Risk Based Planning and Global Insurers Key to a Global Transition to a Low-Carbon Economy

The following article was written to answer the question “In your view, what are the policies that governments should take to encourage public-private partnership and enable the private sector to develop the goods and services necessary for a global transition to a low-carbon economy by 2030?” as a submission to the 2016 Masdar Engage Blogging Contest.

NASA space program public–private partnerships are frequently recommended as a model to achieve aggressive carbon mitigation goals.   A far more sophisticated approach than used by NASA will be required, involving a much broader array of participants including government; research and development organizations; energy and energy efficiency businesses; and the global insurance industry.  These groups must be coordinated and managed using a dynamic strategic planning process.

Dynamic, Risk Based Strategic Planning

Risk based strategic planning (RBSP) begins with a defined set of end states – in this case the specific milestones for emission reductions –  and the construction of several technology development scenarios to achieve them. An inventory of current technologies that could address these goals which are available or in development is taken and the risks associated with each are assessed, including the likelihood of commercialization, energy and market economics, access to financial resources, potential regulatory barriers and environmental impact.  Using risk thresholds, the portfolio is culled to optimize achievement of scenario goals.  The process is continuous with assessments conducted on a regular basis to pare and shape the portfolio.  Such an approach would allow for a systematic optimization of carbon mitigation through technology development.

Stakeholder Roles

R&D organizations and the private sector involved with energy generation and energy efficiency will contribute to the process by providing input to its development and management as well as implementing the technology development defined in the RBSP process.  Their traditional roles will continue, albeit managed somewhat differently.  The roles of government and the insurance industry, however, are unique to this plan.

Government

In addition to the traditional policy direction, government needs to be directly involved in the creation and management of the RBSP process.  This cannot be done using the traditional “ivory tower” approach.  Government must articulate directional policies and provide the foundation for the creation and management of the RBSP in close cooperation with all of the stakeholders. Given its risk based approach and the assessment techniques necessary, the insurance industry’s involvement will be key.  In addition, government can provide financial resources to and incentives to mitigate the financial risks associated with each technology’s development and commercialization.

Government has another important role as it relates to loosening exclusionary intellectual property as well as anti-trust regulation.  IP protection, at least as it is currently being conducted, is a barrier to rapid and collaborative technology development. One need only consider the beneficial impact of limiting IP exclusivity on the U.S. aviation industry between the world wars or the integrated circuit industry in the 50’s and 60’s.  All parties need to be willing to share IP and have the ability to collaborate in ways that would be illegal under current anti-trust regulation.

Global Insurance

The Insurance industry routinely influences public and private decisions in many areas of our economy, some less apparent than others.  Global reinsurance companies are well aware of the long term liabilities inherent in increasingly extreme weather and the rise in global temperatures.  Quietly this industry has been modifying policies for insureds that reward efforts to reduce carbon and increase energy efficiency for the past 20 years.  Global insurance would play a vital role by applying its core competencies of sophisticated risk assessment and mitigation to the RBSP process as well as aligning its own products with the goals of the process.

Fundamental changes in the roles of government and industry, as well as inviting the global insurance industry to play a very significant role, will be necessary to achieve the COP21 goal of limiting the rise in global temperature to 2 degrees C by 2030.

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