Low-cost Climate-change Insurance Could Help Ensure Better Future

Implementing a carbon tax of five cents per gallon of gasoline and gradually increasing the tax over the next 30 years is the optimal solution, the researchers report.

"You can think of the tax as a low-cost insurance policy that protects against climate change," said Michael Schlesinger, a professor of atmospheric sciences at the University of Illinois at Urbana-Champaign and a co-author of the paper. "The policy premiums could be used to develop alternative energy technologies."

Because mitigation would impose immediate costs, with any long-term benefit unknown, some scientists and policy-makers have argued that nothing should be done until the uncertainty surrounding the climate issue is substantially reduced. "By then, however, it may be too late and we will have foreclosed certain options," Schlesinger said. "Rather, the uncertainty is the very reason we should implement climate policy in the near term."

To explore the effectiveness of implementing near-term mitigation policies as a hedge against uncertainty, Wesleyan University economics professor Gary Yohe, Schlesinger and U. of I. atmospheric scientist Natalia Andronova assumed that tax policies would go into effect in 2005 and be in force for 30 years.

"It's really a cost-minimization problem, given that we will eventually have to set a policy target sometime in the future," Schlesinger said.

"The idea is to search for the tax that provides the least cost over the whole period. If the tax is too low, you do too little in the beginning, then after 30 years you have to do a lot. On the other hand, if the tax is too high, you spend too much now, and you may have to do only a little later."

The least cost, the researchers found, is to implement a carbon tax that starts out at $10 per ton of carbon (about five cents per gallon of gasoline) and then gradually climbs to $33 per ton in 30 years. Such hedging effectively "buys insurance" against future adjustment costs and is extremely robust, especially when compared with a wait-and-see strategy.

"It would be much less expensive to buy low-cost, climate-change insurance now, than it would be to wait and act later," Schlesinger said. People voluntarily purchase insurance as protection from extreme events when the risks are private, he said, but societies can require insurance when potential losses are distributed across a population. In the past, risk has influenced policies where voluntary action could prove insufficient.

"In the United States, for example, we allow drivers to decide how much insurance to carry, but we require minimum levels of coverage," Schlesinger said. "We also allow individuals to choose how much to contribute to their retirements, but we use Social Security taxes to guarantee minimum levels of income protection."

The study incorporates the uncertainty in the sensitivity of the climate system estimated by Andronova and Schlesinger in 2001 by using a simple atmosphere/ocean model to reproduce the observed temperature change from 1856 to 1997 for 16 combinations of the radiative forcing by greenhouse gases, the sun and volcanoes.

"Recent work by five independent research teams has shown that climate sensitivity could be larger than the 4.5 degrees Celsius upper bound published by the Intergovernmental Panel on Climate Change," Schlesinger said. "In fact, climate sensitivities as high as 9 degrees Celsius are not implausible."

Paralysis in near-term action could make temperature targets as low as 3 degrees Celsius impossible to achieve if the climate sensitivity turns out to be higher than 6 degrees Celsius, Schlesinger said, and the cost of adjustment measured in terms of discounted gross global product could be many times higher for lower climate sensitivities if nothing were done for 30 years.

"In addition, spending a little over the near term to reduce the likelihood of intolerable risk is the best way to show international leadership in 'global stewardship,' to use a phrase coined in the late 1980s by the earlier Bush administration," Schlesinger said. "Doing so would mean telling energy consumers that their fossil fuel bills are a bit too low."

The National Science Foundation funded the work.