An Insurance Executive Explains Why We Need a Carbon Tax

Sep 13, 2018 by

Cutting greenhouse gas emissions is critical to reduce the risks of exposure to extreme weather like the hurricanes now barreling across the Atlantic.

By Edward B. Rust Jr.

Mr. Rust was the chief executive of State Farm.

A business in Nags Head, N.C., is boarded up as residents evacuate the Outer Banks in anticipation of Hurricane Florence.
Credit Victor J. Blue for The New York Times

In the past few years, we have seen substantial damage from storms and flooding in the United States. Hurricanes Harvey, Irma and Maria, which hit in August and September of last year, cost a combined $265 billion in what was a “historic” year for weather and climate-related disasters, according to the National Oceanic and Atmospheric Administration.

Now we’re once again in the peak of hurricane season, with Hurricane Florence bearing down on the Southeast coast with frightening ferocity and two other storms, Issac and Helene, behind it.

Increasingly, extreme weather events are being influenced by the warming of the planet. Not every hot summer day or winter snowstorm can be chalked up to climate change, of course. But that doesn’t mean the atmosphere is immune from the effects of carbon dioxide emissions from cars, industrial smokestacks and other sources.

For the insurance industry, which focuses on protecting against large events that we expect to happen but don’t expect to happen to us, the trend lines are not encouraging.

As an insurance professional with over 40 years of experience, I learned quickly that when actuaries warn about risks, you listen. Consider then the Actuaries Climate Index, which tracks the frequency of extreme weather and the extent of sea level change relative to a reference period of 1961 to 1990. The five-year moving average of climate extremes across the United States and Canada reached a record high in the fall 2017, according to the most recent index, released Aug. 1.

What this reflects, according to the index, is a “continued deviation of climate and sea level extremes from historically expected patterns.” Increased precipitation and rising sea levels were the leading factors driving the latest result, a fact that should be particularly concerning to coastal states from Texas to Maine.

With history as a guide and with a clear understanding of trend lines, insurance markets can work well and protect consumers efficiently. What the data tells us is that the greater losses we can expect from climate-related events, combined with greater uncertainty about where and when they will take place, will create substantial volatility in insurance payouts. For consumers, this will mean more costly premiums.

While new building standards have reduced losses for owners of new homes in some areas, most homes are older and more vulnerable, and improved building standards can do only so much to protect our housing stock. In the end, while robust building codes can help to mitigate losses, they do not reduce the risk of catastrophes. As sea levels rise, insuring against property losses will become more difficult and more expensive.

We must work to reduce these risks, and one key element of a long-term solution should be a revenue-neutral tax on emissions of carbon dioxide. This approach can spur the same reduction in carbon emissions that regulations can achieve, but without the unintended consequences that regulations inevitably bring.

A revenue-neutral carbon tax will encourage manufacturers to develop new ways to reduce their emissions and prompt consumers to be more environmentally responsible. The market will stimulate these choices, not the government. And the revenue raised from a carbon tax could be used to lower tax rates on work and savings.

We need to move away from the politically charged rhetoric about climate change and talk about its real, tangible consequences that threaten the lives and livelihoods of the people that insurance seeks to protect.

Edward B. Rust Jr. was the chief executive of State Farm from 1985 to 2015. He is an adviser to the Alliance for Market Solutions, a group of conservative business leaders advocating a revenue-neutral carbon tax.

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