# Box 1. The risk of tipping points

The damages from climate change are rising and may spiral out of control. Scientifically, there is “very high confidence in the potential for state shifts” (U.S. Global Change Research Program, 2017) in which the climate system passes tipping points to unleash positive feedback mechanisms of escalating damages, meaning that beyond certain threshold warming levels, the costs of climate change may accelerate abruptly. If human action increases earth’s temperature beyond certain levels, these increases may trigger positive feedback mechanisms in the climate system which cause additional, autonomous warming. This additional warming may spiral out of control, implying that these tipping points could be points‐of‐no‐return. Such tipping points could be the melting of the Antarctic and Greenland ice shields or a shift in the El‐Nino Southern Oscillation.

In addition to global tipping points, there is also the risk of local tipping points where local limits to adaptation (limits to the adaptation of local eco systems or human beings) are crossed. Examples of such local tipping points would be that summer temperatures in the Gulf countries become too high for human being to survive outside, or the death of the local forests due to fires in California or the Russian Federation. Even though such local tipping points are less dramatic than global tipping points and geographically contained, such local tipping points may be crossed earlier and the impacts difficult to manage for individual countries.

It is critical to avoid crossing climate tipping points. At which levels of temperature increases these tipping points lie is not certain; based on the scientific consensus (e.g., IPCC, 2014), the international community has agreed to translate its objective to “avoid dangerous anthropogenic interference with the climate system” (UNFCCC, 1992, Art. 2) into the commitment to contain global warming to “well below 2°C” (Paris Agreement 2015). From a macroeconomic perspective, the concept of a tipping point is familiar. It is important to contain the risk of unleashing crises, knowing that, once triggered, a crisis can be much more expensive to stabilize than the costs of policies to prevent it. For climate change, stabilization might even be impossible (IPCC, 2014), leading to a fat‐ tailed probability distribution of disastrous outcomes (Weitzman, 2009), so there is a clear logic of avoiding such tipping <u>points.</u> A particular shortcoming of IAMs is that they typically do not include money, finance, and banking. As pointed out by Farmer et al. (2015), this may be a significant shortcoming, as “... the financial sector is crucial for understanding cycles of economic activity and hence climate change emissions and mitigation policies.” This also omits the potential impacts of stranded assets and the increasing role of climate finance for green projects. Work is underway to address the shortcoming of IAMs (e.g., Piontek et al., 2018; Burke et al., 2015; or Mittnik et al., 2019).

The focus on aggregate GDP losses also fails to take into account important distributional aspects of the economic impacts of climate change. GDP impacts at the global level do not capture well what happens in poor countries (and to poor people in all countries). Tropical countries are projected to feel the brunt of climate change impacts and the poor in developing countries tend to be more exposed to and have only very limited means to deal with climate change risks. Climate change thus slows down poverty reduction, but the disproportional effect on poor countries and on the poor can also magnify negative impacts on economic growth. While better off countries and people are better equipped to recover from climate impacts, the poor typically lack this ability and temporary impact can have permanent effects, if for example these temporary effects result in children quitting school or households having to sell income earning assets.

A successful transition to a low‐carbon economy will not only avert the negative impact of climate change but can become a new engine of growth for the 21<sup>st</sup> century. Regarding climate mitigation measures, 8