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The moral hazard of climate change

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 One of the factors compromising our prospects for a stable and secure environmental future is outlined by Bryne Purchase in the subject of moral hazard — a hazard he emphasizes simply by changing the title of his article in The Walrus from “moral” to “mortal” (Mortal Hazard: Why catastrophic events like the sub-prime mortgage crisis and climate change are inevitable.) His ideas are insightful and timely, even remotely hopeful because he identifies a structural flaw in “the architecture of our decision making” that we could correct by being aware of it.

The flaw, Purchase explains, “is that in the pursuit of economic growth we privatize reward and socialize the downside risk.” Economists have borrowed the term “moral hazard” from the insurance industry to describe this process.

“A moral hazard exists,” Purchase writes, “whenever decision makers in risky situations reap the rewards from their decisions without bearing all the costs.”

This transfer of cost to others encourages risk taking, a shifting of responsibility that is even officially acknowledged in the term “limited liability”.

 But the society that inherits costs also reaps rewards. Modern market capitalism, Purchase explains, has created an incredibly dynamic economy with unimaginable wealth since its inception a little more than two centuries ago. The material success of our global economic system is due primarily to this agreed distribution of risk and cost.

In exchange for the immense social and economic benefits provided by adventurous investors, their businesses are protected by corporate recognition, legislated support, government grants, tax benefits and even bankruptcy laws that limit personal responsibility for imprudence and outright incompetence. In exchange, society gets jobs, infrastructure, merchandise, services, opportunity, innovative new products, and the promising prospects generally described as progress. 

The danger in this system, however, is that it lacks the checks that provide appropriate restraints. Such a lapse in supervision occurs because both the economic system and the social system are joint beneficiaries of the risk process. Society, therefore, is reluctant to impose restrictive regulations on economic activity because any constraining effects may be felt by everyone.

This exposes modern market capitalism “to new orders of potentially catastrophic failure,” explains Purchase. “Catastrophic, because by the time a potential problem becomes recognized as clear and present danger, no action may be sufficient to prevent social and economic breakdown... .”

The complexity of such a system produces “tipping points” that may have “viral effects”, the most dramatic and vivid example being the recent sub-prime mortgage fiasco of 2008-09 that came close to collapsing the world's entire financial system — secondary and tertiary effects are still reverberating throughout the economies and societies of many countries. 

Purchase quotes Allan Greenspan, the former chair of the Federal Reserve Board in the United States, who succinctly explains the forces of risk in the evolution of this financial shock. “A difficult problem is that much of the dubious financial-market behaviour that emerges during the expansion phase is the result not of ignorance that risk is badly underpriced, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share.” The competitive power of the system, therefore, sanctions inexcusable risk.

This, however, is but half the equation. The other half is the social and political psychology underlying the unfolding disaster.

“I am also increasingly persuaded,” notes Greenspan, “that governments and central banks could not have importantly altered the course of the boom either. To do so, they would have had to induce a degree of economic contraction sufficient to nip the budding euphoria. I have seen no evidence, however, that electorates in modern democratic societies would tolerate such severity in macroeconomic policy to combat a prospective problem that might not even materialize.”

Since everyone was benefitting from the surge in the housing market, and the cost only existed as conjecture for some time in the indeterminate future, no one would take the initiative to reduce the opportunities for financial gain. The present reward overruled the possible risk.


Now transpose this entire argument to the subject of global climate change. “A moral hazard exists,” Purchase reminds us, “whenever decision makers in risky situations reap the rewards from their decisions without bearing all the costs.”

Fossil fuel corporations and their investors, together with almost every member of a modern market capitalistic society, are all reaping the economic wealth accruing from the present unrestrained use of coal, gas and oil. The cost of billions of tonnes of carbon dioxide emitted into the atmosphere is calculated as possible risk projected into the future, cost for some other people to solve with some other ingenuity. Moral hazard invites such deferrals and human psychology is willing to comply. And, as Purchase notes, “There are always politicians willing to offer the policy option with the least short-term cost or the greatest short-term benefit.” 

We are now, however, entering a transition phase. The environmental risk is beginning to impose its cost. The Arctic is melting, the oceans are rising, the temperature is climbing and the weather is getting more bizarre. The cost is floods, droughts, fires, political instability, crop failures, climate refugees, species loss and miscellaneous disasters that are surprising in their imaginative ingenuity. The deferred future is becoming the unfolding present.

Moral hazard is exacting its payment. Whether we continue to play the game of risk and cost remains an unanswered question.

(10) Comments

Bruce Voigt September 3rd 2013 | 9:09 AM

It is of GREAT IMPORTANCE to establish a constant monitoring system for Canada's North Magnetic Pole Movements. Bruce Voigt August 31st 2013 | 9:09 AM

Can't do it alone but with my requested two point two billion dollars could put a huge dent in ongoing world catastrophe.

Dandy September 3rd 2013 | 2:14 PM

How silly of me. I thought that I might read something about the hazard of manipulating data, perverting statistics and falsifying experimental results to gain scientific grants. Then again I thought the article might be about how large US interests like General Electric and the Rockefeller’s  had poisoned the Canadian environmental movement for their commercial gain. But alas it was only more of the global warming claptrap that has been disproven so many time it is not worth reading about.

Mike Pearson September 3rd 2013 | 2:14 PM

The summertime Arctic ice melt is average this year. The ice sheet is more quickly affected by windstorms and wave surges than temps

Antarctic ice sheets are above last years numbers.

Floods have occurred forever ...with or without our help. Not building in a flood plain ( Calgary I'm looking at you ) is a good first step.

Climate refugees? For the entire history of mankind, people have been moving to better/safer locations. That doesn't explain the whole "moving to Florida" thing though.

Weird the winter of 1946-47 when the U.K. nearly froze?...or the 1871 U.S. wildfire that killed 1500 people...( long before climate change blamed droughts )

According to the Keeling curve that measures global co2...the concentration went down after touching 400ppm

Perhaps the pollution and carnage from mining and oil production will get us sooner than a temperature change.

Moral hazard if any would be foolish to poison ourselves in the pursuit of profits.

Mooney September 3rd 2013 | 2:14 PM

Another moral hazard of climate change is that the promoters and benefactors of this theory refuse to acknowledge the planes in the sky that we have all seen, dropping down all that crap on our heads and causing a lot of their so called climate change.

babette September 3rd 2013 | 6:18 PM

Have you not heard of "CLIMATE-GATE" yet! 

Stop with the BS, you shill.  

Try informing people about the military project of geo-engineering/climate manipulation (Owning the Weather by 2025 - read their own documents for proof).

Or talk about Fukushima nuclear disaster or GMO-Monsanto or fracking or fluoridated drinking water or the dangers of Smart Meters etc.

There are plenty of REAL reasons to worry. Start getting the TRUTH OUT instead of fraudulent science that was outed years ago.


















Joseph September 3rd 2013 | 7:19 PM

Yet another example of climate change believers beating the drums of 'capitalistic humans are the devil' and still no proposed replacement to our current economic system or means of producing affordable energy (i.e., fossil fuels).

Who ignorant do these people think we are? We are tired of those who would try to create a sense of emergency in order to justify yet again, another massive financial hit against the middle class. Just like the Bush Administration and its 'war on terror', the Obama Administration is pushing this agenda to impose a financial penalty on energy consumption.

Tell me this, how does it make sense to embrace energy sources (biofuels, wind, solar etc) as the means to reducing the threat of a changing climate when these sources of energy are fundamentally dependent on a stable climate???

C. Brown September 3rd 2013 | 9:21 PM

 Due to Earth's Moral and Mortal Hazards Stone Age male homo sapiens learned the missionary position was optimal for a successful, efficient and quick procreation method during moments of high risk exposure to a Saber Tooth Tiger sneak attack. Hence since practicing this popularized position our species mitigated the risk of death before finishing the job. Stone Age humans rapidly spread by word of mouth or hand signs the evidentiary success of this position hence our species went-forth multiplying and flourishingly across the globe.

 When assessing the environmental risk due to the impending unthawing of large, fertile land masses  such as Greenland, Antarctica and Arctic, 21st Century animal behaviorists' studies of our species procreation habits presented evidence we are up to the tasks at hand to continue our survival on Earth.
 The historical data collected indicates the highest percentage position males place themselves during procreation results in a heat temperature rise and increased exhalation of carbon dioxide due to rapid, heavy breathing, into the surrounding environment. This conclusive evidence of anthropogenic induced increased warming and carbon dioxide levels into the environment during procreating ensures as quick as possible, successful impregnation of females.
al bore September 4th 2013 | 4:04 AM

28 years of needless CO2 panic and CO2 death threats to billions of helpless children was a pure war crime.

Judy Cross September 4th 2013 | 9:09 AM

The most prestigious scientific organization in the world, the  World Federation of Scientists meeting in Sicily in August of this year declared that global warming is no longer a "Planetary Emergency."

Of course it never was anyway, but it is nice to have an official statement on it.

What is a "planetary emergency" is the ongoing radioactive contamination of the Pacific Ocean.

Get your priorities straight!

JrTokin September 4th 2013 | 9:09 AM

Never common sense, or foresight... or forethought about future cataclysmic potential.. just get that profit out now, take what you can get...

greed and willful ignorance. truly ugly things.