Posted on April, 27 2024

A new policy report from UCL Institute for Innovation and Public Purpose University of Exeter's Global Systems Institute explores ecosystem tipping points (ETPs) and their implications for macroeconomic and financial policymakers needing to manage nature-related risks.

Stable natural ecosystems underpin all economic activity. Ecosystems provide the natural resources needed for production; regulate climate change and global rainfall patterns; and provide resilience against natural disasters and the extremes brought on by global warming. Pressures on nature from human activity – such as land use changeand pollution, as well as climate change - are increasing the risk of terrestrial ‘ecosystem tipping points’ (ETPs): non-linear, self-amplifying and irreversible changes in ecosystem states that can occur rapidly and on a large scale. 

Key ETPs that could threaten Earth system stability include: such as the dieback of the Amazon rainforest, the collapse of tropical peatlands in Southeast Asia and the Congo Basin, transitions in boreal forests in the northern hemisphere, and the mass die-off of mangroves to salt flats. These non-linear, self-amplifying, and irreversible changes threaten economic stability by changing the functioning of critical ecosystems on which we depend.

A key global consequence of ETPs is their feedback effect on climate change. The Amazon rainforest, tropical peatlands and mangroves currently sequester around 220 gigatons of carbon – the equivalent
of around 20 years of global CO2 emissions based on current rates  that could be destabilised, making staying below global warming of 1.5º impossible.

Losing these critical ecosystems will severely impact the economy through reduced food and energy security; damages to assets such as real estate, croplands and infrastructure; and health risks that impair household productivity. The direct impacts of ETPs can reverberate globally and extend far beyond the regions where these ecosystems are located.

Yet, the modelling frameworks currently being used to quantify physical risks so far underestimate the level of impacts posed by tipping points due to ecological and economic simplifications. These analyses are not yet decision-useful and should not be used to inform mitigation action.

This paper identifies initial ways forward for financial policymakers to embrace a more diverse array of modelling frameworks. 

• Policymakers should consider a wider range of modelling approaches that can better represent the economic impacts of crossing ETPs, such as accounting for the non-substitutability of critical ecosystems; indirect effects through (global) value chains; and the role of shorter-term, highmagnitude shocks. 
• The fundamental uncertainty associated with ETPs requires policymakers to explore other approaches beyond risk quantification.
• A ‘double materiality’ perspective offers a promising way forward. There is a role for financial authorities to identify and map where financial institutions are exposed to economic activity that is driving ecosystems towards tipping points. 
• The scale of environmental breakdown posed by ETPs needs a precautionary approach. This must focus on rapidly eliminating negative drivers to prevent thresholds being crossed ex ante, rather than
  attempting to predict the timing and outcomes of complex Earth system changes. Ultimately, this approach will need to be led by governments,and requires central banks and financial supervisors to coordinate with policymakers in ministries of finance, industry and environment to fulfil their primary mandates of price and financial stability.