Risk tolerance and risk appetite are very similar but are not the same thing.
Tolerance is how much of a type of risk you are willing to put up with, and generally, you are trying to minimise such risks (think: how much fraud am I willing to put up with before I take drastic measures). Appetite is how much risk you want to take in order to create value or to make money, and you are generally trying to maximise the risk up to the limit of your appetite (think: what level of losses do I need to, and am willing to, sustain in order to get that dominant market share).
The distinction can be applied to climate change – at least for a small number of countries.
The Greenland ice sheet is currently dumping 3bn tonnes of meltwater into the ocean every day. If the entire ice sheet melted, sea-levels would rise by 7 metres, to catastrophic effect. Currently, it is melting faster than the average for the last 40 years.
Whilst climate change risk has gone up the political agenda, not that much is actually happening (a massive programme creating marine carbon sinks would be helpful). However, at some point, the impacts will exceed some countries’ tolerance and they will feel impelled to take real, radical action. By the time that happens, the only options for most countries may be defensive or adaptive measures to try and minimise the impacts. Only two or three countries have the resources to unilaterally take the sort of action that might halt or reverse climate change. By then, it may be that such action will be limited to extremely expensive geo-engineering, such as building and maintaining a system for pumping reflective particles into the atmosphere to block a little of the sun’s energy.
If one of say, USA, China or the EU, has the appetite for such a project, perhaps because although very expensive, the costs are lower than dealing with the impacts of warming, then the risks to other countries might actually increase. For example, one climate model suggests that geo-engineering by China to create a comfortable temperature, would have a harmful impact on India. And the risks will rise when those countries realise that the first mover will have a big advantage….
Data Source: the Economist magazine