It's no surprise that financial disaster has pushed environmental problems out of the news of late. But it's too bad that they can't get together somehow; the two areas of crisis, and the needed solutions, have a lot in common. The common thread is that both involve risks of rare, catastrophic events. In both cases, the prudent response is to focus on insurance against worst-case risks, rather than cost-benefit analysis of the most likely outcomes. The stock market and other financial markets are in the throes of the worst crisis since the 1930s. As Treasury Secretary Henry Paulson recently said, "We are going through a financial crisis more severe and unpredictable than any in our lifetimes... There is no playbook for responding to turmoil we have never faced." In fact, there used to be a playbook - a system of banking regulations, enacted in the wake of the Depression of the 1930s, which restricted the types and amounts of investments that banks could make. Deregulation of banking, a process that has been accelerating since the 1980s, allows banks to make riskier investments, which boost their profits as long as the good times keep rolling. Every once in a while, the good times stop, as they did this year - and the meaning of "risky" investments suddenly becomes all too clear. Something similar applies to environmental crisis. It's not that the worst possible outcomes of climate change are sure to happen any time soon; it's just that this could happen. Like a financial meltdown, a complete melting of the Greenland ice sheet is unlikely but possible (and it becomes more likely as the world warms). The IPCC projects that sea levels are likely to rise by about one meter by the end of this century; the loss of the Greenland ice sheet could raise sea levels by seven meters (23 feet). Should we spend just enough to protect coastal communities from one meter of sea level rise? Or should we act as swiftly as possible to limit global warming and reduce the risk of a catastrophic seven meters of sea level rise? Preparation for the worst case is why people buy insurance; your house is extremely unlikely to burn down next year. If you cancel your insurance and spend the premium on something more enjoyable, there's a very good chance you'll get away with it. But no one does. This insurance approach, sometimes called the precautionary principle, responds to the dangers that are most important. It's why we should ignore cost-benefit analysis based on the most likely outcomes, and instead adopt environmental policies based on protection against worst cases. And it's why it was such a bad idea to spend the last 30 years deregulating the banking system in order to boost short-run profits. In my recent book, Poisoned for Pennies, I discuss the economic theory behind the precautionary principle, as well as its application to many specific issues involving toxic chemicals. With uncertain but ominous risks to our health at stake, why should we accept potentially dangerous chemicals in order to win small economic gains? That's as dumb an idea as deregulating the banks. What do you think? Leave us a comment. ———- Frank Ackerman is an economist who has written extensively about the economics of climate change and other environmental problems. His new book is Poisoned for Pennies: The Economics of Toxics and Precaution.