Moral Hazard
Do we make riskier climate decisions when someone else bears the cost of failure?
How is climate-change mitigation like the insurance industry?
Both are plagued with moral hazard.
If you haven’t heard the term yet, you likely will in future.
Insurance providers and climate-change mitigation both face the challenge of how to manage risks that have high consequences and known probabilities of occurrence.
One way to deal with the challenge is through insurance, which spreads the risk of loss to any one individual over many participants in the market. A brief history of insurance will be helpful to understand how this relates to climate-change mitigation.
Many of us will be familiar with the story of the mid-17th century ship owners who frequented Edward Lloyd’s coffee house by the Thames river in London. Those owners found a way to reduce their individual financial cost from shipping losses by clubbing together to spread the risk. The resultant Lloyd’s insurance market is commonly seen as the genesis of the modern insurance industry. Schemes for spreading risk had been around since the Code of Hammurabi, including a form practised by ancient Greeks and Romans known as “bottomry”, whose fascinating history we won’t delve into here.
Until the last few centuries, though, the risk of a ship sinking was thought to be in the hands of the gods, or God, and little attention was paid to character of the insured parties or their ability to affect the outcome by their actions (or inaction). That began to change as the insurance industry became more sophisticated. By the mid-19th century, it was thought people might take less care than they otherwise would if the risk of loss were covered by insurance. This concept was formalized as moral hazard.1
The inclusion of the word "moral" at that time had two meanings. The one that occurs to our modern minds is the pejorative meaning of unethical behaviour. The other is a meaning in use then but not much now (except perhaps by economists), which is one of economic rationality: what would an economically rational individual do when faced with an insurable risk.
The insurance industry today is much concerned with several varieties of moral hazard, from outright fraud (for example: attempting to save a failing business by burning down the warehouse for the insurance) to negligence (for example: failure to maintain a ship in seaworthy condition when the vessel’s loss would be covered by insurance).
The health care insurance industry (particularly private companies in the USA) prices its products based on moral hazard, believing that people don’t do as much to avoid unhealthy lifestyles when treatment is covered by health insurance, or people make frivolous use of healthcare if they do not pay out-of-pocket at least part of the cost.2
This same insurance moral hazard logic has been applied to climate-change discussions by critics of atmospheric carbon dioxide removal (CDR) and solar (and other) geoengineering schemes. Critics say these schemes essentially allow polluters to keep polluting.
How accurate is the criticism?
The answer seems to depend on how the idea of moral hazard is applied. When moral hazard goes beyond the two-party contractual relationship in insurance, it has been called mitigation deterrence. This could happen when those doing the greenhouse gas polluting avoid reducing GHG emissions, on the assumption that the carbon will be removed from the atmosphere by others later, or they believe global temperature can be lowered by reducing the amount of incident sunlight.
If moral hazard/mitigation deterrence is framed as a narrow economic concern, then carbon removal may be seen as a logical exercise in reducing overall carbon for the least cost: simple substitution.
When other concerns are added, like biodiversity reduction, ocean acidification, climate justice, and the unproven efficacy at scale of most CDR technologies (except perhaps tree planting), then the “uncertainty about eventual outcomes creates plenty of room for inflated narratives, empty commitments, and outright greenwashing.”3
As you might expect, when researchers have looked into how real climate-change moral hazard/mitigation deterrence is, the results are mixed. When individuals are asked, most say they would not trade carbon-dioxide removal for mitigation but they don’t trust others to do the same. Other studies also reveal beliefs that governments and markets in general — and incumbent fossil fuel industries in particular — will see carbon-dioxide removal as a way to maintain the status quo without making serious efforts to reduce emissions.4
In the real world, one likely example of moral hazard/mitigation deterrence at work is the recent approval by Canada’s federal government of a major expansion of an oil-sands pipeline explicitly paired with a carbon-capture and storage project.5 There is no doubt the parties to the agreement to build the projects believe that the captured carbon will offset the increased emissions from expanded oil sands production and export capacity enabled by the pipeline. The technology and costs of the pipeline part of the deal are well understood. The carbon capture and storage part is not yet proven at scale (it will be the largest of its kind in the world) and the cost may ultimately be borne by the taxpayer.6
These paired projects nicely illustrate some of the issues involved with climate change moral hazard/mitigation deterrence. We expect to see more examples in future.
Reading
- Rowell,D, Connelly,L.B. “A History of the Term ‘Moral Hazard,’” ResearchGate, July 13, 2026, https://www.researchgate.net/publication/256040292_A_History_of_the_Term_Moral_Hazard.
- Liran Einav and Amy Finkelstein, “Moral Hazard in Health Insurance: What We Know and How We Know It,” Journal of the European Economic Association 16, no. 4 (2018): 957–82, https://doi.org/10.1093/jeea/jvy017.
- Wim Carton et al., “Is Carbon Removal Delaying Emission Reductions?,” WIREs Climate Change 14, no. 4 (2023): e826, https://doi.org/10.1002/wcc.826.
- Ibid. Carton et al
- “Prime Minister Carney Announces West Coast Pipeline Project Proposal and Pathways Project Carbon Capture Initiative with Alberta to Build a Stronger, More Sustainable Economy,” Prime Minister of Canada, June 7, 2026, https://www.pm.gc.ca/en/news/speeches/2026/07/02/prime-minister-carney-announces-west-coast-pipeline-project-proposal-and.
- “Financial Risks of Carbon Capture and Storage in Canada: Concerns about the Pathways Project and Public Energy Policy,” accessed July 24, 2026, https://ieefa.org/resources/financial-risks-carbon-capture-and-storage-canada-concerns-about-pathways-project-and.