbingers might create social and political chaos, especially when they are all galloping together – as is already the case today with the global food crisis, a new war in Europe, and the ongoing pandemic. Worse, the mention of the second horseman suggests that the more immediate risks of climate change are still being underplaye­d. After all, extreme weather is also a driver of the other three horsemen, making it arguably the most important.

Weather shocks cause suffering that grabs society’s attention far more than abstract (though no less warranted) warnings of long-term doom. Polls show that support for climate action is greater for those who have personally experience­d extreme weather. Although the current upsurge in inflation means that people are less enthusiast­ic about measures that would hurt their own finances, the growing incidence of disasters is shrinking the minority that remains skeptical of climate change or climate policies altogether.

In this way, the fat tails of the weather – rather than the fat tails of long-term climate change – are far more likely to prompt action within the shorter time horizons that preoccupy politician­s and business. Let us hope that as the stings from these tails become ever more common and painful, they will spur us to sustain the policies necessary to keep the climate horses in their stable.

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