Liability for climate change: the benefits, the costs, and the transaction costs.

• Author: Schwarze, Reimund

As we learn that the danger of climate change is real and imminent, we need to develop social mechanisms to redistribute the uneven economic damages resulting from it, both nationally and internationally. The polluter-pays principle, which is widely applied in environmental policy, is an immediate way to do this. Liability for climate change has several advantages: it could generate knowledge about the size and probability of economic damages, and it would create institutions to minimize these costs, such as insurance. (1) However, the liability model faces severe obstacles, in both national and international law, as many of the other speakers in this Symposium have pointed out. (2) The duty of care and proof of causation are cornerstones of any system of liability. Both pose serious barriers to claims for compensation in this field. Depending on how these rules are implemented, claims for climate change-related damages could become crushingly expensive and cause high transaction costs, as the following example may show.

I calculated the potential liability in a climate damage suit for six randomly selected coal power plants in Pennsylvania. To establish their potential liability in 2012, I added their emissions from 1992the year when they "knew that their behaviour (or omission to regulate their economies) would contribute to future damage" (3)--to 2006 (4) and extended the trend of the last fifteen years to 2012. I then weighted these emissions with a damage figure of $50 per ton of carbon based on a comparison of twenty-eight studies done by Richard Tol. (5) Tol shows that the range of figures in the literature is huge--from -$6.60 to $1667. (6) He also demonstrates, with a confidence level of 95%, that the distribution of damage will lie below $62 per ton. (7) Compared to the controversial Stern Report, which puts the social costs of carbon at $314 per ton, (8) the damage in this figure can be seen as a 'conservative" estimate.

Table 1 demonstrates that the liability for climate-related damages would be "crushing" if total greenhouse gas (GHG) emissions since 1992 were accounted for in a climate damage suit. In three out of six randomly selected cases, the damage claim would exceed Exxon's liability--$2.5 billion--for the Valdez oil spill, (9) one of the greatest single damage awards in history. Further, if we estimate the cost of attorneys' fees and administration using the data of Tillinghast-Towers Perrin for the U.S. tort system as a whole, we see that transaction costs would add up to more than $2.4 billion...