climate-change – Between Hell and High Water

Invest in Coal?

By Mike Koetting June 4, 2024

I wasn’t planning on writing another blog on environmental issues so soon, but my interest was severely piqued when I saw a recent article in the Chicago Tribune with the headline:

Communities Being Urged to
Double-Down on Coal

I assumed this was surely not what it appeared to be but was a clever hook for some different kind of story. I was curious enough to look.

Nope. The story was pretty much as advertised. A little more complicated, but the headline was straight. A number of communities around the state who are currently getting their electricity from coal-burning plants are being asked to extend their commitments to coal into the 2050s. To be fair, part of the argument is that by extending their commitment, they would finance the development of carbon-capture technology so that by 2050 it would be “net zero”.

The main problem with that proposition is that this technology does not currently exist in a financially feasible way. Will it get there? It might. Some form of carbon-capture technology would certainly be useful and there are lot people working on it. Then, again, it might not. And in the meantime, coal will continue to get burned with well-known consequences.

I don’t know if there is anything that could be done about the existing contractual obligations that run at least 10 more years. It appears that renewable energy would be available for the same amount or less than these communities are currently paying. However, given the contracts, making that shift now might be difficult.

But extending into the 2050’s on the basis of a technology that doesn’t exist is hard to grasp. The argument is being advanced by the Illinois Municipal Electric Agency, (IMEA). Contrary to impression, this is not a state agency, but is a non-profit consortium of 32 Illinois municipalities for the purchase of power. It is proposing that all of its members re-up to keep the larger of two coal plants burning and finance the carbon capture project.

IMEA does own 15% of the current power producing facility, so that may be part of the reason. (The rest of the project is owned by a shifting cast of investors.) I don’t know how important that share of the ownership is to the economics of the consortium. But it seems likely that the difficulties of generating electricity with coal will continue to grow in step with growing concerns about environmental conditions. There are already new environmental standards on the books for the near future. It seems the odds of getting stuck with environmental problems and an unprofitable coal-burning plant are high.

IMEA argues it is already too late for these communities to lock into low-cost renewable sources in 11 years when the current contract expires. The experts quoted in the Tribune article scoffed. They suggested there was already plenty of renewable energy available with more coming on line all the time. It also seems that if these communities bet on a carbon-capture solution, they will really paint themselves in a box and may find themselves needing to throw ever more money at a technology with no good track record.

A different argument made by IMEA is that coal is particularly reliable. That is true—if you shut one eye and squint hard enough about what you mean by “reliability.” Coal generation does not rely on wind or solar or hydroelectricity, each of which has some degree of indeterminacy. But coal is also reliable in its proven effect on greenhouse gases and public health. Moreover, at least so far, innuendoes about renewable energy being less “reliable” have turned out to be mostly balderdash.

It is fairly the case that an organization composed primarily of small city utility managers—those who are very personally at the sharp end of things going sideways—would be extremely concerned with reliability. But they would also be affected by rates substantially higher than what others are paying. So, while it’s not inconceivable they’d be willing to pay a little more for “reliability”, how sure can they be, given the way the world is going, that coal-burning is in fact a reliable source of energy at a remotely affordable price 20 years from now.

In the absence of an obviously compelling argument—there may be one, but I don’t see it—I am guessing that IMEA is infected with its own brand of energy MAGA. It is a sentiment concocted out of a sense of lost paradise, nostalgia for particular things, a resentment at being given guidelines by people they believe to be condescending, and, in many cases, specific losses or fear of them.

Bigger Picture

When I first read the Tribune article, I was annoyed that the constant comparison point for the IMEA proposal was “Biden’s Plan,” “Biden’s approach,” “rules from the Biden administration,” and so forth. I saw this as a deliberate partisan provocation. Then my wife reminded me that electrification was Biden’s plan and, in fact, it was contrasted to the Republicans having no plan at all.

The penny dropped. There is no Republican plan for energy except to capitalize on this stew of discomfort with whatever environmental constraints are proposed. By refusing to participate, they are able to blame Democrats for whatever people don’t like without having to accept any responsibility themselves.

It’s not that people are being crazy. The underlying discomfort is real. There is a generalized sense of loss. I remember the cars of my youth, fueled with cheap gas and absolutely no thought of “environmental impact.” The world seemed infinite. The Arab Oil Embargo of the early 70s shattered that and it hasn’t been the same since. In some sense that and subsequent events are a loss, but mostly in the sense that growing up inevitably comes with some sense of limits. Societal acceptance of this is complicated by the fact that those limits are not evenly distributed. It was much easier for native American tribes to embrace the environment since they all shared more or less equally in both the riches and the limits, and it all happened in real time.

The resentment is even greater if there is a sense that the limits are being placed by someone who faces different circumstances. The trope of rich environmentalists restricting what rural people can do hardly does justice to the situation, but it is not without more than a few grains of truth. Maslow’s Hierarchy gets muddy when the impacts of action are spread over time and complication. Something that is a very basic level of environmental survival for all of us might not feel nearly so compelling to someone facing an even more immediate survival crisis. The price tag of electronic cars may seem reasonable in the face of gas north of $4/gallon, but not if you can barely afford the clunker you depend on.

It is also true that the transition to cleaner energy includes specific winners and losers. It is no accident that Republican support is greater in states with larger fossil fuel economies. That makes it even easier to put a partisan gloss on environmental issues. The 32 communities that are members of the IMEA coalition include several wealthy Chicago suburbs but most of the 32 are rural communities, many of them deep in the coal mining country of southern Illinois. For some of those communities, keeping open the plants that burn their coal does seem existential. Especially if they can convince themselves that there might be a way to make it carbon neutral.

Mining this discomfort is a strategy of opportunism. In the Republican world, there is no need for a plan for environmental issues: just keep insisting that everything will be more or less okay and any attempt to control events is another form of socialism. This is Ron DeSantis and the Republican Legislature limiting use of the term “climate change”, nullifying previous commitments to renewable energy and approving a movie for educational use that downplays climate concerns and vilifies renewable energy.

One of the favorite Republican arguments is that they don’t want to favor one form of energy over another. Folks, picking one policy over another is the essence of government. That’s the job! And while it’s true no policies are perfect, and some hedging of bets makes sense, all the available evidence suggests some policies are better for the society than others. To hide behind pretending to “protect people” by focusing on their discomforts without attempting to recognize context is foregoing leadership for hucksterism.

What Happens Next

I don’t know what will happen with the IMEA proposal. I’d be very surprised if the Chicago communities accept it. Although the deal twenty-years ago was done without fanfare, substantial activism is already taking place in these communities this time around. (My guess is that they were the ones who called the Tribune’s attention to the matter.) Whether or not the rest will go forward, I’ll leave to them. In the meantime, the Republicans will continue to harass Democrats about the problems of whatever they propose. They will continue to act as if this is all going to take care of itself and if the rest of us would stop worrying about it, things would work out fine without having to make any big changes.

And, yeah, trickledown economics really does work. Just give it more time.

Creating Clean Energy Is Not Enough

By Mike Koetting May 21, 2024

The struggle to adjust to changing environmental conditions is not a challenge that can be resolved by fragmented, individual policy decisions. It requires a network of mutually organized and supportive policies. None of the individual policies will be perfect—and can certainly be pecked to death if we let it happen. But we will thrive, perhaps just survive, only if we look at how the totality of responses work together to achieve an adequate outcome.

What’s going on with the nation’s electric supply puts very bright lights on this issue.

Background

Power in the U.S. and Canada is generated from one of roughly 6,000 generation facilities of various sorts–from solar farms to coal fired generating stations–and sent through more than half-million miles of transmission lines to the local substation in your neighborhood. (The local substation is that fenced off area with a madcap collection of electrical pylons suggesting some mad scientist’s laboratory.)

The transmission lines in the U.S. are organized into roughly three separate grids—East, West and Texas. Power can flow relatively freely within these separate systems, but across them only with considerable difficulty. This is why when, three years ago, a severe winter storm crippled Texas’ power generation, it was mostly impossible to send power from other areas to relieve the pressure. Elsewhere in the country, widespread sharing happens more or less routinely in the event of significant local power failure.

The above makes it sound more organized than it in fact is. In theory, primary authority over power generation and transmission across the United States is vested in the Department of Energy Federal Energy Regulatory Commission. But that excludes the Texas grid since, as a single state entity, it is not subject to federal authority. Moreover, the actual organization of the grids in the other two regions is really composed of a collection of regional associations with varying degrees of cohesion. In any event, most power is actually delivered by private companies—including building, or not building, the long-distance transmission lines. These private companies exist in a maze of state and municipal governments that have uncoordinated laws and regulations, all of which are subject to multiple competing demands. One analyst of our grid has alleged that the U.S. is the only developed country without any kind of overall grid plan.

Moreover, about 70% of this grid infrastructure is more than 25 years old and it is not being maintained sufficiently to meet current demand, let alone adjusting to new demands for electricity. It’s unclear who is ultimately responsible for managing the grid and everyone is trying to get someone else to pick up the bill.

However, if we want to imagine a future that relies very heavily on clean electricity: we need to have enough electricity in total and we need to have a grid to move it around.

Aggregate Demand

Total demand for electricity is increasing much faster than anyone predicted even a few years ago. Predicted further demand varies from state to state, but increases between 35% and 45% by 2030 are not uncommon. Some of that is being driven by movement to environmentally advantageous technologies like electric vehicles and green industry. But the biggest factor currently driving surging electrical demand is the increase in the number of data centers, much of it being driven by planned increases in AI and, non-trivially, bitcoin mining.

The nation’s 2,700 data centers drew more than 4 percent of the country’s total electricity in 2022, according to the International Energy Agency. Its projections show that by 2026, they will consume 6 percent. Industry forecasts show the centers eating up an even larger share of U.S. electricity in the years that follow, as demand from residential and smaller commercial facilities stays relatively flat thanks to steadily increasing efficiencies in appliances and heating and cooling systems.

AI is remarkably energy consuming. By 2027, AI applications themselves will use as much energy as Ireland. That is only for the application. It does not include energy use in constructing the machinery and facilities or the cooling costs for that much hardware, which could add as much as 50% to the application cost. Future AI development will to some degree be limited by its bottomless demand for power.

Bitcoin mining is another significant electricity hog. Until 2021, most Bitcoin mining was in China. Then it drove out Bitcoin operations, citing their power use among other reasons. The United States quickly became the industry’s global leader. A New York Times analysis suggests that each of the nation’s 34 bitcoin operations uses at least 30,000 times as much power as the average U.S. home. The biggest US bitcoin operation uses as much power as the 300,000 homes closest to it. One analysis suggests that if all the bitcoin operations proposed for Texas were built, they could use one-quarter of the state’s electricity at peak demand. (Whether or not this is a good use of resources, the Republican Party seems committed to it. At least two states, Arkansas and Montana, have passed laws guaranteeing bitcoin mining access to the grid. In his first administration, Donald Trump was a big supporter of bitcoin.)

Further stressing the grid—both in total demand and in connectivity—is the increase in extreme weather events. The persistent growth in global temperature is driving energy demands as people strive to keep cool in the summer. According to the Department of Energy, nearly two-thirds of the country is at risk for energy shortages in peak summer heat. A confounding factor, particularly in the West, is that low water levels are beginning to impact the amount of hydro-electricity that can be produced.

Connectivity

Even where there is sufficient supply, it doesn’t do much good if there is no way to match it to demand. At present, there is simply not enough transmission capacity. According to the Department of Energy, the US needs to more than double current regional transmission capacity and increase by five-fold the transmission lines between regions. In fact, however, the number of new transmission lines installed in the US has dropped sharply over the last decade. There are multiple reasons—increased local opposition, people not wanting to pay for them, and the tangle of bureaucratic processes.

Source: Department of Energy, 2023

The problem is particularly vexing in terms of getting clean power to where it is most needed. Across the nation, the waitlists for large projects to connect to the grid — and deliver power to homes and businesses — have ballooned, leaving over 1,400 gigawatts of wind and solar power in limbo. (By way of comparison, total US energy demand is about 4 million gigawatts.) A recent report based on a survey of 123 wind and solar developers nationwide found that the grid-connection process was the top cause of delays of six months or more, followed by local ordinances and zoning, community opposition and supply chain issues. Across the nation, about one-third of all transmission projects are litigated.

The community opposition often includes opposition to transmission lines because of other environmental concerns. For instance, two miles remain to be built of a 102-mile high-voltage transmission line between Iowa and Wisconsin, expected to connect more than 160 renewable-energy facilities to the Midwestern grid. This project is threatened because of litigation brought by environmental groups. Elsewhere, environmental groups, including the Sierra Club, have joined a roughly six-year effort to stop transmission lines that would bring hydropower from Quebec to New England. The inability to get clean energy on the grid has already resulted in several coal-fired generators being kept on line longer than anticipated, while in other places, where coal-fired generators were closed because of expected clean energy, the delays are creating shortages.

What Can Be Done

There are several things that could be done, but what it would take to generate sufficient political will is not as obvious as the need.

It seems to me the first step would be to develop some kind of overall plan for the national grid, what with it being the backbone of life as we know it. But in my reading for this essay, I did not run across a single suggestion to that effect. Apparently, anyone who knows enough about this topic thinks the possibility so remote as to not bear mentioning. I concede it would be formidable, but it seems so obvious I guess it is my lack of real knowledge that causes me to suggest it.

With or without real plans, it is going to be necessary to allocate huge funding. Maintaining, upgrading and expanding the grid is an expensive endeavor. The Infrastructure Investment and Jobs Act authorized substantial sums for these projects, but quite a bit more will be needed. Failure to build out the grid will hobble the transition to clean energy. A Princeton University study suggests as much as 80% of the potential benefits of the Inflation Reductions Act (IRA) could be lost if the pace of transmission construction doesn’t pick up dramatically.

Equally important, there must be some reform of the overall regulatory process for grid construction. Last week’s adoption by the Federal Energy Regulatory Commission, over Republican opposition, of a new rule to streamline how power lines are sited and how costs are shared between states is a good start. However, being a bit of a cynic, I’m guessing it will be endlessly litigated, so actual implementation is uncertain. There is also the danger that people with otherwise worthy goals allow those to get in way of meeting our energy needs.

Finally, we need to encourage projects that reduce the strain on the grid. These include projects that would incorporate generation capacities into the construction of facilities themselves. One of the inadvertent benefits of the difficulty of hooking up to the current gird is that it is forcing some of the larger consumers of electricity to consider how to reduce reliance on the grid. Along similar lines, the ability of quantumly improved battery capacity could reduce the need for grid use by saving excess but variable clean supply (e.g. solar or wind) for times when it was otherwise not available.

What I see from my brief excursion into our electric grid is that the technology is evolving at a sufficient pace that a timely transition to clean energy could be possible. The challenge comes from the political difficulties inherent in managing the technology. It looks like we can maintain an overall high standard of living, but we won’t be able to do so without adapting to new realities. If we remain stuck in the country defined by Rick Perry’s comment that Texans find massive power outages preferable to having more federal interference in the state’s energy grid, the odds are good we will all be facing more power outages. But we face a similar outcome if we demand every project address all our hopes and lose focus on what trade-offs really need to get made.

Posturing of Republican States a Planetary Threat

By Mike Koetting April 22,2024

My last post used property insurance to illustrate how climate change is already intruding on our day-to-day lives. When I started that post, I had the vague idea that this might be causing some softening of attitudes, even in Red states. Talk about misbegotten hopes!

Rather, the impact of these states pretending environmental threats are not man-made has a greater rippling effect than I anticipated.

Killing the Messenger (for Gain)

The leading edge of the Republican approach is “anti-ESG” legislation. More than 15 states, all of them Republican dominated, have enacted such legislation. As most of you know, ESG stands for Environmental-Social-Governance. While ESG evaluations apply to all business practices, it has a special meaning for investors. Investors should take into account the impact in these domains of the investments, the business risks associated with these factors, and the degree to which reporting on both the impacts and risks is clear and explicit. Anti-ESG legislation seeks to blunt this, typically in one or both of two forms. One is to prohibit use of any “social, political or ideological interests” when making investment decisions. The other is to prohibit the state from using any institution that is “boycotting” categories of investments such as fossil fuel or gun manufacturing.

Anti-ESG laws blossomed after many large financial institutions joined the Climate Action 100+ group following the Glasglow 2021 Climate Change Conference that documented the extent of environmental risks. These investor institutions agreed to exert pressure on an identified group of climate-critical corporations to take sufficient steps to reduce the risk of environmental disaster.

As it turns out, administering these anti-ESG laws is more ideological than any commitments made by the financial institutions themselves. Texas, Oklahoma, and several other states maintain a list of institutions that cannot do business with the state because of their alleged stance on environmental issues. But how institutions get put on these lists is unclear. In March of last year, Texas added HSBC bank to this list saying that it “threatens Texas jobs, our state economy and our national security.” HSBC contends that all it doing is maintaining “a balanced approach in the implementation of its net zero commitment, with the primary aim being to support our customers in the transition from a high-carbon to a low-carbon economy.” Apparently, having a commitment to achieving a low carbon economy is sufficient reason for Texas and other states to avoid doing business with you.

Ironically, these laws, which use the rhetoric of making financial decisions based solely on “pecuniary factors,” probably have an adverse economic impact on the citizens of these states. A study from Wharton noted that when Texas’ law was announced, five of the state’s largest underwriters of municipal bonds exited the state. As a result, the researchers estimated that Texas cities will pay an additional $303 million to $532 million on subsequent bond issues because of the loss of competition.

The obduracy of these states is not limited to the laws they have passed in their own states. At least 25 Republican-led states have joined major business groups in litigation to block the SEC from issuing rules that require some degree of transparency about environmental issues. These rules would require, among other things, those issuing stocks or bonds to recognize any environmental risks relevant to their line of business and to disclose in notes to their financial statements the costs incurred by severe weather events and other conditions such as rising sea levels or extreme temperatures.

At some level, it is possible to recognize that the economies of major Republican states are more dependent on industries causing climate damage, particularly fossil fuel industries—and they are therefore more protective of them. However, the extreme hostility to these measures goes too far. Perhaps there could be excesses in using ESG criteria. But the risks from environmental factors are not reduced by refusing to acknowledge them. To be unwilling to concede that even requiring disclosure around issues that have the potential to do enormous damage to everything in their state. or that any institution that is committed to helping the transition to a less toxic energy economy is inimical to the interests of the state is absurd. And, indeed, is an abrogation of these states’ responsibilities to look out for the longer-term welfare of the citizens of their states.

Whatever else is part of the motivation, this deeply irresponsible behavior highlights two key pillars of the GOP’s peculiar approach to politics: culture wars and crony capitalism. Culture war because concerns about environmental threats can be readily portrayed as another example of Democrats looking for pretenses to take away” your freedom”. Crony capitalism because these measures curry the favor of those in the fossil fuel industry, who return the favor with bounteous campaign contributions.

Rippling Effects Undercut Entire Effort

This wave of anti-ESG legislation has contributed to making financial institutions much less willing to take a public stand on environmental issues. In the last few months, at least five major investor institutions have exited the Climate Action 100+ group.

All of which illustrates how difficult the transition to more sustainable world is going to be. The financial institutions are facing dual threats in the way this is unfolding. On the one hand, they are punished for taking a stand on environmental issues. But sticking to this stand has its own punishment because the rest of the world is not following any of the climate-saving models that have been laid out in recent years. We are not on a track for a 1.5C temperature increase; in fact, we are likely blasting through a 2.0C increase. Thus, financial institutions that predicated their business on the idea that those models were guiding business decisions are finding a shortage of clients who are heeding the models. And the supply of clients still running their businesses as if nothing has changed are plentiful.

I suppose it is fair to blame the financial institutions for not showing more fortitude given the longer run implications of climate change. However. I think it more important to focus on the fact that climate change requires pretty much everybody to jump together, all at once. If we’re all waiting for the next guy to take the big step, we’ll all be waiting when the water is swirling over our boots.

There is not going to be a transition to a more sustainable economy without significant participation of private capital. But until the rest of the economy decides it has to commit itself to that direction, it is unrealistic to believe private capital could lever all those changes, let alone be willing to so. I don’t see how this works without the clear policy directions that create the conditions by which the economy feels itself compelled to adopt a different energy mode and, thus, creates the demand for financial institutions to finance this transition.

Conversely, as long as there are substantial financial returns from investing in companies who are not acting with an eye to longer run implications, some investors will make those investments—and corporations will continue to take on environmentally damaging projects.

Republicans are right in saying that ESG rules are interfering with the market. But they say that like invoking “the market” is a Get-Out-of-Jail card for whatever it produces. I can’t imagine we really want a pure market approach to dealing with the environment. The result will be to continue investing regardless of the impact until such time as the profitability disappears. But immediate “profitability” doesn’t take into account long run damage or damage offloaded “somewhere else”. (What economists call “externalities” because they are external to the micro-economic calculations about profit, and therefore don’t enter into the discussion.) We will be cleaning up the mess left behind for decades after the profitability disappears—if we are even able to.

When Florida passes legislation that says any state investment decisions can be made solely with regard to “pecuniary factors”, presumably what they are demanding is the state not consider the long run implications in their decisions…only the short run return. So, sure, go full bore on fossil fuels as long as there is oil. What happens to the next generation is the problem of some different politicians.

Thus, the greatest danger from anti-ESG legislation is that it is destroys the unanimity which will be necessary to make progress on saving the world at sufficient scale–citizen support for the alignment of private capital with government policy. Achieving this will require political bravery and a willingness to put real limits on sectors of the economy. It will not be without pain, perhaps considerable pain. But it is inexcusably feckless to give primacy to the immediate political and economic concerns without taking into account that the U.S. just endured the hottest winter on record, which included, according to Yale’s Climate Connections blog, the largest recorded wildfire in the history of Texas. In the rest of the world, last month, the Great Barrier Reef, the largest living structure on Earth, was hit by the fifth wave of mass bleaching in the past eight years and worse yet is forecast for the coming year. Or that the heat index in Rio topped a hundred- and forty-four-degrees Fahrenheit. Every month since June has been the hottest month ever recorded.

To brush off the accumulation of these events and their consequences as “ideological” is intellectually sloppy and fundamentally dishonest.

In the face of this reality, maybe it wouldn’t be too much for Republicans to at least refrain from throwing monkey-wrenches into attempts to solve these problems. Just how great is the threat to the wellbeing of Texas from a bank signing on to reduce the causes of climate change?

Property Insurance: An Environmentally Endangered Species

By Mike Koetting April 9, 2024

I believe one of the reasons that people discount the threats to our environment is that they imagine them as some really catastrophic events resulting in the kind of dystopian science fiction scenario portrayed in a Mad Max movie. Since that is, literally, unthinkable, it gives license to lower the immediate threat level.

However, it is not likely it will happen like that. It is much, much more likely that things will come apart gradually, one problem after another, each compounding the previous. It has already started to happen, poking successive holes in the fabric of our life. Today’s conversations are no longer just about the future.

This post addresses one of these clear and present problems—the retreat of home owners’ insurance in the face of environmental threats.

The modern insurance industry started during the Enlightenment and has become an essential element of our day-to-day lives. We have all come to expect some degree of protection against bad events, but increasingly that’s problematic.

The industry works on a simple concept—if bad events are relatively unlikely, insurers can collect more from the totality of the insured than they pay out to the unlucky few. The logical consequence of this model is stark: as the odds of bad events increase, rates need to increase proportionately. And, whereas the industry’s entire business model depends on the estimates of those risks, its survival depends on realistic assessments, uninfluenced by any political or cultural baggage.

What they are seeing is unsettling. Losses from natural disasters in the U.S. continue to rise at record rates, as summarized by an insurance industry newsletter:

The U.S. experienced twenty-eight climate disasters last year with losses of at least one billion dollars with a total cost of over $93 billion. For context, since 1980 the U.S. has averaged eight billion-dollar weather events per year (CPI-adjusted) with damages averaging $59.4 billion. These events have become much more frequent in recent years, averaging more than twenty such events causing an average of $121.1 billion in losses per year from 2019 to 2023.

World-wide trends are similar, with almost twice as many events with greater than $20 billion losses in the past 8 years as in the entire previous 16 years.

Source: Aon Insurance

To stay in business, insurers must raise rates, lower risk probabilities, or both. Thus, it is not surprising that costs of homeowners’ policies in Florida have tripled in the last five years. Or that 15 major insurance companies have left that state. Or that companies are simply refusing to provide coverage in areas they deem particularly vulnerable. Same is true in those parts of California judged to be at wildfire risk. Fox News reports one homeowner in California whose policy was cancelled for being in a ”wildfire-prone zone”. And replacement insurance was eight times more expensive. Louisianna, Mississippi, Virginia and other states have been similarly affected.

More people are being forced to go without insurance, falling victim to the actuarial imperative that the more likely you are to need insurance, the more difficult it will be to obtain.

This is not to flagellate the insurance industry—although they continue to make reasonable profits, thank you very much—but it is more symptom than problem. It is the environment that is changing.

Insurance companies are realistic about the causes of the changes in their industry and the prospects for the future. They unequivocally link their condition to climate change and only see it getting worse. A report from McKinsey on the future of the insurance industry is fairly lurid in the problems that will grow exponentially as climate issues worsen. Christian Mumenthaler, CEO of Swiss Re, one of the world’s biggest insurers, told the grandees at Davos that the struggles of insurance companies were the first of many climate related bills that consumers will have to pay as a consequence “of the way we have been living”.

But they are no more sure what to do about this than the rest of us. The McKinsey report mentioned above lists several strategies but, other than helping clients build more environmentally resilient communities, they are focused on strategies for predicting risk and avoiding it. Good strategies for the insurance company. Not so good for consumers. (The Economist is even more bleak, announcing in a headline “Changing weather could put insurance firms out of business.”)

We are just starting to think about the consequences of insurance becoming unavailable or available only on a limited basis. There are several parts of our economic system that assume the availability of insurance–many home loans and most home-owners associations require it. Perhaps more importantly, it adds a degree of stability to life by reducing the possibility of devastating economic losses from events over which we have minimal control.

Right now the most severe problems are relatively focused. But it is highly likely to spread. Forty percent of the American population lives in states categorized as “high risk” for damage from natural disasters. Those states have higher insurance rates and, both predictably and paradoxically, have lower rates of insurance coverage despite the greater risk. Equally unsurprisingly, insurance coverage is lower among vulnerable populations.

The inability of Florida, the epicenter of the insurance crisis, to deal with this issue is symptomatic. Some of the problems are idiosyncratic to Florida, but the broad outlines of the issue are fairly typical. The legislature holds hearings and tries to find a simple solution. Last year they passed legislation designed to limit the ability of consumers to sue insurance companies. It’s too early to tell how much this might slow the rate of insurance cost growth, but even proponents don’t think it will solve the problem. They note the rates being charged to insurance companies from re-insurers, those bigger companies that write policies to cover excess loss, are increasing and, of necessity, that will continue to impact rates to consumers.

Florida does provide an alternative to the private sector — the state-sponsored Citizens Property Insurance Corporation–which was set up in 2002 as an insurer of last resort for those who couldn’t find coverage in the private market. It has grown by 50% over this time last year and there no sign of the growth slowing down. A few legislators have suggested that the future of insurance in Florida is to deliberately engineer a major expansion of this pool. That’s not likely. It runs against too many political interests, but more fundamentally there are questions about its feasibility. Citizens’ finances are not robust. It is unlikely it would be able to cover all its obligations in the event of a major hurricane. It asked for a 12.3% rate increase in the last cycle but state regulators would only allow a smaller increase. All of this has made Florida legislators, and even some U.S. Senators, nervous about who would cover the shortfall if (when?) it ran out of money.

Frankly, it is inevitable that more costs will be shifted to government entities, since they become the payor of last result. The recent changes to FEMA regulations around individual disaster losses is a modest step in that direction. Very modest, adding only $512 million to the federal budget. But as private insurance can no longer keep up with the cost of escalating losses without pricing consumers out of the market, the bill for government will rise by a lot more than $512 million.

This will, in turn, create the need for really hard choices. For openers, at what point do various government entities conclude that building in some areas is just too risky or that building without certain safeguards is unacceptable? These kinds of decisions will have all kinds of ramifications—for the housing and real estate industries and for existing owners—and they simply feel “un-American”. But when does the larger society decide that it is a poor use of their resources to subsidize these levels of risk? And what about individuals who decide on their own to take the risk without insurance? The reason private insurance companies have bailed in the first place is that their assessments show these investments are too risky. This is powerful information. Should taxpayers ignore it?

The issue also reflects the time dimensions that impact these hot button issues. No conceivable set of climate initiatives is going to bend the curve of increasingly frequent climate induced losses in anything like the near future. Even if, miraculously, every country on earth started to achieve the climate change goals adopted in the Paris accords, it would be years before those changes impacted weather related events; in all likelihood, the short-run situation will get worse no matter what we do. There is no getting away from the fact that property insurance as we have come to take for granted is going to undergo major changes in much of the country. Whether there will be concerted action and what form it will take—and what will happen if we don’t–is unclear.

What we should be clear about, however, is that we are not talking years from now. It is as if the soldiers of an enemy army are starting to appear in our suburbs. Too late to wish it away.

WTO or WTI—World Trade Organization or What Then Instead?

By Mike Koetting March 26, 2024

My attention was piqued last week when I noticed two articles suggesting that the wheels were coming off the World Trade Organization (WTO), the 160-something nation member organization whose members have agreed to negotiate, implement and abide by common rules for international trade under the premise of free trade. I started to think about the implications of its collapse and whether that was good thing or a bad thing. Oh, and I suppose, whether or not it was close to death.

Let’s start with the last. My Peanut Gallery View of the facts suggest that the WTO is facing some major problems. The most recent of its biennial meetings ended with no major agreements despite some serious issues on the table. The dispute resolution mechanism has come to a standstill as the United State has blocked appointments to the resolution panel for seven years. The Global South, particularly South Africa and India, have used their ability to block many resolutions. Competition between the U.S. and China has spilled into a wide range of issues.