Climate Policy is Like Buying Insurance

There is a lot we know and don't know for sure about climate change. Those unknowns should influence the decisions being made in Copenhagen and Washington, D.C.

We know how carbon dioxide interacts with heat radiation. We know how much carbon dioxide is being added to the atmosphere every year. And we have a fair estimate of how much more will be added over the next decade if nothing changes.

The trouble is, we don't know the things we most want to know. How much will additional increments of carbon raise the planet's surface temperature? How dangerous are such changes? What value should we set on preventing them?

Because we don't know the most important things, our climate policy is necessarily based on projections. We are trying to measure risk and the value of mitigating risk. In other words, climate policy is a little like buying insurance.

You'd never spend your entire income on a life insurance policy. On the other hand, it would be reckless to go uncovered against large and possibly lethal risks.

That's the approach we should be taking with carbon dioxide. We want to put a price on carbon dioxide that encourages consumers to conserve and producers to substitute.

The cap-and-trade plan before Congress does not set prices. It sets a limit on the total amount of carbon to be emitted. Such a system creates complex and often perverse incentives, as the Europeans are discovering. In order to win political approval, they set the emissions cap so high that no carbon abatement is expected for years to come.

A carbon tax, by contrast, would instantly signal everyone to change their behavior. A tax of, say, $15 per ton would add 14 cents to a gallon of gasoline and raise an estimated $80 billion a year. And it would launch a shift that could be accelerated by higher taxes if the first round did not work fast enough. And unlike a cap-and-trade system, which creates property rights, a tax is very easy to reduce or repeal if further research shows that global warming is proceeding slower or is less harmful than governments today fear.

A good insurance agent thinks not only of the policy he or she wants to sell, but about the total needs of the insured. Let's have more of that kind of thinking and less hustle.

Originally aired on Marketplace on December 9, 2009.