Saturday, June 6, 2009

 

Carbon Legislation as Insurance Policy?

One of the newer moves in the climate wars has been to discuss so-called mitigation policies (taxing or capping greenhouse gas emissions, subsidizing research into alternative energies, etc.) as a form of insurance. The idea is, just as you gladly (and responsibly) pay a small premium every six months for fire insurance on your house, even though there is a decent chance you will never need it, so too should humanity sacrifice a small sliver if annual output to eliminate the small chance of a catastrophic climate event.

Now in this post, I'm not going to talk about the numbers and whether buying such an "insurance policy" is worth it. (I don't think it is, at least not for most of the policies I've seen discussed.) Rather, all I want to point out right now, is that the analogy is a pretty poor one.

When a thousand homeowners all buy fire insurance, they aren't preventing a fire from occurring. It's true, in order to get lower premiums they might have smoke alarms installed and stock up on fire extinguishers, etc. But the essence of insurance is to take a given risk and transfer it all to a single agency. Because people are risk averse, they would much rather lose $1000 for sure (in the form of premiums), rather than face a 1/1000 probability of losing $1 million. So that's why everybody wins, including the owners of the insurance company, when the company charges a slightly higher than actuarially fair premium.

So with conventional insurance, people's homes still burn down, but the "community" (actually the group of insurance customers) agree beforehand to spread that damage collectively, so it doesn't fall entirely on a few pseudo-random households.

Notice that that is basically the exact opposite of what people have in mind, when they refer to climate mitigation policies as insurance. No, if it were really insurance, then what you'd have is a million planets like Earth would all chip in 1% of GDP every year, and then every 50 years one of the planets would become uninhabitable because they passed a tipping point and hit a runaway greenhouse effect. So at that point, the 80 gajillion bajillion dollars that had accumulated in the insurance company's portfolio would be used to transport all of those people to a different home planet and to indemnify them (insofar as this was possible) for their material losses.

To go the other way, what a "climate change insurance policy" would mean, in the context of traditional homeowner's fire insurance, would be a company serving just one homeowner. And the company would say to him, "OK right now there is a 1/1000 chance that your million dollar home will burn to the ground. So, you pay us $1000 every year, and we will take out everything that's flammable in your house and replace it with something that's not quite as good, but is less likely to burn. And you're not allowed to cook with your oven anymore, just the microwave. And no more fires in the wintertime."

To repeat, I am not (in this post) ridiculing the notion of climate mitigation policies. I'm simply pointing out that they really aren't "insurance policies" in any conventional sense. Ironically, it is the adaptationists who truly favor an insurance approach. I.e. people like Rob Bradley and me will say, "Free markets up as much as possible, to generate enough additional wealth so that if and when those disasters strike, humans can deal with it and rebuild." That is far more analogous to what actual insurance companies do in their normal operations.



Comments:
You could also have actual insurance against climate catastrophe. Not for the whole planet, of course, but individuals and even small countries could potentially take out policies against the possibility of climate-related disaster.

I suspect, however, that insuring a tiny atoll nation against the possibility of rising ocean waters would not be cost effective. For all I know, however, that's either already being done, or it's already being rejected in favor of political approaches.
 
Wow, where to start...

When a thousand homeowners all buy fire insurance, they aren't preventing a fire from occurring. It's true, in order to get lower premiums they might have smoke alarms installed and stock up on fire extinguishers, etc.

So, your devastating indictment of the use of "insurance" terminology is, "Hey, you guys are actually talking about ensurance, not insurance." Or, "You guys are really talking about insurance premium discount strategies, not insurance per se."

Wow, that totally shakes up the debate and conclusively proves why we shouldn't even be talking about spending resources now to prevent a probability of catastrophes later.

Notice that that is basically the exact opposite of what people have in mind, when they refer to climate mitigation policies as insurance. No, if it were really insurance, then what you'd have is a million planets like Earth would all chip in 1% of GDP every year,[lb]

Are you really incapable of coming up with good analogies? You don't need to imagine multiple earths to come up with a purer example of insurance. (But I guess your goal was to make all alternatives look artificially unrealistic, right?) You could just talk about people within the current earth paying premiums into a pool that pays out wherever the impacts of warming occur.

But of course, that would be like telling someone he should go buy meteor insurance before you begin orbital bombardment.

Ironically, it is the adaptationists who truly favor an insurance approach. I.e. people like Rob Bradley and me will say, "Free markets up as much as possible, to generate enough additional wealth so that if and when those disasters strike, humans can deal with it and rebuild." That is far more analogous to what actual insurance companies do in their normal operations.

Wtf? How is that analogous to actual insurance companies? They don't care about freeing up markets to generate more wealth to handle whatever life throws at us. They care about making sure their assets cover claims against one set of specifiable future events. Yes, they like to improve the efficiency of the process, but that's not the same as love of free markets in an abstract or universal sense that you and Rob Bradley claim to have.

What your "position"[1] is analogous to is actually (as I've said before) "Let me dump as much crap as I feel like down your kids' throats. The economy will get, like, really supercharged and stuff, and you might be able to afford an operation for one of your kids. YOU will pay for it, of course."

Bob, if there's really such tremendous economic benefit from unrestricted CO2 emission, then surely there's enough to compensate the property owners f'ed over by the emissions, right?

[1] I use scare quotes because "Go f*** yourself, Coastie" isn't really a "position", so much as the grown-up version of "The rules apply to thee, not me."
 
Silas wrote:

Wow, that totally shakes up the debate and conclusively proves why we shouldn't even be talking about spending resources now to prevent a probability of catastrophes later.

Silas, both in the beginning, and at the end, I bent over backwards to say I wasn't questioning (in this blog post) the wisdom of mitigation policies, that I was merely pointing out that they were hardly an example of "insurance."

Do you agree that I said that?
 
I think Stewart has the right idea.

I wonder if there would be a market for global warming insurance which pays in the event of some well defined conditions, e.g. the joint conditions that the global mean temperature exceeds some level, that an above water are becomes submerged and that the increase in water level cannot be attributed to some local event.

Actually, this would also provide a nice market based solution to this perpetual annoying conflict between Silas and Bob:

Silas, you could sell such policies to those in coastal areas right now and make them better off. It would make them better off even if Bob is too depraved to see it your way, even if the government is too backward to implement your preferred carbon policy, etc. What are you waiting for?

Bob you could, anticipating more premiums than payouts, be a major in Silas' operation and enjoy a stream of low risk income. Good deal?
 
Bob, do you agree that I just explained why that's a distinction without a difference? Pretend everyone is really saying "ensurance" instead of "insurance". Then go about your regular life.

Anything to say to the rest of my points? I think this is about the sixth time you've passed on explaining why it's okay to jam toxic crap into children's lungs without compensation, as long as it, like, helps the economy and stuff.

@James: I'm actually not as wealthy as my car, attractiveness, teeth, savings, gold stockpiles, and profession might together suggest. So I can't easily start a business. Besides, I think humanity's efforts are best directed at the problem of artificial general intelligence, which would function as a "trump card" for pretty much all of these problems, and that's exactly where my spare efforts are directed.
 
Silas,

Your AI work seems to leave enough time for you to argue with Bob. You could spend that time pitching global warming insurance to deep pocketed global warming skeptics.

If you manage to convince Bob, still nothing gets better. If you sell the idea, something gets better. Take your pick.
 
Silas wrote:

Bob, do you agree that I just explained why that's a distinction without a difference? Pretend everyone is really saying "ensurance" instead of "insurance". Then go about your regular life.

The point of my post was, "The people using the term 'insurance' shouldn't be calling it that."

You are correcting me by saying, "If you just assumed they were using a different term, your whole point would fall apart."

Yes, that's true, but my point was that they should be using a different term. I specifically said that I wasn't here criticizing their recommended methods.

But it's not just a matter of terminology; they are invoking the idea of insurance, because it's very safe to buy insurance and only a reckless gambler would refrain from it. That's why they call the cost of mitigation policies "insurance premiums" etc.

So in that context, it is indeed relevant if I point out that their linkage to insurance is a misnomer. Maybe their recommended policies are good, but not because "they're like insurance, and we all agree buying insurance is good."

I think this is about the sixth time you've passed on explaining why it's okay to jam toxic crap into children's lungs without compensation,

Because that's not my position, nor has anything I ever said come close to that. Carbon dioxide is not "toxic crap" that hurts people's lungs. Establishing that GHG emissions are a form of aggression is a lot more complex than saying a factory can't dump chemicals in the river.
 
@Bob_Murphy: You are correcting me by saying, "If you just assumed they were using a different term, your whole point would fall apart."

No, I corrected you by saying, "if you assumed they were using a different term that most people don't even distinguish from the objectionable one anyway, then your whole point is irrelevant".

Your point amounts to

a) "that's ensurance, not insurance"
b) so the standard rationale about taking safety precautions to reduce the chance of a disaster are misguided.

b) is plainly false.

a) is basically grammar Nazism, like the fellow who by-golly insists that "You can't say 'three alternatives' because 'alternative' implies two of them."

Really, no one gives a durn. Modern usage has moved on. Most people use insurance and ensurance interchangeably. Either of them can mean 1) buying a hedge against a catastrophe, or 2) taking a measure to prevent a catastrophe.

My 8th grade teacher drilled into us the difference between insure and ensure. The modern world does not care, and your distinction does not help the substance of the issue or the ability to communicate about it. Any positive affect people attach to insurance is also attached to ensurance, and deservedly so.

me:I think this is about the sixth time you've passed on explaining why it's okay to jam toxic crap into children's lungs without compensation,

you: Because that's not my position, nor has anything I ever said come close to that.


You certainly may not want to realize it's your position, but I have firmly established by now that it is a direct implication of the principles you have invoked to justify your arguments.

You have quite clearly claimed that a CBA about the economic benefits of granting the legal right to throw unlimited "bad stuff" into the air justifies that legal right, irrespective of any property rights infringed by such emissions or lack of compensation paid or permission gained.

That very justification carries over directly, without loss of generality, to the point made by the statists of the 19th century that, "Oh, sure, your clothes got all messed up by pollution ... but we gotta have economic growth (as we define it, of course.)" It would imply that any kind of air pollution can be justified if it will make the victims *just* rich enough to undo, out of their own pockets, the horrible damage dealt to them in contravention of their clear, libertarian rights.

Yes, you can point to trivial differences between the cases of killing children for profits, and global warming. But the principles you rely on do not make such distinctions.
 
Bob, I`ll certainly agree with you that taking actions to mitigate potential climate change is not a form of "insurance", but it is very definitely intended by a large slice of its proponents as a risk reduction measure.

Kinda like people in a bus at a top of a hill who can`t see the road ahead are engaged in risk reduction activities when they try to figure out ways to steer, brake or to put the bus in a lower gear - those collective activities would also be seen as risk reduction activities, even if they are not "insurance".

Is there a substantive point in this post?
 
Silas, please explain to me how CO2 "toxic crap"?
 
Daniel, the point wasn't that CO2 is necessarily "toxic crap", but rather, that the argument Bob gave for his preferred policy would, just the same, justify jamming *truly* toxic crap into children's lungs on the grounds that, "hey, chill out! Economic growth will be so great from me doing this that you'll be able to afford an operation for your kids! Rock on!"

The point, ladies and gentlemen, is that you can't justify pollution (or equivalent negative rights-violating externalities) that way. If the benefit to polluting is so gosh-darn great, then, at a minimum, that means you need to compensate others for the physical damage it does to them *now*, or will forseeably be done later.

You simply don't get to say that the economic benefit will eventually make the victim better off. That's just not how libertarianism works, and Austrians are eminently capable of grasping this insight in any other context, when the rip on Coase. If the economic benefit is so great, that it should still be great after paying off the people who had to suffer rights violations to make it happen.

Get it?
 
Well said, Silas. There ARE of course libertarian arguments for opposing government actions on climate change mitigation; we just rarely hear them.

"Ironically, it is the adaptationists who truly favor an insurance approach. I.e. people like Rob Bradley and me will say, "Free markets up as much as possible, to generate enough additional wealth so that if and when those disasters strike, humans can deal with it and rebuild.""

Bob, how is THAT remotely an "insurance" approach, as opposed to a "let the victims grin and bear it, while those who generate risks get away without any responsibility for the downside" approach?

On the adaptation approach, I see the same libertarians who oppose carbon pricing or other mitigation measures calling for governments to spend money on adaptation and geoengineering. Are you one of those?

BTW, just where are you and Rob Bradley calling for freer markets, anyway? I see you both opposing new regulation, but nowwhere have I seen either of you calling for privatization of public lands (or alternate trust policies that give citizens royalty checks), an end to public utility regulation, and an end to the regulatory deals that favor dirty coal plants?

Inquiring minds and all that.
 
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