Insurance is designed to allay our fears of worst-case financial losses, whether it’s losing our cars, our homes, or even our lives. So perhaps it was only natural that a 2014 White House Report would matter-of-factly state that “climate policy can be thought of as ‘climate insurance.’ … to reduce the chances of worst-case outcomes in the future.”
“It’s impossible to know how much buying climate insurance will reduce the risks... After all, neither the Clean Power Plan nor the vaunted Paris Agreement will have any measurable impacts on world climate.”
That report lists all sorts of potential calamities that could supposedly cause a runaway greenhouse effect – melting of the Antarctic and Greenland ice sheets, massive releases of methane from Arctic permafrost, and so forth. But despite the various line-in-the-sand claims of impending calamity or tipping points already tipped, we’re not going to wake up one morning, look out the window, and discover the earth has suddenly become Venus.
The White House report also compared buying climate insurance to “individuals and businesses (who) routinely purchase insurance to guard against various forms of risk such as fire, theft, or other loss.” Except buying “climate insurance” is anything but routine and really can’t be compared to buying insurance for your house or car.
When an insurance company sells you a policy, you know exactly what risks you’re insuring against. You know exactly what the insurance company will pay if your house burns down or your car is totaled. And insurance companies use historic data to predict the likelihood that a customer will make a claim, which is why they charge more to insure a teenager driving a Corvette than they do a 50-year-old driving a Camry.
Not so with climate “insurance.” We don’t know what risks we’re insuring against. We don’t know what the costs of the potential damage might be, or if there will be any costs at all. We don’t know if the premiums we’ll be forced to pay will do anything to reduce those risks. And we ignore the very real costs that climate change policies will impose on the world’s poor.
Other than that, it’s a great idea.
With insurance you buy in the marketplace, the “catastrophe” is well-defined, whether a car accident or a house that has burned down. An insurance company offers buyers a known price for a known amount of insurance against a well-defined catastrophic event.
But what does "catastrophic" climate change actually mean? The White House report, for example, cites studies that estimate a 4 degree Celsius increase in world temperatures above pre-industrial levels could reduce world GDP by 2% annually, or about $1.5 trillion.
Even if those estimates are valid -- a big if, given the limitations of pre-industrial climate data and the arbitrariness of the models used to make such predictions -- that's hardly the end of civilization. If the catastrophe isn't well-defined, then it's impossible to define the payoff from the insurance.
And because the models that link CO2 emissions to changes in climate and world economic growth are so speculative, it's impossible to know how much buying climate insurance will reduce the risks of those future, undefined catastrophes, if at all. After all, neither the Clean Power Plan nor the vaunted Paris Agreement will have any measurable impacts on world climate.
And what about other potential catastrophic events, such as a large asteroid crashing into the earth that destroys most all life (it's happened before), or antibiotic resistant bacteria that mutate and create a "superbug" pandemic (such bacteria already exist)? Some scientists even argue that artificial intelligence soon will reach a point where it improves itself at exponential rates and views human beings as the equivalent of cockroaches in the kitchen, to be met with the AI equivalent of a can of Raid.
Shouldn't society also purchase insurance for these potential catastrophic events, too, especially as they would have far more sudden impacts than climate change? And if so, then how much insurance should be purchased? What if China is more concerned about an asteroid impact than climate change, while India believes the No. 1 priority is insuring against a pandemic? For such global "catastrophes," who makes these decisions?
Finally, in our zeal to insure the well-being of future generations, there is a fairness issue that ought not be forgotten: the effects of climate policies on the poor. Policies such as the CPP or broad-based carbon taxes will increase energy costs, and higher energy costs will mean higher prices for just about everything.
Moreover, higher worldwide energy prices will reduce economic growth, which will further immiserate the millions of individuals who today lack access to clean water, basic sanitation, reliable energy supplies, health care, and education. Who decides that their well-being must be sacrificed for the potential well-being of future generations, even if the latter may be far better off regardless?
Some may remember advertisements for the insurance company that assured its customers would be in "good hands." With climate insurance, all you're going to get is a finger.
This piece originally appeared in Investor's Business Daily
______________________
Jonathan A. Lesser, PhD, is the president of Continental Economics, an economic litigation and consulting firm.
This piece originally appeared in Investor's Business Daily