White House Report Tries to Sell 'Climate Insurance' as 'Paying Mitigation Costs Now'

July 29, 2014 - 6:20 PM

A new White House report attempts to frame its costly climate policy as "insurance" and warns a delay in implementation could cost $150 billion a year.

"The Cost of Delaying Action to Stem Climate Change," by the White House's Council of Economic Advisors, says that, if delay allows global temperatures to increase even one extra degree Celsius, it'll cost Americans $150 billion, or 0.9% of GDP:

"Based on a leading aggregate damage estimate in the climate economics literature, a delay that results in warming of 3° Celsius above preindustrial levels, instead of 2°, could increase economic damages by approximately 0.9 percent of global output. To put this percentage in perspective, 0.9 percent of estimated 2014 U.S. Gross Domestic Product (GDP) is approximately $150 billion. The incremental cost of an additional degree of warming beyond 3° Celsius would be even greater. Moreover, these costs are not one-time, but are rather incurred year after year because of the permanent damage caused by increased climate change resulting from the delay."

The report repeatedly urges Americans to consider the administration's climate policy to be "climate insurance," making 19 references to "insurance" in the 33-page report.

In a section titled "Climate Policy as Climate Insurance," while referencing something called "Weitzman's Dismal Theorem," it even likens environmental action to health insurance:

"Over the past few years, economists have examined the implications of decision-making under uncertainty for climate change policy. In a particularly influential treatment, Weitzman (2009) proposes his so-called "Dismal Theorem," which provides a set of assumptions under which the current generation would be willing to bear very large (in fact, arbitrarily large) costs to avoid a future event with widespread, large-scale costs. The intuition behind Weitzman's mathematical result rests with the basic insight that because individuals are risk-averse, they prefer to buy health, home, and auto insurance than to take their chances of a major financial loss. Similarly, if major climate events have the potential to reduce aggregate consumption by a large amount, society will be better off if it can take out "climate insurance" by paying mitigation costs now that will reduce the odds of a large-scale-in Weitzman's (2009) word, catastrophic-drop in consumption later."

"This logic has its basis in expected utility theory. Because individuals are risk averse, each additional dollar of consumption provides less value, or utility, to individuals than the previous dollar. To avoid this major loss, an individual will buy home insurance. That insurance is provided by the market because an insurance company can offer home insurance to many homeowners in different regions of the country, and through diversification the company will on average have many homeowners paying premiums and a few collecting insurance, so diversification allows the company to run a relatively low-risk business. But risks from severe climate change are not diversifiable because their enormous costs would impact the global economy."

As long as there is a "non-negligible probability" of climate disaster, Americans "should be willing to pay a substantial amount" for protection, the report argues:

"Consequently, as long as there is a non-negligible probability of a large drop in consumption, and therefore a very large drop in utility, arising from a large-scale loss in consumption, society today should be willing to pay a substantial amount if doing so would avoid that loss."

"Because their potential costs are so overwhelming, the threat of very large losses due to climate change warrants implementing mitigation policies now."

"Climate policy can be seen as climate insurance taken out against the most damaging potential consequences of climate change-consequences so severe that these events are sometimes referred to as climate catastrophes."