The posts by Professors Bunzl and Socolow convince us more than ever that injecting the term 'moral hazard' into the debate about climate engineering (CE) is a mistake. Professor Bunzl defends the term's use. He writes that moral hazard results when "...a policy intended to offset a state of affairs will also have an unintended effect of also exacerbating that state of affairs." Yet if we had analyzed CE correctly and found it to be viable, it would lower the risk of harm from climate change -- not 'exacerbate' it. Thus, although Professor Bunzl's terminology seems quite vague to us, it still does not stretch 'moral hazard' wide enough to subsume the case of CE.
An analogy might help to draw out some important distinctions. Consider highway accident risks. Auto collision insurance can create a moral hazard. There is a dispute about how big the effect is, and the advantages of insurance may outweigh the harm from moral hazard, but collision insurance does have the features that can lead to moral hazard -- risk shifting and asymmetric information. Thus, it is easy to see how insurance might cause accident costs to exceed optimal levels. In contrast to the insurance example, an effective auto collision avoidance system would not cause moral hazard. It would simply lower the risks of driving. To be sure, drivers may well take some of the welfare gains in the form of more trips, faster trip speeds, and less mental effort applied to the task of driving. This has been the common result of past improvements, but the efficiency gains are no less real for taking forms other than fewer accidents. CE presents a close analogue to collision avoidance. If it works and if it does not produce unacceptable side effects, it would allow society: * to lower the future harm from GHG emissions, or * to keep the same level of harm with lower abatement costs, or * to do some of both. How much of the hypothetical CE efficiency gain should take one form rather than another depends on the shapes of the GHG marginal abatement cost and marginal damage curves. Some people, though, like some extremist highway safety advocates, want all of the hypothetical efficiency gains from CE to be used to lower risk. They fear, rightly we suspect, that society, if offered a choice, would select a level of climate risk that might be lower than that which would prevail without CE but one that would also be higher than that which would obtain if all of the gains from CE were used to reduce risk. Somehow this chance that society might treat CE in an economically quasi-optimal way has been conflated with moral hazard. Josh Horton may well be right that this misuse of the term 'moral hazard' and the opprobrium that it conveys springs from some kind of "land ethic". Or perhaps we are right, and the misuse merely arises from a failure to take proper care in drawing analogies among concepts. The two notions are not mutually exclusive. Either way, the CE debate would be far better off without the resulting confusion. First, the term as a description of the pros and cons of CE is simply inaccurate. Second, its use biases the discussion. 'Moral hazard', by definition, implies a loss in welfare, and there is nothing in the concept of CE that entails any such result. Third, the term 'imperfect substitutes' offers an accurate and value-neutral framework for discussing the choices among GHG control, CE, and adaptation; so there is no need to use inaccurate and biased language. Lee Lane and David Montgomery ________________________________ From: Martin Bunzl on behalf of Martin Bunzl Sent: Sun 9/19/2010 8:35 PM To: [email protected]; Lane, Lee O.; 'Ken Caldeira' Cc: [email protected]; 'geoengineering'; 'David Keith' Subject: RE: [geo] Re: Fwd: NERC Geoengineering dialogue report published today In the context of public policy as opposed to economics, 'moral hazard' is used informally to refer to the degree to which the implementation of a policy intended to offset a state of affairs will also have an unintended effect of also exacerbating that state of affairs. The classic case is an amnesty for illegal immigrants (or tax evaders). From the point of views of policy (as opposed to morality), the crucial question is the relative balance of gain over loss from the implementation of such a policy. Martin Bunzl From: [email protected] [mailto:[email protected]] On Behalf Of Robert Socolow Sent: Sunday, September 19, 2010 1:37 PM To: [email protected]; 'Ken Caldeira' Cc: [email protected]; 'geoengineering'; 'David Keith' Subject: RE: [geo] Re: Fwd: NERC Geoengineering dialogue report published today Let me give this a try. Moral hazard, yes, is a kind of market failture, but one rooted in psychology. We desperately want there to be low-cost solutions to climate change. So, each time a "solution" arrives that looks like it is low cost, we embrace it and are not adequately critical. That's just how we're wired. Moral hazard captures the tendency to self-deception. If we assessed low-cost proposals with appropriate skepticism, there would be no problem. The arrrival of each new "solutions: should lower our level of effort on what we are already getting ready to do, but we allow these "solutions" to distract us -- we systematically overvalue them -- and thus we lower our level of effort more than we should. We know thjis is one of our own weaknesses, and we are trying to warn ourselves. We need cognitive psychologists here to frame these issues better than I have. Rob ________________________________ From: [email protected] [mailto:[email protected]] On Behalf Of Lane, Lee O. Sent: Saturday, September 18, 2010 2:39 PM To: Ken Caldeira Cc: [email protected]; geoengineering; David Keith Subject: RE: [geo] Re: Fwd: NERC Geoengineering dialogue report published today Dear Ken, A good suggestion. The list that you provide is a reasonable one. I would add that my understanding is that moral hazard refers to a specific kind of market failure. It is not just risky behavior. A simple definition that I think corresponds quite well to the way that the term is commonly used Is: "The risk that the existence of a contract will change the behavior of one or both parties to the contract, e.g. an insured firm will take fewer fire precautions. " Asymmetric information between the contracting parties is a typical feature moral hazard problems. The insurer or principal knows less than the insured or agent about the latter's behavior or state. Climate engineering is not such a case. It's a policy choice by government. There is no contract. There is no information asymmetry. True, risk is involved, but GHG control also implies accepting some risks in order to curb others. Nobody argues that emission limits entail moral hazard, and no one should. People can agree or disagree about the prudence of either or both approaches. As you know, I would buy some of both, but neither of the policies has much in common with insurers' or share owners' options as they try to align the incentives of the insured or their firm managers' with their own interests. These just seem to me to present issues that are quite different from the optimization problems under uncertainty entailed by climate change. And as my previous post suggested, trying to force climate policy into this mold seems to me to invite misunderstanding of the issues at hand. Lee ________________________________ From: [email protected] on behalf of Ken Caldeira Sent: Sat 9/18/2010 12:23 PM To: Lane, Lee O. Cc: [email protected]; geoengineering; David Keith Subject: Re: [geo] Re: Fwd: NERC Geoengineering dialogue report published today Lee, It would help in this discussion to provide a clear definition of "moral hazard" and then say why or why not that definition is relevant in this context. If you look on the web, you can get quite a range of definitions: http://www.google.com/search?q=define%3A+moral+hazard The first definition that comes up is: Moral Hazard (economics) the lack of any incentive to guard against a risk when you are protected against it (as by insurance) The UN Capital Development Fund defines it as follows: Moral Hazard arises from the incentive of an agent holding an asset belonging to another person to endanger the value of that asset because the agent bears less than the full consequences of any loss. So, the question is "Why are these definitions not relevant to climate intervention?" By the way, most but not all definitions of "moral hazard" do not imply that "moral hazard" has anything to do with morality. Climate intervention seeks to diminish risk and not simply transfer risk, which is one distinguishing factor. Here is a little parable: Let's say that people think you should change farming practices to slow runoff to decrease flooding downstream. Let's further say that people downstream build dikes to prevent flooding despite poor upstream land use practices. Would we say that a moral hazard of building dikes is that it will relieve pressure on people living upstream to improve their land use practices (which could have other co-benefits, such as limiting nutrient runoff)? [The analogy is that CO2 emission reduction gets at fundamental cause of problem, has other co-benefits (e.g. w.r.t. ocean acidification) but that climate intervention may really reduce risk and not just transfer risk.] Anyway, Lee, it would be nice if you would provide what you think is a good definition for "moral hazard" and then clearly explain why you think it does not apply in this case. Best, Ken PS. David Keith may want to chime in, as I think he was one of the first to use "moral hazard" in this context and now wishes he had been more precise with his language. ___________________________________________________ Ken Caldeira Carnegie Institution Dept of Global Ecology 260 Panama Street, Stanford, CA 94305 USA +1 650 704 7212 [email protected] http://dge.stanford.edu/labs/caldeiralab @kencaldeira On Sat, Sep 18, 2010 at 8:56 AM, Lane, Lee O. <[email protected]> wrote: Dear Josh, I would suggest that in the future we would all be better off without the term "moral hazard". Moral hazard, as I suspect you know, is a kind of market failure. The concept is perfectly useful for describing a class of problems that arise in insurance markets and other kinds of risk-spreading contracts. It does not, I would argue, fit the case of climate engineering (CE) at all well. The relative priority of climate engineering and GHG control is a matter of public policy. It does not involve insurance markets or contracting. The asymmetric knowledge, so typical of moral hazards, does not obtain. In fact, if CE works and does not cause unacceptable side effects, it would lower the expected damage from an adding a ton of CO2 to the atmosphere. As a result, optimal carbon tax rates or emission allowance prices would fall, and the optimal pace of controls would slow. True, even if CE works well, it may exhibit diminishing marginal returns, and it does not combat ocean acidification. Thus, controls retain some value; so does adaptation. The three approaches, as Scott Barrett has often noted, are imperfect substitutes. (Doing more of one implies doing less of the others, but there is a limit to how far that substitution can stretch.) Each of the three is likely to encounter rising marginal costs; hence, relying over-much on any one of them will lower over-all cost effectiveness. In this context, the term moral hazard adds nothing but confusion. Its misuse can be taken to imply that sole reliance on GHG control is somehow the correct response. Indeed the naïve may take it that controls are the only "moral" response. The more we think, speak, and write in these evocative but misleading terms the harder it becomes to see that climate policy should entail finding the most cost beneficial mix of strategies for dealing with a compound challenge in the face of uncertainty. Josh, I suspect that you know all of this; indeed, you could probably write it more articulately than I have. My guess is that you use the term merely as a convenience. Its misuse has seemed to take root in the debate about CE. Maybe it is too late to expunge it. Still, I would urge that we at least avoid sowing further confusion-even if it involves taking a little extra trouble to explain. Best regards, Lee Lane One of the more interesting findings pertains to the "moral hazard" argument against geoengineering, that is, people will embrace geoengineering as an excuse to avoid emissions reductions, and current levels of fossil fuel consumption will persist if not increase. Moral hazard has emerged as one of the principal arguments against climate engineering, despite the fact that geoengineering advocates generally support aggressive mitigation as the preferred option, and are quick to note the limitations of specific strategies, such as continued ocean acidification and the so-called "termination problem" in the case of stratospheric aerosol injections. Evidence from the public dialogue summarized in the NERC report indicates that participants viewed mitigation and geoengineering as complementary policies, not as mutually exclusive alternatives. Stakeholders saw a link between geoengineering and emissions controls, and preferred a suite of mitigation and geoengineering measures to reliance on any single approach. "This evidence is contrary to the 'moral hazard' argument that geoengineering would undermine popular support for mitigation or adaptation," notes the report. While this study represents only one set of empirical data gathered in one particular sociocultural context, it is to my knowledge the first time the moral hazard argument has been tested, and demonstrates little support for this proposition. Josh Horton [email protected] http://geoengineeringpolitics.blogspot.com/ On Sep 9, 10:45 am, Emily <[email protected]> wrote: > best wishes, > Emily. > > Dear Colleague, > > NERC has published the final report of Experiment Earth? , our public > dialogue on geoengineering. It can be found > at:http://www.nerc.ac.uk/about/consult/geoengineering.asptogether with a > short leaflet summarising the findings and recommendations from the report. > > The latest issue of NERC's Planet Earth magazine also contains an > article about the public dialogue, which can be found > here:http://planetearth.nerc.ac.uk/features/story.aspx?id=744 > > Regards, > > Peter > > Peter Hurrell > > Stakeholder Liaison Officer | Policy and Partnerships Team > > Natural Environment Research Council (NERC) > > Putting NERC science to use: find out more through NERC s Science > Impacts Database <http://sid.nerc.ac.uk/> > > -- > This message (and any attachments) is for the recipient only. NERC > is subject to the Freedom of Information Act 2000 and the contents > of this email and any reply you make may be disclosed by NERC unless > it is exempt from release under the Act. 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