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“Some of the serious anticipated damages from climate change, such as loss of endangered species, cannot be quantified or monetized.” The Social Cost of Carbon

Frank Ackerman argues for the use of an insurance model to value and mitigate climate-related catastrophes instead of the more prominent Cost-Benefit Analysis method.  
 
Cost-Benefit Analysis is widely used to set carbon taxation rates and energy policy.  Ackerman explains the influence of CBA, which “weigh[s] the cost of curbing emissions against the expected damages from every ton of carbon dioxide (CO2) that goes into the atmosphere — a value known as the “social cost of carbon” (SCC). … While no definite SCC has been set so far, an interagency working group has endorsed a “central” estimate of $21 per ton of CO2 in 2010, or roughly 20 cents per gallon of gasoline — far too small a price incentive to prompt substantive mitigation measures. If widely adopted, this low estimate of the SCC could result in ineffectual regulations that would barely reduce U.S. emissions, if at all.” Climate Economics in Four Easy Pieces
 
Ackerman reviews and objects to three dominant models measuring SCC values: FUND, PAGE, and DICE. “Some of the serious anticipated damages from climate change, such as loss of endangered species, cannot be quantified or monetized. … Ethical judgments about the treatment of unmonetized damages play a role in any climate policy, complementing the quantitative calculations embodied in the SCC.” The Social Cost of Carbon
 
“To decide whether climate protection is worthwhile, in cost-benefit terms, we would need to know the monetary value of everything important that is being protected. There are, however, no meaningful prices for many of the benefits of health and environmental protection. What is the dollar value of a human life saved? How much is it worth to save an endangered species from extinction, or to preserve a unique location or ecosystem? Economists have made up price tags for such priceless values, but the results do not always pass the laugh test.  … Is a human life worth US$6.1 million, as estimated by the Clinton administration, based on small differences in the wages paid for more and less risky jobs? Or is it worth US$3.7 million, as the (second) Bush administration concluded on the basis of questionnaires about willingness to pay for reducing small, hypothetical risks?” Climate Economics in Four Easy Pieces
 
Ackerman argues that we need to place a higher value on future costs caused by climate change, and criticizes CBA models for miscalculating the 'discount rate,' or the method of measuring future costs relative to present-day.  “The choice of a discount rate for intergenerational impacts is an ethical judgment, not a data point that can be found in the financial pages. Lower discount rates, decreasing rates over time, and even a zero discount rate (no discounting) can be used to show that our society takes seriously the costs to be suffered by future generations. Instead, he argues for a model based on insurance, which would redistribute wealth.” The Social Cost of Carbon

“We need to buy insurance for the planet.” Climate Economics in four Easy Pieces

 
CBA, Ackerman argues, only measures “average or expected outcomes.”  But given the uncertain risks of climate change, Ackerman argues for a different calculus of risk: “faced with uncertain, potentially large risks, people do not normally act on the basis of average outcomes; instead, they typically focus on protection against worst-case scenarios.” Climate Economics in Four Easy Pieces
 
Ackerman advocates that we follow an insurance model to mitigate the risks of climate change catastrophe.  “The annual number of residential fires in the US is about 0.4 percent of the number of housing units.... Why don’t these statistics inspire you to cancel your fire insurance?... The very existence of the insurance industry is evidence of the desire to avoid or control worstcase scenarios. It is impossible for an insurance company to pay out in claims as much as its customers pay in premiums; if it did, there would be no money left to pay the costs of running the company, or the profits received by its owners. People who buy insurance are therefore guaranteed to get back less than they, on average, have paid; they (we) are paying for the security that insurance provides, if the worst should happen.” Climate Economics in Four Easy Pieces
 

Background

“Frank Ackerman is an economist specializing in climate change. A prominent critic of conventional economic approaches to climate policy and the abuses of cost-benefit analysis, he has written extensively for academic, policy and general audiences and has directed studies for clients ranging from Greenpeace to the European Parliament and U.S. federal and state agencies. Ackerman’s most recent book, Can We Afford the Future? Economics for a Warming World (Zed Books, 2009), reframes the economics of climate change in terms of insuring the planet against worst-case scenarios, addressing the needs of future generations, and accepting the challenge of global equity raised by the climate crisis. His other recent projects include The Economics of 350: The Benefits and Costs of Climate Stabilization (E3 Network, 2009, with Elizabeth A. Stanton et al.), and Poisoned for Pennies: The Economics of Toxics and Precaution (Island Press, 2008). Ackerman is a senior economist and director of the Climate Economics Group at the Stockholm Environment Institute’s U.S. Center, an independent research affiliate of Tufts University in Somerville, Mass.  He is a founder and steering committee member of Economics for Equity and Environment (the E3 Network) and a member scholar of the Center for Progressive Reform in Washington, D.C. He is also a senior research fellow at the Global Development and Environment Institute of Tufts University, where he led the Research and Policy Program until 2007.” http://www.sei-us.org/about/staff-ackerman.html 

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