Carbon Pricing Reimagined: What Insurance Can Teach Us About Climate Risk and Equity

@San Ramon, California (2020)

My friend who lives in Northern California sent me this photo in 2020. It was taken in her backyard during one of the region’s worst wildfires. I still remember how they described the acrid smoke lingering in the air, and how neighbors were scrambling to find air purifiers. At the time, we thought this was the peak of disaster. It turned out to be just the beginning — a series of escalating wildfires, worsened by California’s deepening drought.

Today, more and more property owners in the state are struggling to secure insurance. The old claim that insurers “don’t insure climate disasters but price future losses” no longer holds. In some places, the insurers have already pulled out from the market. Does this mean we can no longer price future risks?

In the world of insurance, risk isn’t just a number. It’s a quantifiable forecast of loss — shaped by uncertainty, exposure, vulnerability, and recovery capacity. For decades, insurers have priced this risk across sectors and geographies. Yet in the world of climate policy, carbon pricing remains flat and formulaic, with little regard for who pays, who suffers, or how impacts unfold over time.

What if we reimagined carbon pricing using the same principles that insurers apply to wildfire or flood risk? What if we used that logic not just to improve economic efficiency, but to address the equity failures embedded in global climate policy?

This isn’t just a thought experiment — it’s an overdue recalibration.

Why Current Carbon Pricing Falls Short

Current carbon pricing mechanisms include carbon taxes, cap-and-trade systems, and the social cost of carbon (SCC). Despite their economic logic, each tool has significant limitations:

• Carbon taxes are often set too low and face political opposition — for example, Canada’s new Prime Minister recently repealed the federal carbon tax.

• Cap-and-trade systems are vulnerable to volatility and manipulation.

• SCC estimates depend heavily on discount rates, and often underestimate long-term damages.

  
  

With only 23% of global GHG emissions currently priced, and an average price around US$6/tCO₂ — far below the US$185/tCO₂ recommended by the IMF — the system is failing to deliver. More critically, it ignores the asymmetries in exposure, historical emissions, and adaptive capacity that define real-world climate risk.

Insurance Principles: A Smarter Way to Price Carbon

In insurance, risk is calculated using the following general formula:

Risk = Hazard × Exposure × Vulnerability

Applied to carbon pricing, this shifts the model from flat or market-based rates to risk-adjusted pricing that accounts for where emissions do the most damage, and to whom.

A risk-based carbon pricing system would:

• Dynamically adjust carbon prices by region and sector using climate risk models;

• Penalize emissions that exacerbate systemic vulnerabilities (e.g., in flood- or drought-prone zones);

• Offer rebates or discounts for climate-resilient infrastructure or adaptive investment.

For example, emissions from a facility in Jakarta — highly exposed to coastal flooding — would be priced higher than the same ton of CO₂ emitted in Stockholm. Swiss Re already uses forward-looking climate risk models in its reinsurance business, estimating GDP losses of 11–14% globally by 2050 under a 3.2°C scenario. The African Risk Capacity shows how pooled, early-warning-based sovereign insurance can work in low-capacity settings.

The Climate Insurance Gap: When the Market Pulls Out

In places like California, Florida, and parts of Australia, private insurers are pulling out of wildfire- and flood-prone areas due to mounting risks. In the Global South, only about 5% of climate-related losses are insured.

When the insurance market withdraws, it leaves communities unprotected — forcing governments to step in with costly bailouts and widening the resilience gap. A risk-based carbon pricing model could help fill this void by:

• Channeling carbon revenue into public reinsurance pools;

• Funding adaptation in areas abandoned by the private market;

• Supporting infrastructure upgrades that make communities insurable again.

Climate Risks Across the Globe by 2040 (Source: Four Twenty Seven & The New York Times (2021)).

Equity in Focus: Correcting a Structural Flaw

Carbon pricing has often been regressive, disproportionately impacting those least responsible for emissions. Low-income households, which spend a higher share of income on energy, are hit hardest. According to the World Inequality Lab, the top 10% of emitters are responsible for nearly 50% of global emissions, while vulnerable countries like those in the Pacific contribute under 0.03%, yet face annual GDP losses of over 50% from climate disasters. A just model would account for emissions history, exposure, and capacity to respond. A climate insurance-based approach offers three key mechanisms:

1. Progressive Climate Premiums: High-income individuals and historically high-emitting sectors would pay higher carbon premiums. These revenues could fund a global carbon reinsurance pool, supporting adaptation in vulnerable nations — similar to how high-income countries support CCRIF in the Caribbean.

2. Risk-Based Incentives for Adaptation: Municipalities or companies investing in resilience — like mangrove restoration, early warning systems, or flood-resistant design — would qualify for lower premiums. This rewards proactive risk reduction, not just emission cuts.

3. Transparent, Science-Based Risk Models: By using Earth observation data (ESA, NASA), CMIP6 projections, and social vulnerability indices, carbon prices can reflect actual geographic and demographic risk, not just political feasibility.

Additional Case Studies

The InsuResilience Global Partnership, backed by G7 and V20, offers insurance to climate-vulnerable populations. In New York, utility regulators and energy agencies are exploring adaptive pricing models — including time-of-use pilots and resilience-linked grid modernization — as a pathway toward more climate-responsive utility systems. In California, insurers and utilities now incorporate wildfire risk modeling — including vegetation, wind, and topographic data — into premium pricing and infrastructure cost planning, with the Department of Insurance formally allowing forward-looking risk models for rate setting since 2022. These examples highlight the feasibility of regionally responsive, equity-aware pricing strategies.

Challenges and Design Considerations

This model holds promise but faces real-world barriers:

1. Data gaps in vulnerability modeling

   Mitigation strategy: use open-source platforms like CMIP6, Copernicus, Earth Engine

2. Political resistance to dynamic pricing

   Consideration: Frame as resilience investment, not a tax hike

3. Emissions relocation (carbon leakage)

   Consideration: Pair with Carbon Border Adjustment Mechanisms (CBAMs)

4. Insurance market collapse in some areas

   Consideration: Use carbon-funded public reinsurance and adaptive subsidies

   
   

Conclusion: A Fairer, Smarter Path Forward

As I look at the maps showing where climate impacts are hitting hardest — and where insurance markets are vanishing — I keep coming back to that photo. Carbon pricing isn’t just about emissions. It’s about who absorbs the risk, who gets left behind, and how we finance the resilience we so urgently need.

Like good insurance, the best carbon pricing systems should do more than penalize. They should protect, prevent, and prepare for the future we’re already entering.

[First published in Substack "Ginci Insights" on May 21, 2025: https://gincinno.substack.com/p/carbon-pricing-reimagined-what-insurance?r=2cxt8s]