Allocating responsibility for the failure of global warming policies.

• Author: Hersch, Joni

INTRODUCTION

A recent series of climate change lawsuits has sought to mimic the "regulation through litigation" approach of the claims brought by the states against cigarette manufacturers. (1) What is distinctive about the cigarette cases relative to conventional tort claims is that they were not brought on behalf of individual smokers, but rather sought to recoup the Medicaid-related costs of smoking. A parallel climate change litigation approach seeks payments from public utilities, energy producers, and other parties responsible for greenhouse gas emissions to reflect the long-term societal damages that the plaintiffs claim will be caused by this pollution.

While environmental litigation of this type is unprecedented, the cigarette cases were novel as well. The cigarette litigation did not establish legal precedents because the cases were settled without any court verdicts, but the threat of the suits was sufficiently real that it led to damages payments of close to $250 billion. (2) Here we examine the similarities and differences between lawsuits seeking to recoup the value of financial externalities caused by smoking and lawsuits targeted at the value of environmental damages due to global warming.

The climate change litigation may not be only about money; it may have a policy purpose as well. Depending on how the damages payments are structured, this litigation may also be viewed as an attempt to use the incentives created by the court system to generate the policy changes needed to curb the risks of global climate change. In this Article, we examine whether current policies have failed, the sources of any such failure, and the overall context of climate change litigation and policy design more broadly.

In order to identify what market failure might be addressed by climate change litigation, we begin in Part I by exploring whether emissions controls are currently at efficient levels. Even apart from emissions related to climate change, there is a shortfall in the stringency of regulation. This failure is one of inadequate policy responses to air pollution externalities. Recognition of the expected costs of global warming bolsters the case for more stringent regulation.

In Part II we explore whether litigation can play a constructive role by comparing the proposed climate change litigation approach to the cigarette litigation. There are fundamental differences in the economic structures of smoking and climate change externalities and in the nature of their associated risks. Careful comparison with the cigarette litigation indicates that the situations are not analogous.

Empirical evidence presented in Part III traces the main shortcoming of climate change policy to the public's unwillingness to incur substantial costs to reduce global warming risks. Given the lack of detailed U.S. data and the prominence of Europe in the climate change debate, this Article examines two large European data sets reporting information on individual beliefs about climate change and the actions that Europeans are willing to take to address their concerns. This exploration of the public's risk beliefs and policy preferences highlights many of the pitfalls that could impede support for climate change policies--notably, the failure of people to properly understand the risks associated with global warming and the presence of substantial self-interest across generational lines that is important given the long time periods over which the risks of climate change will materialize.

In addition to these political economy rationales affecting support for climate change policies, there are also a variety of sources of irrationality that influence the public's preferences and, in turn, government policy. First, people may not properly understand what factors lead to climate change or the importance of climate change risks. Second, there is substantial uncertainty about these risks, which may lead to a failure to view the risks as being real. Third, because the risks are very distant, all the anomalies associated with failure to make rational intertemporal choices will come into play.

Overall, the problems associated with current policies and market operations with respect to the risks of climate change are attributable to factors that are much broader than possible wrongful conduct on the part of the defendants in these suits. Although the mismatch between the policy failure problem and the pending litigation is substantial, damages remedies along the lines of those implemented in the cigarette litigation conceivably might play a constructive role. However, there is no assurance that the plaintiffs' incentives will mirror society's broader interests or that the damages structure that emerges from the litigation will create appropriate incentives to reduce emissions in an efficient manner. Regulation through litigation is a less desirable climate change policy approach than a sound regulatory policy that reflects society's broad interests.

1. THE FAILURE OF GOVERNMENT ACTION

   Climate change and global warming are classic examples of standard economic textbook externalities situations. Private actions generate harms that are not adequately addressed by incentives in the marketplace. The solution for such inadequacies is to impose government regulation or implement some kind of pollution tax that will align the private incentives with socially efficient incentives.

   As an economic principle, the efficiency objective should be to maximize the spread between benefits and costs. (4) In the usual situation, in which marginal benefits are declining as pollution control becomes more stringent and marginal costs are rising, the maximization of the net social benefits occurs where marginal benefits equal marginal costs. If there is a policy shift that leads to a higher level of marginal benefits for any given level of policy stringency, then the optimal level of pollution control is increased. For the purposes of our discussion, we assume that there are additional benefits to reducing climate change.

   With this background information, it is useful to consider the external costs of emissions. Table 1 presents the summary of the social costs associated with different energy sources. (5) The first column of the table indicates the tax rate per unit (gallon, cubic foot, or ton) for the different energy sources (e.g., for gasoline, the tax is per gallon). The second column lists the current tax as a percentage of the price. The third column is the externality cost as a percentage of the price, where these externality cost estimates are based on a variety of government assessments, including regulatory impact analyses undertaken by the U.S. Environmental Protection Agency (EPA). These external costs do not include impacts on global climate change.

   For gasoline, the tax rate and the externality cost are almost identical, as they are each 17%. If these average cost values are also indicative of the level of costs, then that would suggest that the current tax structure is efficient, excluding climate change effects. However, if there is an additional marginal benefit associated with environmental regulation through reduction of the risks of climate change, then the externality cost estimate would be greater than the current tax. This would be a rationale for increasing the tax.

   The emissions component of particular pertinence to global warming is carbon. (6) The final column in Table 1 indicates the relative carbon tax that would be appropriate given the carbon emissions per unit of each type of fuel. Each of the energy sources is rated according to its carbon content relative to natural gas. Natural gas is the cleanest of these energy sources and, consequently, serves as the numeraire in rating the different energy sources. The carbon emissions burden is presented in relative terms rather than in absolute dollar cost terms because of the difficulty in monetizing the costs associated with carbon emissions. As indicated, this relative carbon tax amount for gasoline is fairly substantial, but it is below that of coal, diesel fuel, and heating oil.

   Diesel fuel is the second energy source listed in the table. The current tax rate of 13% is comparable to that of gasoline. However, diesel fuel is much more polluting than gasoline, as diesel fuel's externality cost estimate is just over 50% of the price. Even when considering only those pollution emissions unrelated to global climate change, the tax on diesel fuel is inordinately low. Moreover, if one were to take into account the carbon emissions per unit of diesel fuel, then the appropriate tax rate would be even higher, given that the relative carbon tax value in the final column of Table 1 is almost 53.

   Two other major energy sources in Table 1 are related to the production of electricity by coal-fired electric power and heating plants: heating oils and coal. In each instance, the externality cost estimate is considerably greater than the current tax per unit price. Moreover, the relative carbon tax value is considerable, particularly compared to that for gasoline, which often is the focus of policy discussions about global warming.

   In brief, for these energy sources, even if we ignore the externality costs of climate change, there is still a strong rationale for increasing the tax values above their current levels. Moreover, if the climate change consequences of these energy sources are accounted for, the additional marginal benefit derived from reducing these emissions warrants even more aggressive policies to control the emissions sources.

   Notwithstanding the failure of the United States to ratify the Kyoto Protocol, the scientific evidence suggests that there are, in fact, significant benefits associated with reducing emissions related to climate change. (8) There is, of course, a probability distribution associated with these benefit values at different points in time, but there seems to be...