Bank of America’s climate finance division has warned that the increasing momentum toward a clean economy (The U.N.’s top climate official, Christina Figueres, said “It is unstoppable. No amount of lobbying at this point is going to change the direction.” She also indicated that 155 countries have put forward plans covering 88% of global CO2 emissions in advance of the Paris climate gathering later this year.) creates a “significant” – though “uncertain” – risk for lawsuits against third-party liability insurers for damage suffered due to climate change. Such lawsuits, if successful, would essentially place a price on carbon that could no longer be ignored.
There has been significant hesitation in the past to place a price on carbon (A global price on carbon failed to pass at the Copenhagen climate summit in 2009.), but a lawsuit against a company for polluting with CO2 emissions could effectively do just that.
Assigning compensatory monetary damages to a company for their emissions creates an implied carbon price. The price is based on the negative consequences caused by the emissions – which is exactly what a carbon tax would seek to do outside of the legal system. Such monetary damages would make companies accountable for their pollution – it would no longer be free to pollute, so companies would need to re-evaluate “business-as-usual.” In economics, freely being able to pollute is considered a negative externality (an activity that imposes a negative cost on society but does not cost anything for the polluter). But, assigning a price to that pollution internalizes the negative costs associated with pollution, forcing companies to acknowledge the full societal costs of their activities.
And when you think about it, this accountability seems reasonable, right? If someone spilled toxic chemicals that got into your water and made you sick, you would expect the spill-er to be held accountable and pay for any damages. Carbon emissions cause significant damage to society, so why should they be treated any differently? The real linchpin will be the ability to prove specific damages were caused by a company’s emissions. However, the U.N. is evidently already working on ideas for compensation due to climate change-related damages.
When carbon emissions are viewed as an externality, placing a price on them seems quite reasonable, so it’s disappointing to see a carbon price meet with so much resistance in the regulatory arena. But, the first successful climate change lawsuit will in effect determine a price for carbon, and that price will trickle into business operations – whether businesses want it to or not.