Alternative Energy, Insurance and Economic Forces

This article on an upcoming law review study on the role, effect and potential liability exposure of the insurance industry with regard to climate change provides the perfect opportunity for me to branch out into a new line of discussion on this blog on another issue that is of professional and intellectual interest to me, alternative energy and the climate change debate. To be more precise, what has long interested me about this subject isn’t the doom and gloom sci-fi stuff, but the more prosaic question of the economic and marketplace realities and the myriad ways in which they interact with the need to reduce both oil dependency and greenhouse gas emissions. It seems to me that the profit motive is the real stick that will drive the changes needed to solve this problem and that the marketplace will pick what companies will win and what ones will lose as a result of this environmental issue. A simple example: as gas prices continue to move up, and as Toyota expands availability and lowers the cost of its hybrid engines, competitors who fall too far behind in the race to put oil efficient engines in their cars - anyone in Detroit listening? - will inevitably lose ever more market share to Toyota. It is a safe bet that oil usage per car in first world economies will inevitably decline, simply driven by gasoline pricing and the decisions of millions of individual consumers to avoid overpaying at the pump, and the companies who can cater to that dynamic will win in the marketplace, to their benefit as well as to that of the environment.

But this dynamic doesn’t have to be driven by pure marketplace forces alone. Instead, government tax and regulatory policies can goose those marketplace incentives significantly, prodding automobile companies to win the race against their competitors to produce the most gas efficient autos possible while simultaneously encouraging consumers to punish companies that fail to do so out of their own self-interest in avoiding high gasoline prices. That, in essence, is the point of this recent op-ed piece by the good folks at MIT.

And this article on the role of the insurance industry in climate change can be understood as making the same macro point - that climate change is an economic issue, and how the problem plays out depends on how those economic actors most affected by it respond to it. And for those of you who might be inclined to downplay the extent to which climate change will impact this industry, British insurance blogger ReRisk had this terrific post some time back, illustrating the property damage in the London market should sea levels rise over time. As he points out, will insurers actually continue to provide property coverage long term in such threatened areas? And if so, should forecasts of rising sea levels bear out, just imagine the loss payouts by the insurance industry.