In many cases, the answer is that governments stand as insurance stop-gaps, allowing the uninsured to depend on grants to rebuild in vulnerable areas should disaster strike, or otherwise cushioning the real costs of exposure to extreme weather.
Researchers at the Wharton Risk Center observed in a 2007 paper: "Highly subsidized premiums or premiums artificially compressed by regulations, without clear communication on the actual risk facing individuals and businesses, encourage development of hazard-prone areas in ways that are costly to both the individuals who locate there (when the disaster strikes) as well as others who are likely to incur some of the costs of bailing out victims following the next disaster (either at a state level through ex post residual market assessments or through federal taxes in the case of federal relief or tax breaks)."
Stripping government measures from the risk market would help reveal the real costs of building in disaster-prone areas, and likely encourage development in more stable locales.
Another near-term option is privatization of infrastructure. Governments are quite good at building infrastructure. After all, what politician doesn't enjoy a ribbon-cutting ceremony for some new element of name-bearing infrastructure? But governments are dismal at maintaining infrastructure. They rarely establish revenue streams to keep up with repairs, nor do they set up systems to provide feedback on whether a particular road should be raised, or power-capability increased, or a water-treatment facility expanded. Roadways, electricity infrastructure, water-treatment infrastructure, and flood-control infrastructure would all benefit from such systems--the kind that private owners have an incentive to develop, since ensuring that future changes in climate do not disrupt their long-run cash flow is critical to their current financial performance.
Over the mid-term, we should consider the proposal of Ross McKitrick, a Canadian economist, who has suggested what he calls a Tropical Tropospheric Temperature (T3) tax--that is, taxing carbon dioxide emissions based on changes in the global average temperature. Ideally, this would be a revenue-neutral tax with all revenues rebated to the public in the form of reduced distortionary taxes, such as income tax.
A T3 tax has the advantage that should be attractive to both global warming skeptics and those who fear Climageddon: If temperatures remain low, as skeptics believe, the tax will stay low. If temperatures rise sharply, the tax will rise also, and incentives will grow to decarbonize energy systems around the world. Carbon taxes are a vastly superior policy option when compared either to cap-and-trade, or command-and-control regulation. Indexing the tax to the temperature of the atmosphere that shows anthropogenic change most clearly is only common sense. Mr. McKitrick suggests starting out small with something politically innocuous, on the order of 10 to 15 cents per ton of carbon dioxide emitted.
In the long term, we should trust in resilience and a carbon price, but tie up our camel. We should insure against the possibility that temperatures rise toward the higher-end scenarios of the U.N.'s Intergovernmental Panel on Climate Change, by speeding the development of a robust geoengineering tool box, with multiple techniques that have been tested long before they might be needed. Such research should be accelerated now, to give us an insurance policy against the calamity predictions. There is at least one well-known mechanism by which Mother Nature cools the planet, and that is when volcanic eruptions launch sulfur dioxide high into the atmosphere, brightening clouds, and increasing their reflectivity. Some scientists have estimated that this could be done extremely inexpensively without harmful environmental impacts.
What went on in Copenhagen was more political theater than an effort to think about realistic approaches to managing the risk of climate change, whether man-made or natural. The world would be better off with a fresh start and a process that isn't run by U.N. bureaucrats for whom every problem is an excuse to expand their power.
Kenneth P. Green is a resident scholar at AEI.