Tipping Points and Fat Tails

Why the risk of extreme, irreversible climate outcomes matters greatly for policy, and Martin Weitzman's argument about catastrophic uncertainty.

Most economic analysis focuses on the most likely outcomes. But for climate change, the unlikely extreme outcomes may matter most.

Tipping points

A tipping point is a threshold beyond which a change becomes self-reinforcing and hard or impossible to reverse. Scientists have identified possible climate tipping points, including:

Melting of the Greenland and West Antarctic ice sheets, which could raise sea levels by many metres over centuries.
Dieback of the Amazon rainforest, turning parts into savanna.
Thawing permafrost, releasing stored methane and carbon dioxide.
Disruption of major ocean currents, such as the Atlantic circulation that affects European and Indian monsoon climates.
Loss of tropical coral reefs.

Crossing tipping points could cause very large damages that are hard to capture in standard models.

Fat tails

In 2009, economist Martin Weitzman argued that the probability distribution of climate outcomes has fat tails: extreme outcomes, such as warming of 6 degrees or more, have small but not negligible probabilities. Because the damage from such outcomes could be catastrophic, even a small chance can dominate the expected cost.

This argument suggests climate policy should be viewed partly as insurance against catastrophe, rather than only a balancing of most likely costs and benefits.

Implications for policy

Precaution: taking stronger action early to reduce the chance of catastrophic outcomes.
Research into climate risks and tipping points.
Robust decisions that work reasonably well across many possible futures.

Why people insure their homes

The chance that a house burns down in any year is small. Yet most homeowners buy fire insurance because the loss would be devastating. Weitzman argued climate policy should be thought of similarly: even if catastrophic warming is unlikely, its consequences are so severe that paying to reduce the risk makes sense.

Thinking only the most likely outcome matters

When possible outcomes include catastrophes, focusing only on the most likely scenario can seriously understate risk. The tails of the distribution can dominate decisions.

Key takeaways

Tipping points are thresholds beyond which climate changes become self-reinforcing.
Examples include ice sheet melt, Amazon dieback and ocean current disruption.
Weitzman argued climate outcomes have fat tails with small chances of catastrophe.
Climate policy can be seen partly as insurance against catastrophic risk.