Insuring the Climate

September 15, 2008

The unwelcome arrival of Hurricane Ike in the wake of storms Hanna and Gustav is bound to reignite debate over the link between stronger hurricanes and global warming. Coincidentally, the most recent contribution to this debate, a new study published Sept. 4 in the journal Nature, shows the strongest storms have indeed become even stronger over the last 25 years.

The new study adds another significant brick to a growing wall of scientific evidence attributing storm intensification to climate warming. Indeed, in a consensus scientific report released last year, the Nobel Prize-winning Intergovernmental Panel on Climate Change concluded hurricanes will likely become more intense, with “larger peak wind speeds and more heavy precipitation associated with ongoing increases of tropical sea surface temperatures.”

Looking ahead 10, 20 or 50 years, no one can say conclusively what this intensification might mean for coastal communities or for the American economy as a whole, but the simplest economic measures of damage for past strong storms can begin to put some of these potential consequences in perspective. The last five Category 5 hurricanes to make landfall in the United States—Wilma (2005), Rita (2005), Katrina (2005), Ivan (2004) and Isabel (2003)—resulted, on average, in $29 billion worth of damage per storm. Katrina alone resulted in estimated damages of $81 billion.

By any reasonable standard, these numbers are large. So too are the anticipated costs of mitigating climate change. The most studied U.S. climate proposal to date—the so-called Lieberman-Warner Climate Security Act, which was defeated in the Senate earlier this year—would have cost American consumers $21 billion annually between now and 2030, according to the U.S. Energy Information Administration.

While the annual costs of mitigating climate change are projected to be less than the costs of a strong hurricane, the uncertainties involved in balancing these sorts of numbers will lead some to question the need for prompt action.

But, in reality, uncertainty itself provides sufficient reason to act. Think of climate change mitigation as an insurance policy in which one pays a regular and reasonably stable premium (associated with the relatively well-understood costs of mitigation) to hedge against the risk of potentially severe but far less predictable extreme outcomes, like stronger storms.

Familiar examples are ubiquitous, from car insurance to life insurance to—yes—even hurricane insurance.

The additional benefit of buying public climate insurance, of course, is that many additional extreme outcomes will effectively be covered by the policy. Reducing carbon dioxide concentrations will lower the risks associated with extreme heat waves in many interior sections of the country, with extreme sea-level rise in coastal areas and with extreme water shortages in the mountain west, all in addition to reducing the threat of extreme storms along the Southeastern and Gulf coasts. For this reason, almost all Americans would benefit from a climate policy, whether or not they live in regions directly threatened by hurricanes.

Of course, such an insurance policy is only a good bargain if the implied premium is commensurate with the expected damages associated with extreme events. Designing such a policy will therefore require us to simultaneously acknowledge both the costs of climate mitigation and the costs of climate change itself, something both sides have so far been reluctant to do.

Ultimately, hurricanes have the potential to be devastating, but they also have the power to remind us that policies requiring public sacrifice may, in the long run, yield even greater public dividends.