Should Rich Nations and Fossil Fuel Companies Pay for their Climate Damage?

Published on: 28 October 2022
by KnowESG
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Pakistan was hit by devastating flooding in August. The enormous monsoon rains killed over 1,500 people and cost the inundated country more than $30 billion (£27 billion). New scientific research found that excessive rainfall was "likely increased" by climate change.

The link between greenhouse gas emissions and current extreme weather events is now well established. Because of climate change, floods in Pakistan, cyclones in Madagascar, and droughts in Somalia are getting worse and happening more often.

They have caused death, destruction and a lot of damage to the economy. This has put governments in debt and taken funds away from critical areas such as healthcare and education.

As climate concerns grow more prevalent in our lives, many say that the countries and companies responsible for the pollution in the first place should bear the financial burden.

So, what if we lived in a world where polluters were indeed held accountable for the climate damage they caused? How much would they have to pay, and would this be the end of the fossil fuel industry? Will this funding ever be able to repair the damage? And does this mean that the world's most vulnerable countries will be able to recover from climate disasters and adapt to looming threats?

Who should pay for climate-related losses and damages has become a major geopolitical issue and is likely to be one of the most important topics of discussion at the upcoming Cop27 climate talks in Sharm el-Sheikh, Egypt, in November.

By 2030, vulnerable countries are estimated to incur $290–580 billion (£260-520 billion) in annual climate "residual damages" – damages that cannot be avoided through adaptation measures. The overall cost of loss and damage might reach $1-1.8 trillion (£890 billion-1.6 trillion) by 2050.

In recent years, UN Secretary-General Antonio Guterres has spoken out more and more about how unfair climate change is. He has called the climate crisis a "case study in moral and economic justice." He argues that "polluters must pay" because "vulnerable countries need meaningful action."

Responsibility for climate change can be seen on several different levels—the actions of governments, companies, communities, and individuals can all be linked to emissions.

This year, a study from Dartmouth College in New Hampshire, US, was the first to look at how much each country is to blame for the climate crisis. It concluded that emissions from the US, the world's largest historical emitter, cost the world more than $1.9 trillion (£1.6 trillion) in climate damage between 1990 and 2014. China, Russia, India, and Brazil, the next four largest emitters, caused another $4.1 trillion (£3.6 trillion) of damage to the world economy during the same period. Combined, these losses are equivalent to around 11% of yearly global GDP.

Justin Mankin, co-author of the study and assistant professor of geography at Dartmouth College, said, "The science shows that if one country can have detectable damages; one country's foregoing [of] emissions can have detectable benefits. That's really essential… it overturns this narrative of 'what can one country do?'"

If governments were serious about covering the costs of this damage, they could set up a loss and damage finance facility under the UN Framework Convention on Climate Change (UNFCCC) - the UN's climate change body - into which they would pay their fair share, according to Sadie DeCoste, an organiser for Tipping Point UK, a non-profit working on climate justice. According to her, the fair share might be computed based on their past and ongoing contribution to world emissions.

The fund would be more "accountable and transparent" if it was part of the UNFCCC process rather than an external organisation, according to DeCoste. She said, such a fund should not be based solely on voluntary commitments made by countries who are more inclined to pay.

The world's most climate-vulnerable countries have asked for the establishment of such a facility, which would analyse countries' requirements following a climate calamity and request particular payments from governments based on factors such as their role in global warming. Rich countries have thus far resisted these efforts, claiming that humanitarian aid is sufficient to address the problem.

Companies that use fossil fuels are also increasingly being held accountable for their greenhouse gas emissions. According to a 2017 CDP report, just 100 fossil fuel companies are responsible for 71% of all worldwide greenhouse gas emissions since 1988. Another study, conducted by the consultancy Profundo and the non-profit Transport and Environment, revealed that Europe's five largest oil companies have caused $13 trillion (£11.5 trillion) in damage over the last 30 years, including pollution, deteriorating public health, and carbon emissions. These companies profit enormously from the extraction and sale of fossil fuels, which have contributed to increasing temperatures and intensified catastrophic weather events.

If the world's largest fossil fuel firms were held accountable for these emissions, they could be obliged to pay an annual sum into a polluters-pay climate fund based on their part of global carbon pollution emitted over the last 20 years. This could assist underdeveloped countries in dealing with the effects of climate change and the costs of shifting to renewable energy.

Polluters might also be forced to pay for any ongoing emissions through a worldwide tax on fossil fuel extraction, as advocated by a group of climate-vulnerable countries. Companies would be taxed for every tonne of coal, oil, or gas extracted. Starting at a low rate and gradually increasing each year, such a tax might raise billions of dollars to assist countries in rebuilding and recovering from disasters.

"[A climate damages tax] is a method of imposing accountability and responsibility," DeCoste explains. It starts a discussion about how polluters can provide vulnerable countries with enough funds to adapt to climate dangers, she says.

Some countries are already considering taxing windfall gains made by fossil fuel companies as a result of high energy costs. Some of the funds produced by such a tax may be used to assist vulnerable areas in recovering from extreme occurrences like droughts and floods. However, a significant short-term limitation is that windfall taxes on fossil fuel firms are only designed to be temporary. "We need to guarantee that fossil fuel firms are taxed properly and consistently over time, not simply with one-time windfall taxes," says Olivia Hanks, climate justice lead of the British Christian group Quakers.

However, because governments must also define a timeframe for the rapid phaseout of coal, oil, and gas, Hanks believes that fossil fuel taxes would only support climate losses and damages temporarily, implying that additional sources of funding will be required to compensate for climate damages.

Industries that utilise a lot of fossil fuels, including aviation and bunker shipping, might also be taxed to provide the revenue needed to compensate those affected by climate change. Unsustainable behaviours, such as frequent travelling and consuming red meat, might also be taxed to help countries affected by climate change, according to DeCoste. The most polluting behaviours are related with the lifestyle of a tiny number of individuals with very high incomes - for example, just 1% of the global population is responsible for 50% of flying emissions, whereas 90% of people have never flown.

According to some researchers, airline travel charges that increase with each extra flight taken are a "fair, practical, and reasonable" means to raise loss and damage payments. They could generate up to $5-10 billion (£4-9 billion) per year, be easily collected at international flight departures, and be channelled to vulnerable communities via international bodies such as the Green Climate Fund, which was established to assist developing countries in reducing emissions and adapting to climate change.

Redirecting public funds that are currently supporting polluting activities to individuals suffering from the effects of climate change could also make a significant difference. According to a recent analysis, governments throughout the world presently spend a staggering $1.9 trillion (£1.3 trillion) every year on environmentally harmful subsidies such as support for fossil fuel production and intensive agriculture. This equates to roughly 2% of yearly global GDP - money that could, in many situations, be used to assist victims of climate calamities.

Governments would play a significant role in allocating money in these ways, but the courts are another crucial avenue for victims of climate calamities to seek compensation. Recent advances in the science of "climate attribution" are particularly critical in this context.

"Climate attribution allows us to quantify the contributions of specific fossil fuel producers to impacts such as global average temperature increase, sea level rise, and ocean acidification," says Kathy Mulvey, campaign director for climate accountability at the Union of Concerned Scientists in the United States.

According to Richard Wiles, head of the Center for Climate Integrity, a US-based advocacy organisation that works to hold polluters accountable, ongoing scientific improvements in this field will allow lawyers to file more lawsuits against polluters. (Learn more about why climate lawsuits are on the rise.)

According to Wiles, one 2014 report was particularly influential in initiating additional legal actions against polluters. The Climate Accountability Institute's Richard Heede authored the study which demonstrated a causal link between the behaviour of fossil fuel firms and climate impacts. It identified 90 fossil fuel and cement firms, called the "carbon majors," as being collectively responsible for 63% of world emissions since the industrial revolution, and specified the share of emissions attributed to each of these companies.

"This was crucial in getting [legal] matters started," Wiles explains. "[As a lawyer], you must be able to establish, with statistics, that Exxon was liable for a share of those damages and that the firm you're accusing of crimes can actually be proven to have contributed to the damage."

A representative for ExxonMobil said that the company has "long recognised the reality and risks of climate change and has put a lot of resources into dealing with those risks."

"We've said that we want to operate assets with net zero greenhouse gas emissions by 2050," he says, adding that the company is making plans to cut emissions from its facilities and assets.

A lawsuit initiated by a Peruvian farmer against Germany's largest electricity provider, RWE, is a significant case that tries to use attribution science to claim for climate damages. The lawsuit is the first of its type and might establish a precedent for whether polluters should pay for climate damage on a pro-rata basis.

In the current litigation, farmer Sal Luciano Lliuya seeks to hold RWE liable for its part in melting a glacier above his hometown of Huaraz in the Peruvian Andes. According to Lliuya, RWE should pay 0.47% of the cost of erecting flood defences to protect Huaraz, which would be roughly €20,000 (£17,600; $19,600). The figure is based on the Climate Accountability Institute's update to Heede's analysis, which links this share of global emissions to RWE.

Lliuya's lawyers are relying on climate attribution science, such as a 2021 study that concluded that the melting of the Palcaraju glacier is "entirely attributable" to rising temperatures and that the changed geometry of the glacial lake and valley has "substantially increased the outburst flood hazard."

"We have a very clear picture of climate change being responsible for building this very enormous lake that now threatens a city," says Rupert Stuart-Smith, the study's principal author and an Oxford Sustainable Law Programme research associate in climate science and the law.

He believes that the influence of precedent "may imply that we will see more and more successful claims brought before courts." He says that these might be in jurisdictions all around the world and target a large number of businesses. "If firms with substantial emissions can be held accountable for their impact, that might be a game changer in many aspects for pay action [polluters paying for climate damages]."

If some more lawsuits and taxes made fossil fuel companies more responsible for the effects of their emissions, would this be the end of coal, oil, and gas?

Hanks says that it would give fossil fuel companies a reason to switch to clean energy sources like wind and solar instead of making fuels with more carbon. "The energy transition would happen much faster if polluters knew they had to pay the full cost of their actions."

Could this put fossil fuel companies out of business? Stuart-Smith says, "If polluters are held responsible for the damage their emissions cause, you could be looking at huge amounts of money." "I don't think it's unreasonable to talk about numbers in the billions of dollars. We could see payouts that are big enough to have a big effect on the profits of fossil fuel companies."

Over the last 50 years, the fossil fuel industry is thought to have made a profit of $2.8bn (£2.5bn) per day, or $1tn (£891bn) a year, for a staggering total of $52tn (£46tn). If fossil fuel companies were asked to pay for all of the damage caused by climate change, which is expected to cost $290–580 billion (£260–520 billion) per year by 2030, this is about 30–60% of their annual profits right now.

Stuart-Smith adds that lawsuits can also have a direct effect on how a polluter does business in the future. "Cases are being brought, for example, saying that corporate and national plans to cut emissions aren't good enough," he says. For example, in 2021, a Dutch court told Shell to cut its pollution in line with the Paris Agreement on climate change.

Wiles says that this has effects that go beyond the direct damage costs paid by the companies. "The real damage is to their reputation and social licence," he said. He compares this to what happened to the reputations of the tobacco and opioid industries when they were forced to talk about the health risks of their products and make key documents that showed these risks public. In the case of opioids, this information led to hundreds of new lawsuits that tried to hold the industry accountable. Wiles says that this could also happen to the fossil fuel business.

Polluters' funds would be a lifeline for countries that are at risk from climate change. With long-term financing, they could put money into infrastructure that would protect them from both fast-moving and slow-moving threats, like rising seas and hurricanes.

The money would also help countries improve their public health systems and pay for health costs caused by climate change, like the rising number of waterborne diseases.

It could also provide compensation for workers losing jobs in polluting industries. The global coal industry, for example, is estimated to lose 4.7 million jobs in the clean energy transition, while the mining industry is expected to lose 4 million jobs. Compensation could also support workers who have lost their jobs due to climate impacts, such as farmers and fishers, says Mulvey.

A lot of the energy and economic growth in many developing countries comes from fossil fuels. "But industrialisation is a dirty way to get to development," says Mankin.

Mankin says it's not clear if loss and damage funding would put these countries on a cleaner path and help them grow and adapt to climate threats at the same time. But Hanks says that loss and damage finance would give developing countries "financial and decision-making space" so they could focus on the energy transition instead of "constantly dealing with disaster after disaster without the money to do so."

People who have been permanently moved because of climate change could also benefit a lot from loss and damage finance. It is thought that by 2050, as many as 216 million people will have to leave their homes owing to a lack of water, less food from crops, and rising sea levels.

The money could also be used to fix or rebuild ecosystems like mangroves and coral reefs that have been damaged or destroyed by storms and floods. These ecosystems are very important because they protect against the impacts of climate change.

If polluters paid their fair share, would that be enough to make up for the losses communities have had to deal with? Wiles says that no matter how much is paid, it will "never be enough" because the effects of climate change will keep happening in many places.

Also, Mulvey says that there are some impact of climate change that polluters could never pay for because they can't be measured or recovered at any cost. "No amount of money can make up for some climate-related losses and damages, such as the loss of human lives, cultural heritage, animal and plant species, and ancestral lands," she says. "Money can't bring back a country's sovereignty if it has lost physical territory, like because of rising seas."

Still, polluters having to pay for the damage they cause would help fix the global climate injustice and show that those who are hurt the most by climate change aren't usually the ones who caused it.

Hanks says that it would help us think about responsibility in a different way. "It's about pointing out moral wrongs and thinking about the world and power relationships in a different way."

She says that capitalism teaches us to be competitive and that as a country, we shouldn't give money to another country and lose our strategic advantage. "But you can think in a more cooperative way and realise that if [vulnerable nations] do well, [rich countries] are more likely to do well."

Source: BBC

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