Insurance and Climate Change column

Regional Greenhouse Gas Initiative Grows by Another State

By | October 3, 2019

Pennsylvania Gov. Tom Wolf on Thursday ordered his administration to start working on regulations to bring Pennsylvania into the Regional Greenhouse Gas Initiative.

The initiative is a nine-state consortium that sets prices and limits on greenhouse gas emissions from power plants. The member states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont.

Wolf’s call for entrance into the initiative is significant, as Pennsylvania is the nation’s 4th largest carbon dioxide emitter, according to data from the U.S. Energy Information Administration.

The directive signed by Wolf in part states that in 2015, the Pennsylvania Climate Impacts Assessment Update found that the state has undergone a warming of more than 1.8 degrees Fahrenheit over the past 110 years, and that current warming trends are expected to increase at an accelerated rate with average temperatures projected to increase an additional 5.4 degrees by 2050.

Annual precipitation has risen by 10 percent over the past 100 years, and is expected to increase by an additional 8 percent by 2050, according to the directive.

“Pennsylvania is experiencing the numerous negative effects of these trends. 2018 was the wettest year on record in the Commonwealth,” the directive states. “The increased rainfall resulted in extreme weather events and flooding throughout the state costing residents an estimated $144 million in reported damages, and costing the Commonwealth at least $125 million in damages to state-maintained infrastructure.”

It decrees that by no later than July 31, 2020, the government must develop and present to the Pennsylvania Environmental Quality Board a proposed rulemaking package to “abate, control, or limit carbon dioxide emissions from fossil-fuel-fired electric power generators.”

It also calls for the establishment of a carbon dioxide budget, and providing for more frequent auctioning of carbon dioxide missions allowances.

EIOPA Opinion

Reinsurers should consider the impact of their underwriting practices on the environment, the European Insurance and Occupational Pensions Authority said in a recently published opinion.

EIOPA is part of the European System of Financial Supervision, an independent advisory body to the European Commission, the European Parliament and the Council of the European Union.

The European Commission is set to take the opinion into account in the preparation of its report on Directive 2009/138/EC (Solvency II Directive), due by 1 Jan. 2021. That report is part of regulatory requirements for insurers, covering authorization, corporate governance, supervisory reporting, public disclosure and risk assessment and management, as well as solvency and reserving.

“Climate change increases the uncertainty about the occurrence and the impact of physical or transition risks, which can happen at any time and suddenly, with far-reaching consequences. Hence, undertakings should not be complacent about these risks,” the EIOPA report states.

The report continues: “Consistently with sound actuarial practice, where risk mitigation and loss prevention can make a significant difference, the development of new insurance products, adjustments in the design and pricing of the products and the engagement with public authorities, should be part of the industry’s stewardship activity.”

According to Gabriel Bernardino, chairman of EIOPA, the overall goal is securing a resilient industry in a sustainable environment for the benefit of consumers.

“In the interest of our society and the next generations – before it is too late – immediate actions are needed by all players globally. A sustainable environment is a precondition for a sustainable economy,” Bernardino said in a statement.

Mortgage Defaults

Climate change poses risks to real estate that homebuyers may not be able to predict, according to a pair of economists.

“As sea level rises, coastal properties, for example, may be subject to increased flooding and intensifying storm surges,” the autors, Matthew E. Kahn and Amine Ouazad, wrote in an article recently posted on Claims Journal, the sister site of Insurance Journal. “First-time homebuyers often lack the expertise to evaluate these new risks, and thus tend to underestimate them and overpay for increasingly exposed properties.”

The authors say their research has found that risk is shared by mortgage lenders and, through the operations of Freddie Mac and Fannie Mae, the American taxpayers.

As an example they used a buyer of a $400,000 home with a 5% fixed-rate, 30-year mortgage on $320,000, which is to be paid through 360 monthly payments of $1,700.

If a lender holds on to this loan on its balance sheet, and then climate change creates new expenses from flooding, storms or wildfires, the borrower is more likely to default on the loan, according to the authors.

“Consider that lenders originate an estimated $60-100 billion in mortgages on coastal properties, and it’s clear the potential aggregate impact of default due to climate change is significant,” the authors write.

Robots and Climate Change

Can automation and robots impact the climate?

The World Economic Forum, in an article titled, Automation and robotics could have a surprising impact on climate crisis, attempts to answer that.

The article looks at what’s being called “the fourth industrial revolution,” in which disruptive technologies like the internet of things, virtual reality, robotics, and artificial intelligence are changing the way we interact, work and live.

What will all this mean for climate change?

“The answer is complicated,” the article out on Thursday states. “These innovations have the potential to significantly reduce greenhouse gas emissions and provide unprecedented levels of insight and data to mitigate climate change. But without proper consideration mass automation could be bad news, increasing consumption and emissions.”

Auto manufacturing, for example, is highly automated, with human teams replaced by robotic workers, enabling more efficient energy management in factories.

“This has allowed manufacturers to reduce waste and emissions across the entire lifecycle of products such as cars – from the initial metals and minerals, through to the energy used to transport products to market,” the article states.

While there has been a significant improvement in energy and resource efficiency, we haven’t seen an absolute reduction in environmental impact.

“In fact, overall environmental impact is generally increasing. Some commentators even argue that improvements in technology have actually driven an increase in consumption, a phenomenon commonly referred to as the ‘rebound effect,'” the article states.

The efficiency savings made by robots in auto manufacturing have also made cars more affordable, so more people can afford to buy a new vehicle, increasing the numbers on the roads and the overall emissions.

“So, yes, increasing automation and smart technologies do promise sweeping changes to society, with the potential to liberate human populations from the mundane,” the article states. “If managed carefully this technological revolution has the potential to provide significant environmental benefit. But that is a big if. Automation will not necessarily deliver a positive outcome for sustainability – we need to manage our consumption, even as the latest technological revolution races ahead of us.”


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