Oxford University’s Tim Palmer is a professor of climate physics. In an interview for an article in Sunday’s Guardian, “Feel free to doubt climate change: just don’t deny it”, he touched on climate skepticism, “denialism”, and a topic not often broached by the Climate Change community: Uncertainty.

You may be confident that your house will not burn down this year, but you would be considered a fool by many people if you failed to take out insurance. And so it is with climate change. The detailed nature of global warming’s impact on the planet is not yet agreed by scientists. It could be dreadful; it could be limited. It might destroy vast stretches of the planet’s farmlands and send deserts spreading round the globe. Or it might merely result in sea level rises that inundate parts of Bangladesh and Florida and not much else.

“There might be a 50% risk of widespread problems or possibly only 1%,” says Palmer. “Frankly, I would have said a risk of 1% was sufficient for us to take the problem seriously enough to start thinking about reducing emissions.”

OK, now we’ve found a climate scientist that speaks rationally, not a ManBearPig warming alarmist who thinks people will only be motivated to action if they’re scared out of their wits.

But there’s a problem with Prof. Palmer’s analogy.

Climate Science lacks a serious treatment of probability theory. I agree with Professor Palmer that the average person is uncomfortable with uncertainty and risk.The analogy with homeowner’s insurance is his attempt to bring the concept into everyday terms.

To his credit, Palmer says what few in the Climate Science racket are ready to admit: the conclusions drawn from Climate Science are far from certain. (I addressed the same notion here and here.)

ILLUSTRATION: A homeowner, Fred, pays $1,500 per year to insure against the catastrophic loss of his $200,000 house. Fred’s statistical risk of loss is 0.5%. The “expected loss” per year is $200,000 times 0.5%, or $1,000. To Fred, the certainty of the loss of $1,500 makes sense if he can be certain that the insurance company will keep him whole (or as whole as money can make him) in the unlikely event of a catastrophic loss. The extra $500 makes the transaction a profitable one for the insurance company. Both Tim and I would agree that this transaction is a wise and rational one for Fred to make.

But what if Fred’s insurance premium were, say, $5,000? Most of us would advise Fred to get a quote from another agent. How about $50,000? The risk of loss hasn’t increased, just the cost to insure that risk. The wise choice might be to “self-insure”, that is, to keep the $50,000 and live with the risk (maybe Fred puts that money to use fireproofing his house instead).

To take the argument a step further, what if Fred’s insurance company is be unreliable or insolvent? Fred has purchased a policy, but is uncertain that the promised compensation has any value? What is the policy worth? The answer is next to nothing, because insurance primarily buys peace of mind.

This is my point of disagreement with Professor Palmer: his insurance analogy as justification for some unspecified strategy to counteract Global Warming lacks a cost/benefit analysis.

In order to perform such an analysis, we need to assess the following:

• The chance of a catastrophic loss – 1% to 50%? I’d favor the low end, Prof. Palmer the high end.
• The magnitude of a loss, if it were to happen. Prof. Palmer says we can’t really know.
• The cost of the “insurance” against loss.
• The likelihood that the “insurance” will effectively mitigate against the loss.

The proposed “cost” is the willful hobbling of our industrial economy by forcing greater than necessary expenditures for energy (via an energy tax, carbon trading, or what have you). Such an action will certainly make those of us in industrial economies less prosperous. In the developing world, where people exist at the margins, it will ultimately cost lives. The cost is simply too high.

Where the whole deal falls apart is in the uncertain efficacy of the solution. Any real world carbon curtailment agreement is meaningless without the participation of China and India. Those countries have shown no interest in cooperating. Their continued growth (and unabated carbon emissions) will more than offset any self-inflicted carbon strategies on the part of the developed economies.

In summary, society is being asked to bear the certainty of a very high cost to insure against a potential loss of uncertain magnitude, when it is completely uncertain that the remedy can mitigate the loss.

Back to the homeowner’s insurance analogy, it’s called being “insurance poor”.

By definition, capital resources are limited. A key to a healthy economy is making capital allocation decisions wisely in order to prevent waste and inefficiency, and to maximize the benefit of employing that capital. The best way to make those wise decisions is to let them happen naturally, in the marketplace.

Cross-posted at VladEnBlog.