April 19, 2014

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Creating the Future Part 1: Iterative Risk Management

In place of traditional cost-benefit analysis, a new approach toward risk management promises a better way for businesses to transition to a sustainable economy.


By Jonathan Koomey

This is the tenth post of an eleven-part series on CSRwire that summarizes key lessons from the new book Cold Cash, Cool Climate: Science-based Advice for Ecological Entrepreneurs.  

When our children and grandchildren look back on our era the political squabbles of today will have been long since forgotten. What they will ask (I hope) is “How did they have the wisdom to build for the future?” 

That’s how we need to measure our actions now. Will they thank us for acting with reason, compassion and foresight?  Will they express gratitude for our wisdom? Or will they wonder what the hell we were thinking?  Let’s make sure we earn their gratitude, because the alternative is too unpleasant to contemplate.

In my book Cold Cash, Cool Climate I’ve outlined the depth and breadth of the climate challenge, and summarized some insights that entrepreneurs starting new ventures in this space should find useful.  That exploration began with the insight that humans are now no longer small compared to the earth.  Because of our wealth, our numbers, and our technology, we can (and have) significantly altered the global life support systems upon which we all depend.

If current greenhouse gas (GHG) emissions trends continue, the earth is in for at least two doublings Palmer Z Index Short-Term Conditionsof greenhouse gas concentrations in the next century, which implies more than a 10 degree Fahrenheit increase in average global surface temperatures, with no end in sight.  This outcome would be disastrous for humanity and for the earth’s natural systems, and we should do everything in our power to avoid it. 

This path also opens up the real possibility of accelerated warming due to positive feedbacks (like release of carbon from rapidly melting ice, thawing permafrost, burning peat bogs, and warming methane hydrates), which in the distant past have led to even more significant changes in the earth’s climate, and could do so again if we push the climate system too far.

The Fixed Emissions Budget

To meet this challenge we’ll need rapid GHG emission reductions in the next few decades. This conclusion is inescapable because it’s cumulative emissions that matter, due to the long lifetime of many greenhouse gases. 

If we want to prevent global temperatures from increasing more than 2 degrees C, we have a fixed emissions budget over the next century. If we emit more now we’ll have to reduce emissions more rapidly later, so delaying action (either to gather more data or to focus on energy innovation) is foolish and irresponsible. If energy technologies improved as fast as computers there might be an argument for waiting under some circumstances, but they don’t, so it’s a moot point.

Of course, we need new technologies and should therefore invest heavily in research and development, but there are vast opportunities for emission reductions using current technologies, and Fixed Emissions Budgetcost reductions for these technologies are dependent on implementing them on a large scale (learning by doing only happens if we do). So the focus in the next few decades should be on aggressive deployment of current low-emissions technologies, bringing new technologies into the mix as they emerge.

Conventional Cost-Benefit Analyses Distort The Picture

Conventional benefit-cost analysis has often led to a different view of the problem, one that emphasizes a more cautious approach. Studies of this type attempt to balance costs and benefits using computer models, but such efforts are dependent on accurate forecasts (which are impossible for economic and social systems), and for many reasons these efforts are biased towards preserving the status quo.  

The models ignore important effects like increasing returns to scale, assume that structural rigidities will continue into the future, omit relevant options from consideration (thus overestimating costs), and bury ethical judgments in ostensibly technical concepts like the discount rate or the economic value of climate damages (many of which are unquantifiable in principle). These limitations make it seem like fixing the climate problem is harder and more costly than it really is, and so use of these models in this way is bound to lead us astray.

Iterative Risk Management: Fail Fast and Evolve

I advocate instead an evolutionary approach to this problem, implementing many different technologies, failing fast, and doing more of what works and less of what doesn’t. This approach, Sustainability and Iterative Risk Managementwhich the National Research Council dubs “iterative risk management”, recognizes the limitations of economic models and puts such analysis into an important but less grandiose role: that of comparing cost effectiveness of different mitigation options in achieving a normatively defined target (like the 2 degrees C warming limit). 

I call this approach “working forward toward a goal” and it’s a more business-oriented framing of the problem. It mirrors the way companies face big strategic challenges, because they know that forecasting the future accurately is impossible, so they set a goal and figure out what they’d have to do to meet it, then adjust course as developments dictate. It also frees you from the mostly self-imposed conceptual constraints that make it hard to envision a future much different from what exists today.

This approach is useful in identifying and evaluating opportunities both at the very highest level (like global carbon emissions) but also for analyzing component parts of possible solutions. So for example, we can consider what would have to happen to allow the utility system to use huge amounts of variable generation from renewable energy in the case where solar generated electricity becomes three times cheaper than it is today (which is a real prospect over the next decade). These kinds of thought experiments can yield real insights into where new opportunities may lie.

Next: Creating the future, part 2.


Reasons For Optimism: Why Climate Change is not a 'Zero Sum Game'

Institutionalizing Sustainability: It’s Not Just About Manufactured Products

Using Information Technology To Change The Game

Envisioning the Future We Want to Create

Addressing the Underlying Drivers of Emissions Growth

The Scope of the Problem

So You Want to Solve the Climate Problem...

Cold Cash, Cool Climate: Some Fundamentals

Cold Cash, Cool Climate: Science-Based Advice for Ecological Entrepreneurs

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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