Compulsory environmental liability insurance as a means of dealing with climate change risk

Conventional economic instruments encourage least cost emissions abatement but provide no information about the optimal level of abatement. A mechanism is suggested that involves markets in communicating both the potential costs of climate change and the risks of incurring these costs, so that the externality is properly priced. The suggested mechanism involves placing liability for consequences of climate change with emitters and obliging them to insure against these consequences, with the government acting as insurer of last resort.