Climate tipping points through an option pricing lens

The scientific view of tipping points goes something like this: as temperatures rise we will traverse critical milestones that will make certain catastrophic events inevitable and irreversible.  Even if temperatures are subsequently controlled, this sequence of unstoppable calamities will continue to play out and we will have to live with the ramifications. Or perish.

Let’s face it, this is irrefutable given the available evidence. 

People in finance often go on to infer that future investment losses will occur as a direct result of these tipping points being passed.  I’ve also noticed that central bankers have subtly expanded the definition of tipping points to cover anything that might one day cause an upward bend in physical risk, even if such a development is subsequently reversible.

Unlike the physical reality of tipping points, the financial consequences are not settled science, mainly because the evidence demonstrating their effect is not present.  As such, whenever a regulator or commentator implies that it is, or refers to tipping points in a throwaway manner to justify some regulatory initiative or other, we should be highly skeptical.  

Here, I want to do some due diligence and actually explore the veracity of the claim that “tipping points make elevated financial losses inevitable.”  At face value the claim is plausible, but there are several elements that make it dubious at best.  The urgency with which financial regulators describe the tragedy of tipping points is reasonable from a humanistic standpoint but hyperbolic when viewed strictly in the context of financial stability.