The insurance industry believes climate change is a serious threat to people and property, yet only some companies advocate climate solutions. [New York Times]

If there were one American industry that would be particularly worried about climate change it would have to be insurance, right?

From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt, natural catastrophes across the United States pounded insurers last year, generating $35 billion in privately insured property losses, $11 billion more than the average over the last decade.

And the industry expects the situation will get worse. “Numerous studies assume a rise in summer drought periods in North America in the future and an increasing probability of severe cyclones relatively far north along the U.S. East Coast in the long term,” said Peter Höppe, who heads Geo Risks Research at the reinsurance giant Munich Re. “The rise in sea level caused by climate change will further increase the risk of storm surge.” Most insurers, including the reinsurance companies that bear much of the ultimate risk in the industry, have little time for the arguments heard in some right-wing circles that climate change isn’t happening, and are quite comfortable with the scientific consensus that burning fossil fuels is the main culprit of global warming.

“Insurance is heavily dependent on scientific thought,” Frank Nutter, president of the Reinsurance Association of America, told me last week. “It is not as amenable to politicized scientific thought.”

Yet when I asked Mr. Nutter what the American insurance industry was doing to combat global warming, his answer was surprising: nothing much. “The industry has really not been engaged in advocacy related to carbon taxes or proposals addressing carbon,” he said. While some big European reinsurers like Munich Re and Swiss Re support efforts to reduce CO2 emissions, “in the United States the household names really have not engaged at all.” Instead, the focus of insurers’ advocacy efforts is zoning rules and disaster mitigation.

Alaska politicians wrestle with the impacts of climate change while adhering to recent policy conversions to not acknowledge the causes of climate change. [Guardian]

Secretary Kerry regrets that the U.S. has not done more on climate change. [The Hill]

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Policymakers in developed countries are increasingly looking to leverage private sector funds to finance climate action in developing nations, filling the gap left by tight government budgets and a lack of political focus on climate change in the United States and other major emitting countries.

The numbers are striking. In the analysis we conducted with the World Resources Institute (WRI) and the Overseas Development Institute, we found that the United States’ climate finance is increasingly coming from America’s two business-oriented foreign investment agencies: the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank of the United States (Ex-Im). In 2010, only 20% of U.S. climate finance came from these agencies (which don’t rely on taxpayer dollars), but by 2012 they were spending almost half. Almost all the loans, loan guarantees, and insurance policies issued by OPIC and Ex-Im fund clean energy projects in developing countries.

Globally, the picture is similar. In 2011, companies based in developed countries spent close to $13 billion in support of climate projects in developing nations, surpassing climate-related official development assistance by about half a billion dollars. And there is no doubt that private capital will figure heavily in the coming years as developed countries scramble to demonstrate that they have met their pledge to provide $100 billion in financial assistance to developing nations to address climate change.

Given the current budgetary issues and a lack of focus on climate change in many developed country governments, it’s going to be challenging to get to the $100 billion with or without private sector finance. But what’s even more daunting is that $100 billion is nowhere near the size needed to meet the challenge. Experts estimate that truly comprehensive action on climate will require $700 billion per year of additional climate-related investment in developing countries, and greening another $5 trillion of infrastructure investment per year to 2020. Even if we maintain the current 50-50 split of public-private investment as we reach $100 billion in 2020, and even if every dime of $50 billion in public money leveraged private sector investment (unlikely), a 14:1 leverage ratio would be needed to meet the challenge — substantially higher than the possibly inflated ratios typical of development finance instruments.

So how can the world meet this urgent financing challenge when huge investments are needed and governments can’t come close either through public investment or by leveraging private sector investment through typical development finance? What will generate sufficient private sector investment?

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By Michael Wolosin & Abigail Jones, via Climate Advisers

The World Economic Forum has put out a new report on global risks for 2013, and the report’s chapter on “X factors” — concerns more remote than the report’s primary risks, but still worthy of note — includes a section on rogue “geoengineering” experiments.

Geoengineering involves large-scale efforts to either remove carbon from the atmosphere, or to remake the atmosphere’s chemical or physical make-up to offset the effects of climate change. The most plausible scenario mentioned by the report uses aircraft to inject particles into the atmosphere to mimic the way eruptions of volcanic ash block sunlight, and thus cool the climate. More far-fetched scenarios go so far as deploying mirrors into orbit to reflect sunlight.

Such projects involve a host of funding and deployment problems, as well as the serious risk of unintended consequences for both the climate and the billions of humans who rely on it. For instance, a project at the UK-based Stratospheric Particle Injection for Climate Engineering project, or “SPICE,” working on the idea to mimic volcanic ash, was delayed in October over environmental concerns. Unfortunately, this leaves an opening for smaller nations or even commercial interests to begin experimenting with geoengineering unilaterally, say researchers at the World Economic Forum:

Nobody envisions deployment of solar radiation management anytime soon, given the difficulties in resolving a suite of governance issues (evidenced by the fact that even the relatively simple SPICE experiment in the UK foundered in the midst of controversy). Beginning with Britain’s Royal Society, many academic and policy bodies have called for cautious research as well as broader conversation about the implications of such technologies.

But this has led some geoengineering analysts to begin thinking about a corollary scenario, in which a country or small group of countries precipitates an international crisis by moving ahead with deployment or large-scale research independent of the global community. The global climate could, in effect, be hijacked by a rogue country or even a wealthy individual, with unpredictable costs to agriculture, infrastructure and global stability. [...]

For example, an island state threatened with rising sea levels may decide they have nothing to lose, or a well funded individual with good intentions may take matters into their own hands. There are signs that this is already starting to occur. In July 2012 an American businessman sparked controversy when he dumped around 100 tonnes of iron sulphate into the Pacific Ocean off the west coast of Canada in a scheme to spawn an artificial plankton bloom. The plankton absorb carbon dioxide and may then sink to the ocean bed, removing the carbon – another type of geoengineering, known as ocean fertilisation. Satellite images confirm that his actions succeeded in produce an artificial plankton bloom as large as 10,000 square kilometres.

The July 2012 incident was first reported by The Guardian in October, noting the gambit may have violated two international agreements and possibly involved misleading the local indigenous population about the nature and risks of the experiment. Russ George, the American businessman who oversaw the iron sulphate dump, is the former chief executive of Planktos Inc., and has been involved in other failed efforts to pull off large commercial dumps near the Galapagos and Canary Islands. Those attempts led to a warning from the EPA and to his ships being barred from ports by the Spanish and Ecuadorean governments. George had apparently hoped to net lucrative carbon credits.

The basic problem with geoengineering is that portions of the climate cannot be walled off to perform small-scale tests. This means geoengineering projects essentially have to jump straight from the experimental and computer modeling phases to a full-on implementation phase — as Russ George recently attempted. This means, at best, that geoengineering is last-resort, break-glass-in-case-of-emergency response to climate change, to be attempted when all other efforts have failed.

At worst, geoengineering is a distraction jumped on by interest groups, who wish to delay far more technologically and economically feasible efforts to tackle climate change by simply reducing the amount of carbon human beings emit into the atmosphere.

By Brad Johnson, campaign manager of Forecast the Facts

The Obama administration’s Bureau of Land Management auctioned a major tract of Wyoming coal to Peabody Energy at a bargain-basement price of $1.10 per ton yesterday.

The North Porcupine coal tract in the Powder River Basin went to the single bidder, Peabody subsidiary BPU Western Resources, for $793,270,310.80 for 721 million tons, BLM representative Beverly Gorny stated in a telephone interview.

This sale, made under the provisions of the Mineral Leasing Act of 1920, represents a massive fossil-fuel subsidy based on the assumption that the use of coal benefits the American public. However, it is likely this coal is intended for the Asian market, where sub-bituminous coal fetches a much higher price. The non-competitive leasing program is under federal investigation.

Moreover, the costs of the carbon pollution from mining and burning this coal were not taken into consideration. The 721 million short tons of sub-bituminous coal in the lease sale will generate approximately 1.1 billion metric tons of carbon dioxide when burned. With a modest estimated social cost of carbon at $65 per ton of CO2, the global-warming impacts to society of this lease sale exceed $70 billion — 90 times the price paid for the lease. More than 27,000 people signed a Credo Action petition opposing the fire sale of Wyoming’s sub-prime carbon reserves.

The lease sale still has to be approved by the BLM post-sale panel, which recently rejected a low-ball bid for an adjoining tract.

by Robert Stavins, via An Economic View of the Environment

Debate continues in the United States, Europe, and throughout the world about whether the forces of the marketplace can be harnessed in the interest of environmental protection, in particular, to address the threat of global climate change.  In an essay that appears in the Spring 2012 issue of Daedalus, the journal of the American Academy of Arts and Sciences, my colleague, Joseph Aldy, and I take on this question.  In the article – “Using the Market to Address Climate Change:  Insights from Theory & Experience” – we investigate the technical, economic, and political feasibility of market-based climate policies, and examine alternative designs of carbon taxes, cap-and-trade, and clean energy standards.

The Premise

Virtually all aspects of economic activity – individual consumption, business investment, and government spending – affect greenhouse gas emissions and, therefore, the global climate. In essence, an effective climate change policy must change the nature of decisions regarding these activities in order to promote more efficient generation and use of energy, lower carbon-intensity of energy, and a more carbon-lean economy.

Basically, there are three possible ways to accomplish this: (1) mandate that businesses and individuals change their behavior; (2) subsidize business and individual investment; or (3) price the greenhouse gas externality proportional to the harms that these emissions cause.

Harnessing Market Forces by Pricing Externalities

The pricing of externalities can promote cost-effective abatement, deliver efficient innovation incentives, avoid picking technology winners, and ameliorate, not exacerbate, government fiscal conditions.

By pricing carbon emissions (or, equivalently, the carbon content of the three fossil fuels – coal, petroleum, and natural gas), the government provides incentives for firms and individuals to identify and exploit the lowest-cost ways to reduce emissions and to invest in the development of new technologies, processes, and ideas that can mitigate future emissions. A fairly wide variety of policy approaches fall within the concept of externality pricing in the climate-policy context, including carbon taxes, cap-and-trade, and clean energy standards.

What About Conventional Regulatory Approaches?

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Read the first half of his interview with ThinkProgress Green, where Capital Institute founder John Fullerton discusses the $20 trillion carbon bubble.

John Fullerton, a former Wall Street banker who founded the Capital Institute, believes that the financial industry can and must change its priorities to preserve the promise of a healthy civilization. His think tank is part of a growing movement of alternative economics, seeking a theory of capital and finance that addresses the crisis of climate change, instead of accelerating the destruction of our atmosphere.

Fullerton isn’t a traditional environmentalist. Rather, he learned about the scope of the climate crisis after retiring from JP Morgan in 2001, and reflecting on the state of the global economy in the wake of the 9/11 attacks:

I don’t have a particularly green background. I discovered it as a systemic crisis. I’m completely prepared to bet my life that the solution lies in looking at nature.

As related in the first post from his interview with ThinkProgress Green, Fullerton discovered that the global carbon-based economy is sitting on a $20 trillion bubble of unburnable fossil-fuel reserves, a potential economic crisis that dwarfs the collapse of the housing market.

Below, Fullerton talks about a hopeful path forward, where the financial industry is key to an economy based on “growing well-being instead of material throughput”:

We are in the process of an evolutionary if not revolutionary change in how we structure the economy. We’re going to need to redefine well-being. There have been people working on alternatives to GDP for twenty years now. “uneconomic growth.” We need to shift into growing well-being instead of material throughput. When people are adolescents, they’re physically growing. When they mature, they read books, go to yoga, increasing their growth in ways that don’t mean physical consumption. We’re on the proverbial rat race, and it’s not buying anyone well-being and happiness. There’s a hopeful scenario in front of us.

This maturation of capitalism, from consumption-based growth to the growth of happiness, will require a global shift of capital investment. This means, Fullerton argues, that finance is the “critical lever” to building resiliency:
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John Fullerton, the founder and president of the Capital Institute, sees the global economy facing the possibility of a crash that would dwarf the subprime crisis and the Great Depression. He also envisions a future where the economy is based not on consumption and competition for resources but on personal well-being. An essential finding that drives his work is what he calls the “stranded asset problem.” In an interview with ThinkProgress Green about this big choice, Fullerton explains the extraordinary challenge of the $20 trillion carbon bubble.

Randy Wray has described the current state of the commodities market as the biggest speculative bubble of all time, but the carbon bubble is even greater. In order to avoid catastrophic global warming, the Carbon Tracker Initiative found, we need to keep 80 percent of known carbon reserves buried in the ground.

By Fullerton’s estimates, this unburnable carbon is valued at $20 trillion:

There’s way more carbon in the ground than there is carbon budget left. If we choose not to trash the planet, we have the get fossil-fuel companies to leave the oil and coal in the ground. Only 24 percent of proved reserves are held by public companies. If you add the reserves owned by state-owned companies — Saudi, Venezuela, Russia, China — if we’re to keep that Potsdam budget, we need to keep 80 percent of reserves in the ground. If you add up that 80 percent at current market value it’s $20 trillion. If you’re Exxon, your stock prices reflects the value of your reserves. If you’re Saudi Arabia, your entire fiscal solvency is dependent on producing those reserves.

Fullerton is a former JP Morgan executive who began his career as an oil and gas banker before rising to manage global capital markets. In 2001, he left JP Morgan and, in the shadow of the 9/11 disaster, investigated the intersection of global economic growth, global sustainability, and human welfare. The Capital Institute is part of a growing movement in alternative economics that includes think tanks like the New Economics Foundation, Demos, and the Institute for New Economic Thinking.

In a telephone interview with ThinkProgress Green, Fullerton described how alternative-economics thinking reflects the fact that the real world — governed by the laws of physics and with finite material wealth — must eventually constrain the monetary world, which has been operating under the assumption that the flow of material inputs and outputs is unbounded:

The central premise of our work is that there is a fundamental disconnect between the world of economics and finance which sees the economy largely as a monetary phenomenon and the physical aspect of the economy which is a material phenomenon. Historically, when the economy was relatively small we could convert the physical into money and let the market price inputs and outputs. It worked in a nice theoretical abstraction. Limits to growth force physical reality onto the abstraction. We’ve been thinking about it in the abstract forever. Finance is probably the most extreme example of this problem because it’s inherently an abstraction and thinks only in terms of monetary value. A business is forced to deal with physical reality. In finance it’s all numbers and values.

The cost for civilization of this financial disconnect from reality is extraordinary. When the music stops for the carbon bubble, the financial system will have to reckon with the disappearance of supposed assets ten times the scale of the subprime crisis:

If we’re serious about not trashing the planet, we need to pro-actively decide to take a write-off of $20 trillion. That makes the $2 trillion subprime crisis seem trivial by comparison. The real cost of that crisis was the feedback loop it triggered in the global economy. A $2-trillion asset writeoff triggered a global near-depression. The way the carbon writeoff would be felt is a pensioner that holds BP or Exxon stock watch the stock go down by 80 percent. The state of Russia, China, Venezuela, and frankly the United States, would watch their fiscal situation implode. If we imposed this quota tomorrow morning there’d be a rolling thunder — you’d see Russia’s financial stability implode, then Venezuela, then economic collapse that depresses demand.

“It would be very hard to forecast how it would play out other than it would be very volatile and confused and frightening,” Fullerton said.

It shows you the force of the powers that will fight climate change. There’s $20 trillion of value. Would the senior management of BP be able to have the conversation that they can’t exploit 80 percent of their reserves?

That’s the $20 trillion question.

Fullerton noted that his $20 trillion estimate is conservative. “Many of the biggest companies are integrated — they have oil and gas reserves, and also do refining and marketing. These companies have an expectation that they’ll be going as continuing concerns, so they trade at some multiple of their current value. The $20 trillion ignores all the value of private companies. I didn’t add any value for the infrastructure which becomes worth a lot less if you start reducing volume,” he explained.

Of course, if existing proven reserves of fossil fuels are 80 percent greater than is sustainable, that means that all new exploration should be off limits.

“That would say no one’s allowed to drill for more oil or expand the tar sands.”

Projects like the Keystone XL tar sands pipeline, or Shell Oil’s exploratory drilling in the Arctic Ocean, or the expansion of Western coal mines are reckless — the equivalent of deliberately creating financial instruments designed to explode just for a short-term profit.

Reconfiguring the global financial system to safely devalue the toxic carbon bubble is a tremendous challenge, Fullerton pointed out. In the second part of our interview, coming later this week, he discusses why he has significant hope that we can build a revitalized global economy that values sustainable wealth.

by Yoram Bauman and Dani Ladyka, reposted from the Sightline Institute

This spring marks the release of new editions of introductory economics textbooks, so it’s a good time to update our 2010 review of the treatment of climate change in economics textbooks. As in 2010, some hit the mark while others are wildly misleading, but we’re happy to say that there’s plenty of good news: about half of the books improved their treatment of climate change.

Especially noteworthy is Glenn Hubbard and Tony O’Brien’s Economics, 4th ed., which has jumped to the top of our list. (Our previous review gave the 3rd edition a C+, describing it as “a masterpiece vandalized by hooligans”.) As a political aside, it is worth noting that Glenn Hubbard and Greg Mankiw, whose textbook also received a top grade, are the two economists advising Mitt Romney.

Only one textbook received a worse grade this time around: Roger Miller’s Economics Today, 16^th ed. Not coincidentally, it has also earned the coveted 2012 Ruffin and Gregory Award for the Worst Treatment of Climate Change in an Economics Textbook.

If you’d like to congratulate Professor Miller and/or encourage him to update his textbook—which is full of fallacies, including the astounding assertion that an 80% reduction in CO2 emissions by 2050 is “the official carbon emissions target of the U.S. government” (!)—he can be reached at rogerleroy33031@yahoo.com. (Please be polite, because that’s the best way to effect change.)

PS. On a historical note, Paul Gregory is now aware that there is an award named after his textbook, which went out of print ten years ago after this hilarious email exchange about the book’s ridiculous treatment of climate change. He of course claims to be a victim of the “climate police”, but the truth is that his textbook now sells on Amazon.com for $3.78 because it included wildly inaccurate statements like “There are in fact very few climatologists in the United States, and the majority of them are skeptical of global warming.” We are delighted that most textbook authors are more open to constructive criticism than Professor Gregory was, and we invite authors to email us at yoram@standupeconomist.com for free and confidential feedback on draft material related to climate change.

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Last week economist William Nordhaus slammed global warming deniers and explained that the cost of delaying action is $4 Trillion. As I wrote, Nordhaus’s blunt piece — “Why the Global Warming Skeptics Are Wrong” – is worth reading because, like most mainstream climate economists, he is no climate hawk.

A key reason for that, I believe, is a chronic low-balling of future temperature rise and hence future climate impacts and hence future climate damages by the mainstream economic profession. Nordhaus’s piece proves that point.  In his argument on why CO2 is a pollutant and negative externality—”a byproduct of economic activity that causes damages to innocent bystanders”– he writes:

The question here is whether emissions of CO2 and other greenhouse gases will cause net damages, now and in the future. This question has been studied extensively. The most recent thorough survey by the leading scholar in this field, Richard Tol, finds a wide range of damages, particularly if warming is greater than 2 degrees Centigrade.⁷ Major areas of concern are sea-level rise, more intense hurricanes, losses of species and ecosystems, acidification of the oceans, as well as threats to the natural and cultural heritage of the planet.

That highlighted sentence may strike some of you as a bit strange. After all, the chances that warming would be less than 2°C have been pretty small for quite some time even with aggressive action and essentially nonexistent without it. So I went to the original Spring 2009 paper in The Journal of Economic Perspectives, “The Economic Effects of Climate Change” (online here).

Note: Figure 1 shows 14 estimates of the global economic impact of climate change, expressed as the welfare-equivalent income gain or loss, as a function of the increase in global mean temperature relative to today. The circular dots represent the estimates (from Table 1).

Yes, a spring 2009 review of the economic impact of climate change reviewed 14 studies — and not single one of them looked at warming of more than 3°C! And Tol is, according to one of the leading scholars in the field, “the leading scholar in the field.” And that is “the most recent thorough survey.”

Who says economics is the dismal science? It’s the super-optimistic science. If you could ask climate economics to sum itself up in one word, it would be “cheerful.”

Note that if you check out Table 1, you’ll see that the 2 estimates of the impacts of 3C warming are Nordhaus himself from 1994 and 1995. Indeed, 4 of the 9 estimates of the impacts of 2.5C damage come from either 1995 or 1996. The head-exploding estimate that 2.5C warming could actually be a significant positive for welfare is from 1996 also. Way to stay up to date on the science.

As readers of Climate Progress know, the recent scientific literature has amped up the likely consequences of inaction considerably (see “An Illustrated Guide to the Science of Global Warming Impacts: How We Know Inaction Is the Gravest Threat Humanity Faces.”

A 2010 AAAS presentation on “the Asymmetry of Scientific Challenge“ concluded: New scientific findings since the 2007 IPCC report are found to be more than twenty times as likely to indicate that global climate disruption is “worse than previously expected,” rather than “not as bad as previously expected.”

Multiple independent analyses conclude that we are on track for total warming of some 5°C by century’s end and more after that.  What would be the impact of that level of warming? There is a clue inside Nordhaus’s 2008 book, A Question of Balance. Nordhaus explains that in his DICE model, atmospheric concentrations of CO2 only hit 685 ppm in 2100 and “measured mean global surface temperature …  is projected in the DICE model  to increase by 3.1°C in 2100 relative to 1900″ or a mere 2.4°C between 2005 and 2010. But he also notes that

… the DICE model’s  projected baseline increase in temperature for 2200 relative to 1900 is very large, 5.3°C. The climate changes associated with these temperature changes are estimated to increase damages by almost 3% of global output in 2100 and by close to 8% of global output in 2200.

That 8% certainly seems closer, though still low. It’d be quite interesting if somebody ran an impacts estimate using the latest science.

Now you may ask how it is that this supposedly “most recent thorough survey” was blissfully out-of-date from a scientific perspective (though not apparently an economic one) before it was even published? The answer is really that the mainstream climate economics community is generally years behind where the science is.

Consider this jaw-dropper from Tol’s  supposedly definitive paper:

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