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Opinion Climate change
Protecting energy groups from climate lawsuits is a bad idea
US Congress should be wary of facile comparisons with the big tobacco settlements
Amy Myers Jaffe
Firefighters try to control a forest blaze in California in July. The state’s legislature passed a law allowing its electricity utility to bill customers for the costs of wildfire liabilities © AFP
Amy Myers Jaffe yesterday
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The impact of climate change made itself painfully obvious in many places this summer, sparking debate about who and what is contributing to the death and destruction. California’s legislature recently passed a bill that would require its pension funds, the two largest in America, to report on climate-related financial risk. It also passed a law allowing its electric utility Pacific Gas and Electric to bill customers for the costs of wildfire liabilities.
In the US, those who feel they have been damaged routinely turn to the courts for compensation. So it is with climate change. Now the American legal system is struggling to deal with this issue. New York City and Oakland recently brought suits against energy companies including Chevron, BP and Shell, seeking to use public nuisance laws to force them to pay for costs they have incurred through rising sea levels and higher temperatures due to climate change. The claims were dismissed.
Other types of climate-related lawsuits remain. Some are trying to use the “precautionary principle”, which requires governments and large organisations to take advance actions to protect people from harm, to force energy groups to pay for climate-related damages. The New York attorney-general is trying to use the state’s Martin Act to sue ExxonMobil for alleged fraud, arguing that it publicly played down climate change evidence while privately using the information to protect its facilities.
The fossil fuel industry faces any number of environmental lawsuits. Although President Donald Trump’s administration has sought to ease or roll back regulations aimed at reducing carbon dioxide and other emissions, activists and local governments are challenging this in the courts. Some of the same states and cities are suing energy companies seeking funding for sea walls and other public infrastructure upgrades.
Faced with this onslaught, some lobbyists for the energy industry have sought to enlist Congress in crafting a defence. Led by former senators Trent Lott and John Breaux, they are pushing to add an amendment granting oil companies immunity from environmental lawsuits to a bill calling for taxes on carbon heavy industries. Although liability caps for climate change lawsuits sound superficially similar to the one that was eventually crafted for the tobacco industry over smoking, this plan is a raw deal for the public.
Here’s why. Tobacco damage claims were limited to the healthcare sector: a fifth of the US population in 2005 smoked. But energy is a critical input to almost all economic activity, and fossil fuels have been relatively ubiquitous especially in transport. The potential liability claims against energy companies found negligent would far exceed the total faced by cigarette makers. That means a solution will almost certainly require the involvement of elected officials. But having Congress nationalise these claims and remove them from the courts is at odds with an open, market-oriented economy such as the US.
Instead, we need a hybrid system to address the climate risk exposure. Public debate on climate policy needs to include a more robust, transparent discussion of the liability issues. There is no question that policymakers will have to consider how best to balance the public interest. We need to make sure the supply of fossil fuel-based products continues until new, cleaner technologies have taken over. But we also need to consider how to create and manage compensation processes that allow those injured by climate change to win just awards.
Past precedent is instructive. US government actions to create an orderly process for a claims fund in the aftermath of BP’s Deepwater Horizon oil spill could be one model. The US Superfund programme created in the 1980s to clean up toxic industrial sites and more recent legislation to offer government loan guarantees for operations of new nuclear plants are others.
Beyond the question of liability, policymakers also need to make sure that climate risk information is more widely shared to make securities trading fairer. This will allow efficient markets in climate risk instruments such as derivatives to develop. The Securities and Exchange Commission should also begin to fashion a system for climate risk disclosure. This could be similar to the 1976 test programme that allowed companies to disclose sensitive foreign payments ahead of the Foreign Corrupt Practices Act of 1977 that made overseas bribery illegal. The US has the chance to be a world leader on dealing with damages from climate change. It must act or we risk destabilising legal outcomes and market failures.
The writer is energy fellow at the Council on Foreign Relations. Paul Griffin, finance professor at the University of California, Davis, contributed
Copyright The Financial Times Limited 2018. All rights reserved.
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