BOX 4.1
A Problem of Risk Management

The problem of managing climate-related risks shares important features with the problem faced by the captain of an ocean liner who had to pass through an iceberg-filled section of the ocean at night in the days before radar. The captain may have information about the location of some icebergs, but not all, and new ones can form at any time. The maneuverability and hull strength of the ocean liner—that is, its ability to avoid or survive a collision with an iceberg—may likewise be known in theory, but not tested in practice. Thus the risks are significant, but information is limited.

The captain could choose to go full-steam-ahead and hope that information becomes available in time to detect and avoid risks. Or the captain could consider alterative actions, such as taking a longer course through iceberg-free waters or fortifying the ship’s hull—but there may be substantial costs associated with such actions. In any of these cases, it would be prudent to post lookouts to learn as much as possible about the risks ahead, to constantly evaluate the ship’s environment and performance, and to be prepared to change course if needed, knowing that evasive maneuvers take time. In addition, it is essential to prepare for adverse outcomes that may occur, despite efforts to reduce their likelihood. The captain, in short, faces a problem of risk management.

America’s climate choices are not, of course, made by one “captain,” but by decision makers at all levels of society—from the President and Congress, to state and local leaders, to individual households and business owners. Nevertheless, the collective ship of state is best guided by coherent national strategies for assessing options and taking advantage of opportunities to reduce risk.

world is already committed to some degree of climate change as a result of GHG emissions to date.

Making America’s climate choices thus necessarily involves managing risks that may be quite substantial and that cannot be eliminated, yet are often difficult to assess precisely. Making choices under such conditions can seem very difficult in the abstract, yet most people make such decisions every day. For instance, people decide how fast to drive, knowing that driving faster saves time but also uses more gas, increases the chances of a speeding ticket, makes an accident more likely, and makes the consequences of an accident more severe. People invest in measures to prevent fires in their homes and businesses, and they take out insurance to deal with the consequences in case fires do occur. People who make financial investments usually diversify their portfolios to hedge against uncertain future market changes. At the national level, history contains countless examples of policy makers taking action to address serious but poorly defined risks that could be neither eliminated nor responsibly ignored. For instance, investments in deterrence during the Cold War were justified as reducing the



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