Ministries of Finance support important government decisions on the prioritization of climate change, i.e., how much to spend on countering it relative to spending on other priorities.
While integrated assessment models (IAMs) are often used to assess the economic implications of climate change risks and opportunities, they can underestimate both climate risks and the opportunities arising from the energy transition, such that basing policy decisions on them may lead to inadequate adaptation, loss of resilience, and missed economic opportunities. To address this, MoFs can draw on actuarial principles to carry out a realistic risk assessment of climate change, including economic impacts, and can invoke the precautionary principle to justify long-term policy actions required to avoid economic and societal collapse.
- MoFs should adopt a set of principles to develop realistic economic assessments of climate impacts and opportunities, which includes adopting a precautionary approach and developing risk management capacity, to provide decision-makers with better information.
- MoFs should lead the development of National Transition Plans (NTPs): strategic pan-economy plans that direct private sector action around financing, incentivizing, coordinating, and enabling the transition. NTPs should include requirements for realistic risk assessment to support policy decisions to accelerate mitigation and build resilient infrastructure.
- Global warming has accelerated: the 12-month average temperature is now above the 1.5°C goal, and this trend is likely to continue. Such warming is driving increasingly severe impacts (fires, floods, heat, and droughts), such that climate change is becoming a national security issue, with food, water, and heat stress impacting populations.
- Warming above 1.5°C presents a high chance of triggering multiple climate tipping points, such as ice sheet collapse, permafrost melt, dieback of the Amazon rainforest, and halting major ocean current systems, with potentially catastrophic consequences.
- Through a series of reports over the past few years, the Institute and Faculty of Actuaries along with Earth system scientists at the Climate Crisis Advisory Group and the University of Exeter have sought to combine actuarial risk management principles (often concerned with assessing low-probability, high-impact events, referred to as the precautionary principle) with cutting edge science to shine a light on areas of risk and uncertainty, with the objective of improving the risk management of climate change.
A key challenge is the present gap between the climate science, economic impacts, risk assessment, and policymaking. It is critical that MoFs bridge this gap by building capacity to put in place policies backed by science as well as enhanced economic models, while being clear on limitations of models and outputs. International collaboration, e.g., to develop a central repository of resources and practical considerations covering climate science, economic models, and risk management, can be useful to aid this effort.
Keywords
damagesmodelsphysical riskrisk managementtransition
