Applying Risk Management Steps to Climate Change
John Pryor | January 17, 2020
An important admonition for all who fear climate change is from the Greek philosopher, Heraclitus, in 500 BC: change is the only constant in life. The argument on climate change rages on. On the one side, climate change activists fear this risk is leading to the total destruction of our planet; on the other is total denial that climate change exists.
One suggestion is the reduction of carbon dioxide emissions (CO2)—including those emanating from our nation's oil and gas facilities. However, before shutting down producing oil wells and demolishing refineries, a fundamental understanding of this risk and how it needs to be managed should prove helpful. The formal discipline of risk management applied to climate change should help provide each of us a quiet night's sleep, the goal of risk management articulated long ago—yet, still valid today—by PhD authors Robert Mehr and Bob Hedges.
Let's apply the traditional risk management steps to the problem of climate change.
Step One: Risk Identification and Measurement
As all IRMI readers know and understand, the first step in the risk management process is "risk identification and measurement." In this case, the risk is easily identified (climate change—especially in terms of CO2 emissions). However, measurement of this risk is another matter.
It's interesting to read the two perspectives in "Debate: For and Against Climate Change," Engineering and Technology (E&T), Peter Landon and Johnny Ball, January 1, 2017. The magazine cites the following findings that effectively identify and measure the global scope of this risk.
- Less than 4 percent of all CO2 produced is manmade.
- Each tree and creature grows, dies, rots, and ferments, giving back its CO2.
- Oceans cover 70 percent of the earth's surface and contain 80 percent of all plant and animal life.
- Only one-quarter of the 30 percent of the planet that is land can support man unaided—just 7.5 percent of the entire surface.
This risk is reminiscent of the 1798 Malthusian Theory that exponential population growth would outstrip arithmetic food supply and cause worldwide starvation. The solution, then and now, was and is innovation in food production. I recommend that we apply the theory to CO2 releases today in oil production and other energy-producing operations: innovation in energy production.
Step Two: Risk Reduction and Control
According to E&T, "We are a burden to the earth and reducing that burden is our responsibility.… The risk treatment is greater efficiency." Most CO2–generating industries continue to accomplish major innovative efficiencies to reduce emissions.
The following facts are expressed in tons of CO2 emissions released during the past 27 years.
| 1990 | 2017 | % Change | |
| China | 2,397,048 | 10,877,218 | 353.4% increase |
| Russia | 2,378,921 | 1,764,866 | 25.8% decrease |
| India | 605,968 | 3,454.774 | 305.1% increase |
| United States | 5,685,897 | 5,109,393 | 3.0% decrease |
| Wordwide | 22,674,116 | 37,077,404 | 63.5% increase |
| Source: Marilena Muntean, Diego Guizzardi, Edwin Schaaf, Monica Crippa, Efisio Solazzo, Jos Oliver, and Elisabetta Vignati, Fossil CO2 Emissions of All World Countries—2018 Report, Publications Office of the European Union, 2018. | |||
In India and other countries, climate change doesn't even make their list of priorities. Risk reduction is a low—or no—priority in many major nations.
How successful can our country's noble efforts be in view of other countries' increasingly negative results? Yet, we need to persist—not by destroying industries but rather by innovative win-win solutions that help each industry grow in productivity and profitability but with lower CO2 emissions—in the same manner that the Malthusian Theory was resolved.
Step Three: Risk Transfer
Insurers have long accepted "climate change" risks for affordable premiums. Whether such inevitable risks are windstorms, hailstorms, floods, wildfires, or other risks associated with climate change, risk transfer works.
When not meeting the criteria of commercially insurable risk, our government typically steps in with a program that works (e.g., crop, hail, flood, and other insurance programs outside the private insurance sector).
Step Four: Risk Assumption
Risk assumption for families is the deductible that they pay in minor amounts ranging from $100 to $500 or higher. For large entities, it will be self-insured retentions of major amounts ranging from $5,000 to $5 million or so, depending on the financial capacity of each entity.
Total risk assumption is always an option but rarely an acceptable solution.
Final Step: Total Cost of Risk Calculation
As with all risk management systems, tracking results over time for each public or private entity is always important. As illustrated, trending matters. Equally important for our 50 states as well as countries of concern is a "dashboard" that includes graphic displays of aggregated (otherwise "raw") data of, for example, CO2 emission trends, and other relevant data.
Conclusion
Climate change activists need to understand and support the reality of these risk management processes not only to "save the planet" but also to save our critical industries.
That's a win-win!
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
