Imagine that in a few years you wake up to news reports on the radio that your town is under a flash flood watch. The ground has been so baked by the recent drought that water can’t soak in, and so the pounding rain is just flowing off into streams and filling low-lying areas.

What’s worse is you’ve got a pediatrician appointment today for both of your kids – their asthma is acting up and the drugs aren’t working as well as they should be. Furthermore, your son is still recovering from a case of malaria he picked up, probably from a mosquito bite he got during the pee wee football game by the reservoir a couple of months ago. At least the rains will damp down on your environmental allergies some today. Better rain, even flooding, than the dust storm that blew through the area a couple of weeks ago. That caused several major pileups and fouled up ventilation so bad that some of the buildings downtown are still closed..

As you pull together breakfast for the family, there’s no milk because it’s too expensive. Most of the local dairies were forced to close down over the last few years as the drought reduced the cows’ milk production. The few diaries that survived can charge almost as much as they want to since the supply is far lower than the demand. The same is true of eggs and cheese, although beef has been cheaper recently as dairy cows are slaughtered for their meat in a last-ditch effort to pay off drought-driven debts.

You take the kids to their appointments and find out that your son’s malaria isn’t quite gone yet – it’s apparently a strain that’s become resistant to the more common, and cheaper, anti-malarial drugs. The next course of drugs is not only more expensive, but also has more side effects that will make it harder for your son to be effective in school. Both kids’ asthma is doing OK, but the pediatrician points out for the third time that you might want to consider moving out of the suburbs and into a rural area with cleaner air. Unfortunately, because of your spouse’s job, that’s just not possible. And with the chronic conditions you and the kids have, you need the company’s good health insurance.

After dropping off the kids at school, you head to the grocery store. The produce section is half the size that it was just a few years ago, and all the produce you do see is expensive – almost all of it was shipped in from out of state. Over the last three months there have been two e. coli recalls of produce from out-of-state farms where the water got polluted, and there have been dozens of others over the last few years. You’ve tried to grow a garden yourself to supplement the meager grocery store selection, but growth issues and the drought has forced your town to go on strict water restrictions. It doesn’t help that the garden plants always seem to be out-competed by the invasive weeds in your yard. The bindweed and thistle have grown largely immune to the commercially avaialble herbicides.

There have been several large dry lightning-sparked wildfires recently that tore through mountain communities. As a result, the insurance companies gave up on insuring homes in the mountains. The regional wildfire fighting coordination office had to give up on fighting fires – there is just too much fuel and temperatures have been too high for safe fire suppression, and when the city’s conserving every drop of water for human consumption, using city water to fight wildfires just was not possible. As a result, your neighbors were driven out of their beloved mountains down to the suburbs where they could be safe and get homeowners insurance.

Your neighbors’ daughter is in the U.S. Air Force, piloting an armed drone patrolling the Mexican border as air cover for the Border Patrol. There’s been a massive influx of immigrants and refugees from Central and South America recently, and even though the Border Patrol is now three times the size it was in the early 2000’s, there’s still not enough agents to police the border without military help. She’s worried that she’ll be deployed soon to southern Europe as back-up for our allies’ efforts at keeping the EU from being overwhelmed by Turks, Arabs, and Africans pouring northward. There have been a few brushfire wars recently, but most of Africa and parts of the Middle East are looking more and more like a powder keg just waiting for the right spark. As a result of the worsening national security situation, taxes have skyrocketed to pay for the large military required to maintain all the active deployments. Worse yet, there’s a chance that your neighbors’ daughter might be deployed to guard the Venezuelan oil fields that the previous President “annexed” in support of U.S national security interests and that the Venezuelans are resisting as an invasion and occupation.

After dinner, you let the kids stay up late for the first time in months – the flooding dumped enough water into the reservoirs and local streams that the power plants have enough water to operate all day instead of shutting down or operating on a rolling blackout schedule. You wish now you hadn’t voted to approve the nuclear plant (or elected the public utilities commissioners who approved the increase in your electricity rates to pay for it), since it’s no better than the coal plants – they all need so much water for cooling that just hasn’t been there the last few years. Well, until today’s flooding, anyway. So you let the kids enjoy the special treat.

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According to the Intergovernmental Panel on Climate Change Fourth Assessment Report, one of the largest peer-reviewed studies of climate science performed to date, a scenario similar to that described above is 90% likely. More recent scientific data suggests that the IPCC’s conclusions about the severity of climate disruption were overly conservative. As a result, both the IPCC’s projections for climatic upheavals later this century and their 90% confidence in those projections are very likely under-estimates of the severity of the problem.

Knowing all of this, how much would you spend on an insurance policy that lowers the chances that the overly conservative scenario described above happens? How much is your quality of life, your family’s health, your friend’s well being, your lower tax rate, worth to you? 1% of your annual income? 5%? 10%? More? Or nothing at all?

In 2008, the average American spent approximately 16% of their salary on health, home, car, and life insurance premiums¹. That’s a huge amount of money. The reason people pay that much is because they want to be insured against the likelihood of something horrible and expensive occurring. And the more likely something is, combined with how expensive it it is, the more we pay in insurance.

The table below illustrates the difference^{2, 3}:

The table clearly shows that Americans pay the most overall money for our health insurance, but given how high the risk of needing the insurance is (estimated at 100% in a given year), the risk value metric is actually pretty good.

What the table doesn’t show, however, is that we have homeowners or renters insurance not because of the average claim, but because the small chance of a severe financial loss is still risky. The table below illustrates this point:

Remember, insurance premiums cost the average American 16% of their annual salary in order to insure against future financial losses that could be, but usually aren’t, extraordinarily high. So the question is how much should the world be willing to pay in order to insure against future financial losses?

As was mentioned above, the likelihood of substantial risk is at least 90%, with more recent studies than the 2007 IPCC report saying that the risk is actually higher. The next question has to be “how much is the future financial risk” of doing nothing?

A University of Oregon analysis estimated 4% as the bare minimum cost of doing nothing. An International Institute for Environment and Development (IIED) study estimated that the benefit:cost ratio of addressing climate change was at least 8:1. Recent worst-case estimates (discussed below) say that the annual GWP cost of addressing climate disruption is approximately 3%, so the IIED study says that the cost of doing nothing could be as much as 24% of GWP. This number is similar to that calculated by the Stern Review (which, not coincidentally, is what the IIED used as their baseline) back in 2006. The lowest estimates of the cost of doing nothing are in the range of 1-2% of GWP, and a few scientists have suggested that the upper range of the cost could literally be the end of human civilization.

As for the cost of mitigation, aka climate insurance, a recently released study by the E3 Network calculated how much money the world would have to spend in order to return the carbon dioxide (CO₂) in the Earth’s air to a recent estimate of a “safe” level – 350 parts per million (ppm). The study reviewed the available literature and found that the worst case estimate was 3.0% of global gross domestic product (aka gross world product, GWP), and the E3N models estimated the estimate put the cost at approximately 2.5% of GWP.

The table below compares the insurance paid by Americans to three projected climate costs vs. risks.

Notice that Americans pay more in premiums than they get in benefits (ie claims), so the risk divided by the expense is less than 1. The difference represents insurance company profits, and clearly Americans are willing to pay for the comfort that insurance gives them. The table also shows that the risk of significant damage due to climate disruption divided by the global expense of addressing climate disruption varies from 0.33 to 100, and in five out of the six cases shown above, the future financial risk that is effectively insured equals or significantly exceeds the cost of insurance.

To put this all into perspective, the GDP of the U.S economy in 2008 was about $14.4 trillion. 16% of that (the money spent on average for insurance) is a little less than $2.6 trillion. According to the World Bank, the GWP was just over $60 trillion in 2008. The percentage of the global economy that is likely at risk is 24%, or $14.4 trillion. And the economists are estimating that the cost of insuring against losses that could equal the size of the entire U.S. economy will be no more than 3% of GWP, or $1.8 trillion.

In other words, for less money that the U.S. spends on insuring itself, the entire globe could be insured against climate disruption. Then imagine taking your four favorite cities in the world – and then erasing one.

And for another dose of reality, the United States is presently arguing over spending money to insure the U.S. against climate disruption to the tune of 0.25% to 3.5% of GDP (ACES analysis by the CBO). 0.25% to 3.5% of U.S. GDP in 2008 would be between $36 and $500 billion ($0.5 trillion)⁴. That’s well below what the U.S. already pays for insurance and is several hundred billion dollars less than the financial bailouts.

Ultimately, the analysis of what the U.S. already pays to voluntarily insure itself against future losses illustrates that insuring the global economy against future financial losses makes economic sense. After all, Americans already pay more to insure against smaller future losses that have a smaller chance of occurring than does climate disruption.

If the U.S. is willing to insure itself against future financial losses due to damage to home, vehicle, and health, then there’s no good reason why the U.S. and the world should be unwilling to insure themselves against future financial losses due to climate disruption.

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¹ According to the national car insurance comparison site CarInsurance.com, the national average annual premium for car insurance was $1,600 in 2008. According to the National Association of Insurance Commissioners, the national average premium for homeowners insurance was around $800, although it varies widely from state to state. The Kaiser Family Foundation estimates that the annual cost of health care per person in the U.S. is nearly $5,300. Life insurance premiums vary so widely that it’s difficult to come up with a solid number, but $300 per year is a reasonable estimate. The total from this estimate is $8,000.

Average salary was derived from 2008 Census Bureau data.

² Derived from the Federal Highway Administration and the National Highway Transportation Safety Board, and the Insurance Industry Institute. Percentage is defined by the number of collisions divided by the total number of private, commercial, and publicly-owned vehicles on the road. Average Insurance claim is the total for all claim types (injury, collision, comprehensive, and property damage) divided by the number of accidents.

³ “Risk value” is a term defined for this analysis only. While the insurance industry undoubtedly has its own metrics, this metric is my own and may or may not be equivalent to an official industry metric.

⁴ This “cost” is not an accurate accounting of the actual costs to the economy. This money would be circulating in the economy still, but would not be going to the interests that it goes to presently, especially oil and coal companies and coal-burning utilities. Instead, the money would be directed toward energy and carbon-efficient companies. As a result, the argument in Congress is clearly not one of economics, but rather a battle between entrenched, old-energy interests protecting their profits and influence and up-and-coming, new energy interests hoping to gain profits and influence.

In fact, this entire analysis illustrates that the reasons behind opposing insuring the world against losses due to climate disruption are neither scientific nor economic. Instead, the reasons are ideology, profit, and political power.