The Choice between Economic Policies to Face Greenhouse Consequences

Abstract

In the past few years, unstable and extreme weather patterns are increasingly occurring as phenomena of climate change and the link to greenhouse gas emissions, we can say, is scientifically accepted. Extreme weather patterns are causing major damage on health, property and business and the question is becoming who is going to pay. In this paper, the problem is analyzed starting from the consideration that emitters of greenhouse gases externalize the true costs of their contribution to climate change. The comparison of alternative regulatory systems in the environmental field, following an economic analysis of law (EAL) approach, lies on the assumption that people act rationally and respond to incentives, as stated by the price theory. Traditionally regulatory systems originates from the presence of market failure: in our specific case, the environment appears as a “public good” that may not be appropriated and has no market price; the damage to the environment is a case of “externality”, in that it is fully or partly a social cost that is not internalized into the accounts of the parties causing it. In the EAL literature, environmental regulation has been seen as it may play a role in correcting malfunction and subsequent inefficiencies. Particularly, regulation systems intervene ex ante or ex post on the behavior of (potential) injurers that (can) cause an environmental accident with a consequent environmental damage. Efforts to recover these costs, which manifest both through the costs of impacts and the costs of efforts to prevent impacts, could imply a relevant role for the insurance sector. Because the insurance sector is the world’s largest industry, the response of insurers to the broader climate-change challenge will no doubt be key to solve this internalization problem. The first part of the paper aims to provide an overview of the literature within the traditional EAL approach about the comparison between different environmental systems, first of all ex ante regulatory system, such as command-and-control policies; secondly, ex post regulatory system, such as a civil liability system, having in mind their application within United States and European Community. Particularly the contributions of the EAL literature will be analyzed considering how the authors increasingly try to describe the two regulatory systems including imperfections, such as the uncertainty in the implementation of the liability system. Then, the paper discusses the role that insurance sector can play in the design of political economic solutions for climate change consequences. In this sense, the role of the insurance sector can be in different directions: first of all, the supply of insurance coverage for claims of third-parties who allege injury or property damage; secondly, the design of insurance financial products aim to finance technological responses to climate-change (mitigation and adaptation strategy). Specifically the paper will address the issue of the indirect effects of the insurers, in proactively stimulating climate change prevention behavior related to their customers in the view of the choice of political economic instruments. Finally the paper will take into account the new policies on this field that, at the end of this year, the COP-21 conference in Paris will consider in a new International Protocol.