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Managing Environmental Uncertainty Created by Global Warming

Scientists agree: the Earth is warming. Efforts are under way to cut greenhouse gas emissions and hence reduce the warming that occurs in the next hundred years. However, some warming is likely to occur even with major policy changes and greenhouse gas reductions. Overall, this means that average temperatures will increase, oceans will rise, damaging storms will occur more frequently. But coupled systems of climate, earth, ecosystems, and humans are complex and chaotic. Some places will experience extreme warming while a few spots feel little change, and the exact spatial patterns of warming are unknown. In addition, it’s hard to predict the amount of future mitigation and adaptation activity that will occur. The result is great uncertainty about the details of how climate will affect the things people care about. Where will the heat hit hardest, and which people will be least able to adjust? How much will oceans rise, and which coastal areas will be inundated most? Which ecosystems will adapt to climate change, and which will simply be wiped out?

Uncertainty complicates investment and policy choices

People, companies, and policy makers make many investments in conservation, environmental management, and resource use that have future payoffs dependent on environmental conditions. Farmers and winegrowers plant orchards and vineyards that will bear profitable fruit years in the future only if temperatures and precipitation are right. Conservation groups and government agencies invest funds today to protect current habitat for rare species, but those species may shift ranges with global warming. Urban planners and agencies make zoning regulations that govern where developers can build homes and they decide where to put long-lived urban public infrastructure like subway stations on the basis, in part, of assumptions regarding the susceptibility of sites to storm damage, flooding, and eventual inundation from sea level rise.

While the climate was relatively stable, decision makers could make investment choices by using current and historical climate conditions to estimate which places would be best in the future for such things as enrolling in the Conservation Reserve Program to help birds, planting fields of Riesling vines, or siting a network of subway stations. Uncertainty about the extent and effects of future global warming makes that model of decision making obsolete. If policies place all investments in projects that look good right now, nations, companies, and people could be left looking at a basket full of broken eggs in 50 years: protected lands the birds won’t occupy, vineyards that produce lousy wine, and subway stations that are under water.

Decision tools to manage risk

It’s tempting to just try to get the best estimates possible of which single policy or investment decision is most likely to yield a good outcome and go with that, but a different approach can do more to manage the uncertainty. Portfolio theory, pioneered by Harry Markowitz in the 1950s, has been used for decades to help financial investors to choose diversified asset portfolios that efficiently reduce the overall uncertainty in the financial returns they will receive; if one buys both stocks and bonds, the risk of losing all your money in a downturn is lower than if you only invest in a few individual stocks. That same approach can be used to manage uncertainty in the future returns of environmental and natural resource investments and policies. Portfolio theory has been applied to decisions as wide ranging as picking where to locate conservation reserves, choosing seed sources for projects to re-plant degraded forests, and deciding where to focus scouting efforts on damaging invasive pests. To consider how a financial tool can mitigate environmental risk, consider conservation planning to help waterfowl in the United States.

The Prairie Pothole Region (PPR) is a huge area of the U.S. and Canada characterized by a mosaic of small, shallow, and often ephemeral wetlands that are surrounded by grasslands. It is a vital breeding ground for waterfowl in North America (in addition to hosting other facets of biodiversity and producing other ecosystem services like carbon sequestration and flood regulation.) Much of this area has been converted to cropland in the U.S., and it is a major focus of conservation activity for the U.S. government and for NGOs such as Ducks Unlimited. The area with greatest value as waterfowl habitat has historically been in the central part of the region. Hence, that area is the primary current target of conservation activity. However, wetland models suggest that under several likely climate outcomes with warmer temperatures and changes in precipitation, the best waterfowl habitat could shift in part to the Eastern PPR.

Currently, conservation planning focuses on areas that are likely on average to have the best conservation outcomes; in statistical terms, the highest “expected value.” Planning that puts all investment in the part of the PPR with the highest expected value of conservation benefit would indeed continue to invest entirely in the center of the region. However, this exposes society to serious risk that all the protected and restored lands in the PPR would be in an area that was too warm and dry for waterfowl if a very bad climate outcome does prevail. Research indicates that decision makers could reduce uncertainty in the future conservation value of the network of reserves by almost a quarter while only reducing the expected value of the reserves by 7 percent if investment were diversified by placing just less than a third of the conservation effort into the East.

More work is ongoing: identifying exactly how and when shortcuts in measurement of benefits and costs are a problem; adapting portfolio theory for decision makers who only want to avoid downside risk and don’t mind happy windfalls; and figuring out how to use portfolio theory when you have multiple objectives. This body of research will yield a useful and accessible tool for policy makers and investors to manage the uncertainty global warming creates in the outcomes of environmental policy and investment choices.

Author’s Note: This article draws extensively on research conducted in collaboration with Mindy Mallory and Payal Shah.