Monday, November 28

Insurers could have been climate heroes. Instead, they have risked a crisis to dwarf 2008 | Eugene Linden

In 1994, I wrote an article for Time magazine noting that property and casualty insurers would provide an early warning about the costs of climate change and also serve as a white knight. My white knight turned out to be very timid and the reasons why help explain why it has been so hard for the world to take action on global warming.

The reinsurance side of the industry, the side that underwrites insurance for catastrophic risks, understood early on that climate change could bankrupt the industry and reinsurers produced some of the best reports on the costs climate change will likely impose on society. At the same time, however, the retail side of the industry continued to provide coverage for homes and businesses at risk from climate-related fires and wind storms. Indeed, since the climate risks surfaced, millions of people have moved into wildfire zones in the US west and to coastal properties at risk of hurricanes, storm surges and sea level rise. That influence of people continues, even though the Florida coast has eight of the 20 cities in the US most threatened by sea level rise.

Insurers continued to ignore the threat of climate change in part because the incentives at the retail end are to continue to write policies right up until catastrophe strikes and because the reinsurance end has shown extraordinary ingenuity in limiting, spreading and offloading risks. For one thing, most policies have to be renewed every year, which gives insurers the option to either raise prices or pull out of an area entirely should disaster strike. For another, after Hurricane Andrew in August 1992, insurers offloaded some of the risks through the innovation of so-called catastrophe bonds, which offer outside investors high rates insuring a specific risk for a specified period of time.

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But now this same industry is beginning to do the things I expected 28 years ago. The problem is what to do about insuring the many people who have moved into climate hazard zones during this period.

The ultra-wealthy can self-insure, but most middle-class homeowners or homebuyers cannot get a mortgage in a zone vulnerable to wildfires or other natural disasters without insurance protection. And if private insurers raise rates or pull out, do taxpayers want to assume responsibility for trillions of dollars of damages from climate risks to protect people who choose to live in harm’s way? The mispricing of climate risk has set the stage for a property and banking crisis that could dwarf what happened in 2008 and, unlike that meltdown, the weather extremes that caused the crash would only intensify in subsequent years.

The risks that climate change pose go far beyond the property market, of course. Even with the Paris agreement, the expected temperature rise by 2100 is predicted to be between 2.7C and 3.7C. Such temperatures would wreak havoc with agriculture, shrinking and shifting the zones that could grow staples such as wheat and maize and raising the question of whether the global food system could even sustain the current population, much less the billions that will be added during this century. .

And at the worst possible time, the Ukraine invasion has renewed calls for a surge of new drilling for oil, ignoring the fact that a surge in renewables would reduce dependency on Russian oil.

So, what’s to be done?

Experience of the last three decades has shown that whatever actions the world takes to reduce emissions have to apply to all nations.

Another lesson is that any such agreement needs to be simple. Complexity invites endless negotiations and complex agreements are subject to gaming. Many of the alleged greenhouse gas reductions of past years are more an artifact of accounting trickery than actual reductions.

Thankfully, there is a strong measure ready to deploy. It’s called tariffs. To prevent calamity, we need to institute a universal tariff that would kick in for any country that did not meet a specified emission reduction each year. A universal climate tariff would eliminate cheating and finally promote action commensurate with the scale of the problem. It is now possible to monitor greenhouse gas emissions by nation of origin using satellite-based remote sensing technologies. That data could set a baseline of the greenhouse gas emissions for 194 nations. Then a percentage goal for annual reductions in emissions could be established following a short phase-in period, with tariffs adjusted based on success or failure to meet those goals.

Countries could choose their own paths to compliance. European countries might focus on electric vehicles and renewables, following what they are doing. Some nations might want to put a price on carbon. Brazil might dramatically lower its emissions simply by controlling illegal deforestation in the Amazon, something it should be doing anyway.

An across-the-board tariff creates an incentive within a country for competing interests to police bad actors. Such a tariff regime could be created under a revised Paris agreement with rules drawn up in coordination with an existing international forum such as the World Trade Organization, which, in its document, The WTO at Twenty, acknowledges that climate change is an issue it must address. Tariffs could be collected by the importing nation and then channeled to an international finance institution such as the World Bank, which then could allocate funds for emissions-reducing projects in poorer nations.

Tariffs would provide the stick that’s been missing since the dawn of the climate change was 33 years ago. A universal tariff would differ from past tariff horror stories, because it would not be one nation seeking advantage over a competitor, but, rather, a set percentage tariff on exports that would fall on any nation that failed to meet whatever threshold would trigger the penalty . I expect that nations will become more open to the idea as climate change imposes ever more harsh penalties, but whether it’s tariffs or some other enforcement device, it had better happen soon. We don’t have the luxury of time.

Eugene Linden’s Fire and Flood: A People’s History of Climate Change, from 1979 to the Present is published by Allen Lane on 5 April

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