Over the last year of financial instability, we’ve heard a lot about moral hazard. This term originally arose in the insurance industry; there it refers to the suggestion that if people are insured against some negative outcome, they may be more liable to behave in ways that increase the risk of that negative outcome arising. So, if your car is insured for all kinds of accident damage, you might be tempted to drive that bit more recklessly, knowing that you won’t have to pay for all the consequences of an accident. In the last year, it’s been all too apparent that the banking system has seen more that its fair share of recklessness, and here the role of moral hazard seems pretty clear – why should one worry about the possibility of a lucrative bet going sour when you think that the taxpayer will bail out your bank, if it’s in danger of going under? The importance of the concept of moral hazard in financial matters is obvious, but it may also be useful when we’re thinking about technological choices.
This issue is raised rather clearly in a report released last week by the UK’s national science academy, the Royal Society – Geoengineering the climate: science, governance and uncertainty. This is an excellent report, but judging by the way it’s been covered in the news, it’s in danger of pleasing no-one. Those environmentalists who regard any discussion of geo-engineering at all as anathema will be dismayed that the idea is gaining any traction at all (and this point of view is not at all out of the mainstream, as this commentary from the science editor the Financial Times shows). Techno-optimists, on the other hand, will be impatient with the obvious serious reservations that the report has about the prospect of geo-engineering. The strongest endorsement of geo-engineering that the report makes is that we should think of it as a plan B, an insurance policy in case serious reductions in CO2 emission don’t prove possible. But, if investigating geo-engineering is an insurance policy, the report asks, won’t it subject us to the precise problem of moral hazard?
Unquestionably, people unwilling to confront the need for the world to make serious reductions to CO2 emissions will take comfort in the idea that geo-engineering might offer another way of mitigating dangerous climate change; in this sense the parallel with moral hazard in insurance and banking is exact. There are parallels in the potential catastrophic consequences of this moral hazard, as well. It’s likely that the largest costs won’t fall on the people who benefit most from the behaviour that’s encouraged by the belief that geo-engineering will be able to save them from the worst consequences of their actions. And in the event of the insurance policy being needed, it may not be able to pay out – the geo-engineering methods available may not end up being sufficient to avert disaster (and, indeed, through unanticipated consequences may make matters worse). On the other hand, the report wonders whether seeing geo-engineering being taken seriously might have the opposite effect – convincing some people that if such drastic measures are being contemplated, then urgent action to reduce emissions really is needed. I can’t say I’m hugely convinced by this last argument.