Monday, January 07, 2008

Global Warming Insurance?

Just a quick thought about global warming rhetoric, which came to mind while reading this Marginal Revolution post and the linked posts by Jim Manzi. Some of those who advocate taking major steps (starting with a hefty carbon tax) to stop global warming say doing so is a way of “buying insurance” against a major catastrophic event. Their point is that the really really bad scenarios, like a complete melting of the polar ice caps, might be very unlikely, but the consequences are sufficiently bad that we should act anyway.

As policy, there is something to this position. But calling the measures in question “catastrophe insurance” is akin to calling new brake pads “car insurance.” An action designed to reduce the risk of something is not the same as an action that insures against the risk of something. New brake pads reduce your risk of getting into an accident. Car insurance, on the other hand, doesn’t reduce your risk of an accident; it just pays for your losses if an accident occurs. The policies being advocated, insofar as they are supposed to reduce the likelihood of catastrophic climate change, are more like the brake pads. If you’re looking for policies that take the form of insurance, think investments in air-conditioning and dike-building technologies that will be mostly useless unless the crazy stuff really does happen.

It is true that people might buy insurance and adopt preemptive/ameliorative policies for similar reasons. If you’re risk averse, you want to both reduce risk and buy insurance. (Though not necessarily both; if you can reduce risk, it’s not as necessary to insure against it, and vice versa.) But despite similar justifications, the mechanisms are different.

5 comments:

Carl Shulman said...

Glen,

You left out geoengineering, which is probably the most relevant 'insurance' technology.

C.S. Writer said...

Glen,
I'm curious to know what the money from this carbon tax would be used for? Since I do not know (for lack of research) what the plans are for that money, I am merely speculating here: Do you think perhaps the money collected by that tax will be used as "insurance" for such a catastrophe? If that were the case, it might explain the phrase "a way of buying." E.g., not only is the tax going to reduce emissions, but it will also help provide the capital necessary to insure catastrophe. Again, this is speculation because the significance of this tax in comparison to the cost of a catastrophe is unknown to me.

Just a thought,
C.S. Writer

dmarti said...

What about futures on measurable results of climate change, such as sea level? Might be closer to "insurance" since you could use them to hedge your investment in land at risk of flooding.

Glen Whitman said...

C.S. -- The tax revenue could be used for all sorts of things, but that's not why the carbon tax advocates say it's insurance. Sometimes they say it should just offset other revenue sources (like income taxes); sometimes they say it should be used to research alternative fuels; etc. (Note that alternative fuels, if successful, would reduce the risk of global warming catastrophe, and thus still would not really qualify as insurance against such risk.)

Dmarti -- Yes, I think futures like that would constitute a form of insurance. But only for the people who bought them; for those who sold them, they would be anti-insurance (betting against catastrophe).

Anonymous said...

In ft.com, lawrence Summers recently wrote:

Fiscal stimulus is appropriate as insurance because it is the fastest and most reliable way of encouraging short run economic growth at a time when a serious recession downturn would pressure American families, exacerbate financial strains, raise protectionist pressures and hurt the global economy.
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Apparently, the misuse of the word "insurance" isn't restricted to non-economists.