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

Tatiana Ermolieva, Peter Havlik, Yuri Ermoliev, Nikolay Khabarov and Michael Obersteiner
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Tatiana Ermolieva: International Institute for Applied Systems Analysis, Laxenburg 2361, Austria
Yuri Ermoliev: International Institute for Applied Systems Analysis, Laxenburg 2361, Austria
Nikolay Khabarov: International Institute for Applied Systems Analysis, Laxenburg 2361, Austria
Michael Obersteiner: International Institute for Applied Systems Analysis, Laxenburg 2361, Austria

Sustainability, 2021, vol. 13, issue 2, 1-16

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.

Keywords: interdependent systems; systemic risks; two-stage non-smooth stochastic optimization; quantile-based risk constraints; robust strategic and adaptive decisions (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
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