Robust Management of Systemic Risks and Food-Water-Energy-Environmental Security: Two-Stage Strategic-Adaptive GLOBIOM Model

Tatiana Ermolieva,Nikolay Khabarov,Yuri Ermoliev,Petr Havlik,Michael Obersteiner

doi:10.3390/su13020857

Tatiana Ermolieva, Nikolay Khabarov + Show 3 more

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https://doi.org/10.3390/su13020857

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Abstract

Critical imbalances and threshold exceedances can trigger a disruption in a network of interdependent systems. An insignificant-at-first-glance shock can induce systemic risks with cascading catastrophic impacts. Systemic risks challenge traditional risk assessment and management approaches. These risks are shaped by systemic interactions, risk exposures, and decisions of various agents. The paper discusses the need for the two-stage stochastic optimization (STO) approach that enables the design of a robust portfolio of precautionary strategic and operational adaptive decisions that makes the interdependent systems flexible and robust with respect to risks of all kinds. We established a connection between the robust quantile-based non-smooth estimation problem in statistics and the two-stage non-smooth STO problem of robust strategic–adaptive decision-making. The coexistence of complementary strategic and adaptive decisions induces systemic risk aversion in the form of Value-at-Risk (VaR) quantile-based risk constraints. The two-stage robust decision-making is implemented into a large-scale Global Biosphere Management (GLOBIOM) model, showing that robust management of systemic risks can be addressed by solving a system of probabilistic security equations. Selected numerical results emphasize that a robust combination of interdependent strategic and adaptive solutions presents qualitatively new policy recommendations, if compared to a traditional scenario-by-scenario decision-making analysis.

Highlights

Increasing interdependencies among systems involving interactions between man, nature, and technology resemble a complex chain network connected through supply–demand relations
The main issue discussed is that growing interdependencies between FEWE systems increase their vulnerability, especially if the systems are governed by incoherent policies
Any insignificant-at-the-first-glance-shock, e.g., due to weather variability or inadequate, say, biofuel, policies may induce systemic risks that implicitly depend on the whole structure of the systems, in particular, costs, technologies, prices, trade flows, risk exposure, security constraints and targets, risk measures, and decisions of agents

Summary

Introduction

Increasing interdependencies among systems involving interactions between man, nature, and technology resemble a complex chain network connected through supply–demand relations. Risks of disruptions and failures in such systems may be unlike anything that has been experienced in the past These risks can be induced by human decisions, in combination with natural shocks. A hurricane, in combination with inappropriate dams’ maintenance and land-use management, can result in human and economic losses, similar to those induced by Hurricane Katrina [2]. Another example relates to an increase of biofuels production, which affects crops and food prices, destabilizes food and water provision, and worsens environmental conditions [3,4]. The notion of systemic risks was introduced by Kaufman and Scott [5] in relation to financial systems

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