Investment or Insurance perspective

In the Beyond Carbon 2008 dinner, Amanda McKenzie, National Coordinator of the Australia Youth Climate Coalition gave a fantastic speech. In her talk, she asked the audience about the probability of flying on a airplane with a 50% chance of survival but can take us to a nice place like a tropical island. Naturally, nobody was interested. Then, she questioned the chance of climate change happening. Would’nt that be the same thing?

Gene Sperling has more on this at 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.

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