Does it automatically follow that nothing should be done about the possible undesirable effects of global warming? Absolutely not! The Shergold Report and the entire current debate offer us a false choice between reducing CO₂ emissions on the one hand, and doing nothing on the other. But these are not the only two choices available to us. Different kinds of ‘insurance policies’ — policies which at least offer the possibility of a positive payoff — exist.

Parish (1972), following arguments similar to those made by Coase (1960), points out that welfare improvements can be made by either reducing pollution or mitigating its possible undesirable effects.^[9] Recall that the marginal benefit of an action is defined as the change in total benefits with respect to a change in that action. The point here is that there are other actions available which could be taken by Australia to reduce the possible undesirable effects of higher average surface temperatures in Australia and climate change more generally, even if we may not be able to do anything about the alleged causes of those effects.^[10] The marginal benefits to Australia of such appropriately chosen damage-prevention measures will likely be positive, at least in some states of the world.

For example, suppose that one of the anticipated adverse effects of higher average global surface temperatures on Australia is a reduction in existing sources of potable water in a major population centre. In this scenario the benefit of any action can be easily measured as the consumption benefits of fresh water. Reducing Australia’s CO₂ emissions will have absolutely no effect on these possible benefits — marginal benefits of emissions reductions are always and everywhere zero in this scenario, for reasons discussed earlier. On the other hand, building new dams, desalination plants and so on may have positive benefits (depending on the state of the world that actually eventuates). These (appropriately discounted) expected benefits could then be weighed against expected costs in the usual way.

In the global warming debate these actions often come under the general heading of adaptation, but this terminology does not quite encompass the above scenario or what Parish was actually referring to. Adaptation implies that one waits passively until an adverse consequence is observed before acting. But, as the above scenario indicates, damage-prevention measures can take place in anticipation of possible adverse climatic conditions, well before those events actually occur. This is real ‘risk management’ in action. In contrast to the policy of reducing emissions, these measures may constitute an ‘insurance policy’ that actually offers the prospect of a positive payout if adverse circumstances occur.