Global Warming Insurance Policy Is Worth Premium: Gene Sperling

Bloomberg: …. Should a policy maker have to know beyond a reasonable doubt that climate change is caused by humans to support policies to address it? The answer may depend on whether you take an investment or an insurance perspective to the issue of climate change.

From a conservative investment perspective, the prudent person chooses to invest new funds only where he believes it is more likely to get a higher return than leaving the money in low- risk bonds or money markets. From this framework, the skeptic needs a relatively high probability of certainty that climate change can be affected by changes in human activity before he could justify investing resources to address it.

Yet, if this investment perspective was appropriate for all areas of life, no one would ever buy a house or life insurance. After all, there is a very low probability that in any one year, or even over many years, that the purchaser of such insurance will see a return on his investment. Yet, I have still never heard anyone say, "Damn, what a poor investment I made buying fire and life insurance. It is New Year's and I am still alive, and my house didn't burn down. What a waste of money!''

People don't need to know beyond a reasonable doubt, or even with modest certainty, that life or fire insurance will ever provide a positive return. They understand there is value in bearing modest costs to protect against the small chances of catastrophe.

The case for seeing climate change through an insurance lens comes more into focus once any cost-benefit calculation starts to include remote probabilities that the costs of inaction could be extreme. A starting point might be the Stern Review on the Economics of Climate Change, written by former World Bank Chief Economist Nicholas Stern at the request of then-U.K. Prime Minister Tony Blair. True, the report was strongly criticized by Harvard Professor Martin Weitzman and Yale Professor William Nordhaus for the methodology it used, taking a low so-called social discount rate to arrive as its lofty estimates of harm to the global economy.

What it accomplished, though, was to advance the public dialog by focusing attention on the cost of doing nothing in the face of climate change. In his critique, Weitzman suggested that by employing more of an insurance perspective one could make a strong case for swift action even while acknowledging the high degree of uncertainty in global-warming scenarios. Policy makers, Weitzman argued, should view spending now to slow climate change ``as an issue about how much insurance to buy to offset the small chance of a ruinous catastrophe that is difficult to compensate by ordinary saving.''

How high a probability, after all, must one have that global warming might lead to major environmental, refugee, and water and food-supply crises to see some value in taking preventative measures now? From this perspective, even congressional skeptics who don't believe that global warming is caused by humans might be persuaded to support a carbon cap-and-trade system just on the chance that the scientists of the Intergovernmental Panel on Climate Change are right and the skeptics are wrong. They could see it as simply taking out a little Earth insurance.