Regulation

Climate Change Litigation: The Second Wave - Our Children's Trust Goes to Washington

December 16, 2011 19:09
by J. Wylie Donald
2000 years ago all roads led to Rome.  Nowadays, as Our Children’s Trust recently found out, the road of a climate change lawsuit leads to Washington.  All are familiar with the path to Washington taken by Massachusetts v. EPA and American Electric Power v. Connecticut.  Last week a different path surfaced:  the trial court.  The District of the District of Columbia became the Washington venue of Alec L. v. Jackson when  the Northern District of California transferred the federal climate change suit instigated by Our Children’s Trust.    Our Children’s Trust (OCT) is an Oregon public interest group that is quarterbacking a set of lawsuits and regulatory petitions seeking to reinvigorate federal and state regulation to combat climate change.  OCT burst on the climate change litigation scene last May with suits or petitions in all 50 states, invoking the public trust doctrine as available to protect the atmosphere – a new twist on an old doctrine.  Besides a dozen lawsuits in state court, one was also brought in federal court in the Northern District of California (where another climate change lawsuit – Native Village of Kivalina v. ExxonMobil - was also filed).  Alec Loorz, a teen-aged environmental activist, and other youths, in company with Kids vs Global Warming and Wildearth Guardians, sued Lisa Jackson, Kenneth Salazar, Thomas Vilsack, Gary Locke, Steven Chu and Leon Panetta. You may recognize the defendants as the EPA Administrator and the Secretaries of Interior, Agriculture, Commerce, Energy and Defense, respectively. In the amended complaint, after explaining the plaintiffs’ circumstances (youths1 and an environmental group that will be harmed by the effects of climate change), the defendants’ alleged misfeasance (failure to act to restrain and reduce carbon dioxide emissions), the effects of climate change and the need to take action (among other reasons: “A failure to act soon will ensure the collapse of Earth’s natural systems resulting in a planet that is largely unfit for human life.”  Complaint ¶ 9.), a single cause of action is set forth. Plaintiffs allege, among other things:   143. The United States government is a co-tenant sovereign trustee of the atmosphere and shares a duty with other co-tenant sovereigns, including Tribal Nations, to protect the atmosphere as the trust asset and prevent its waste or harm for the benefit of the people, including Plaintiffs and future generations of citizens 146. Defendants, and each of them, have wasted and failed to preserve and protect the atmosphere Public Trust asset, and have caused and will continue to cause imminent injuries as described above, from increased greenhouse gas emissions, global heating, and adverse impacts to natural and other resources. 147. Defendants, and each of them, have injured Plaintiffs by failing to protect the atmosphere as a Public Trust asset. Needless to say, the government defendants don’t agree.  But instead of contesting the merits or challenging standing or asserting the political question defense in California, defendants sought something simple:  just a change of venue to Washington, D.C. Plaintiffs opposed.     The district court sided with the defendants in a nine-page opinion that addressed the relevant considerations point by point.  As set out by the Supreme Court, transfer is appropriate based upon an ‘individualized, case-by-case consideration of convenience and fairness.’  Opinion at 2 (citing Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29 (1988)).  The relevant factors to be considered included:  (1) plaintiffs’ choice of forum, (2) convenience of the parties and witnesses, (3) ease of access to sources of proof; (4) local interest in the controversy; (5) familiarity of each forum with the  applicable law; and (6) relative congestion in each forum.  Opinion at 3 (citing Ctr. for Food Safety v. Vilsack, No. 11-00831 JSW, 2011 U.S. Dist. LEXIS 31688, at *18 (N.D. Cal. Mar. 17, 2011)). Without delving into each of the factors, a fair summary of the court’s view might be:  because the effects of global warming are felt equally by every citizen and the decisions directing the government’s response were made in Washington, there was no compelling reason to keep this case in California and there were good reasons to transfer the case to the District of Columbia.  It is not a very satisfactory analysis. While it is likely that climate change on the whole is bad, some will be advantaged by it (for example, farmers in Canada with longer growing seasons, or shippers that can use the Northwest Passage to the detriment of the Panama Canal); others will be disadvantaged (such as homeowners facing increased insurance premiums in hurricane-prone states, or asthmatics troubled by the particulate arising from more frequent wildfires caused by lack of rain).  To say that all will be affected equally seems plainly wrong. Nevertheless, the court made that point on several occasions to support its conclusion that the plaintiffs did not have an interest localized to the Northern District of California.  See Opinion at 4, 7, 8-9.   Conversely, to find out why the District of the District of Columbia was the proper forum, one needed to look at who the defendants were:  heads of regulatory bodies who resided in or near Washington and whose allegedly improper decisions were likely made there as well.  Opinion at 4, 5, 6, 7, 8.  This reasoning suggests that a plaintiff seeking to avoid transfer should assert his or her claim against the local representative of the federal agency or department.  Of course that would likely be met with a motion to dismiss for failure to join an indispensable party because an agency's local representative would not be the one making the decisions about responding to climate change.  Which further suggests that under this factor, a suit about federal government policies against the federal government is always most appropriate in Washington.  Such a rule sounds like a bad idea. But bad idea or not, the OCT plaintiffs are now in Washington.  Transfer has eliminated the possibility of an appeal to the relatively more liberal Ninth Circuit. Presumably, this was what inspired the motion to transfer. But it has also put the case into a more favorable news market offering better hours for prime time access to a decision.    A hearing date is not set but the case will be taken seriously. Already the National Association of Manufacturers has weighed in on the side of the government.  On the plaintiffs' side, they have drummed up support from nearly two dozen law professors and scholars to explain the application of the public trust doctrine. 1It may only be us but the youth plaintiffs do not appear terribly sympathetic. By the tender age of 16 they have the suffered the misfortunes of going hiking on Icelandic glaciers, visiting Patagonia in the company of Robert Kennedy, Jr. and traveling to Africa.  Complaint ¶¶ 30, 37, 45.

Climate Change Effects | Climate Change Litigation | Regulation

Good COP, Bad COP - Durban and the Future of a Climate Change Treaty

November 26, 2011 05:39
by J. Wylie Donald
Durban, South Africa.  Home to the Shark Tank (where Kwazulu-Natal's rugby team, the Sharks, plays), extensive beaches and South Africa's busiest port.  But not home to a new treaty to address climate change.  COP-17 gets underway on Monday and the delegates haven't even met yet; some might think we are being somewhat premature.  We think not.  There is an election here next year.  Europe is mired in a sovereign debt crisis.  China and India will not derail their economic growth just to appease the industrialized West.  Notwithstanding that there will not be any legally binding agreement, the discussions in Durban are of some moment.  Before we get to that, let's make sure we are all on the same page.  COP-17 is the annual "Conference of the Parties", the yearly meeting of the United Nations Framework Convention on Climate Change. In diplomat-ese, it is also 7th Session of the Conference of the Parties serving as the Meeting of the Parties (CMP7) to the Kyoto Protocol. The ultimate objective of the Framework Convention is “to stabilise greenhouse gas concentrations at a level that will prevent dangerous human interference with the climate system”.  Nearly all nations (including the United States) are members. There are three primary subjects that will be considered in Durban: 1.  Kyoto Protocol - This treaty entered into force in 2005 and established a regime to address greenhouse gas emissions around the world.  There were two tiers:  developed nations and developing nations.  The standards for the first group were stricter than those for the second.  While most nations signed on to the treaty, the United States (and Andorra, Afghanistan and South Sudan) did not.  The United States' primary criticism is that the Protocol did not appropriately take into account the massive greenhouse gas contributions that are now coming from developing nations like China and India.  Now Kyoto is set to expire.  COP-17 is to set up the next stage.  However, the United States, Russia and Japan have stated that they will not sign on for a second stage.  The consensus of observers is that Kyoto will not be extended. 2.  Green Climate Fund - At COP-15 (Copenhagen in 2009), developed nations promised to provide by 2020 $100 billion per year or more to help developing nations address climate change.  As noted by the Overseas Development Institute in the United Kingdom, how to do this is not simple, even apart from finding the funds.  The payors (wealthy nations) favor funds to reduce emissions and running funds through the World Bank (where large donors have more control). The payees (poorer nations) have a much more pragmatic approach.  They favor direct access to funds and more adaptation than mitigation.  To quote Greenpeace Africa:  “The argument is that the developed countries, especially the United States and Western Europe, built their economies on dirty energy – principally coal. So they’re chiefly responsible for the greenhouse gases, such as carbon dioxide, that are causing climate change. Yet the worst of the climate change impacts are being felt in least developed countries. So there is definitely a strong argument for the developed countries to greatly help poorer countries to switch to renewable energies.”  In October the UN Transitional Committee submitted a draft instrument on the structure of the Fund.  News reports state that the United States does not support the draft. 3.  REDD+ - Reducing emissions from deforestation and forest degradation is an additional path to addressing greenhouse gas emissions, separate and apart from combustion sources.  Forest degradation is responsible for up to 20% of global greenhouse gas emissions.  The UN organized a program in 2008 to address this problem.  "Reducing Emissions from Deforestation and Forest Degradation (REDD) is an effort to create a financial value for the carbon stored in forests, offering incentives for developing countries to reduce emissions from forested lands and invest in low-carbon paths to sustainable development.“REDD+” goes beyond deforestation and forest degradation, and includes the role of conservation, sustainable management of forests and enhancement of forest carbon stocks."  Some have claimed that REDD is "the fastest-moving portion of the whole climate negotiations."   Some environmental groups want a portion of the Green Climate Fund earmarked for REDD. So why does this have any significance for businesspeople in the United States?  We start from the premise that climate change is occurring. No dispute about that. There will be significant changes as a result. No dispute about that either. And humans, as is their nature, will respond to the change in their habitat.  Likewise, no dispute.  In the jargon, there will be adaptation - armoring the shore against rising sea levels, further restrictions on water usage for drought areas, more hurricane-proof building codes, enhanced floodplain analysis - and there will be mitigation - efforts at reducing the emissions of greenhouse gases.  For better or worse, the COP meetings set the rules of the mitigation game, and influence responses to adaptation.  Although the Kyoto Protocol was not adopted in the United States, it led to the establishment of a billion dollar trading system in Europe on carbon credits.  It influenced RGGI and the Western Climate Initiative here.  We have written about how the European system is set to impact American air carriers at the first of the year.  Down the road, we believe the nations of the world, including the United States, will come together to address climate change.  The frameworks that are in place - built by the COP meetings - will inevitably be important in cementing and implementing the mutuality of purpose.

Carbon Emissions | Climate Change | Regulation

Renewable Fuels Take Off - Algae Arrives and Certiorari Denied

November 8, 2011 08:41
by J. Wylie Donald
Yesterday was a good day for renewable fuels enthusiasts and not because someone figured out how to make ethanol cocktails from pond scum.  In Houston American renewable fuel use literally took off on its maiden flight and in Washington the Supreme Court denied certiorari in a suit brought by the oil industry challenging the USEPA's regulations promulgating a revised renewable fuels standard. In National Petrochemical Refiners Association and the American Petroleum Institute v. EPA, the plaintiffs asserted the EPA's final rule, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program, 75 Fed. Reg. 14,670 (Mar. 26, 2010), was invalid because it "violate[d] statutory requirements setting separate biomass-based diesel volume requirements for 2009 and 2010; [was] impermissibly retroactive; and it violate[d] statutory lead time and compliance provisions."  630 F.3d 145, 147 (D.C. Cir. 2010).  From those arguments, one might justifiably conclude that watching paint dry would be far more exciting than this opinion; we will leave it to others to explicate.  E.g., see the case comment in the Texas Journal of Oil, Gas and Energy Law Blog. In any event, the court of appeals denied all of petitioners' arguments and left EPA's rulemaking completely intact.  The Supreme Court saw no reason to step in.  What does the standard mean in the real world?  It is huge.  Among other things, according to the EPA's website it raised the mandated volume of renewable components in motor vehicle fuel from 9 billion gallons in 2008 to 36 billion gallons by 2022.   And it "appl[ied] lifecycle greenhouse gas performance threshold standards to ensure that each category of renewable fuel emits fewer greenhouse gases than the petroleum fuel it replaces."  In other words, if one measures all the greenhouse gases emitted in the production of, for example, one gallon of corn-derived ethanol, fewer gases would be emitted than in the production of one gallon of gasoline. But the standard is not huge for airlines.  It only applies to motor vehicle fuel. 42 U.S.C. § 7545(o)(1)(C)(i).  Nevertheless, airlines are starting to line up for renewable fuels.  A case in point is the news story in yesterday's Houston Chronicle, Algae helps power flight to Chicago.  The gist of the story is that a United Airlines Boeing 737 lifted off from George Bush Intercontinental Airport for Chicago with a fuel tank filled with a blend derived from algae and conventional aviation fuel.  Passengers noted nothing different despite participating in history.  As stated by United:  "the first U.S. airline to fly passengers using a blend of sustainable, advanced biofuel and traditional petroleum-derived jet fuel."  More details are provided in the press releases from Solazyme (the biofuel manufacturer) and United. The blend was 40/60 algae to conventional fuels, complied with the ASTM D7566 specification for aviation fuel, and is a "drop-in replacement[] for petroleum-based fuel, requiring no modification to factory-standard engines or aircraft."  Tomorrow Alaska Airlines takes off with used cooking oil product in its tanks. The price for this "green" fuel?  One internet source puts it at between $17 and $26 per gallon.  Is this cutting edge?  For the United States, yes, for Europe not at all. Lufthansa flies 8 flights daily to and from Hamburg and Frankfurt using 50% biofuel in one engine. The press release goes on to explain the single engine:  "next to reducing CO2 emissions, the main aim of this long-term operational trial, [is] to examine the effects of biofuel on the maintenance and lifespan of aircraft engines."  That is, the two engines will be torn down to the last o-ring at the next overhaul and compared, providing valuable data for future operations. Both United and Lufthansa emphasize the role renewable fuel has in their sustainability initiatives.  Good public relations and potential competitive advantage may be reason enough to incorporate biofuels.  But besides green-ness can $17 per gallon be justified? It might be if it could reduce costs elsewhere, and faithful readers have already figured out where that might be. As we reported recently, the EU will start imposing carbon emission fees on flights originating or terminating in the European Union. Bio-fueled flights can get credits and reduce their fees.  With that, a little innovation, some economies of scale, and some luck, we might soon find ourselves enjoying a little pond scum at 30,000 feet.

Green Marketing | Greenhouse Gases | Regulation | Renewable Energy | Sustainability

Cap and Trade - California Leads the Way

November 1, 2011 20:39
by J. Wylie Donald
Subchapter 10 Climate Change, Article 5, Sections 95800 to 96023, Title 17, California Code of Regulations, to read as follows: Article 5: CALIFORNIA CAP ON GREENHOUSE GAS EMISSIONS AND MARKET-BASED COMPLIANCE MECHANISMS Note: All text is new. "All text is new."  And so it is and so begins a new chapter in California's odyssey into the regulation of greenhouse gas emissions, which began over 5 years ago with the passage of AB 32, the Global Warming Solutions Act of 2006.  Under that law, greenhouse gas rules - including market controls - adopted by the California Air Resources Board are required to take effect by January 1, 2012.  Thus, market control regulations - a cap and trade program - were adopted unanimously by the CARB on October 20 and submitted to the Office of Administrative Law by last Friday, October 28. Cap and trade has two parts.  What does the cap look like? The CARB's implementing resolution explains that the regulation "Establishes a declining aggregated emissions cap on included sectors. The cap starts at 162.8 million allowances in 2013, which is equal to the emissions forecast for that year. The cap declines approximately 2 percent per year in the initial period (2013–2014). In 2015, the cap increases to 394.5 million allowances to account for the expansion in program scope to include fuel suppliers. The cap declines at approximately 3 percent per year between 2015 and 2020. The 2020 cap is set at 334.2 million allowances[.]" An "allowance" is a "limited tradable authorization to emit up to one metric ton of carbon dioxide equivalent."  Cal. Code Regs. tit. 17 § 95802(a)(8).  Initially large industrial facilities will receive a free allocation, with auctioned allowances to come.  Electric utilities will receive their allowances for free, with ratepayers to receive the benefit of the value of those allowances. Trade is what one does if one does not have the right number of allowances.  Allowances can be bought and sold in the present, or  banked for future needs (such as to guard against shortages and price swings), or even retired. Let there be no mistake.  This is not a small program.  The regulations run on for 260 pages with 43 pages of definitions.  They cover 350 businesses operating 600 facilities.  By 2013 electric utilities and certain large industrial facilities will be obligated to comply.  Distributors of transportation, natural gas and other fuels will see themselves subject to regulation in 2015.  California's goal is to return to 1990 levels of greenhouse gas emissions by 2020.  The cap and trade program "sets a statewide limit on sources responsible for 85 percent of California’s greenhouse gas emissions, and establishes a price signal needed to drive long-term investment in cleaner fuels and more efficient use of energy." The program is comprehensive.  Besides specifying the calculation of allowances and describing the operation of allocation and auction schemes, the program also sets forth in detail the use of offsets ("a GHG emission reduction or GHG removal enhancement that is real, additional, quantifiable, permanent, verifiable, and enforceable" Cal. Code Regs. tit. 17 § 95970).  Perhaps most interesting because it suggests a self-replicating paradigm in the minds of the California authorities, is the set of provisions recognizing "compliance instruments from external GHG emission trading systems."  Cal. Code Regs. tit. 17 §§ 95940-43.  In other words, if a cap and trade program is implemented elsewhere, California can take notice and give credit.  And since that will enhance business activity with California, other jurisdictions (such as those in the Western Climate Initiative and in Canada) have an incentive to replicate California's model. Will any of this work?  CARB will not learn by happenstance.  Its implementing resolution requires annual updates, which will measure, among other things the effectiveness of the cap-and-trade program, its stimulation of investment and innovation in clean technology, shifts in transportation fuel use and supply, the working of offset protocols, carbon capture and sequestration technology, and, last but not least "federal greenhouse gas activities, including federal equivalency for a State program."  Our last post concerned a House bill that forbade American air carriers from participating in the the EU Emissions Trading System (Europe's cap and trade program). We wonder what the response in Washington will be to these efforts by the world's eighth largest economy?  We suspect they will tread gingerly and note that California voters had a chance to rein in AB 32 last November but rejected a ballot initiative (Proposition 23) that would have done just that. 

Carbon Emissions | Regulation

House Passes Bill Challenging Application of EU ETS to American Carriers - Will It Fly?

October 25, 2011 20:58
by J. Wylie Donald
When people bring up new climate change legislation today they aren't seeking to reinvent the Clean Air Act or implement the Kyoto Protocol.  Rather, the goal is to block responses to climate change. A case in point is a bill that passed the House of Representatives on a voice vote yesterday, H.R. 2594, the European Union Emissions Trading Scheme Prohibition Act of 2011. As its name implies, H.R. 2594 is not about a climate change fix. Instead it is all about getting in the way of a fix. Its operative provision provides:  "The Secretary of Transportation shall prohibit an operator of a civil aircraft of the United States from participating in any emissions trading scheme unilaterally established by the European Union."  We understand about the need for the government to interfere with business activities in rogue states, but this seems somewhat far afield. Nevertheless, this did not come out of the blue. In 2008 the European Union announced in Directive 2008/101 that all airlines flying in, into or out of European airspace would have to participate in the EU Emissions Trading Scheme. This meant that operators would have to surrender to regulators one "allowance" for every ton of carbon dioxide emitted on such journeys. Failure to obtain the requisite allowances would invoke fines, and the obligation to obtain the allowances would continue. Following a monitoring and verification period in 2010 and 2011, where baseline emissions were established, the ETS regime is scheduled to take off on January 1, 2012.  Based on their established baselines airlines will be allocated allowances, most of which will be distributed for free. However, to the extent an airline wishes to grow, or new entrants arrive, or efficiency requirements kick in, expenditures will be required. Standard & Poors estimates it could cost over one billion euros in the first year, and between 23 billion and 35 billion euros through 2020.   Numerous governments and domestic and international aviation officials are lined up attempting to block or divert the European program.  A resolution of the International Civil Aviation Organisation in October 2010, Resolution A37-19, set forth goals and advocated further study and cooperation, but imposed no obligations.  The ICAO asserts that airline carbon dioxide emissions should be left to its self-governance.  The Air Transport Association (and others) filed a lawsuit in 2009 which ultimately ended up at the European Court of Justice asserting that the EU was violating international law.  Specifically, the plaintiffs argued:  "As proposed, the EU ETS provisions would regulate an entire flight from across the United States to the EU, even though the flight would be in EU airspace for only a tiny fraction of the journey, ... If the EU ETS regime implemented an international agreement agreed by third countries, as well as by the EU, we would not be here today. ATA challenges EU ETS because it is a unilateral measure, which has not been agreed by countries outside the EU, yet nevertheless applies EU law to third country carriers in third country airspace."   In June 2011 the Obama administration demanded that U.S. airlines be exempted from the scheme.  And at the end of September 21 non-EU members of the ICAO issued a declaration at their New Delhi meeting rejecting the EU ETS program.  None of this has availed.  On October 6 an Advocate General of the European Court of Justice rendered her opinion and concluded, among other things: 145. As many of the governments and institutions involved in the proceedings have correctly concluded, Directive 2008/101 does not contain any extraterritorial provisions. The activities of airlines within the airspace of third countries or over the high seas are not made subject to any mandatory provisions of EU law by virtue of this directive. In particular, Directive 2008/101 does not give rise to any kind of obligation on airlines to fly their aircraft on certain routes, to observe specific speed limits or to comply with certain limits on fuel consumption and exhaust gases. 146. Directive 2008/101 is concerned solely with aircraft arrivals at and departures from aerodromes in the European Union, and it is only with regard to such arrivals and departures that any exercise of sovereignty over the airlines occurs: depending on the flight, these airlines have to surrender emission allowances in various amounts, (131) and if they fail to comply there is a threat of penalties, which might even extend to an operating ban. More succinctly, as set forth in the European Court of Justice's press release:  "EU legislation does not infringe the sovereignty of other States or the freedom of the high seas guaranteed under international law, and is compatible with the relevant international agreements."      Where is this all headed?  The ECJ itself should render its opinion by early 2012.  Unless it undoes Directive 2008/101, some are predicting a trade war.  Even if everyone grudgingly goes along with participation in the scheme, "carbon leakage" is likely to be a significant factor.  Long-haul flights that now stop in Europe may find it more cost-effective to stop over in the Middle East, which does not impose any charge for carbon dioxide emissions.  And of course, the traveler is likely to see higher fares. Will H.R. 2594 make any difference?  We think it unlikely.  In a time of budget cuts and market reliance, what is to be gained by establishing another bureaucracy when United Continental, Delta and American Airlines can find gates at Abu Dhabi, Doha and Dubai?

Carbon Emissions | Climate Change Litigation | Regulation

Ceres and a Series of Serious Thoughts About the NAIC Climate Disclosures - Part III

September 19, 2011 05:15
by J. Wylie Donald
This is the last of three parts concerning Ceres’ recently released Climate Risk Disclosures by Insurers:  Evaluating Insurer Responses to the NAIC Climate Disclosure Survey.   We already have looked at the first two Recommendations to Regulators.  Today we finish with number 3:  more clarity in disclosure expectations.  Id. at 51.  It is always easier to make apples-to-apples comparisons when everyone is speaking the same language.  Uniform and detailed disclosure requirements would help achieve that goal.  However, the down side of specifying what will be disclosed is that it assumes the specifier knows all that needs to be identified.  The scariest part of climate change is that we probably do not yet know how all the changes will interact.  Correlated risk is a prime example.  IRMI describes “correlated risk profiles” as those “that move in concert when affected by the same set of stimuli.”  Insurers run from correlated risk and the Ceres report rightly poses a troubling concern in that regard:  “If … climate change has the potential to introduce correlated risks across previously uncorrelated assets and to drive market values in ways that cannot be predicted from historical trends, the insurance industry may be poorly positioned to meet its investment objectives.”  Climate Risk Disclosures at 39.  According to the report, few companies recognize the potential for correlated losses across their business.  Id. at 43.  And the ones that do say no more than that climate change will increase insured losses and may negatively impact the businesses in which insurers invest.  Id.   We don‘t think that this is news to those who did not specifically mention correlated risks in their submissions.  What we take from all this is that no one yet knows in a meaningful way where the climate change correlated risks lie.  Or they are keeping mum (see our first posting on the Ceres report concerning competitive advantage).  So the question for a regulator is the following:  Is one better off with answers that are less-constrained and potentially more revealing, or is more specificity in the guidance more helpful?  If one is a regulator who knows all the questions that should be asked, one should opt for more specificity.  But if one does not, then one might support providing unstructured disclosure opportunities. The Ceres report, of course, is not all about recommendations, but we have gone on for too long to delve further.  Before we close, however, we did want to address the need for stronger research. The Corporate Liability section attracted our particular focus, as climate change liability suits and their insurance have been a central feature of the blog.  Those of us following this subject drop the names of the three liability damages suits, Comer, General Motors and Kivalina, and the insurance suit, Steadfast, like they were business cards.  The statement that got our dander up was this:  "Since the first suits were filed in 2003, their numbers have rapidly proliferated—more than 120 suits were filed in 2010 alone, nearly two-thirds of them in the U.S."  Id. at 11.  This is an accurate paraphrase of its source, a sentence in a short article published by the Geneva Association.   The problem is that the source, at best, is misleading.  While there may have been 120 climate change suits filed in 2010, as demonstrated by the comprehensive set of charts kept by the Climate Change group at Arnold & Porter LLP there were none filed that were seeking damages under common law theories.   Those suits continued to be the three:  Comer, GM and Kivalina. We will be the first in line to agree that the insurance industry should be concerned about climate change liability suits.  But that concern has not yet had to focus on 120 climate change liability suits, because they have not been filed yet. That being said, the Ceres report brings to the fore statements by representatives of a multi-trillion dollar industry that is in the eye of the climate change storm.  Those statements otherwise might languish in some regulator’s dark bottom drawer.  The report is a valuable resource; we look forward to next year’s reprise.

Climate Change Litigation | Insurance | Regulation

Ceres and a Series of Serious Thoughts About the NAIC Climate Disclosures - Part II

September 16, 2011 05:09
by J. Wylie Donald
We wrote yesterday to introduce Ceres’ report on the disclosure of climate risks by insurers and considered its first Recommendation to Regulators concerning mandatory and public disclosures.  We address today the second recommendation in Climate Risk Disclosures by Insurers:  Evaluating Insurer Responses to the NAIC Climate Disclosure Survey.    Ceres’ second recommendation is to "[c]reate shared resources around the implications of climate trends on enterprise risk management."  Id. at 51.  In other words, more research should be made available concerning investment risks and opportunities, correlated risks, loss modeling, the potential for loss of health and life, and customer resilience (ability to resist extreme events).  Id.  Taking modeling by way of example, Ceres discusses modeling thoroughly in Part 2 and the discussion is thought-provoking.  Several insurers are conducting climate change modeling internally.  For the rest, they rely on third-party vendors, which invokes much criticism from Ceres.  "The majority of insurers that report using catastrophe models describe them in terms that suggest their company does not have a clear understanding of how the models can or cannot be used to anticipate changing risk.  Most of the industry relies on third-party catastrophe risk models that only marginally integrate changing extreme weather."  Id. at 6.  "[I]nsurers relying entirely on third-party models may be severely unequipped to adjust pricing to incorporate emerging climate risks." Id. at 31.  "Insurers' disclosures suggest that the majority of insurers may be setting pricing based on flawed assumptions of how the industry's loss models incorporate changing climate trends."  Id. at 32. Ceres lauds those companies that can do it in-house.  But specialization and economies of scale are fundamental drivers of the market.  Were every insurer to bring modeling inside, undoubtedly there would be some new insights not presently uncovered.  But there would also be insurers who got the models grievously wrong and, in most cases, the resources spent on modeling would be more cost-effectively spent on other items necessary to delivering products or services. To be sure, reliance on EQECAT, AIR Worldwide and RMS as the sources for all climate change modeling has its flaws.  One need only think back a few years to where another triumvirate dispensing financial ratings (allegedly) misled sophisticated investors around the globe.  But in a world of constrained resources, or even an unconstrained one, third-party modelers are necessary and beneficial.  Further, a disadvantage to society from in-house modeling is that the insights developed from proprietary work may remain just that:  proprietary.  Ceres acknowledges "it is ... possible that asymmetrical information can be used by individual companies to secure a competitive edge against their peers."  Id. at 38.  Indeed, "larger insurers more readily recognize the inherent limitations of current catastrophe models in light of changing climate than do their smaller competitors or clients.  These players have a clear competitive advantage in deploying resources to build the latest climate science into their pricing models."  Id. at 37.  Third-party vendors, on the other hand, spread their best products across many insurers, in effect sharing their best research (but only to those willing to pay for it).  We wrote yesterday of the need to recognize that intellectual capital is a business asset and criticizing a goal of making climate change disclosures public available.  We think those comments apply likewise to the sharing of resources. Nevertheless, Ceres does great work in raising the bar for third-party vendors.  By pointing out to insurer-users that they may not be getting what they really need from the modeling firms, we expect the modelers will have to go out and address Ceres’ criticisms.  For example, insurers are exposed if (as Ceres asserts) "few insured perils are modeled by insurers, leaving the possibility for climate-affected perils to be underpriced."  Id. at 35.  More specifically, "recent years have demonstrated that climate change may be driving up aggregated losses from smaller events, including perils such as floods, snowstorms and hailstorms, in ways that erode insurer profitability."  Id. Tomorrow we conclude our review with a look at Ceres’ third recommendation as well as sharing some concerns about research.

Climate Change | Insurance | Regulation

Ceres and a Series of Serious Thoughts About the NAIC Climate Disclosures - Part I

September 15, 2011 20:42
by J. Wylie Donald
Ceres released last week the first analysis of the insurer climate change disclosures submitted to state regulators pursuant to the National Association of Insurance Commissioners rule.  The report is eye-opening.  The authors have combed through the disclosures of 88 insurance companies and offer thoughtful insights on, for example, investment practices, management structure and modeling.  Those seeking to advance their bottom line will find nuggets of information directly related to competitive advantage.  In this post, we outline the report and discuss its first recommendation regarding mandatory and public disclosures.  In subsequent posts we will address Ceres’ second and third recommendations. The report’s title is dry and daunting:  Climate Risk Disclosures by Insurers:  Evaluating Insurer Responses to the NAIC Climate Disclosure Survey.   Fortunately, it does not live up to the ominous desiccation foretold by the title.  We know from the get-go where this is going:  "This report documents this powerful industry's sluggish and uneven response to the ever-increasing ripples from global climate change, which could undermine both its own financial viability and the stability of the larger global economy."  Id. at 3. For those to whom Ceres and NAIC are unfamiliar, the former is a non-governmental organization composed of a coalition of investors, environmental organizations and other public interest groups, whose mission is to “integrat[e] sustainability into day-to-day business practices for the health of the planet and its people.”  The latter is the National Association of Insurance Commissioners, which in 2009 approved mandatory requirements for climate change disclosures for insurance companies, because "[a]s regulators, we are concerned about how climate change will impact the financial health of the insurance sector and the availability and affordability of insurance for consumers.  This disclosure standard will give regulators the information we need to better understand these risks."    NAIC later revised its requirements to make disclosure voluntary. Ceres's work is based on the 2010 disclosures of 88 US insurers filed in six states (mandatory:  New York, California, Pennsylvania; voluntary:  New Jersey, Oregon, Washington).  The report is set up in three parts.  Part 1 describes climate change risk and the need for disclosure.  "The changing climate will profoundly alter insurers' business landscape, affecting the industry's ability to price physical perils, creating potentially vast new liabilities and threatening the performance of insurers' vast investment portfolios." Climate Risk Disclosures at 9.  Part 2 is the meaty analysis of the report and addresses the following topics: Risk Perception and Management StructureRisk Exposure and ManagementFinancial EffectsLoss ModelingInvestmentsEmissions ManagementExternal Engagement Its goal is to set out “risk perceptions and management practices for handling climate change across the American insurance industry.”  Id. at 17.  While often couched in possibilities, the analysis raises numerous interesting issues. Part 3 is the Recommendations to Regulators.  There are three and we focus there.  First, Ceres recommends “implement[ing] mandatory disclosure annually, and mak[ing] survey responses publicly available."  Id. at 50.  We take no position on whether NAIC should require climate change disclosures and would be interested to read NAIC’s own evaluation of the disclosures and how they advance the goals of insurance regulators.  As for public disclosure, while we are perhaps more interested than most in these types of things, we are acutely sensitive to the issue of competitive advantage.  There will be winners and losers in the insurance industry as a result of climate change.  The winners will be those who, among other things, recognize correlated risks first, have more accurate models, and innovate better.  Requiring companies to give away their proprietary information may lead them not to generate it in the first place. And items leading to competitive advantage are all over the NAIC submissions. Harleysville Insurance Company reports that “over time the Company has witnessed the traditional tornado alley expand causing increased losses further east and toward the southeastern states." Id. at 24. "[A] handful of insurers discuss the ways their approach to establishing reserves, reinsurance coverage or capital market transfers have been adapted to reflect changing risk statistics or future scenarios where historic statistics do not illuminate future risk."  Id. at 32. Allianz is “developing products and services geared to address climate change, ... leveraging climate change research, and contributing to related public policy development."  Id. at 19. There are a lot of things that make a business succeed.  Intellectual capital is one of them.  Just as we would not expect businesses to give out greenbacks to passersby, why should their green ideas be treated differently?  Tomorrow we will look at Ceres’ second recommendation concerning shared resources.

Climate Change | Climate Change Effects | Insurance | Regulation

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Flooding from Irene: Whither the Flood Plain?

August 30, 2011 20:50
by J. Wylie Donald
My train this morning usually continues to New York. Today it terminated in Philadelphia, a victim of the deluge delivered by Hurricane Irene. Amtrak explained: Most Northeast Regional service will operate south of Philadelphia, but no Acela Express, Northeast Regional or other Amtrak trains can operate north of Philadelphia to New York. As of early this Monday evening, about a half-mile of Amtrak right-of-way remained submerged near Trenton, N.J. As the water levels recede, Amtrak engineering forces will make repairs to the track and signal control infrastructure. Updates will continue to be provided and an estimate for restoration of full service south of New York is not yet available. Many attribute the recent spate of natural disasters (heat waves, droughts and wildfires in Texas, tornadoes in Missouri and Alabama, Hurricane Irene) to the effects of climate change. We reserve judgment. Climate change is about trends, not individual events. One trend we are watching closely is the status of flood plains. We dug up the Flood Insurance Rate Map for the Trenton train station. The Amtrak right of way mentioned above is in the 100 year flood plain. We weren't able to determine how many times it had flooded recently, but the mayor of nearby Lambertville noted that they have been flooded out 5 times in the last ten years.   The flood at the train station was a record, nearly seven feet above flood stage.  Id. And  a study out of the University of New Hampshire  reports New Hampshire has experienced 4 100-year floods in the last four years.  Some may discern a trend. Fortunately, we are not the only ones watching. FEMA is in the process of preparing a report on climate change impacts on the National Flood Insurance Program. Preliminary information indicates that some Special Flood Hazard Areas (the 100-year flood plain) will double in size and that by the next century the nation's flood plain will be 40%-45% larger.  Look for The Impact of Climate Change on the National Flood Insurance Program to be out this fall. FEMA currently does not directly address climate change in the NFIP, because its practice is to make its assessment based on the historical record.  But that does not mean communities and businesses cannot.  For example, a community may request that the applicable Flood Insurance Rate Map address future conditions.  44 CFR 64.3(a)(1).  Where business continuity planning is standard practice (and we hope that is everywhere) vulnerability assessments need to ask not only where is the flood plain, but where is it likely to be.  Many have been off to a slow start on climate change planning.  But, as with trains, late is better than never. View of Trenton Amtrak right of way (c) Times of Trenton

Climate Change | Climate Change Effects | Flood Insurance | Regulation

Coal Exports and Rising Temperatures

June 13, 2011 04:33
by J. Wylie Donald
Front page news in Baltimore this past week were two stories. The first notes record temperatures in Maryland in the first full week of June, 2011.  The second was a lead article this Sunday on the record year the Port of Baltimore is having moving coal from the mines of Appalachia to the coke ovens of Asia. It does not take a Shakespeare schooled in climate change to grasp the irony. First, the weather. Central Maryland suffered four 90-plus record highs in ten days, topping out at Baltimore-Washington International Airport at 99 degrees on June 8.  The summer (which hasn't even started yet) is picking up where last year left off as being the hottest on record for Baltimore.   Now, the coal. Ships are literally waiting in line in Chesapeake Bay to get a place at the pier to load the high quality anthracite "metallurgical" coal that this part of the world produces in abundance. Freight trains deliver millions of tons to two private terminals, which load ships capable of carrying 77,000 tons of the black stuff, or even 135,000 tons.  The Port of Baltimore is on track to ship over 14 million tons this year. For comparison this is almost 3 times the pre-recession volume of just 5 years ago. More jobs, more dollars, more activity. Of course, not everyone is happy. The Sierra Club points out that shipping coal is not consistent with being a leader on combating global warming. But the Sierra Club has no present intent to attempt to interfere with exports (but they will object to increasing the size of the Port). Not so across the continent.  Seems the Asian appetite for coal is also seeking the carbon of Montana and Wyoming.  The difference is that on the West coast the only dedicated coal terminal is in British Columbia.  Washington State is seeking to build new coal terminals with the first being at Longview.  Montana interests are excited at the prospect.  In Washington, however, the Sierra Club and others are opposing such activities and have appealed the Cowitz County commissioners' approval of an application to build a new coal terminal.    Besides the usual types of challenges to mining and transport in the domestic realm, the appellants also assert that the commissioners should have studied the consequences of burning coal in Asia.  This is novel.   My colleague, classmate and Seattle Port Commissioner John Creighton shared with me the implications:  "While many in Washington State are sympathetic to the environmental community's concerns over the ultimate impact of a large dirty coal export operation on global warming, the port community is apprehensive about how such a precedent might affect the environmental review process on other port projects.  For example, in looking to permit an airport project, would we be required to go beyond the airport grounds and consider greenhouse gas emissions of a British Air nonstop all the way from Seattle to London?  On a container terminal project, would we have to trace the greenhouse gas impacts of every possible product transportable in a container?" Commissioner Creighton's concerns are well-founded.  What are the limits of environmental impact assessments?  This approach by environmental groups - looking at the entire chain of events in a particular activity - is well-tested, however.  New nuclear power was stopped in California by focusing on California waste disposal law.  See Pacific Gas & Elec. Co. v. State Energy Resources Conservation & Development Comm'n, 461 U.S. 190 (1983).  Chemical weapons disposal was challenged (unsuccessfully) by attacking the environmental impact statement and transportation across the "global commons."  See Greenpeace USA v. Stone, 748 F. Supp. 749 (D. Haw. 1990), dismissed as moot, 924 F. 2d 175 (9th Cir. 1991). So, it is hot in Maryland.  And elsewhere.  Notwithstanding the pass current coal shipping operations have in the East, the West may hold a lesson on whether this will continue to be business as usual.

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