By Institute for Energy Research ——Bio and Archives--April 17, 2014
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The [IPCC Fifth Assessment Working Group II] report itself is scientifically bold. It frames managing climate change as a challenge in managing risks… [One theme of the report] is the importance of considering the full range of possible outcomes, including not only high-probability outcomes. It also considers outcomes with much lower probabilities but much, much larger consequences. [Bold added.]Field’s emphasis on paying attention to very low-probability events that carry large consequences should underscore the analogy with conventional insurance. (After all, your house probably won’t burn down, but if it does, it will be catastrophic.) In a recent debate on climate change issues, when discussing the uncertainty surrounding the climate system’s sensitivity to increased carbon dioxide concentrations, MIT’s Kerry Emanuel argued:
To say it’s between 2.5 and 9 degrees for a doubling or more of CO2, Fahrenheit, it’s to confess that we don’t know…[If it’s the] near end [of that range], it doesn’t morph, it’s 2.5 degrees—we don’t have to worry very much, I would argue. And I don’t think many of my colleagues would suggest we do. If it’s in the middle range, there will be problems. Probably we’ll adapt to them. If it’s up at the higher end, that could be catastrophic. And the question for me is: Do we do nothing to avoid, even a small risk of catastrophe for our grandchildren? [Bold added.]As Emanuel’s remarks indicate, the current argument for government action to curb greenhouse gas emissions isn’t to fret about the likely damages, but instead to focus on theoretically possible scenarios that would be catastrophic. This shows the connection to the layperson’s understanding of insurance. (Later in the debate, Emanuel went on to explicitly liken his support for climate change mitigation policies as a form of insurance.) Notice that with this approach, the deck is now stacked heavily in favor of interventionist policies, because the critic no longer can merely point out the cost of such actions and the unlikelihood of the risks they are allegedly addressing. As Emanuel admits in the quotation above, for the low to medium ranges of impacts, climate change won’t be a big deal; our grandchildren will adapt with little difficulty. Nonetheless, Emanuel still thinks it is perfectly reasonable to take steps just in case the really bad outcomes occur. This rhetorical framing may resonate with many people because—to repeat—people in real life take out insurance policies against such things all the time (risk of a heart attack, house burning down, severe car accident, etc.). Yet even though the rhetorical framing sounds plausible, it’s actually quite misleading. There are many crucial respects in which government efforts to artificially curb greenhouse gas emissions are nothing like private insurance.
[W]hile the projected loss for the first 3˚C is 1.5 percent, the loss at 6˚C is five times higher. And the estimated loss associated with an increase of 9˚C is about 20 percent [of consumption’s share of GDP]…Overall, it is evident that policy based on the most likely outcomes may not adequately protect society because such estimates fail to reflect the harms at higher temperatures. [2010 Economic Report of the President, p. 242, bold added.]As the bolded portion indicates, even back in 2010 the rhetoric was shifting to show that government action was needed, not so much to deal with what would probably happen, but rather to avoid the unlikely scenarios of what might happen. So if the real danger zones kick in with warming of 6 degrees Celsius and higher, we have to ask how likely is such an outcome, and how soon might it occur? To answer that, let’s consult the following chart from the IPCC’s AR5 Working Group I report, which came out last fall: Source: Figure 12-40, IPCC AR5, Working Group I In the figure above, the IPCC has provided projections of the mean and “envelopes” of warming (in a 66% confidence interval depicted by the gray bands) for four Representative Concentration Pathways (RCPs). For three of them (which may include assumptions of strong government measures to reduce emissions), humanity never comes close to the danger levels of warming. But for the sake of argument, let’s look at the most pessimistic scenario—RPC 8.5. Further, let’s look at the lower end of when we might reach 9 degrees Celsius warming, meaning where the left gray band first hits the 9˚C mark. Eyeballing the chart above, this happens around the year 2145. In other words, even if we just consider the worst-case emission and climate sensitivity scenario reported by the IPCC in its summary chart from its September 2013 update, the suite of IPCC computer models still only assigns a 17% probability that the earth will experience 9 degrees Celsius of warming before the year 2145.[1] In light of the above, let’s pick round numbers and say that a very unlikely outcome—give it a probability of 1 in 500—involves 9˚C of warming by the year 2100.[2] This is the climate change analog of the house burning down. So, does it make sense to “buy fire insurance” against this extremely unlikely, but awful, outcome? No, it doesn’t. Remember, the damage estimate for this amount of warming is around 20 percent of global consumption. (The White House report that gave this figure was relying on the IPCC’s AR4 literature, but we’re just giving a ballpark analysis here.) On the other hand, the latest IPCC Working Group III report estimates that aggressive government policies to limit climate change would cost 3.4 percent of consumption by the year 2050. Now ask yourself: Suppose someone from an insurance company came to you in the year 2050 and said, “We’ve run computer models many thousands of times using all kinds of different assumptions. In the worst-case scenario, a very small fraction of the computer runs—about 1 in 500—has you losing 20% of your income in the year 2100. In order to insure you against this extremely unlikely outcome that will occur in half a century, we want to charge you 3.4% of your income this year.”[3] Would you want to take that deal? Of course not. The premium is way too high in light of the very low probability and the relative modesty of the “catastrophe.” When someone’s house burns down, that’s a much bigger hit than 20% of annual income. And yet, the premiums for fire insurance are quite reasonable; they’re nowhere near 3.4% of income for most households. Moreover, the threat of your house burning down is immediate: It could happen tomorrow, not just fifty years from now. That’s why people have no problem buying fire insurance for their homes. Yet the situation and numbers aren’t anywhere close to analogous when it comes to climate change policies.
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