Climate risk refers to risk assessments based on formal analysis of the consequences, likelihoods and responses to the impacts of climate change and how societal constraints shape adaptation options. Common approaches to risk assessment and risk management strategies based on natural hazards have been applied to climate change impacts although there are distinct differences. Based on a climate system that is no longer staying within a stationary range of extremes, climate change impacts are anticipated to increase for the coming decades despite mitigation efforts. Ongoing changes in the climate system complicates assessing risks. Applying current knowledge to understand climate risk is further complicated due to substantial differences in regional climate projections, expanding numbers of climate model results, and the need to select a useful set of future climate scenarios in their assessments.
One of primary roles of the Intergovernmental Panel on Climate Change (IPCC), which was created by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) in 1988, is to evaluate climate risks and explore strategies for their prevention and publish this knowledge each year in a series of comprehensive reports. International and research communities have been working on various approaches to climate risk management including climate risk insurance.
Understanding risks
Climate risks are increasingly felt in all regions of the world, and they are especially visible in the growing number of disasters that are driven by climatic events. Many of these risks and impacts are expected to increase in future, and therefore are an increasing concern. Risk assessments are based on responses of a climate system that is no longer staying within a stationary range of extremes. The IPCC assessment framework is based on the understanding that climate risk emerges from the interaction of three risk factors: hazards, vulnerability and exposure.
In this framework, climate risks area also described in 5 sets of major risks:.
- unique and threatened systems
- extreme weather events
- distribution of impacts
- global aggregate impacts
- large-scale singular events
Climate change adaptation and climate change mitigation can reduce climate-related risks. These two types of climate action can be complementary and can result in synergies, and thus more successful results.
Types
Natural disasters and diseases
According to the IPCC Fifth Assessment Report: "Impacts from recent climate-related extremes, such as heat waves, droughts, floods, cyclones, and wildfires, reveal significant vulnerability and exposure of some ecosystems and many human systems to current climate variability".
The following future impacts can be expected:
- Temperature increases
- Extreme weather
- Bumper crops and crop failure
- Polar cap melting
- Changes to Earth's eco-systems
- Epidemics
- Disruption of the North Atlantic current
Economic downfall
While affecting all economic sectors, effects on single continents will vary. Beside these direct physical climate risks there are also indirect risks:
- Physical risks: Direct risks of climate change negatively impact agriculture, fisheries, forestry, health care, real estate and tourism. For example, storms and flooding damages buildings and infrastructure, and droughts lead to crop failure.
- Regulation risks: Governmental endeavors to reduce climate costs have direct effects on the economy. For example, Kyoto-Protocol emissions targets could be realized by implementing emissions trading, requiring the cost of emissions to be quantified monetarily. These costs would be used by companies to evaluate investment decisions. Factoring in emissions costs will cause prices to rise therefore impacting consumer demand. The insecurity of legislation leads to indefinite postponement of projects and investments.
- Litigation risks: Similar to the tobacco industry, industries producing excessive greenhouse gases (GHG) are exposed to the risk of an increasing number of lawsuits if damages can be correlated to emissions.
- Competitive risks: If companies do not take measures to reduce climate risks they are competitively disadvantaged. This might lead to increasing production costs caused by obsolete technologies and therefore to decreasing profits.
- Production risks: Production shortfalls can result from direct or indirect climate risks, i.e., hurricanes damaging oil production facilities can lead to supply disruption and increased prices. Also the price for energy will rise, as heatwaves cause water scarcity, impacting the supply of power plant cooling water.
- Reputational risks: Companies publicly criticized for their environmental policies or high emissions might lose customers because of negative reputation.
- Financial risks
Vulnerability
Climate change vulnerability (or climate vulnerability or climate risk vulnerability) is defined as the "propensity or predisposition to be adversely affected" by climate change. It can apply to humans but also to natural systems (ecosystems). Human and ecosystem vulnerability are interdependent. Climate change vulnerability encompasses "a variety of concepts and elements, including sensitivity or susceptibility to harm and lack of capacity to cope and adapt". Vulnerability is a component of climate risk. Vulnerability differs within communities and across societies, regions, and countries, and can change over time. Approximately 3.3 to 3.6 billion people live in contexts that are highly vulnerable to climate change in 2021.
Vulnerability of ecosystems and people to climate change is driven by certain unsustainable development patterns such as "unsustainable ocean and land use, inequity, marginalization, historical and ongoing patterns of inequity such as colonialism, and governance". Therefore, vulnerability is higher in locations with "poverty, governance challenges and limited access to basic services and resources, violent conflict and high levels of climate-sensitive livelihoods (e.g., smallholder farmers, pastoralists, fishing communities)".Management
Climate risk management
Climate risk insurance
Climate risk insurance is a type of insurance designed to mitigate the financial and other risk associated with climate change, especially phenomena like extreme weather. The insurance is often treated as a type of insurance needed for improving the climate resilience of poor and developing communities. It provides post-disaster liquidity for relief and reconstruction measures while also preparing for the future measures in order to reduce climate change vulnerability. Insurance is considered an important climate change adaptation measure.
Critics of the insurance, say that such insurance places the bulk of the economic burden on communities responsible for the least amount of carbon emissions. For low-income countries, these insurance programmes can be expensive due to the high start-up costs and infrastructure requirements for the data collection. It is theorised that high-premiums in high risk areas experiencing increased climate threats, would discourage settlement in those areas. These programmes are also usually timely and financially inadequate, which could be an uncertainty to national budgets. A considerable problem on a micro-level is that weather-related disasters usually affect whole regions or communities at the same time, resulting in a large number of claims simultaneously. This means that it is needed to be sold on a very large, diversified scale. However a well-designed climate risk insurance can act as a safety net for countries while improving resilience.External links
- "All About Climate Risks" esgriskguard.com
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