Climate change, carbon prices and insurance systems

Abstract

Market approaches to limit CO₂e emissions such as carbon taxes and emissions trading schemes (ETSs) aim to avoid dangerous anthropogenic climate change by ascribing a financial cost to emissions. Yet such approaches have failed to establish either emissions limits or carbon prices equal to the task. We propose an approach to carbon pricing that better reflects the biogeophysical limits of the Earth system by drawing on aspects of insurance systems including forms of social insurance and the insurance industry. Our proposal achieves this by: (i) creating a financial liability link between current emissions and attributable near future losses; and (ii) applying Fraction Attributable Risk (FAR) analysis to determine the contribution of anthropogenic climate change to increased probability of experienced damaging weather events. Our proposal, a departure from current approaches to pricing CO₂e emissions, has aspects that are consistent with existing forms of insurance. It requires participation by states and a small number of larger and established reinsurers. Our proposal provides both the scientific–technical capacity and the political–economic incentive to shift the anchor point for carbon prices away from pressing short-term political and economic considerations and closer to strategic ecological requirements for Earth system stability: the balance is shifted to favour changes in the global economy necessary to avoid dangerous anthropogenic climate change over current estimations of what is politically and economically feasible or desirable. Our proposal is an example of reflexive mitigation, grounded in complex adaptive systems theory, and centres on relationships between the Earth system, the global economy and insurance systems.

Keywords:

• climate change
• carbon price
• insurance
• reflexive mitigation
• adaptation
• complex adaptive systems

Acknowledgements

Many thanks to George Walker for insightful and helpful comments. Many thanks to the Graduate School of the Environment, Macquarie University, Sydney, Australia, and to colleagues in the Discipline of Geography & Environmental Studies, University of Newcastle, Newcastle, Australia, and the Australian Research Council (ARC) for research support.

Notes

1. CO₂e (equivalent carbon dioxide emissions) is a ‘standard and useful metric for comparing emissions of different greenhouse gases’ (IPCC 2007b: 945). In this paper, in the interests of flow, we use ‘emissions’, ‘CO₂e emissions’, ‘carbon emissions’, ‘carbon’ and ‘greenhouse gases’ interchangeably.

2. Carbon is also priced as part of assessing the anticipated benefits and costs of proposed projects and policies, for example infrastructure developments such as highways and airports. Similar to market-based instruments, approaches such as shadow price and social cost of carbon (Stanton and Ackerman 2008) are aimed at internalising the externality of carbon emissions. The approach to pricing carbon presented in this paper may be applicable and useful in these contexts also but is not considered here.

3. Washington et al. (2009) begin by conceding that significant warming this century cannot be avoided. Their objective is to model emissions reductions necessary to avoid the most serious climate change impacts. On this basis Washington et al. (2009: 5) suggest deep cuts in emissions in the order of 70% on today's levels by 2100 would still allow stabilisation of the Earth system, albeit at a warmer temperature.

4. ‘Transient Climate Response’ is defined as ‘the warming we should expect at the time of carbon dioxide doubling – around year 70 – if carbon dioxide levels were to increase at 1% per year, starting with a climate in equilibrium’ (Allen et al. 2007: 1353–1400). The alternative approach uses the more common stabilisation scenarios, about which there is less scientific consensus. See Frame et al. (2006) for a detailed discussion.

5. The FAR method is not applicable to future events: it is not a predictive tool. The FAR method provides a probabilistic assessment after the fact. Allen et al. (2007: 1390) however suggest as a future research direction exploring the predictive application of FAR method, i.e. attempting to catalogue and define damaging weather events before they occur.

6. Point Carbon (2009) calculates a ‘weighted average world carbon price of €19 ([US]$26) per tonne CO₂e in 2008’, and notes that in 2008, ‘[t]he world's carbon market exchanged 4.9 billion tonnes (Gt) CO₂ equivalent in … worth an estimated US$125bn’.

7. Others have also proposed climate change-linked funds, for example the ‘Earth Atmospheric Trust.’ See Barnes et al. (2008).