Cole Porter Was Right: The Economic Cost of Climate Change

Posted on December 18, 2014 by Seth Jaffe

There has already been significant discussion of the economic impacts of climate change. Damage from catastrophic events, the cost to build adaptation measures such as sea walls; these have all been examined. Now, a National Bureau of Economic Research Working Paper suggests a much more direct measure. Apparently, we’re just not as productive as the planet warms.

Cole Porter knew what he was talking about.

Climate Change Litigation – Will Property Insurers Take the Lead?

Posted on April 24, 2014 by Ralph Child

Common law litigation seeking relief from petrochemical companies for causing climate change has been much touted but little successful.

The insurance industry has been warning of huge coming losses due to climate change, but has not taken aggressive action to force change.

Until now? 

In a lawsuit filed in Illinois state court on April 16, 2014, some property insurers sued the City of Chicago and a host of regional and municipal water managers for failure to provide adequate stormwater storage.  The class action suit alleges that the plaintiffs’ insureds would not have suffered so much flood damage from a 2013 storm had the defendants exercised better planning and construction to deal with foreseeable storms. 

Notably, the plaintiff insurers rely heavily on the 2008 Chicago Climate Action Plan.  The plan recognized that climate change would cause increased amounts, durations and intensities of rainfall.  Plaintiffs allege that despite the foreseen problem and having had adequate time and opportunity, the defendants failed to make the recommended and necessary improvements, leading to the injuries to the insureds’ properties.

Certainly this suit faces many challenges.  Courts are slow to override state and local governments’ complicated budgeting choices.  Moreover, courts may be ill-equipped to oversee projects such as Chicago’s Deep Tunnel Project, which was commissioned in the 1970s to address metropolitan flooding, stormwater and sewage.  After more than $3 billion so far, itwill not be completed until at least 2029.

Also, query whether such litigation will help or hurt state and local efforts to adapt to climate change.  It could deter honest forecasting of what it will take.

Still, this lawsuit could augur a new wave of common law climate change litigation – a category involving well-funded plaintiffs with provable arguments for proximate cause of real damages.

ExxonMobil Admits Climate Change Is Real. It also Imposes an Internal Cost on Carbon. Still Not Enough to Get Any Love From the Greens (Interesting Reading, Though)

Posted on April 14, 2014 by Seth Jaffe

Last week, in response to shareholder requests that it disclose information regarding how climate change might affect it in the future, ExxonMobil released two reports, one titled Energy and Climate, and one titled Energy and Carbon – Managing the Risks.  They actually make fascinating reading and seem to represent a new tack by ExxonMobil in its battle with those seeking aggressive action on climate change.

The reports do not deny the reality of climate change.  Indeed, the reports acknowledge climate change, acknowledge the need for both mitigation and adaptation, acknowledge a need to reduce fossil fuel use (at some point), acknowledge the need to set a price on carbon, and acknowledge that ExxonMobil in fact already is making future planning decisions utilizing an internal “proxy” price on carbon that is as high as $80/ton of CO2 in the future.

The reaction of the shareholder activists who pushed for the disclosures?  They are not happy.  Why not?

Because ExxonMobil has said explicitly that it doesn’t believe that there will be sufficient worldwide pressure – meaning government regulations imposing very high carbon prices – to reduce fossil fuel use sufficiently quickly enough to limit global temperature rise to 2 degrees Celsius.  It also does not believe that worldwide carbon regulation will leave it with any “stranded assets.”

I understand the moral case against fossil fuel use.  Personally, however, I’d rather rely on a carbon price that provides the appropriate incentives to get the reductions in CO2 emissions that we need to mitigate climate change.  On that score, sadly, it’s not obvious to me at this point that ExxonMobil’s analysis of likely outcomes is actually wrong.

My biggest complaint with the reports is the refusal to recognize that markets react dynamically to new regulatory requirements.  The history of big regulatory programs is that they pretty much always cost less than the predictions made before the regulations are implemented.  The lesson then is that the current projections of energy cost increases resulting from a high cost of carbon are likely to be overestimated.

Time will tell.  At least I hope so.