Here's another, featured in the same place, this time flying the colours of the Economist Intelligence Unit (and oddly sponsored by Aviva, presumably to provide top-cover for some bizarre new policy direction they are taking). It pupports to establish that the Cost of Doing Nothing - about climate change, naturally - is as follows:
"value at risk to manageable assets from climate change calculated in this report is US$4.2trn, in present value terms. The tail risks are more extreme; 6°C of warming could lead to a present value loss worth US$13.8trn, using private-sector discount rates. From the public-sector perspective, 6°C of warming represents present value losses worth US$43trn—30% of the entire stock of the world’s manageable assets"Oo-err, missus. It runs to 63 pages but I can't recommend you spend the time. However, as part of the usual C@W service to readers, here are a few comments.
1. Gross mis-use of 'VaR'
The report states (correctly): "A core responsibility of asset managers and institutional investors is to manage risk, and the most commonly employed measure to assess it is value at risk (VaR)." Just so, but the calculation of VaR as understood (and in the finacial world it is indeed well-understood, check google to see the wealth of serious work done on this metric) absolutely cannot sustain a horizon-period of 85 years. Most practitioners wouldn't trust it much beyond 8.5 days (- find me a company report citing VaR beyond 5 days). Nicholas Taleb often writes as though he wouldn't trust it at all.
But they are clearly inviting us to accept it in the technical sense that the 'VaR' moniker is regularly employed for (as well, perhaps, in an ordinary-language sense for those who have no inklining it is in fat a technical term). It is hard for a non-practitioner to grasp what violence has been done to the underlying concepts to push out VaR that far. It's a bit like saying to a patient: we need you to hold your breath for ten seconds while we do this test. Good: now hold it for ten hours.
What they've done mathematically might have some ultra-qualified, very abstruse 'meaning'. But they are trying to leverage the broad, intuitive acceptance of VaR as a financial metric: and VaR it ain't.
2. Ludicrous scenarios / counterfactuals
A related issue is the craziness of projecting either scenario - a world without climate change (base case) and a do-nothing world of climate change (in varying degrees of temperature-rise) - on a continuous basis, with nice smooth curves. One of the reasons VaR is properly limited to what might be lost over a few days is that much beyond that, (a) empirical data shows that the maths breaks down / ceases to be valid; and (b) a massive factor behind this is that people react to developing situations and re-optimise their positions. Feedback kicks in. So nothing in the human world carries on in smooth curves (check the price of oil since 1972 for an illustration). Sometimes - retrospectively - 'secular trends' are identified, and how long do they last? Only the benign ones last 85 years.
Why is it to be imagined that anything would drag on getting worse and worse for 85 years? I don't mean "- because obviously we will all agree to install more windfarms at the next Paris Conference", I mean because (if you really believe this stuff) something will fundamentally bust a great deal sooner than 85 years. (And I understand, of course, that a believer might advocate 'acting', for that very reason - but please don't tell us the financial incentive to do so is measured by an 85-year model.)
The way the world really works is, if something really bad is actually happening then a war breaks out (or similar extreme reaction) - in other words, a discontinuity results, much sooner than 85 years into the affair. Do wars destroy wealth? Well they do, and more - strongly to be avoided where possible. But have a look at how WW2 turned out for the USA. Or the aviation industry. Or nuclear science. Things change, and change a lot.
3. Why call this stuff 'Climate VaR'?
Why not 'over-population VaR'? It's every bit as good a conceptual diagnosis of what they think is going on.
I really thought better of the Economist than this.