Climate change, carbon prices and insurance systems

Market approaches to limit CO2e emissions such as carbon taxes and emissions trading schemes (ETSs) aim to avoid dangerous anthropogenic climate change by ascribing a financial cost to emissions. Yet such approaches have failed to establish either emissions limits or carbon prices equal to the task. We propose an approach to carbon pricing that better reflects the biogeophysical limits of the Earth system by drawing on aspects of insurance systems including forms of social insurance and the insurance industry. Our proposal achieves this by: (i) creating a financial liability link between current emissions and attributable near future losses; and (ii) applying Fraction Attributable Risk (FAR) analysis to determine the contribution of anthropogenic climate change to increased probability of experienced damaging weather events. Our proposal, a departure from current approaches to pricing CO2e emissions, has aspects that are consistent with existing forms of insurance. It requires participation by states and a small number of larger and established reinsurers. Our proposal provides both the scientific-technical capacity and the political-economic incentive to shift the anchor point for carbon prices away from pressing short-term political and economic considerations and closer to strategic ecological requirements for Earth system stability: the balance is shifted to favour changes in the global economy necessary to avoid dangerous anthropogenic climate change over current estimations of what is politically and economically feasible or desirable. Our proposal is an example of reflexive mitigation, grounded in complex adaptive systems theory, and centres on relationships between the Earth system, the global economy and insurance systems.