Would you try to cross a river if you only knew the average depth and not the maximum depth, the speed of the flow or whether there were other dangers such as crocodiles? The chances are you wouldn’t. Most people are risk averse and so is society. For example, we require insurance companies to be well enough capitalised to withstand the losses that would flow from a 1 in 200 year event. So why do we, as a society, base so much of our action on climate change on the central or most likely projected outcomes rather than trying to make sure that we are preparing for the more extreme scenarios that models indicate have small but not negligible probabilities1?
As Simon Sharpe (Author of Five Times Faster, Rethinking the Science, Economics and Diplomacy of Climate Change) says, “Too often, the long-term impacts of climate change are described in terms of central estimates, when rule number one of risk assessment is to focus on the worst case. Governments should have full risk assessments for climate change just as they do for threats to national security or public health. This is not about the psychology of science communication to individuals; it’s about the proper processing of information through institutions.”
One key question is how much more warming is already baked in because of the level of greenhouse gases (GHG’s) already in the atmosphere, for which some of the estimates of the related forcing (warming effect) have doubled compared with pre-industrial times. Over the last twelve months, temperatures reflected over 1.6oC of warming, and even if we stop increasing the level of GHG’s, we know that warming will continue, unless we are able to start reducing GHG’s in the atmosphere. The latest IPCC assessment of the long-term impact of doubling GHGs, is 3oC warmer (best estimate) and a very likely (90% probable) range of 2oC -5oC. There is considerable uncertainty of over how long it will take to reach this ultimate level of warming. However, we are sure to see much of the warming over the coming decades, but the ultimate temperature rise, and impacts such as ice melting, will continue for centuries.
What matters for our preparations as a society is not simply the central estimate of 3oC but also protecting ourselves not just against a reasonably plausible downside, but also a likely worst-case scenario. Even if we stopped all new GHG emissions today, this might be 5oC based on the IPCC range but with further emissions certain and allow for modelling uncertainties, there is a significant risk of even higher levels. And this is before the effects of reaching global tipping points such as melting of the Greenland icesheet or loss of Amazon rain forest are taken into account. The potential for such events and their interactions to accelerate warming adds to the risk of climate change.
Clearly the higher the ultimate level of warming reached, the more catastrophic the consequences for the planet will be. We don’t know how bad it could get but a recent article2 in the Guardian reports that many scientists are looking into the possibility of societal collapse. Another article3 from Climate Code Red written as long as five years ago explains why even 4 o might be catastrophic with less than a billion people surviving.
What can actuarial methods contribute to tackling the problem? There are well established methods for managing the solvency of financial institutions such as banks and insurance companies. Through regulation society sets a risk appetite for the failure of institutions at the level of a one in 200-year event. In other words, failure is not completely ruled out as that would lead to unaffordable insurance premiums but the bar is set very high. Actuaries model the assets and liabilities on a regular basis and inform management on the ability to withstand the prescribed loss. This enables action to be taken if a company starts to get too close to its solvency limit. Similarly, we could introduce the concept of ‘planetary solvency’4. Just as we assess the ability of a financial entity to pay claims, planetary solvency would combine nature, climate, and societal risk assessments to evaluate risks to the ecosystem services that underpin our society, now and in the future.
Actuaries can see climate through a planetary solvency lens, for example setting the temperature limit of 1.8oC as a solvency limit and key assumptions including the sensitivity of the planet to greenhouse gases, which drives carbon budgets. As with solvency, risks can be assessed and actuarial principles applied to investigate where we should set our risk appetite. As with solvency complex projections are required over long time periods to assess how things might pan out.
However, unlike with financial solvency, there isn’t a global regulator, audit standards, or tailored actuarial methodology to adhere to. Applying actuarial principles to our climate ‘solvency’ position reveals over-stated carbon budgets, a lack of experience analysis, no process to update our assumptions and an absence of structured governance and reporting. We risk climate ‘insolvency’, shooting past target even as we continue to use ‘net zero’ carbon budgets that are increasingly implausible for meeting the temperature goals of the Paris Agreement.
What action is needed? There needs to be global agreement to carry out this analysis and set a risk appetite for avoiding societal ruin. The framework will need to include governance arrangements and provision for ongoing monitoring and experience analysis so that assumptions can be adjusted to emerging reality and carbon budgets can be tailored to the new situation. A mechanism will need to be developed for allocating carbon budgets and this will need to be done with climate justice and fairness as a major consideration.
None of this will be easy and, in the meantime, we need to recognise that carbon budgets are almost certainly too high and decarbonisation efforts need to be radically increased. In other words, we are allowing ourselves to emit too much greenhouse gas and most plans to reduce emissions are based on optimistic assumptions and need to be adjusted to go further and faster. Governments need to play their role by making policy adjustments that drive this behaviour. We all need to become aware of the needs of planetary solvency – and actions required to protect against a plausible worse-case scenario.
Mike Ward
Livery Climate Action Group Representative
Actuaries Company
October 2024
NB The views expressed here are my own and not necessarily those of my company.
Footnotes
- This blog is based on the recent Institute and Faculty of Actuaries research paper Climate Scorpion ly/IFoA_Climate_scorpion, which provides a realistic assessment of warming trajectories and exposes the inadequacy of commonly used carbon budgets, as well as providing recommendations for how to address these shortcomings. The paper also shows that climate risks are complex and interconnected. It calls for a realistic risk assessment of climate change as a matter of urgency, considering the full range of outcomes, including tipping points, worst-case scenarios and the risk of ruin.
- Link to Guardian article: https://www.theguardian.com/environment/2024/oct/08/earths-vital-signs-show-humanitys-future-in-balance-say-climate-experts?utm_term=67060348fd31c429ea1364514045ed74&utm_campaign=GuardianTodayUK&utm_source=esp&utm_medium=Email&CMP=GTUK_email
- Climate Code Red article: https://www.climatecodered.org/2019/08/at-4c-of-warming-would-billion-people.html
- More information on the operation planetary solvency is contained in an article published in The Actuary magazine, by Sandy Trust, one of the authors of the Climate Scorpion paper. It can be found here https://www.theactuary.com/2024/04/04/worst-case-scenario-latest-ifoa-climate-paper