Climate change is the fattest tail risk of them all

Casting doubt on science is an unwise risk management strategy

Melting ice threatens to raise the sea level, scientists warn

Businesses have two ways of dealing with inconvenient scientific findings. They can accept them and begin to adapt industry practices accordingly; or they can reject the science, cast doubt on the validity of the research and fight tooth and nail to prevent the policy changes that the scientists recommend.

The former approach might make more sense in the long run but, all too often, companies choose the latter. As Naomi Oreskes and Erik M Conway describe in their book Merchants of Doubt,1 the essence of the strategy is not to undertake a frontal attack on science – which would be unlikely to succeed – but to plant seeds of doubt in the minds of politicians and the public at large about the finality of scientific discoveries. By invoking arguments about the uncertainty of academic theories, the naysayers create an illusion of discord among mainstream scientists (when in fact none exists) and drown the calls to action in background noise.

Interestingly, a relatively small group of the same ‘experts' has been involved with many of these PR campaigns. Truly Renaissance personalities, they move from one Congressional hearing to the next and dispense their wisdom on topics such as the health effects of secondhand tobacco smoke, acid rain, the biological impact of dioxin and pesticides and the consequences of greenhouse gas emissions.

It is legitimate, of course, to highlight uncertainties around scientists' conclusions. Since scientific discovery is always a work in progress, asking questions about the latest findings is an inherent part of the process. But an element of intellectual dishonesty creeps in when such healthy scepticism is conflated with the justification of inaction and the endless deferment of mitigation measures. More proof is needed, the critics contend, because the costs of accepting the scientists' conclusions is too steep. But the critics never seem satisfied with the evidence presented to them. Instead they keep raising the bar higher and higher.

In a 2011 paper on climate change, Harvard economist Martin L Weitzman turned the tables on this line of thinking.2 If the evidence accumulates in one direction, pointing to a potentially catastrophic outcome, preventive measures can be justified and the conventional analytical technique used to support decision-making processes – cost-benefit analysis (CBA) – may be inapplicable, Weitzman writes. His most important observation is:

"[T]he most striking feature of the economics of climate change is that its extreme downside is non-negligible. Deep structural uncertainty about the unknown unknowns of what might go very wrong is coupled with essentially unlimited downside liability on possible planetary damages. This is a recipe for producing what are called ‘fat tails' in the extremes of critical probability distributions. There is a race being run in the extreme tail between how rapidly probabilities are declining and how rapidly damages are increasing."

It should be noted that not all economists agree with Weitzman's conclusions on CBA in the presence of fat-tail probability distributions.3 In my mind, though, there is little doubt that the fears of potentially extreme environmental consequences of global warming are fully justified.

I revisited Weitzman's theory after reading a recent paper by Columbia University's James Hansen and a group of his associates.4 The much-discussed paper reviews the consequences of the depletion of the ice cover over Greenland and Antarctica, a phenomenon that can be seen from space and whose existence can hardly be disputed. Melting ice sheets will not only lead directly to an increase in sea levels, the paper says; they may also trigger feedback-loop effects that accelerate this process, resulting in an estimated sea-level rise of six to nine metres over the next 50 to 150 years.

Energy firms are seen as the main culprit behind climate change. If the predictions of climate scientists come true, the industry will be trapped in a vice, caught between continued demands for more abundant and cheaper energy sources, and calls to reduce emissions


Hansen and his coauthors write: "[If] the ocean continues to accumulate heat and increase melting of marine-terminating ice shelves of Antarctica and Greenland, a point will be reached at which it is impossible to avoid large-scale ice-sheet disintegration with sea-level rise of at least several metres. The economic and social cost of losing functionality of all coastal cities is practically incalculable."

Of course, these projections may underestimate the ability of the global planetary system to equilibrate and trigger processes that might prevent such dire outcomes. But if Hansen and his team are correct, the consequences of ice melt will have profound effects – not just on the coastal cities and regions, but also on the energy industry.

Rightly or wrongly, energy firms are seen as the main culprit behind climate change. If the predictions of climate scientists come true, the industry will be trapped in a vice, caught between continued demands for more abundant and cheaper energy sources, which are critical to maintaining our standard of living and hopes of eliminating poverty, and calls to reduce emissions.

Energy industry executives may be justified in feeling sceptical about the predictions summarised above, but they should have a plan of action in case current climate change forecasts come even remotely close to becoming reality. In these turbulent times, the mantra in the C-suites should be hoping for the best, but planning for the worst.


1. Naomi Oreskes and Erik M Conway, "Merchants of doubt: how a handful of scientists obscured the truth on issues from tobacco smoke to global warming", Bloomsbury Press, 2010. A documentary based on this book, directed by Robert Kenner, was released in 2014.

2. Martin L Weitzman, "Fat-tailed uncertainty in the economics of catastrophic climate change", Review of Environmental Economics and Policy, Volume 5, Issue 2, Summer 2011, pp. 275–292.

3. See, for example, this paper by William D Nordhaus, "An analysis of the Dismal Theorem"

4. James Hansen et al, "Ice melt, sea level rise and superstorms: evidence from paleoclimate data, climate modeling, and modern observations that 2C global warming could be dangerous".

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