Page - 6 - in options, Volume winter 2018/2019

News in brief A new book edited by researchers at IIASA, the London School of Economics, and Deltares looks at the research, political debate, and policy options surrounding the impacts of climate change that may be irreversible and beyond physical and social adaptation limits, known as Loss and Damage. Loss and Damage from Climate Change: Concepts, Methods and Policy Options, is the first publication from the Loss and Damage Network, a partnership of scientists and practitioners Reinhard Mechler, Risk and Resilience Program deputy director led the editorial team, which also included IIASA researcher Thomas Schinko and Risk and Resilience Program Director JoAnne Linnerooth-Bayer. The book covers the political, legal, economic, and institutional dimensions of Loss and Damage, highlights the role of climate management, presents case studies, and identifies practical, evidence-based policy options. Five key propositions to policymakers include identifying the distinct policy space for Loss and Damage, the use of attribution science (the understanding of the mechanisms that lead to climate change) to better inform policy, and the development of a broad narrative highlighting mutual benefits of improved policies. Mechler explains that the science supporting potential policies has been trailing the debate. The new book aims to address this, and the propositions could form a foundation for the development of widely acceptable policies. Researchers at IIASA have developed a new method to reduce systemic risk in the European government bond market by half without disadvantaging involved institutions financially. Systemic risk is the chance that a crisis at one company could lead to the collapse of a financial system. The new method focuses on the risk posed by common asset holdings by financial institutions, known as ‘contagion’, which occurs when investors have overlapping portfolios of assets. If an institution under financial stress sells a particular asset at a reduced cost – a fire sale – it will devalue it, thus devaluing the portfolios of other institutions. The researchers first developed a model to quantify systemic risk within a financial market with overlapping portfolios, and then used the information to rearrange overlapping portfolios without changing any size or risk profiles. The model showed that the systemic risk of the optimized market was reduced by a factor of 2.27. It is more densely interlinked and in the European government bond market example, every bank was invested in every asset. The researchers tested the new method by simulating fire sales. In every simulation in the original network, banks defaulted. In the optimized network however, there was not a single default. The research will be useful to the academic community, policymakers, and regulators, and is applicable to other types of markets. Written by: Helen Tunnicliffe How to deal with critical risks from climate change beyond adaptation limits Further info: Pichler A, Poledna S, Thurner S (2018). Systemic-risk-efficient asset allocation: Minimization of systemic risk as a network optimization problem. Journal of Financial Stability [pure.iiasa.ac.at/15098] Sebastian Poledna: poledna@iiasa.ac.at Further info: Mechler R, Bouwer LM, Schinko T, Surminski S, Linnerooth-Bayer J eds. (2018). Loss and Damage from Climate Change: Concepts, Methods and Policy Options. Springer International Publishing [pure.iiasa.ac.at/14506] Reinhard Mechler: mechler@iiasa.ac.at Written by: Helen Tunnicliffe Halving systemic risk in financial markets without adverse economic effects 6 www.iiasa.ac.atOptions Winter 2018/19