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Climate Change and the Cost of a Carbon Tax - Free Market Players Enter the Debate

Climate Change and the Cost of a Carbon Tax - Free Market Players Enter the Debate

By Bob Kohut 30.07.2011

Of all the divisive issues in modern industrialised societies, nothing approaches the rancor generated by the debate over global warming and its role in climate change.  Both sides hurl demeaning epithets at the other and question the intellectual capabilities of anyone holding an opposing view to their own.

The recent government announcement of an impending carbon tax here in Australia has certainly fanned the flames.  Although the aggressive pro-tax advertising campaign rolled out by the government has reduced opposition to the tax from 59% to 53% according to a recent poll, a majority still do not like the idea.

At the risk of oversimplification, let us divide the two sides on the issue of global warming and climate change into two camps – the Yeas and the Nays.  These terms are less descriptive than ecotards, fruit loops, and Neanderthals; however, using Yeas and Nays may allow readers to consider some of the issues with a tad more objectivity.

The Yeas tend to be more monolithic in their beliefs than the Nays.  Yeas believe climate change is real and it is caused by humans’ greenhouse gas emissions.  Science, they say, supports this view and science cannot be wrong.  Furthermore, only a greedy capitalist would even consider the cost of doing anything as an issue, since the cost of doing nothing is the destruction of the planet as we know it.

Perhaps the debate would be somewhat less heated were the Yeas to acknowledge a few alternate thoughts.

•    How can you explain periods of climate change – like the ice ages – that occurred when there were not enough humans here to have had any influence at all?

•    Science can be wrong.  In 1914 the world believed there was nothing more to learn about the physical universe.  Newton’s laws explained everything, with no exceptions.  Except Newton was wrong, as Albert Einstein proved.

•    In a perfect world, cost would not be an issue.  It is not a perfect world and if the cost of battling climate change reduces mankind to a massively lower standard of living, what is the point?  Aren’t prices high enough in Australia already?

On the other hand, the Nays have subdivided themselves into splinter groups.  One believes climate change is a total hoax.  Some claim greenhouse gases are similar to carbon dioxide emitted from plant life and therefore no more harmful.  Another group believes climate change may be happening, but man has nothing to do with it.  They adamantly believe it is a naturally occurring phenomenon and we cannot do anything about it.  Finally, there are a few that acknowledge the role of greenhouse gases in climate change, but believe the cost of doing anything about it would lead to economic Armageddon.  

The Nays might also contribute to a cooler debate by considering a few additional thoughts about their point of view.

•    To say mankind can do nothing about climate change is to deny the very nature of humanity.  Since the cave dwellers learned to make mobile shelters to allow them to follow their food sources, mankind has never stopped developing new ways to deal with the earth’s climate – from heating to air conditioning.

•    On a smoggy day in Sydney, take a hike into the hills and look out over the city.  Then tell yourself the cloud you see doesn’t really matter.

•    While the cost of a carbon tax may be high, there are other costs associated with climate change that have nothing to do with the end of the world scenario put forth by some of the Yeas.

Until a decade or so ago, the only costs most of us associated with climate change were the burdensome costs of emissions controls on our vehicles and increased energy costs due to higher fuel efficiency standards.  

In the 1990’s a free market industry that has been around for centuries began to sit up and take notice of climate change.  The industry is the insurance sector, and more specifically, the reinsurance companies.

Reinsurers sell insurance to traditional insurance companies to help them deal with catastrophic losses.  By definition, catastrophes are the exception, not the rule.

European Reinsurance giant, Munich Re, says the exception may be becoming the rule.  Here is an excerpt of their conclusions you can find on their website:

•    Floods in central Europe, wildfires in Russia, widespread flooding in Pakistan. The number and scale of weather-related natural catastrophe losses in the first nine months of 2010 was exceptionally high. A month before the start of the world climate summit, Munich Re is drawing attention to the strong probability that there is a connection between the large number of weather extremes and climate change. The reinsurer has built up the world’s most comprehensive natural catastrophe database, which shows a marked increase in the number of weather-related events. For instance, globally, loss-related floods have more than tripled since 1980, and windstorm natural catastrophes more than doubled, with particularly heavy losses from Atlantic hurricanes. This rise can only be explained by global warming. Worldwide, 2010 has been the warmest year since records began over 130 years ago.

Some Nays in countries like Australia and the United States would dismiss these claims as wild conclusions from a socialist leaning company.  That may be, but no one can deny the string of extreme weather seen all across the globe of late.  We have major droughts and major flooding.  We have extreme winters, extreme rainy seasons, and extreme heat.  Weather records are being broken everywhere.

In the United States, most insurance companies are publicly traded and could hardly be called socialist.  For the most part, United States insurers have ignored the debate over weather related catastrophes and whether or not they are becoming more common.

Everything changed when the tornado season slammed into the American south in the spring of 2011.  Record tornadoes did record damage.  If you search the Internet for insurers and climate change, you might come across the following headline:

Insurers Study Climate Change to Decide Rate Hikes in Alabama

Here is what the article had to say:

•    Insurance companies are considering rate hikes for homeowners after devastating tornadoes caused $2.5 to 3.5 billion in losses on April 27 in Alabama. The amount of rate increases depends on whether or not the storms are considered a new normal pattern caused by climate change. At only halfway through the year, Alabama’s tornado total is already three times the average and there have been more F4 and F5 storms than any other year. According to Lee Bowron of the Birmingham actuarial consulting firm Kerper and Bowron, LLC, insurance rates are based on models that predict the frequency and intensity of disasters, and “re-insurers and insurers are now evaluating tornado risk in light of the recent outbreak.” Brian Thomas, a sustainability consultant who formerly worked in the reinsurance industry, says, "the global re-insurers are very concerned about climate change. As far as they are concerned, there is a pretty clear signal."

Now we have a new voice in the debate – private enterprise.  Forget about the scientists and the socialist companies in Europe, what will people have to say if those bastions of capitalism in the United States come down on the side of global warming and climate change being a real and present threat?

None of this has anything to say about whether or not a carbon tax will really reduce greenhouse gases and ultimately lead to a lowering of global temperatures.  What it suggests is that a future filled with disasters like the recent flooding in Australia pose cost considerations that need to be taken into account in this debated.  Considering what these costs do to national economies and the taxpayers who bear much of the burden of the bill, isn’t it worth taking a shot?

In one sense, Australians should be proud to be leading the world here.  Mankind has always found a way, and a carbon tax may be an errant step; but it is a start and we can always try something else.  Isn’t that worth the estimated $10 a month it will cost each Australian household?

>>Back to the newsletter to view other articles - July 30th 2011

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