Financial Assurance Mandates: A Mechanism to Prevent Climate-Induced Industrial Disasters

• Date: 01 August 2018

48 ELR 10678 ENVIRONMENTAL LAW REPORTER 8-2018

COMMENT

Financial Assurance Mandates:

A Mechanism to Prevent Climate-

Induced Industrial Disasters

by Liz Williams Russell

Liz Williams Russell is the Coastal Community Resilience Director at the Foundation for Louisiana.

Within his call for Financia l Assurance Mandates

(FAMs), Zachary Arnold highlights some of the

coastal impacts of climate change and empha-

sizes the need for industrial ad aptation, while underscoring

the reality that adaptation eorts are mostly underdevel-

oped genera lly.1 He illustrates some socioeconomic eects

of environmental hazards to industrial facilities, extrapo-

lating future economic losses across industrial systems,

environmenta l and public he alth cat astrophes, and the

likelihood of abandonment of vulnerable industrial facili-

ties. Arnold presents the notion that industry is likely to

underinvest in mitigation and adaptation activities such

as upgrading facilities to withstand weather or relocating

from vulnerable areas because of a set of realities present in

existing regu lations, incentives, and disaster response prac-

tices. Industrial faci lities and operators are able to external-

ize much of the cost of failing to ta xpayers and society at

large, thus reducing the benet that reducing risk to f uture

harm provides the company, and weakening the cost-to-

benet ratio typically used for decisionmaking. Arnold

states that typica l command-and-control responses,

such as zoning and building codes, are generally inex-

ible and dicult to enforce while often being bulk y and

poorly tailored to various circumstances; adaptation pro-

grams often include similar problems with additional cost.

us, Arnold proposes that industr y should be requ ired to

insure its activities and assets in preparation for the coastal

impacts of climate change, presumably sea level rise and

increased tidal and surge-based ooding, as a way of moti-

vating mitigation and adaptation.

A series of mechanisms are likely necessary to induce

adaptation. Financial Assurance Mandates are a promis-

ing option to ensure that companies pay for the liabilities

they incur as a result of environmental ha zards likely to

1. Zachary C.M. Arnold, Preventing Industrial Disasters in a Time of Climate

Change: A Call for Financial Assurance Mandates, 41 H. E. L. R.

243 (2017); see also Nat’l Oceanic & Atmospheric Admin., Adapting to Cli-

mate Change: A Planning Guide for State Coastal Managers, 1, 16 (2010),

https://perma.cc/VZG5-9K9V; John R. Nolon, Land Use and Climate

Change: Lawyers Negotiating Above Regulation, 78 B. L. R. 521, 545

(2013).

continue increasing from the eects of climate change and

other human activities. As A rnold states, they also appear

to be appropriate for use by state and local policymakers

due to variations of intensity in experienced eects of cli-

mate change, should st ate and loca l policymakers prove

willing to pursue appropriate versions and adopt such mea-

sures. Still, the way insura nce requirements would likely

be determined depends on external premises that could

dilute performance of these measure s, some of which could

be addressed through an expanded lens of the industrial

insurance eld, and others of which would likely prove to

be barriers with increased attention. ough some experi-

ences of these hazards are familiar, the eects of climate

change are expecte d to bring unknown extremes of calami-

ties that do not exist within current parameters of plan-

ning or design. Another challenge is that the most severe

eects of climate change will likely not be seen for decades

or generations across most vulnerable coastal la ndscapes

nationwide. Similarly, institutions of various means with

the power to act were not designed to address challenges

on this time scale and, t hus, the “tragedy of the horizon”

deters necessar y action.2 However, within Louisiana, the

implications of coastal land loss and increased ood risk

are an ongoing set of complex, evolving conditions—oer-

ing a nationally relevant case study in which to hypoth-

esize, test, and iterate within the present.

Louisiana’s coastal crisis did not begin a s one centered

on climate change, but the predicament of ongoing and

upcoming relative sea level rise ensures that the current

coastal crisis in Louisiana is unlikely to be solved through

established methods. Most of Southern Louisia na was built

by annual spring oods over thousands of years, spreading

the Mississippi’s muddy water across the delta to build lay-

ers of new land.3 is deltaic deposition provided for fertile

2. Mark Carney, Governor, Bank of England, Chairman, Financial Stability

Board, Speech to the Insurance Market Lloyd’s of London: Breaking the

Tragedy of the Horizon—Climate Change and Financial Stability (Sept. 29,

2015).

3. America Needs the Delta, R  M. R D, http://mississip-

piriverdelta.org/ (last visited Apr. 5, 2018).

Copyright © 2018 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.