First interim report to the Climate Change Committee of the advisory group on the economics of climate risk and adaptation

Abstract

Systemic crises occur when the disruption of an individual or multiple parts of a complex, interconnected system results in one or more shocks that are amplified and spread, or cascade, across space, time, and systems, ultimately leading to a collapse or severe impairment of an entire system. The costs of systemic risk can therefore be extremely high, and there is considerable evidence that the benefit-cost ratio of investing in adaptation and resilience to reduce the likelihood of a systemic crisis is likely to be high. Yet despite this, in the UK (and likely elsewhere), there is a sense that efforts to deal with systemic risk are inadequate. We suggest that there are key features of systemic risk that make it tricky for governments to take timely and proportionate action. First, systemic crises are associated with extreme uncertainty (unknown probabilities), in terms of the likelihood that a systemic crisis will be triggered, when it will be triggered, how the crisis will pan out, and what the overall costs are. Second, the likelihood of a specific systemic crisis being triggered and amplified in the next year has tended to be very low, though the likelihood is increasing over time due to climate change. Linked to this is the potential misalignment “between short-term evaluation cycles and the long-term, sporadic nature of systemic risks.” As such, a sense of urgency to act on systemic risks may be missing. For example, it may be easier for a government to act on risks that are perceived to have a relatively high chance of occurring in the next 12 months, compared with acting on risks perceived low changes of happening, even if the “best guess” of the expected benefit-cost of a systemic crisis is high.