You might not hear that exact question any time soon, but don’t be surprised if companies start shifting carbon risk from their balance sheets to someone else’s, using the time-honored marketplace tool of insurance. And when that happens, expect the price of products to reflect the new reality.
China, India, and other emerging economies argue that we became prosperous using up the atmosphere and must now bear a disproportionate share of the burden to fix the problem, at least in the first few years of any new global deal. One proposal floating around before the global climate talks in Copenhagen next month is for developed countries, like the US and EU, to buy insurance for climate change-related impacts that are likely to occur to developing nations. Flood insurance for low-lying areas of Indonesia, for example. That might be a way, some argue, to deal with the rich/poor nation divide that threatens to undermine any new global deal.
Insurance premiums may be cheaper than other forms of “compensation” or aid, but like any cost borne by governments or companies, it will be passed on to taxpayers or consumers. There is also a growing movement to be more transparent about such costs, adding them as surcharges. California is flirting with car insurance paid at the gas pump, so you’re actually paying based on how much of highway system you use – – and how much carbon you pump into the air – – and are reminded each time you fill up. A carbon insurance premium could easily be included in such a gas pump surcharge so drivers pay the true cost of operating their vehicles in terms of all relevant risks, including their fair share of creating both fender benders and climate change collisions.
Allstate, State Farm, and Progressive are considering the idea and already lower rates for customers who drive less than average annual mileage. Because such discounts today are based on the honor system, doing real carbon or mileage-based insurance would require technology on the car to verify the driver’s habits. That’s where innovative companies like MileMeter (at milemeter.com) come in, a company already doing this in Texas. Research by the Brookings Institution concluded that such verified pay-as-you-go insurance would incentivize motorists to combine shopping trips and otherwise cut back on fuel consumption, saving about $270 a year per car and cutting oil consumption by 4%.
Indeed there are already profits being made by insurance companies in the carbon field. Chartis Insurance and AIG both provide insurance on carbon offset projects, essentially guaranteeing that the carbon-reducing project is completed so the buyer of offset credits will actually get the benefits purchased. As the carbon market heads towards the trillion-dollar range in the next five or 6 years, insuring that marketplace will also rapidly increase in value.
Swiss Re has been insuring agricultural crops against potential losses from climate change-related impacts like drought and new pest infestations. Knowing the science behind the climate change predictions, this is clearly another valuable growth area for the insurance industry.
Although I don’t know if any company has insured a coffee crop against climate change risks just yet, given the high value of the morning brew you can bet that this commodity will soon have carbon insurance percolating around somewhere. Which should put your mind at ease about always being able to get your daily dose of caffeine – – even if that latte costs a few pennies more for the insurance.