Macro Risks:The Challenge for Rational Risk Regulation

30 Pages Posted: 18 Feb 2012 Last revised: 20 Feb 2012

See all articles by Michael P. Vandenbergh

Michael P. Vandenbergh

Vanderbilt University - Law School

Jonathan M. Gilligan

Vanderbilt University - Department of Earth and Environmental Sciences; Department of Civil and Environmental Engineering; Vanderbilt Institute for Energy and Environment

Date Written: February 1, 2011

Abstract

Drawing on the recent financial crisis, we introduce the concept of macro-risk. We distinguish between micro-risks, which can be managed within conventional economic frameworks, and macro-risks, which threaten to disrupt economic systems so much that a different approach is required. We argue that catastrophic climate change is a prime example of a macro-risk. Research by climate scientists suggests disturbingly high likelihoods of temperature increases and sea level rises that could cause the kinds of systemic failures that almost occurred with the financial system. We suggest that macro-risks should be the principal concern of rational risk assessment and management, but they are not. The principal analytical tool, cost-benefit analysis using expected values, is far less valuable for addressing macro-risks than micro-risks because it fails to adequately treat tail-risks that are capable of disrupting the entire economy. We note the difficulty of assessing and responding to macro-risks such as catastrophic climate change, and we offer several proposals for improving macro-risk assessment methods and the information available to policy makers.

Keywords: climate change, risk analysis, risk management, regulation, cost benefit analysis, environmental law

Suggested Citation

Vandenbergh, Michael P. and Gilligan, Jonathan M., Macro Risks:The Challenge for Rational Risk Regulation (February 1, 2011). Duke Environmental Law & Policy Forum, Vol. 22, pp. 401-431, 2011; Vanderbilt Law and Economics Research Paper No. 12-4; Vanderbilt Public Law Research Paper No. 12-7. Available at SSRN: https://ssrn.com/abstract=2004671

Michael P. Vandenbergh (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

Jonathan M. Gilligan

Vanderbilt University - Department of Earth and Environmental Sciences ( email )

VU Station B #351805
2301 Vanderbilt Place
Nashville, TN 37235-1805
United States
615.322.2420 (Phone)
615.322.2138 (Fax)

HOME PAGE: http://https://www.jonathangilligan.org/

Department of Civil and Environmental Engineering ( email )

2301 Vanderbilt Place
Nashville, TN 37240
United States

Vanderbilt Institute for Energy and Environment ( email )

2301 Vanderbilt Place
Nashville, TN 37240
United States

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