Preventing Industrial Disasters in a Time of Climate Change: A Call for Financial Assurance Mandates

• Date: 01 August 2018

48 ELR 10662 ENVIRONMENTAL LAW REPORTER 8-2018

ARTICLE

Preventing Industrial Disasters in

a Time of Climate Change: A Call

for Financial Assurance Mandates

Zachary C.M. Arnold

Zachary C.M. Arnold is an Associate with Latham & Watkins, L.L.P.*

I. Introduction

When Hurricane Katrina tore throu gh southern L ouisi-

ana, it left more than downed trees a nd standing water in

its wake: over one million gallons of oil coated the streets,

homes, and businesses of the small city of Meraux, home

of a Murphy Oil renery. Katrina’s erce winds and storm

surge had torn a massive tank o its foundations and car-

ried it away on the oodwaters, gushing oil as it went.1

e damage could have been far greater. Katrina was by

no means a worst-case storm,2 and luckily, only one of the

renery’s many tanks ruptured—and it leaked less than a

third of the oil it contained.3 Nonetheless, the spill devas-

tated the surrounding area, c ausing hundreds of millions

of dollars in damage to t housands of homes and businesses

and choking nearby cana ls with oil.4 When reporters

returned to the scene a year later, they found “abandoned

houses and overgrown lawn s,” and neighbors lamenting

the loss of a community.5

1. See M O S F S, EPA, 1 (2006), https://perma.

cc/8VQU-4YHA.

2. See, e.g., Katrina Was Category 3, Not 4, CNN (Dec. 21, 2005, 9:23 AM),

https://perma.cc/J35Y-PQTP (“When it slammed ashore on the Gulf Coast

in August, Hurricane Katrina was a strong Category 3 storm, not a Category

4 as initially thought . . . New Orleans . . . likely escaped the storm’s stron-

gest winds.”).

3. See M O S F S, supra note 1.

4. See $330 Million Settlement Deal in Katrina Oil Spill, NBC N (Sept. 25,

2006, 7:43 PM), https://perma.cc/779P-KW44.

5. See id.

e Murphy Oil incident may be a sign of things to

come. Consensus projections of climate change and its

impacts suggest that over the next several decades, sea lev-

els will rise, coastal ooding will become more and more

prevalent, and hurricanes may become stronger and more

frequent as ocean temperatures warm. In turn, industrial

facilities along the coast s will become more and more likely

to experience destructive oods and storms.

is trend has sobering implications. America’s popula-

tion and economy are disproportionately coastal. R ising sea

levels, more powerful and frequent storms, and increased

ooding threaten to wreak havoc on these facilities, caus-

ing grave harm to life, property, and natural resources in

surrounding communities.6

Financial assura nce mandates (FAMs) may help induce

coastal industries to invest in adaptation. FAMs require

companies to prove that they can pay for the liabilities t hey

may incur—whether by drawing on t heir own resources or

by bringing in a third party, such as an insurer or surety,

to pick up the tab.

FAMs are familia r tools whose strengths have been dem-

onstrated in practice as well a s in theory. Federal, state, and

local regulators use them to reduce the risk of catastrophes

of all sorts, from nuclear incidents and oil spills to impacts

resulting from abandonment of dangerous facilities. His-

tory shows that these measures can be eective and rea-

sonable in cost.7 And crucially, because they are relatively

6. See, e.g., Scott Gurian, New Jersey’s Industrial Coast Remains Vulnerable to the

Next Extreme Storm, NJS (Dec. 8, 2015), https://perma.cc/TA5L-

U7LE/; David A. Graham, e Mothers of All Disasters, T A

(Sept. 2, 2015), https://perma.cc/28YX-XQCW; Eric Berger, Models Show

“Massive Devastation” in Houston, H C. (Feb. 20, 2005, 6:30

AM), https://perma.cc/SJ9J-UPA6; Tom Fowler, Houston-Area Facilities Say

ey’re Prepared, H C. (Sept. 21, 2005, 5:30 AM), https://

perma.cc/A37M-FXNH.

7. James Boyd, Financial Responsibility for Environmental Obligations: Are

Bonding and Assurance Rules Fullling eir Promise? 5–8 (Resources for

the Future Discussion Paper 01-42, Aug. 2001), https://perma.cc/9D9B-

SHEP (“In every regulatory context to date, private nancial markets have

developed to provide the insurance, bonds, and other nancial instruments

necessary to demonstrate assurance, and they provide these products at rea-

sonable cost.”); R V. P  ., E R:

L, S,  P 145 (“[F]inancial assurance mandates in the Oil

is Article is adapted from Zachary Arnold, Preventing Industrial

Disasters in a Time of Climate Change: A Call for Financial Assurance

Mandates, 41 H. E. L. R. 243 (2017). Copyright in the

Environmental Law Review is held by the President and Fellows of

Harvard College, and copyright in the article is held by the author.

*is Article expresses the personal views of the author and has not

been approved or endorsed by Latham & Watkins. e views expressed

herein should not be attributed to Latham & Watkins or its personnel.

e author wishes to thank Dan Esty, John Broomeld, Don Elliott,

Sue Neuman, Cameron Partovi, David Schleicher, Mark Tomaier,

Mike Walker, and Hannah Wiseman.

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