Warren Buffet, Climate Change and Pascal's Wager

Guest essay by Eric Worrall

Legendary businessman Warren Buffet has waded into the climate issue, with his latest letter to Berkshire Hathaway investors. Buffet seems to believe climate change is likely to be a serious issue – but he is cautious about this belief. Naturally everyone is interpreting Buffet’s words to suit their own position.

I am writing this section because we have a proxy proposal regarding climate change to consider at this year’s annual meeting. The sponsor would like us to provide a report on the dangers that this change might present to our insurance operation and explain how we are responding to these threats.

It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger.

This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery.

Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.

It’s understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because we are a huge insurer, covering all sorts of risks. The sponsor may worry that property losses will skyrocket because of weather changes. And such worries might, in fact, be warranted if we wrote ten- or twenty-year policies at fixed prices. But insurance policies are customarily written for one year and repriced annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums.

Think back to 1951 when I first became enthused about GEICO. The company’s average loss-per-policy was then about $30 annually. Imagine your reaction if I had predicted then that in 2015 the loss costs would increase to about $1,000 per policy. Wouldn’t such skyrocketing losses prove disastrous, you might ask? Well, no.

Over the years, inflation has caused a huge increase in the cost of repairing both the cars and the humans involved in accidents. But these increased costs have been promptly matched by increased premiums. So, paradoxically, the upward march in loss costs has made insurance companies far more valuable. If costs had remained unchanged, Berkshire would now own an auto insurer doing $600 million of business annually rather than one doing $23 billion.

Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather- related events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years, which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely – though far from certain – effect on Berkshire’s insurance business would be to make it larger and more profitable.

As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.

Read more: http://www.berkshirehathaway.com/letters/2015ltr.pdf

If adapting to or mitigating climate change was cost free, I would be an enthusiast – embracing free protection from an unlikely risk is a no brainer. But actions advocated by climate enthusiasts all have a cost, which has frequently been admitted to be in the trillions of dollars.

Even if alarmists are right about climate sensitivity to CO2, does global warming have the potential to make the world uninhabitable? I suggest the historic record strongly indicates that the answer is no.

A 2c warmer world, even a 4c warmer world, would still be habitable, perhaps more than habitable; life would likely be far more abundant, than today’s world. Wild predictions of lonely survivors clinging to existence on the edge of Antarctica are nonsense.

We know this, because in geologically recent times, the world was that warm. The Cretaceous Period, which lasted for 80 million years, and ended 66 million years ago, had a CO2 level of around 1700ppm, and was 4c hotter than today’s world. The dinosaurs didn’t eke out an existence in a barren scorching desert – their world was a lush, tropical world of jungles, giant trees, and super abundant life. So the risk that the Earth will become uninhabitable in the next few centuries, due to anthropogenic CO2, is essentially zero.

Next we have to consider other risks, the opportunity cost of chasing the climate dragon. What do we lose, which we could have had, if we hadn’t spent a trillion dollars building wind turbines?

As the recent Chelyabinsk Meteor showed, as countless asteroid strikes throughout the Earth’s history has shown, there is a very real risk of a catastrophic encounter with a large meteor. The probability in a given year of the Earth being struck by a dangerous meteor is very low – but a really large meteor actually could end civilisation, or could even end all life on Earth.

The Cretaceous Period ended because the Earth was struck by a gigantic meteor, which blackened the skies – eventually killing 75% of all living species on Earth. What would have happened if the meteor was a little larger? Would Earth’s biosphere have been returned to a primitive primordial soup, with tough single-celled organisms clinging to life on a barren, blasted world? Or worse, could the atmosphere itself have been swept into space by the impact, leaving an unbreathable mix of volcanic sulphates and ash?

Of course, you don’t need a dinosaur killer to end civilisation. Much smaller meteors pose a significant threat. For example, the East Mediterranean Event, a nuclear scale meteoric blast which occurred in 2002, occurred during a period of heightened tension between India and Pakistan. If the meteor had struck a few hours later, over India or Pakistan, it could have been mistaken for a first strike, and triggered a nuclear war.

If we bankrupt the world by chasing climate fears, we won’t have any cash left over for a meteor defence system.

There is a long list of other problems which could use some of that trillion dollars climate cash; disease, poverty, desperation, hunger, all of which would be ignored, if the world committed every available resource to building wind turbines.

Disease should be an especial concern for Westerners. The recent Ebola epidemic came very close to spreading beyond Africa. The period between infection and symptoms is frighteningly long. While it has been claimed that such a disease couldn’t spread in the West, I’m not sure I believe such claims. Many Western cities are host to large slums, which are every bit as filthy and degraded as the run down urban slums of Africa – think the Favelas in Rio, or the run down skid row slums in some North American cities.

Ebola potentially poses a far worse threat, than has currently been realised to date. In some animals, such as pigs, Ebola is an airborne disease. In humans it isn’t airborne, though there is some question about this, it is more likely marginally airborne. Ebola might be be frighteningly close to mutating into a fully airborne strain in humans, to becoming a flu like disease which eventually kills high percentages of its victims. Diseases like Swine flu frequently make the evolutionary leap, from pigs to humans – could Ebola do the same?

If we spend all our money on wind turbines, we don’t have any cash left to fund early warning for dangerous diseases.

I could go on, but I think you see my point. As long as climate change is having no impact on our life, as long as there is serious uncertainty about whether it will ever have a significant impact on our life, there are far more urgent, immediate problems which deserve our attention.

If in 200 years, our descendants discover the weather is becoming worse, thanks to CO2 emissions in the early 21st century, as far as I’m concerned it is their problem. Manipulating the weather and climate will be child’s play, to people who will inevitably master technology, science, and planetary scale engineering capabilities which we today can only dream of. If they’re not happy with my position on this issue, they can sue me.