RUINS- Risk, Uncertainty and Insurance under Climate Change. Coastal Land Management on the German North Sea
RUINS investigates risk, uncertainty and insurance of climate change adaptation measures along the German North Sea coast. Uncertainty about the future consists of indeterminate Knightian uncertainty and quantifiable risk: the behavior of society in future decades has such a large as well as unpredictable influence on climate change severity that no probability can be calculated for individual development paths (RCPs/SSPs) (Knightian uncertainty). However, if a climate change scenario is assumed as a framework condition, environmental modeling can be used to make predictions for the impact of adaptation measures and their probability distribution (risk). Using examples of ecosystem services from three land-use sectors - agriculture, wind power generation, and flood control - we develop procedures for the combined analysis and communication of risk and uncertainty. The goal is to help decision makers understand the importance of uncertainty in the decision-making process.
The combined risk and uncertainty analysis has shown that in the presence of Knightian uncertainty, options other than those in the simple risk analysis are attractive. These robust options minimize uncertainty between future scenarios and act as insurance. In this context, the decision maker's subjective attitude toward risk and uncertainty has a major influence on the exact relationship among the options for action.
The experiments showed that known sociodemographic parameters (age, education, satisfaction) are also relevant for the risk and uncertainty preferences of the local population. However, gender and income did not affect preference differences.
Illustration of project results
In the objective risk analysis (left) of individual courses of action (here: the mix of three crops), 100% corn achieves the maximum yield in RCP2.6, and mixes of wheat and corn achieve the lowest variance in yield. However, looking at all three future scenarios (middle), clearly 100% wheat is the highest yield option with the smallest difference between RCPs, whereas 100% corn has the widest possible range and thus the greatest uncertainty. However, the degree to which the differences between RCPs (Knightian uncertainty) are evaluated depends on the risk and uncertainty aversion of the decision maker (right): when the perception of risk or uncertainty is neutral, options can only be distinguished from each other by their utility (far left); as risk and uncertainty aversion increase, the field of options for action fans out, making options with similar utility clearly distinguishable from each other. The uncertainty of an option can be compensated by a premium; this increases significantly with stronger uncertainty aversion.
- When deciding between several courses of action, both objective risk and uncertainty play an important role, as well as their subjective evaluation by the decision maker.
- Considering differences between different future scenarios helps to find the options that are as independent of the scenario as possible and thus robust against Knightian uncertainty.
- Such options act as insurance against Knightian uncertainty and may be more attractive than those with a potentially higher return.
- However, how mean returns and deviations from them are evaluated depends on the decision maker's individual risk and uncertainty aversion.
- To help decision makers deal with risk and uncertainty, we have developed an interactive website (www.uncertaintymatters.de).