Stop calling it insurance

My sister sent me a link to an op-ed by Henry Paulson, which got me thinking about an old pet peeve of mine, which is the framing of climate-change policy as a matter of insurance, as for example here.

It’s an understandable temptation. With insurance, you pay a modest amount each year so that, in case something bad happens, you’ll be OK. With climate change, the idea is that we should pay a modest amount each year (take actions that cost the economy something) so that we’ll be OK.

But insurance isn’t actually what we’re talking about, and I wonder if thinking about climate policy in terms of insurance misleads us in a dangerous way.

The key is the difference between insurance and risk reduction.

Insurance doesn’t reduce the chance that a particular bad thing will happen. Instead, it puts together a bunch of people who are vulnerable to that same bad thing, but whose risks are (to some extent) independent, or uncorrelated. What that means is that one person having a bad year doesn’t make it more likely that someone else is also having a bad year.

When you have those two properties—a bunch of people with the same kind of risk, and their risks being independent—an amazing thing happens, which is that the risk for the group as a whole basically goes away.

Say each of you has a house worth $200,000, and you each face a small chance of your house burning down, something like 0.1% (a one-in-a-thousand chance). For you as an individual, the cost of fire will almost certainly be $0. But there’s a small chance that it will be $200,000. But for the group of you, the average cost of fire is right around $200.

As an individual, the only way you can prepare financially for fire is to have an extra $200,000 stashed away. If that’s beyond your means, then you have no way to prepare financially. But as a group you can each pay a mere $200 per year. When someone’s house burns, they’ll still have the emotional loss and the inconvenience of having their house destroyed, but they can be sure that they will be financially protected. Premiums from the people whose houses didn’t burn this year provide the means for financially compensating the few whose houses did burn and nobody in the group faces any financial risk at all.

But remember that the insurance doesn’t reduce the risk that houses will burn. What it does is ensure that when a bad thing happens, you’re not financially ruined by it.

Climate change isn’t like that at all.

My last joke

I know how lame it is to tell people about “this dream I had last night,” but bear with me.

I was in a hospital or clinic, and was sent to one room and another and so on, and finally back to a bed where I’d been before, and I was in my hospital gown and everything, and there was a nurse moving around the bed as she fussed with various necessaries. And a few feet beyond the foot of the bed and to the left there was a man in a lab coat holding a clipboard.

He indicated that there was some paperwork on the table by the bed that I needed to fill out. And I don’t remember if they told me, or if it was in the paperwork the man had pointed to, but that’s when I realized that I was being put to death.

At first it was more like a medical thing, like when you have a pet put down for its own good, but then it morphed and it was more like an execution.