Alternatives for Resolving Climate Change?

1. Alternatives for Resolving Climate Change?

3. What should the law do? • 1. U.S. Congress – Clean Air Act (air pollution) • 2. Environmental Protection Agency – regulations on emissions causing global warming • 3. Litigation in federal court for damages to pay for re-location – federal common law doctrine of public nuisance • 4. Litigation in state court for damages under state environmental laws or common law • 5. International treaties or accords? • 6. Other???

4. ProblemswithCongressionalSolution • PoliticalIssue • VerydifficultforCongresstogetanything done • Should be bi-partisanbutisnot

5. Politics

8. Problemswith EPA and Clean Air ActRegulations • Betterthannothing, but… • Ineffectivebecause of position changeswhenpresidentchanges • Veryslowprogress – topromulgate new rules – lobbying of businessesopposedtoregulation

9. Problemswith Federal CourtLitigation • No federal commonlaw of publicnuisancebecause of Clean Air Act (displaces commonlaw) • But can askcourtstoorderrulemaking in thisarea (Massachusetts)

10. PossibleStateCourtClaims in Litigation • 1. Commonlawpublicnuisanceunderstatelaw • 2. Public Trust Doctrine • 3. Statestatutesonenvironmentalharms • 4. Intentionaltorts – Conversion; Trespass • 5. Negligence • 6. StrictProductsLiability – vs. Manufacturers of automobiles; emissionproducingproducts

11. Problemswithstateclaims • Possibility of federal preemption of stateclaims • Doctrine thatsaysthatthe federal law (Clean Air Act) occupiesthefield and no suitspermittedunderstatelaw • BUT - A number of scholarsbelievethatthecourtswillnotfindpreemption

12. Purposes of TortLitigation • Compensation • Twotypes: • 1. post facto (mostcommon) • 2. ex ante – would be preferablehere – paymoneytopreventharm (e.g. Tobuildstormwalls – unusual in U.S. butsomeexamples (medical monitoring) • Deterrence (must be costlyenough; insurancecoveragemay reduce deterrence) • CorrectiveJustice – companieshavebeenunjustlyenriched at others’ expense

14. Daniel Farber, Basic Compensation for Victims of Climate Change • Compensation for intermediate harms • Harms to natural systems that react strongly to temperature changes (coral reefs, etc.) • Sea level rise – loss of coastal lands, harm when salt water intrudes upon estuaries • Severe changes in weather • Precautionary measures – should be compensated • Too difficult to compensate individuals (at least now)

15. Alternatives – Analogous Compensatory Systems • 9/11 Fund – special master – covered individuals who were present – physical harm, economic harm • Threat of tort liability caused creation of fund and potential for tort liability may also do so for climate change • Most important thing about litigation = it creates an incentive to come up with other compensatory systems • May also permit discovery – allows for information to get out to public

16. Other Examples of Alternatives • United Nations Compensation Commission • Iraq’s invasion of Kuwait • Iraq liable for environmental damage and depletion of natural resources • Disputes over compensation to pure nonmarketable environmental resources – UNCC held damages compensable; Value of resources was cost of mitigation

17. CompensationforDamagesto Natural Resources • U.S. Law – permitscompensationfornonmarketdamagestoenvironmentalresources (oilspill cases) • Default isrestorationcost • Somecourtsrequire a persontosuffer “directphysicalharm” in ordertorecovereconomicloss – someexceptions • Causationproblems

18. Compensationfor natural disasters • 1. Insurance: Oftenprivateinsuranceunavailableforcatastrophicrisks • 2. Litigation: needproof of wrongdoing; causation; limitation of resources; judicial doctrines like standing • 3. Compensationfrom federal orstategovernmentsfornegligence, claimsunderspecialcompensationschemes (e.g. 9/11 fund), claimsbasedonunconstitutionaltakings

19. Prevention

20. International TreatiesorAccords • Kyotoprotocal • US failedtojoinbecausedevelopingcountries (China and India) didnothavethesameresponsibilities • Concernthatifeveryoneelse in theworldcuts back onemissionsbut China and India do not, there can be no remedytoclimatechange

24. Is a Global Political Solution Possible? • Kyoto Protocol – Revival and Expansion? • Treaties? • E.U and other association laws and regulations? • United Nations? • But without the USA, China, and India? • Even with the USA, China, and India? • Issues of compliance, monitoring, change in governments

25. If Not International Politics, Can The Market Save The World? • A Ridiculous Question? • Hasn’t the Market Created the Problem? • e.g., Industrial revolution, short term profits, lack of consideration for the long-term • But command-and-control economies are also big greenhouse gas emitters (e.g., China) and totalitarian regimes often have the worst pollution control

26. Possible Market Solutions (with legislative push) • More transparency in labeling? Publicity? Selling “green” operations and social conscience? • But will consumers respond? • Unlikely – to save 15 cents at Wal-Mart, consumers have been willing to destroy Main Street • Force internalization of costs • Carbon Tax and its cousins? • But would single national carbon tax be enough? • Use tax code for incentive? Punishment? • Promising – but perhaps politically unfeasible

27. Can the Insurance Industry Save the World? • Much potential for Insurance to be a private corrector of market imperfections in safety • Modern business “needs” insurance to function • To get insurance – at an affordable price – businesses may be willing to alter behavior in ways that reduce climate change problems

28. Insurance has an Important Role in Business and Politics • Insurance Companies: “huge amalgamations of money” • Roughly $1.5 trillion (or more) in assets • Usually in very liquid investments • $ 4 trillion (Worldwide) in premiums collected each year -- $500 billion in USA • These premiums or “float” technically do not belong to insurers (because most of it will eventually be used to pay claims) but in the meantime is invested by insurers – and the investment income belongs to the insurers

29. Insurance as Quasi-Nation • If Insurance was a country, it would be the 4th largest nation in the world (measured by economic wealth) • Richard Ericson, AaronDoyle & Dean Barry, Insurance as Governance (2003) • Describes at length the ways that insurance influences behavior • But to address climate change, would insurance need to be Quasi-World in scope, influence, power?

30. Insurance a “silent regulator” – when it wants to be • 1986 – a perceived “crisis” with the upsurge of certain claims: product liability; child abuse at day care centers, neck injuries from diving at swimming pools • Insurers respond by refusing to sell policies to some manufacturers, pre-schools, pool operators (unless diving boards are removed) • Policyholders respond with more safety (also off-shore insurers with more capacity are started)

31. Insurance Influence: Carrot & Stick • The “stick” we saw in 1986 – and still see • Some businesses never start or grow because they are uninsurable • Or there is only restricted insurance (high deductibles, lower limits) • And, of course, higher premium prices • Arguably forcing greater safety for the less insured/uninsured (the reverse of “moral hazard”)

32. The Occasional “White Hat” of Insurance – An Example • Early 1900s: using an electrical appliance was like playing Russian Roulette because of frequency of fires caused by malfunction • Insurers establish Underwriters Laboratories (UL), which tests electrical products for safety • To get affordable insurance, a manufacturer had to be “UL approved” • Carrot and Stick? • Consumers began to look for UL approval label on products • Fire losses from electrical appliances plummeted during the 20th Century

33. The Occasional “White Hat” of Insurance – Another Example • USA Automobile Collisions kill and maim many (more than 100,000 deaths in 1960 when population was less than 200 million) • Seat belts brought about a big reduction (but initial impetus for this was science and consumer activist Ralph Nader) • 1960s – seat belts become common • 1970s – seat belts become mandatory in cars • 1980s and 1990s – use by drivers becomes mandatory

34. The Occasional “White Hat” of Insurance – Example II (con’t) • But to supplement seat belts – Air Bags suggested • Automobile dealers resists regulator efforts • Insurers side with regulators because air bags save lives • Insurers back up claims with economic cost-benefit analysis • Air bags become mandatory in cars (front – and then side)

35. How Is (or is not) Climate Change Like Faulty Wiring or an Air Bag? • Insurers very concerned • Considerable study; constantly collecting information • Dr. Peter Hoeppe (Munich Re) in Chasing Ice • Property insurers particularly concerned • Extreme weather events are one of the few ways a well-run insurer can lose money

36. Property Insurer “Solutions” • Increased premiums for property in more vulnerable areas near the ocean, rivers, flood plains • Even for inland windstorm zones (“tornado alley” in the Midwest)(e.g., Oklahoma) • Support for stronger building codes • Support for improved weather forecasting • Support for other government programs

37. Other First Party Insurance Concerns • Life, Health, and Disability Insurers also have an interest in reducing losses related to extreme weather • A safe room in a home facing a tornado can save a life (and an insurance payment), or serious injuries that bring health and disability costs • Support for smarter zoning, preparedness, disaster response

38. More Than Just Windstorm • Wildfires destroy property, cause injuries and fatalities • Heat waves cause death, injury, lost work, lost productivity • Power outages spawned by heat, fire, wind problems can lead to additional problems

39. More than Just Discrete Events • The surprising dangers of Climate Change • Warmer winters mean reduced killing of unwanted forms of life • Increase in deer ticks brings increase in Lyme’s Disease • Lyme’s disease caused substantial medical costs, lost work, human injury in the Northeastern USA • JP Morgan/Chase perhaps lost $3 billion due to Lyme’s disease (key manager was ill for 3 months and under-supervised rogue trader made horrendous money-losing investments)

40. Life/Health Concerns • Even without direct loss from catastrophic events, there will be more payments by these insurers • Greenhouse gas pollution causes premature death • Raises health costs • Results in disability and work absences

41. Third Party Insurer Concerns • Liability Insurers will want to reduce the number of lawsuits to which they must respond and the amount they must pay in settlements or judgments • Provided that liability insurers are not too quickly let off the hook • This is what the California v. GM and AES v. Steadfast Ins. decision (Va. 2012) are so bad • Cases let liability insurers “off the hook” re defending cases • Keeping them involved increases their interest in public policy improvements as well as providing money for possible compensation

42. Third Party Insurers – what they can do if motivated • General Liability Insurers can insist on more precautions, better response plans, etc. • Directors & Officers insurance companies can do the same • D & O policies cover liability claims of top corporate management if the managers are sued for not doing enough to minimize climate change liability • But this requires that there be at least some threat of climate change liability

43. More on Third Party Insurers • Ironic – D & O Insurance may be required to cover claims that General Liability (GL) insurers are not • For GL insurance, there must be an accident and the plaintiff must have a reasonable negligence claim or nuisance claim, etc. • For D & O insurance, there may be liability if the management failure to act prudently causes shareholder claims against the company (e.g., for getting in trouble with the government, for bad climate change publicity or liability that lowers stock price or creates other loss of company value)

44. Different Means of Addressing Climate Change • Spreading Risk – or managing the impact of climate change • Preventing or Reducing Risk • Insurers can do both • But their performance can vary – and perhaps they do neither if it requires too much work or threatens profits • If they act: Will it be air bags or higher premiums and deductible?

45. Managing Risk (Protecting Reserves) • Traditional (and self-centered) insurance response • Higher premiums, lower policy limits, higher deductibles, broader exclusions from coverage or more exclusions

46. Managing Risk: Increasing Capacity • This is what insurers did with the move to off-shore companies in the 1980s as a way of providing more product liability insurance • ACE and XL (Bermuda) ACE so successful it acquired other insurers and is now one of the world’s largest • But this was facilitated by large commercial insurance brokers (principally Marsh) • Brokers procure insurance for policyholders

47. Managing Risk: Increasing Capacity • Catastrophe Bonds • A financing device to attract investors • In a good year with fewer hurricanes, an attractive investment • In a bad year, still a limited downside as compared to common stock, other equity investments

48. Reinsurance • A super silent regulator • Much of the reinsurance capacity located in a few companies: Munich Re, Swiss Re, Hanover, Lloyd’s • They – particularly the continental European reinsurers – have been at the forefront of industry interest • Where are the Americans? Asleep at the wheel? • Warren Buffet’s Berkshire Hathaway reinsurance companies are large enough that they should care – but have been far less active

49. Business Concerns • Insurers may perceive individuals and businesses as unwilling to pay sufficiently for policies that price in climate change rather than excluding or limiting some coverage • Policyholders make cognitive errors – undervalue many risks • Do Insurers as well? Investment in safety could be captured by later insurers in other policy periods • Policyholders believe government bailouts will be there if needed • Should the USA be more like Switzerland? • If you fail to purchase adequate insurance, it’s your tough luck

50. “New” “Improved” Insurance Possibilities • Property insurance that prices according to green buildings and policies – or perhaps is only available to such properties or policyholders. • Automobile insurance discounts for hybrids, high-mileage vehicles • “Pay as you drive” premium pricing • Historically not done in the USA