Legal liability as climate change policy.

• Author: Sigman, Hilary

Several attempts have been made to impose liability on private parties for the harms caused by their greenhouse gas (GHG) emissions. Examples of such litigation in the United States include a case brought by northeastern states against several electricity producers (1) and a suit filed by the State of California against six automobile manufacturers in late 2006. (2) In addition to building on a broad tradition of tort law being used in response to other environmental damages, such litigation draws on the experience of the American tobacco settlement and on recent attempts to use liability as an alternative to legislative gun control.

Three rationales have been offered for liability as climate change policy. First, litigation might be desirable for the compensation that it provides to victims of climate change. Second, liability might create incentives for private actors to reduce GHGs. Finally, these lawsuits might make political conditions more favorable to ex ante public policies for GHG reduction. This Commentary addresses the desirability of each of these effects in turn.

1. COMPENSATION FOR HARMS FROM CLIMATE CHANGE

   Compensation may be desirable from either the perspective of economic efficiency or of fairness, but strong arguments may also be made that it is undesirable from both of these perspectives.

   Although arguments for compensation usually hinge on fairness, an efficiency argument might be made for compensation. People potentially harmed by climate change might be willing to pay for the ability to reduce the variance in their well being as a result of climate change. Although some variance, such as that caused by local storms, may be managed through conventional insurance markets, Howard Kunreuther and Erwann Michel-Kerjan argue that these markets may not handle aggregate risks, such as the risk of rapid climate change or of catastrophic regional storms. (3) If so, compensation for some harm through legal liability might help smooth well being across states of the world and thus improve total welfare.

   However, as is well known, compensation may be inefficient if it weakens the incentives to avoid harm and thus raises social costs of climate change. (4) Recent research suggests that adapting to climate change should be an important part of any response strategy. Examples of such adaptations include building sea walls to reduce the damages from sea level rise and adjusting agricultural infrastructure to shifting crop zones. Gary Yohe and Michael Schlesinger estimate the costs of sea level rise in the United States to be approximately thirty percent lower with private adaptation than without. (5) Compensation, even if only partial, will weaken incentives for private and public sector investments in adaptation and thus substantially increase the costs of climate change.

   A stronger justification for compensation would focus on fairness rather than efficiency. Daniel Farber makes persuasive arguments of this nature. (6) However, it is possible that the redistribution that would occur under a liability regime would be undesirable. Rules for assessing damage based on lost property values would strongly favor the rich. For example, in the United States, the property value losses from sea level rise would likely be concentrated among wealthier households who own high-value coastal real estate. Firms may raise energy prices to pay for compensation, however, so the burden of compensating those harmed by climate change is likely to be regressive. (7) Thus, litigation could create a net transfer to wealthy households.

2. GREENHOUSE GAS REDUCTION

   Another justification for liability is that it might bring about GHG reductions. One way to achieve this goal would be to abandon compensation for victims and require defendants to invest in projects that create environmental improvements...