Climate Engineering: Insurance Perspective—Effectiveness and Associated Risk Pathways
“We do not know much about modeling climate. It is as though we are modeling a human being. Models are in position at last to tell us the creature has two arms and two legs, but we are being asked to cure cancer.”
—Gerald North, former head of the climatology department at Texas A&M University
By Srivathsan Karanai Margan
CLIMATE CHANGE REPRESENTS THE MOST SIGNIFICANT SYSTEMIC RISK that the Earth has ever encountered since the dawn of human existence. The severity of these risks is exacerbated by our limited understanding of Earth and climate systems, their interactions, and our failure to establish a unified global response. For decades, climate scientists and governments have prioritized climate change mitigation efforts, aiming to transition from fossil fuels to green energy and reduce greenhouse gas emissions. However, it is becoming increasingly clear that these mitigation initiatives are falling short of their targets.
The global fraternity is now explor-ing climate engineering techniques such as carbon dioxide removal (CDR) and solar radiation management (SRM) as potential solutions to combat climate change. However, the effectiveness of most climate engineering approaches remains unproven on a planetary scale. The optimistic scenario suggests that these solutions are effective in staving off a climate breakdown. However, the negative scenario could extend beyond simply failing to meet the climate targets. The adverse impacts could range from exacerbating existing climate and weather risks to causing unintended consequences and resulting in loss of life and property.
This article examines the various effec-tiveness and associated risk pathways of climate engineering from the perspective of the insurance industry.
An overview of the risks
Climate engineering involves the deliberate anthropogenic manipulation of cli-mate and earth systems to slow down and reverse the negative impacts of climate change. If successful, climate engineering approaches, CDR, and SRM could potentially create a new, technically engineered, habitable world. However, achieving such targets at the planetary scale requires globally coordinated, massive, and aggressive intervention. These initiatives must directly or indirectly interact with the same climate and earth systems that are primarily responsible for climate change. Currently, most climate engineering activities consist of small experiments or deployments that do not produce significant adverse effects. However, the risks associated with deploying these techniques on a planetary level, as well as the impacts from simultaneous, sequential, or long-term deployments are less understood. An individual deployment that appears peaceful and event-free may prove detrimental when it interacts with other deployments, upon mass adoption or in the long term.
Until now, discussions and action plans related to climate have primarily focused on climate change mitigation, adaptation, and resilience. Various frameworks and standards, such as the Task Force on Climate-Related Financial Disclosure, the Principles for Responsible Investment, the Carbon Disclosure Project, the UN Principles for Sustainable Insurance, and the Net-Zero Insurance Alliance, have been established to guide insurers in addressing climate-related risks. The insurance industry has aligned with these frameworks to develop specific risk models, products, rules, and gover-nance structures for addressing physical, transitional, and liability risks associated with climate change. However, there has been only minimal mention in the insurance literature of climate engineering solutions and the risks they pose.
Climate engineering involves the deliberate manipulation of climate and earth systems for the common good. Ideally, such interventions should be managed by states and overseen by an overarching governing body. However, given that the private sector is funding most research and substantial deploy-ments are required to achieve goals, either the private sector or a public-pri-vate partnership may be necessary. The solutions being piloted under the CDR and SRM approaches may have limitations regarding their area of effect (local, regional, or planetary), duration of effect (short- or long-lasting), and scalability (limited or expandable). Among all climate engineering solutions, direct air capture (DAC) from CDR and strato-spheric aerosol injection from SRM are anticipated to have significant potential for scaling up to effect a planetary-level change.
Climate engineering approaches, such as CDR and SRM, often involve the addition or removal of substances to the elements of air, land, or water, thereby creating a new category of permissible pollution. Consequently, the current restrictive terms of environmental poli-cies need to be reexamined to differen-tiate between accidental contamination and the deliberate addition of substances. The insurance needs of these companies can be categorized into two main areas. First, there is a need to protect them from the operational risks inherent in their business operations. Second, there is a need for liability coverage to protect against adverse effects resulting from climate engineering deployments on third parties. However, to adequately address the insurance needs of climate engineering companies, the insurance industry must first understand the risks associated with them. Depending on the effectiveness of climate engineer-ing deployments, whether they work or not, and the resulting cascading adverse effects, four pathways can be envisaged: ideal, realistic, scam, and sinister. (See Figure 1.)
Climate engineering works!
Climate engineering deployments with exclusively positive outcomes and no consequential adverse effects represent the most optimistic scenario. These approaches effectively achieve their targets at the local, regional, national, or planetary levels at which they are implemented. Despite potential delay in the response time between deployments and the slowdown or reversal climate change, this optimistic scenario averts the worst-case outcome of climate breakdown. After a few decades of climate engineering implementation, there is even a perceptible decrease in the frequency and severity of catastrophes. This would immensely benefit the insurance industry as climate and weather risks are contained within a predictable range, leading to a decrease in claims from natural catastrophes.
The insurance industry performs two important functions: risk management and investment man-agement. The inclusion of climate engineering as a qualified climate response will impact both functions significantly.
Risk management
For the insurance industry, an effective and risk-free climate engineering industry would present an ideal risk profile. Assessing the risks faced by these com-panies and catering to their requirements would be a business-as-usual scenario. The risks faced by these companies during research, development, and deploy-ment stages may closely resemble those faced by other industries. Existing insurance products, including builder’s risk, business interruption, commercial auto, commercial property, cyber liability, environmental liability, equipment breakdown, general liability, property insurance, reputation, standard engineering products, vehicle insurance, and worker’s compensation, will be adequate for address operational and liability risks. Providing coverage against various perils and traditional liability risks associated with the operations will bring stability to the nascent climate engineering industry.
Investment management
Currently, the focus of businesses across the globe is to comply with carbon emission targets outlined in the Paris Agreement. However, not all businesses are realistically positioned to achieve the target solely through their operations. Consequently, many companies
are making a beeline for CDR solutions to meet the net-zero emission goals. Nature-based CDR solutions are currently the primary target of most investments in this area. However, there is also growing interest in the new breed of DAC companies that are emerging. Several companies, including insurers, are seen investing in DAC companies, entering long-term CO2 offset agreements, and purchasing carbon removal certificates.
To influence a climate change slowdown or reversal through CDR approaches, large-scale DAC projects must be implemented. Insurers can play a vital role in supporting the industry by acting as industrial investors, providing finance for projects, services, and new infrastructure. This would bolster the confi-dence of the industry and increase the flow of funds into the sector. Existing guidelines for sustainable finance mandate that insurance companies consider Environmental, Social, and Governance (ESG) factors while investing. This is to ensure that long-term investments are directed towards sustainable economic activities and projects. It may be just a matter of time before the investments made in climate engineering companies are integrated into ESG considerations and qualify as sustainable investments.
Climate engineering works, but…
The ideal scenario, with minimal or no cascading adverse effects, may be feasible only for a select few climate engineering solutions. Realistically, apart from nature-based CDR and surface-based SRM solutions, others may have cascading adverse effects in some form. Deployments should be undertaken after a reasonable risk assessment, ensuring that benefits outweigh the adverse effects and the risks of non- deployment. While the risk and investment-related aspects discussed in the earlier section remain relevant for this scenario as well, the insurance industry must also be aware of the new risks that could arise at various stages of the deployment. These risks can be broadly classified into two groups: performance- related and cascading adversity-related risks.
Performance-related risks
A weird performance-related risk would be the possi-bility of climate engineering solutions not just working but being overly eff ective. In the case of CDR solu-tions, this would mean that instead of merely stabiliz-ing CO2 levels in the atmosphere and bringing them to permissible levels or pre-industrial era levels, these solutions are so potent that they decrease the atmo-spheric CO2 levels below the established threshold.
Similarly, for SRM, this would entail a scenario where, instead of arresting global warming or reducing global mean surface temperature to targeted levels, a region or planet experiences much cooler tempera-tures. Th ese are reverse-risk scenarios of what is being discussed with respect to the current climate change and the increasing global average temperature. Th ese scenarios would have signifi cant eff ects on the earth’s climate and ecosystems.
A healthy percentage of CO2 in the atmosphere is crucial for photosynthesis, supporting plant growth and productivity. A drop below benchmark levels would have disastrous eff ects on the ecosystem and food web, making it uninhabitable. Th is disruption would wreak havoc on terrestrial fl ora and fauna, potentially leading to widespread ecological damage. Furthermore, a reduction in the atmospheric CO2 levels and overly eff ective SRM could lead to drastic
cooling of the planet. These changes could significantly alter weather patterns and temperature distributions, impacting life on the planet. In the most extreme scenarios, a reduction of the global average tempera-ture by a few extra degrees Celsius below the threshold could trigger an ice age. Insurance companies may face increased risks of agricultural losses, loss of life, and geopolitical turmoil. In such circumstances, many risks could become unpredictable and uninsurable until successful efforts are made to reverse the cooling and increase CO2 to appropriate levels, allowing the effects to subside.
Cascading adversity-related risks
CDR and SRM approaches offer contrasting pathways for addressing climate change. CDR aims to remove atmospheric CO2, the supposed primary cause of global warming. SRM ignores the cause but focuses on reducing the global average surface temperature by directly mitigating solar radiation. Considering the differing approaches, the nature of the cascading adverse effects from CDR and SRM methods may vary. The risks associated with CDR and SRM deployments could differ based on factors such as timing, location, method, and intensity of deployment. These risks may include damage to real and personal property, impacts on physical systems such as oceans, lakes, and snow-pack, as well as effects on biological systems such as humans, vegetation, and wildlife. Additionally, some climate engineering deployments could be counter-productive and exacerbate the very problems they aim to solve.
Risks from CDR solutions
Nature-based CDR solutions such as forestation, soil carbon sequestration, and wetland restoration may not have serious adverse effects. Hybrid solutions such as enhanced weathering and biocarbon with carbon capture and storage could change the land use pattern, alter soil chemistry, impact plants and micro- communities, and damage biodiversity. However, these negative impacts would be mostly localized. Biochar, another hybrid solution, could potentially worsen cli-mate change as it could release carbon monoxide and methane during the process.
Ocean fertilization, a nature-based solution, has the potential to deplete oxygen levels in sea water, leading to the formation of ‘dead zones’ and causing catastrophic consequences to marine ecosystems. Similarly, ocean alkalization, a hybrid solution, could increase the presence of toxic metals and other minerals in seawater, altering the biodiversity of the oceans. It is expected that ocean-related solutions will be deployed within the territorial jurisdiction of states. Measures will be taken to ensure that any adverse effects are contained within the territories of the deploying states and do not spill over to the territories of other states or the global commons. The environ-mental liabilities of the companies deploying them will be to clean up the toxins and restore habitats. They may also be required to compensate for any adverse impacts on human life resulting from the consumption of seafood affected by these interventions. In cases where the leakage of toxins or other adverse effects has a transboundary impact, there may be a need for states to share the associated risks. Resolving such issues could be complex and may involve international arbitration processes.
DAC, a tech-based solution, is currently the most discussed solution, on which significant expectations are placed for its potential to achieve net-zero targets and reversing climate change. However, DAC poses certain risks, both during its operational phase and in the post-injection and storage phases. During operations, DAC could potentially increase stresses or pore pressure, leading to seismic activity in the areas where CO2 is stored. This may necessitate specialized earthquake insurance coverage to mitigate associated risks. Another significant risk from carbon storage is the long-term permanence and containment of CO2. Leakage of CO2 from storage sites, whether gradual or abrupt, poses environmental hazards such as ground-water contamination or acidification. While gradual leakage may not pose immediate toxic effects, it undermines the purpose of carbon capture, potentially leading to liability claims from investors and clients who relied on DAC services.
On the other hand, an abrupt release of CO2 in high concentrations could lead to serious health and life-threatening issues. Such a leakage might occur during operations when CO2 is being transported
to storage sites or after it has been stored. A notable historical incident that illustrates this risk occurred in Cameroon in 1986. A sudden release of CO2 from Lake Nyos, which is located within the crater of a dor-mant volcano, resulted in the deaths of 1,746 people and 3,500 livestock. The CO2 gas had been trapped at the bottom of the lake under the pressure of 682 feet of water. Natural triggers caused the sudden release of 1 million to 3 million tons of CO2, which proved fatal by causing asphyxiation and loss of consciousness among both humans and animals.
While leakage during transportation could be immediate, an abrupt reversal from storage sites might be time-delayed, occurring years or even decades after the operations have ceased and the site has been sealed. This delay could happen due to natural reasons, such as the storage site becoming saturated and unable to sequester further CO2 or failing to contain the CO2 already stored. Such a sudden surge in CO2 concentra-tions of high magnitude in the air could pose risks to both humans and animals. Additionally, if the release occurs explosively, it could cause damage to proper-ties. If the carbon is sequestered beneath the ocean floor, a leakage event could result in mortality among marine organisms and disrupt the marine ecosystem.
The operational risks associated with carbon storage are expected to resemble those already identified for carbon capture, use, and storage (CCUS) practices that are currently adopted by the oil and gas industry. These risks can be addressed through existing risk mitigation and risk transfer options. However, environmental risks could escalate if the carbon storage leakage is significant and potentially aggravates climate change at a planet-level. Furthermore, not all countries possess appropriate natural capacity to effectively sequester CO2. This could get complicated if multinational DAC companies establish storage sites in other countries on commercial agreements and leakage occurs.
Risks from SRM solutions
SRM, which aims to cool the Earth by targeting solar radiation, is viewed as climate change in reverse. Just as global warming triggers changes in climate and extreme weather events, cooling efforts may also have unintended consequences. Surface-based SRM solutions such as roof and crop albedo could have a limited and localized impact on the surface temperature and are not expected to cause severe adverse effects. The other surface-based solutions, such as desert, snow, and ice albedo modifications, when implemented on a large scale, could significantly influence the microclimate of a region. These modifications may alter precipitation and weather patterns, potentially affecting the species dependent on those habitats.
Just as global warming triggers changes in climate and extreme weather events, cooling efforts may also have unintended consequences.
The risks associated with a space-based space mirror could occur during the pre-launch, launch, and post-launch phases, like those for launching satellites and space objects. Pre-launch and launch risks primarily involve localized events such as failed launches causing harm to property and life. Insurance coverage would be needed for malfunctions, material damage, failed launches, and liability when in case debris falls on private property. During the post-launch phase, coverage may be required for partial or complete failure of the sky mirrors and the associated repair or replacement costs. Adverse impacts post-launch could affect the global commons or potentially trigger transboundary risks. These effects may include changes in weather patterns, alterations to precipitation regimes, impacts on biodiversity, and effects on plant growth and overall ecosystems. Space mirrors could also contribute to space debris, increasing the risk of collisions with other space objects and satellites, further complicating the risk landscape.
Atmosphere-based cirrus cloud thinning could alter the balance of incoming solar radiation and out-going longwave radiation. It may inadvertently lead to a net warming effect instead of the intended cooling. Marine cloud brightening, on the other hand, reduces the amount of sunlight reaching the ocean surface, potentially impacting marine ecosystems reliant on sunlight for photosynthesis and decreases the CO2 that oceans absorb. Both these approaches could have or simultaneous losses across an entire region, thereby making the entire region uninsurable. To accurately assess the consequences of SRM, new climate models are required to simulate the outcomes of deploying such solutions, including factors like the type, quantity, and the duration any substance is injected into the atmosphere. As the frequency, severity, and randomness of risks increase, insurers must recalibrate their cost structures and approaches to risk management accordingly.
Climate engineering does not work!
In the scenario where climate engineering fails to produce the desired effects, two potential outcomes can be envisioned: one without cascading adverse effects and the other with cascading adverse effects. As climate engineering goes mainstream, a proliferation of companies offering related services will emerge.
In such a scenario, governments and regulators may find it difficult to individually approve and monitor all companies, regardless of size, geographical scope, or cascading adverse effects. While stringent approval and monitoring processes may be necessary for companies whose solutions may pose potential transboundary risks, governments may establish standardized frameworks and legal guidelines for all other companies to follow. These frameworks would outline the criteria and standards that companies must adhere to, ensuring responsible and accountable deployment of climate engineering solutions.
It is likely that some of these companies could be grossly ineffective, and some are mere speculative snake oil salesmen who rush to capitalize on the climate engineering hype. These scamsters may present them-selves as benevolent and effective players. Identifying these speculative players can be a complex task, as they may appear legitimate but get exposed as fraudulent in retrospect. Even when their effectiveness is questioned, these companies could assert that natural forces or the actions of other players negated their good work. As their solutions may ultimately prove to be ineffective or even detrimental, insurance companies may face claims for damages, financial losses, liability, and reputational losses from both their clients who would have sought their services to meet net-zero or cooling commitments and affected third parties. The question before the insurance industry is how to identify these speculative players and whether they should provide coverage only for specific targeted risks and not as umbrella liability insurance.
On the contrary, it is possible that the potential of climate engineering to prevent a climate breakdown at a planetary level proves to be overhyped. The positive outcomes may be insig-nificant and negligible and might not be not able to counter the menacing onslaught of climate change. This can be likened to attempting to extinguish a forest fire with teaspoonfuls of water; while pouring water is the appropriate method, the small scale of the effort renders it ineffective and ultimately futile.
From a climate perspective, the underperformance of climate engineering efforts may not have a significant impact, as the broader trajectory of climate change will continue unabated. However, for the companies involved in climate engineering, such underperformance could result in increased conflicts, including those related to the contractual obligations not being met and investment losses for clients who sought their services. This failure to deliver on promises could lead to an increase in liability insurance claims against these companies. Additionally, as carbon removal and cooling credits become closely integrated with the ESG scores, companies that get cheated would be in turn failing to deliver on their climate engineering commitments and may see a decline in their environmental ratings. This could impact their attractiveness to investors and their insurability, further exacerbating their financial challenges.
In the cooling economy, potential insurance claims could arise for the costs and penalties associated with reversing carbon removal or cooling credits, as well as the additional expenses incurred in purchasing compensatory credits. These companies may find themselves needing to purchase credits from the market at inflated prices to maintain their ratings. Insurers may need to consider offering new products to cover investment, legal, and reputational losses in response to these emerging risks.
End Note
Despite all the progress in science and technology, our collective intelligence on climate, earth, and planetary systems is still very limited. There are a lot of unknown-unknown blind spots, so we are incapable of making an incontestable affirmation regarding why certain things do happen, why they do not happen, or even worse, why something entirely different than what was anticipated happens. In all such instances, we come up with retrospective associations and new suppositions.
Given the enormity of cosmic events and the relative insignificance of human existence, it becomes impossible to accurately time-test many of the hypotheses. As a result of this conundrum, there are as many quantitative analyses and dissertations claiming that climate change is anthropogenic as there are those denying it. Climate change and climate engineering share a common approach to transforming the Earth system into a mathematical model where the input variables can control the output value. Both climate change and climate engineering scientists share a common approach—they transform the Earth system into a mathematical model wherein the input variables can control the output values.
If we believe that climate change is anthropogenic, then we must acknowledge that negative climate feedback began appearing several decades after the great acceleration of human activity started. In the same way, there could be a delay in receiving positive or negative feedback from climate engineering deployments, potentially over-shooting our current disaster prevention timelines. Given all the unknowns, uncertainties, and risks related to climate change and climate engineering, the insurance industry must stay focused, exercise caution, be adaptive, engage in a mutually coordinated response, and—more importantly—stay away from misadventures.
SRIVATHSAN KARANAI MARGAN works as an insurance domain consultant at Tata Consultancy Services Limited.
