Insurance Post

Weathering the storm

The potential impact of climate change is immense and it is now widely accepted that time in which to address the problem is running out. Aubrey Meyer and David Crichton look at contraction and convergence as a possible solution

It is quite possible that the recent tsunami may only be the start of a series of major disasters. It is widely recognised that climate change will lead to increasingly severe weather conditions around the planet, particularly in the form of water-related disasters.

So could contraction and convergence help to create more stable weather patterns, making insurance less of a gamble?

A recent United Nations report stated: "Over 90% of all deaths from natural disasters are water-related and 99% of deaths from flood between 1975 and 2001 (more than 250,000 people) were from low-income groups. In the richer countries, total disaster losses are less than 2% of gross domestic product; in poor countries the figure is nearly 14% from 1985 to 1999."

Climate change could increase the number and severity of tsunami disasters.

It is argued that glacial ice melt will add so much more water to the oceans, that the added weight will create new stresses on fissures in the sea bed that could trigger underwater landslides and volcanoes.

Even if this does not happen, the fact that sea levels are rising sharply cannot be ignored and this means natural and man-made coastal defences are more likely to be overtopped by tsunami or storm events.

Kyoto protocol

Climate change is now generally considered by the world's top scientists to be the result of human-induced greenhouse gas emissions, hence the Kyoto protocol, which is designed to reduce such emissions and is due to come into force on 16 February.

While it is a start, Kyoto is really too little too late. With the UK holding the presidency of the G8 countries this year, UK Prime Minister Tony Blair has expressed the intention to put climate change at the top of the agenda. And the House of Commons Environmental Audit Committee is currently taking evidence on 'The International Challenge of Climate Change: UK Leadership in the G8 and European Union'.

After Kyoto

One of the burning issues will be what happens after Kyoto. A highly favoured contender is the concept of 'contraction and convergence', which was developed by Aubrey Meyer of the Global Commons Institute in London around 10 years ago.

The plan is now at the core of the UN Framework Convention on Climate Change. It has been approved by the European Parliament and other governments and, in July 2004, even received divine backing from the Church of England.

The proposal might be considered radical - to reduce greenhouse gas emissions per person around the world to a safe level within a few decades - but climate change is such a big threat that urgent and serious action is needed.

The authors of the UK Chartered Insurance Institute report on climate change were in no doubt of this when they said in 2001: "The most realistic way to bring about the required reduction in greenhouse gases emissions ... is that proposed in the concept of contraction and convergence."

Far-sighted insurance companies would be well advised to become familiar with this concept, which could have a major impact on their businesses over the next 20 years.

The first assessment report of the Intergovernmental Panel on Climate Change was published in 1990 and recognised that cuts in the emissions of greenhouse gases in the order of 60% to 80% would be necessary to halt the increase in their concentrations in the atmosphere.

With fast-growing economies around the world, especially in countries like China and India, Western countries are faced with the problem of having to reduce their carbon emissions by even more than 60% to prevent runaway climate change.

To make matters worse, some developed countries such as the US and Australia appear to have little intention of curbing their growth in carbon emissions, while others seem to have adopted a delaying tactic called the 'Frog' approach, namely 'first raise our growth'.

Contraction and convergence is the only solution that is consistent with the principle that is enshrined in the United Nations Charter, which states that everybody is born equal. If you carry this through to its logical conclusion, it means everybody in the world should have equal rights to enjoy the benefits of modern technology. It also means generations still to be born should have equal rights to those living today.

The underlying principle of contraction and convergence is that developing countries should be allowed to grow their emissions while developed countries contract theirs until the figures converge at some agreed per capita level.

This may seem a bit radical to some, but recently, Dr Rowan Williams, the Archbishop of Canterbury, said contract and convergence "appears utopian only if we refuse to contemplate the alternatives honestly".

In any case, it appears unreasonable for anyone to argue that a US citizen has a greater right to pollute the planet with greenhouse gases than someone from China or India. Carbon dioxide concentration in the atmosphere is now 40% above pre-industrial levels and the rate of increase is growing every year (see chart, left).

Future global climate

The Royal Commission on Environmental Pollution's report in 2000 made only one recommendation: the UK government should press for a future global climate agreement based on the contraction and convergence approach, combined with international trading in emission permits.

This approach is consistent with the 1987 Brundtland Report, also known as Our Common Future, which first alerted the world to the urgency of making progress toward economic development that could be sustained without depleting natural resources or harming the environment.

Published by an international group of politicians, civil servants and experts on the environment and development, the report provided a key statement on sustainable development. It defined it as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs".

The Brundtland Report focused primarily on the needs and interests of humans, and was concerned with securing a global equity for future generations by redistributing resources towards poorer nations to encourage their economic growth.

It also suggested that social equity, economic growth and environmental maintenance are simultaneously possible and that each nation is capable of achieving its full economic potential while at the same time enhancing its resource base. However, it recognised that achieving this equity and sustainable growth would require technological and social change.

It is important to note that applying environmental and sustainable limits on human activities need not result in limits on economic growth; it simply means new solutions must be found. For the insurance industry this could have many implications.

Renewable energy

For example, in order to maintain economic growth, there would be a much greater pressure to find cheap energy sources that do not rely on fossil fuels. The trading permit system in the Kyoto protocol would be expanded.

More renewable energy will create the need for new insurance, and hedging products such as wind guarantees for wind and wave power and crop guarantees for biomass.

Insurers could encourage the use of bio fuels, such as ethanol, for vehicles and aircraft. New technology means ethanol can now be produced from any form of organic waste, even waste paper, at a cost of a few pence per litre.

Such fuels are much safer than petrol or hydrogen fuel cells, do not cause pollution of watercourses, and release no more carbon than is absorbed during the growing process.

Natural disasters

In less-developed countries, insurers can have an important role in helping to protect the livelihood of people at risk, by providing affordable micro-insurance for items such as fishing boats, sewing machines and tools so that people can get back to work quickly after a disaster.

There is also a need for insurance of infrastructure, including roads and bridges, to help people recover from disasters quickly without depending on charitable handouts.

Such insurance would be very risky, however, unless there were signs that something was being done about climate change. If contraction and convergence were to be adopted globally, it could ultimately help to create more stable weather patterns, which would make insurance less of a gamble.

The war on terrorism is insignificant compared to the war the human race is currently waging on Terra, our home, and the only planet we have. Insurers and banks need to take action to persuade society to adopt effective strategies such as contraction and convergence to cope with the threats this planet faces. After all, they are going to be on the front line when climate change impacts really start to bite.

More than 200 financial institutions around the world have already indicated their agreement that the position is serious and that they should be taking action on the environment, and have signed up to the UN Environment Programme's statement of environmental commitment. A full list of the signatories appears at www.unepfi.org and if your company is not on the list, perhaps ask your chief executive 'why?'

Aubrey Meyer is the originator of 'Contraction and Convergence' and head of the Global Commons Institute. David Crichton is a visiting professor at the Benfield Hazard Research Centre at UCL, and a fellow of the Chartered Insurance Institute.

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