Originally published in The Guardian on January 6, 2021

Is it fair that young men pay more for car insurance than older women, or that we make young healthy people buy private health insurance to keep the price of health insurance low for older customers? How about the fact that those who live in far-north Queensland are paying far more for home and contents insurance than those in the southern states?

While there’s no right answer to those questions, there is a wrong person to ask: namely, an economist.

Economists, quite literally, don’t do “fair”. We didn’t learn anything about it in our degrees beyond the belief that democratic forces – not market forces – should answer questions of fairness.

But while economists have got nothing to say about fairness, we do have something very simple and very important to say about risks: someone has to pay for them.

So concerned are we with the expensive harm car crashes can do to people, we force them to buy third-party insurance when they register their car. But when it comes to insuring the car itself, if you resemble a person who crashes cars a lot, or your car resembles the kind that crashes a lot, it will cost you much more to insure your car. Is that fair? Again, don’t ask me, I’m just an economist.

Democratic notions of fairness play a big role in private health insurance as well. While most people can’t predict a car accident, people have a fair idea if they’re going to need a hip replacement, obstetric care or glasses. As a result, people who know they’re going to need expensive health treatment (particularly older people) are keen to buy insurance and those in good health (most often young single blokes) aren’t so keen. So in Australia, we have developed a range of carrots and sticks where we effectively force a lot of young people to take out private health insurance, even when they don’t think it’s good value. It means young people spend more on private health insurance than they’d like, and it keeps the price of insurance for older people down. Sound fair?

So, what about house and contents insurance in northern Australia? As we heat the planet, the risk to property of cyclones and hurricanes continue to increase. Likewise, as sea levels rise with our coal exports, the risks of storm surges and coastal erosion destroying beachfront property rise as well. Should the people who own houses in high-risk areas pay higher insurance premiums as global emissions and climate risks continue to rise? Should young renters who don’t own homes subsidise the cost of home insurance for those fortunate enough to own their own home up in north Queensland? The Australian Competition and Consumer Commission offers a defiant maybe.

A recent report by the ACCC, demanded by Scott Morrison back when he was treasurer, makes clear that just as it’s more expensive for young men to insure sports cars than for older women to insure a new sedan, it’s a lot more expensive to insure a house in cyclone-prone north Queensland than in the western suburbs of Sydney.

But unlike young sports car drivers, north Queensland homeowners have powerful political representatives and, in turn, the Morrison government is looking seriously at the idea of subsidising north Queensland homeowners. While the ACCC chose its words carefully when it recommended that “if governments want to provide immediate relief to consumers facing acute affordability pressures, subsidies [should] be used in preference to other measures”, headline writers typically dropped the “if” and reported, “ACCC recommends government subsidise insurance in top end”. Job done.

So assuming those north Queensland MPs, who rage against policies for climate action, succeed in convincing their southern colleagues to subsidise the costs of climate change up north: who should pick up the tab? Would less spending on other services fund it, or should a new levy be introduced?

Contrary to popular belief, economists love a good tax or levy. While we don’t know anything about fair, we do know there’s no such thing as a free lunch, so we tend towards “user pays” for the simple reason that it’s often superior to non-user pays. When people and companies have to pay for the things they use, it’s a good way to test if they really value them. Take buffets, for example: when the price of a return trip to the bacon and eggs is zero, people tend to eat a lot more breakfast than they ordinarily would.

While user pays is widely accepted as fair for bacon, eggs and most consumer goods, when it comes to things like vaccination and education, where there’s a public benefit associated with private consumption, the majority of the public, and economists, think subsidies are OK. While most people don’t mind if high insurance prices discourage young men from buying fast cars, most people do mind if high prices discourage parents from sending their kids to school, or from vaccinating them.

Which brings me back to the risky activity of owning a house by the ocean in tropical north Queensland. Queensland MP Peter Dutton once appeared to laugh at the impact of storms and sea level rise on Pacific Island nations, but when it happens to his own state, it’s clearly no laughing matter.

As an economist I’m in no position to determine what the fairest way to deal with the growing risks of climate change in north Queensland are, namely:

Homeowners pay: Let insurers do their job and assess the risk of each property. If insurance for some properties is “too expensive”, then the price of those properties will fall as new buyers factor in expensive insurance to what seems like a “cheap house”.

Taxpayers pay: Let the general public pay for the risks in north Queensland. While the costs will be small when spread across 25 million Australians, there will be no price signal to discourage people from building ever more expensive houses in ever more cyclone-prone regions. There’s also the question of whether non-homeowners in southern cities should fund the lifestyle choices of hom owners in north Queensland.

Disaster levy: If we don’t want homeowners or the general public to pay, we could simply put a levy on the companies that profit from causing climate change. Such a levy could help not just homeowners, but local councils and other groups that will inevitably bear the costs that come with other people’s decisions to buy and sell coal.

Economists don’t do “fair”, but we do have a preference for user pays to change consumer behaviour, and levies to change producer behaviour. But somehow I reckon, when it comes to picking up the tab for the costs of climate change in north Queensland, the coal lovers in the National party will have no problem asking the “inner-city elites” to pay. The interesting question is how long the Liberals from the southern states will let them get away with it.

• Richard Denniss is the chief economist at independent thinktank The Australia Institute

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