Friday, 26 February 2010

Moral Hazard and the Need for "Plan B"

When UK retailer Marks & Spencer launched its flagship sustainability programme, it branded the initiative "Plan A - because there is no Plan B".  The idea behind the name is intuitive and compelling: our economy and society are dependent on the natural resources and services provided by the earth.  Depleting those natural assets puts everything else at risk.

Last year, government representatives and spokespeople from advocacy groups began using the phrase in a different context.

In the first half of 2009, a team from the University of East Anglia called on the British government to support an investigation of geoengineering options.  Geoengineering involves combatting the effects of climate change via large-scale changes to the earth's reflective albedo (injecting sulfur dioxide into the stratosphere or launching space mirrors to block sunlight) or artificially removing large quantities of carbon dioxide from the atmosphere.  The East Anglia researchers, like many climate scientists, were concerned that we are reaching one or more "tipping points" beyond which rapid and uncontrollable climate impacts become unavoidable.

Speaking on behalf of the Department for Energy and Climate Change, Minister Joan Ruddock stated that geo-engineering is a Plan B approach, and a diversion "when we should all be focused on Plan A."[1]

In October 2009, Prime Minister Gordon Brown gave a speech in the run-up to the climate change summit in Copenhagen.  Referring to the need for a legally binding international agreement to reduce emissions, he stated that "there is no Plan B".

Government insistence that there can be no discussion of a Plan B (or C, or D for that matter) reflects concern about moral hazard.  Moral hazard is a widely used concept in behavioural economics.  It holds that people and organisations behave differently when protected against risk than they would when fully exposed to that risk. For example, someone with homeowner's insurance might be less careful about protecting their property against theft or fire when they know the insurance company will reimburse their losses

Seen in this light, Minister Ruddock's unwillingness to entertain research on geoengineering reflects concern that the ability to "repair" the climate might cause us to forego efforts to prevent the damage in the first instance.  Likewise, Gordon Brown wanted to increase the pressure to secure a replacement to the Kyoto Protocol during the December 2009 climate summit.  Given the rancorous debates in the months and years prior to Copenhagen, telling people there are alternatives to Copenhagen would almost guarantee a continuation of the stalemate.

The problem, of course, is that fires and thefts sometimes happen despite our best efforts.  When they do, it helps to have insurance.  Despite a Herculean effort by the British government and other parties, Copenhagen did not result in a binding emissions reduction treaty to replace Kyoto.  If Brown was correct, we're doomed.

As it happens, there was a Plan B after all.  There is also a Plan C, a Plan D, etc.  On the last day of the summit, the US, China, Brazil, India and South Africa negotiated the Copenhagen Accord, which focuses on the largest polluting nations, and relies on public pledges and peer pressure instead of legal treaties to drive emissions reductions at the national level.  Governments around the world also agreed to reconvene in Mexico City in late 2010 after a series of preparatory meetings in order to try again to reach a legally binding agreement.  And meanwhile, carbon management companies like Carbon Clear, the Carbon Disclosure Project, the UNEP Climate Neutral Network and other initiatives continue to work with businesses, NGOs and governments around the world to achieve dramatic CO2 reductions.

Publicising the existence of "Plan B" raises the risk of moral hazard, but misleading the public when there is the very real possibility that Plan B will be needed breeds cynicism and distrust.  Imagine the response if the Prime Minister again went before an audience and declared that the Mexico summit is our last chance because "there is no Plan B".

We cannot predict the future.  Climate change is a complex phenomenon that involves the interaction of nearly two-hundred governments, tens of thousands of organisations, billions of people, and a bewildering array of natural environmental phenomena.  As I've said many times before, climate change is too big a problem to solve with one hand tied behind our collective backs.  We need to embrace as many possible solutions as we can, as swiftly as we can.

There is no single solution, no single Plan A that can be guaranteed to solve the problem.  If Plan A doesn't work out, we need to have Plan B ready.  Or as a medieval Arab scholar once noted, "Trust in God, but tie your camel."

(Image credit: Paolo Buggiani)

[1] - Presentation by Tim Lenton to the All-Party Parliamentary Group on Climate Change on 14 July 2009