The Ranting Kraut

19.3.2006 – 27.9.2010

Carbon Tax as Insurance?

Posted by rantingkraut on December 30, 2009

Fareed Zakaria has suggested that “Carbon Taxing” and cap and trade arrangements should be understood as insurance against the costs of climate change. By Zakaria’s argument, you pay a small charge now to insure yourself against the larger cost of climate change.

The argument correctly identifies the equivalent to an insurance contribution. What about the payout? Maybe emissions charging and trading is assumed to actually stop or sufficiently moderate lobal warming. If that is the assumption, the charge would be better described as an investment. How wise this investment is, would then depend on how high you expect the cost of global warming to be if no action is taken. This amount would significantly depend on how much trust you put in the ‘hockey stick team’ and other co-authors of the key IPCC projections. It would also depend on how effective you expect the remedial measures to be.

A more literal interpretation of the insurance metaphor would require a pay-out for those actually affected by global warming. It is far from clear though that this would require upfront payments. An alternative would be the agreement of contingency rules: If e.g. Mauritius really becomes submerged as sea levels rise, then the main producers of greenhouse gases could agree in advance to meet the costs arising.

Under either interpretation, the comparison of emissions charges to insurance contracts doesn’t quite work.

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