Climate Change: Taking Out An Insurance Policy

By John Richardson

WOULD you get on board a plane without taking out travel insurance to protect your family? Of course not, even though the chances of you being involved in a planeSharkie2 crash are one in 9 million.

And would you step into an ocean where dangerous sharks swim, especially if you live where I live in Western Australia, without at least checking the wording of your life insurance policy – even though the chances of being attacked by a shark are only one in 3.1 million? Very probably not.

So why, despite the fact that scientists are more than 95% convinced that climate change is human-made, are some people still questioning the need to take out insurance?

This is even more baffling, given that:

  1. This is a tremendous new source of wealth creation as the New Normal develops.
  2. If you don’t respond, you will be penalised, regardless of what you think about the science because public opinion has decisively moved in the direction of accepting that the majority of scientists are right.  So any oil, gas and/or chemicals company will end up losing money, never mind making money, if they ignore this decisive shift. They may even lose their licence to produce.

For governments there is another huge gain from going with the consensus: You will save hundreds of thousands of lives through improving air, water and soil quality. These extra lives mean more economic growth and lower healthcare bills. And, of course, many of the same measures that improve life expectancy by reducing, say, particulate matter in the air  might also slow-down global warming – for example, switching to electric cars.

You will also, as I have just said, make lots of new money and create lots of new jobs by developing “green” manufacturing industries and services.

The opportunities for the chemicals industry are fantastic. Take China as the best example where its government wants to spend at least $1 trillion over each of the next five years on cleaning-up the environment.

But once you have decided that investing in a climate-change insurance policy is essential, how you draw up the policy is immensely difficult to start with. It will then require constant rewordings.

One of the reasons is the old problem of unintended consequences. Policy decisions can make something worse rather fixing it.

Another second reason is that there will always be people who will quite rightly say, “Never mind tomorrow. What about my job today?” because of inevitable short-term job losses. Governments will need to constantly find ways of cushioning the impact of change. In this case, Germany serves as the best example.

Thanks to the Energiwende policy, renewables last year accounted for 26% of Germany’s power generation, writes John Gapper in the FT.

But in eastern Germany and the Rhineland power generation via lignite coal has become essential because of the electricity generation gap that has been created by Germany’s decision, following the Fukushima disaster, to close its nuclear power stations, he adds.

Generating power from coal is also very cheap as the global price has fallen – partly because China is moving away from coal for environmental reasons!

And whilst lots of small and medium-sized companies (Mittelstands) in states such as Baden-Wurttemberg are doing fantastically well from the green-energy boom, if this spread to eastern Germany and the Rhineland than coal miners would be out of work.

The end result has been an increase in Germany’s carbon emissions that Gapper says promises to embarrass Angela Merkel at the UN climate change summit in Paris in November and December.

Getting government polices right is therefore going to be a long and difficult battle, as is getting the strategic direction right at chemicals companies.

But to repeat: Taking the easy way out by just giving up on this battle would be nothing sort of political, social and economic disaster.

I’ll return to this theme again on Monday when I’ll talk about India.

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