Climate change – long term regulatory and civil liability risks

In July 2004, triggering a flood of publicity, eight US States and New York City commenced proceedings against five of the USA's largest energy companies demanding that they reduce their emissions of the greenhouse gas (GHG) carbon dioxide by 3 per cent per year for the next 10 years. Although this is bold US style litigation many argue that even if the actions fail the effects on major American GHG emitters will be significant.

It is easy for us in the UK with legislation aimed at tackling climate change coming from the EU and our own government to look upon the litigation in the USA as a result of a litigation culture and the current US government's apparent unwillingness to act. However, the evidence of significant man made climate change is increasing and rapidly becoming accepted as fact rather than mere theory. Current and historic heavy emitters of greenhouse gases (GHGs) will be considering the potential for a significant future increase in regulatory requirements or liability, for civil claims aimed at reducing emissions or seeking compensation for losses suffered and for general climate change activism. Indeed some see this as development of a dual track approach of regulation bolstered by litigation risk. The extent to which these risks will materialise may depend on developments in world politics as well as the incidence of negative and possibly catastrophic events attributed to climate change. Despite the uncertainties it is advisable to treat GHG emissions as a risk issue in the management of existing businesses and also in acquisitions and divestitures.

The US Litigation

These cases are not the first examples of climate change driven claims in the USA. Certain US States, Greenpeace and the Sierra Club have previously commenced actions against the US Environmental Protection Agency to challenge its failure to use its powers to require reductions in emissions of GHGs and, specifically, carbon dioxide.

This time the litigation is aimed direct at industry. The targets are five energy companies with 174 power stations in 20 states. They are reported to be responsible for 10 per cent of total emissions of carbon dioxide in the USA.

The claims are based on the US law of public nuisance. Importantly, the States and New York City are not seeking any monetary compensation. Instead they are asking the courts for (i) an order holding the companies jointly and severally liable in the law of public nuisance for contributing to the ongoing climate change and, (ii) an order that the companies cap their current carbon dioxide emissions and reduce their future emissions by 3 per cent per year for the next 10 years. The States claim that this can be done without affecting energy prices. The companies, on the other hand, disagree and are warning of increased prices for the US households and businesses.

If the litigation succeeds a range of other claims may follow including claims for monetary compensation. Conceivably these could include major class actions. The legal bases for claims might also expand. It is possible that cases might also be commenced under US product liability law, in some respects reflecting claims made against gun manufacturers.

Further, if the cases succeed US industry might favour the option of increased regulation, which it has been resisting to date, as at least that way the companies can be sure that their competitors are subject to the same requirements.

Applying cold legal reasoning the merits of the cases look tenuous. Significant evidential hurdles will have to be overcome and the type of nuisance alleged differs significantly from earlier public nuisance cases. However, even if the cases fail industry would be naive to think that the issue has gone away. At very least the cases will act as a marker making it very difficult for the companies involved (and also for other industrial concerns) to argue any lack of awareness or foreseeability of damage should claims arise in the future. Comments from the companies which tend to scoff at the cases' prospects of success might also be missing the point as the claims have already resulted in massive adverse publicity for the companies. The companies have responded by publicising actions or programmes they have to reduce emissions. It is unlikely that these companies will be able to avoid further scrutiny and they may well be pressured into taking more steps to reduce or offset GHG emissions.

Insurance could be a hot topic. If the US courts decide in favour of the States and New York City the companies will face legal liability to reduce emissions. Will this legal liability be a liability covered by the various insurances taken out by the companies. If so, insurers could face enormous claims. Insurers might argue that the pollution exclusion will exclude claims but will it? Importantly if the claims succeed in securing a declaration of liability claimants are likely to try and push back the date when the courts are prepared to recognise that damage became foreseeable and insurers might then find claims arising under older insurance policies for historic emissions.

The Climate for Claims

The drivers for an increase in regulatory and civil liability and general climate change activism are not only present in the USA. Worldwide there has arguably been a lack of effective action at both international and national levels to address the problem of climate change. While climate change is the driver behind a great many UK and EU laws and policy initiatives the scientific consensus appears to be that the current emissions reductions programmes will be too little too late.

Governments have been making efforts at an international level notably at the UN Framework Convention on Climate Change of 1992 and in drawing up the 1997 Kyoto Protocol to try and create concerted action to reduce emissions of GHGs. It is alleged by many that those efforts have been undermined by the decisions of certain nations that are responsible for a large part of the world's GHG emissions not to ratify the Kyoto Protocol. At present the world is awaiting Russia's decision on whether to ratify the Kyoto Protocol. If Russia does this then the requisite number of nations will have ratified the Protocol so that it enters into force. Even if the Kyoto Protocol does enter into force it was generally recognised as a significant compromise and merely a first step towards what is required. On its own it is unlikely to be enough.

The UK government has been a proponent of action to prevent or slow climate change. However, the UK emissions trading scheme (ETS) has been the subject of a great deal of criticism from some quarters for paying major emitters to make emissions reductions that they were legally obliged to make anyway. It is also questionable whether the UK government's motivation for establishing the UK ETS was really about slowing climate change or rather establishing the UK as the centre of emissions trading.

Even the EU ETS, due to commence on 1 January 2005, and Member States' measures to implement it have been the subject of considerable criticism and, in certain Member States, legal challenges.

With governments having failed, to date, to take or agree on decisive action to deal with climate change we are already seeing increasing attempts to target industry direct. The actions in the USA against the US Environmental Protection Agency and now the five energy generators, referred to above, are not the only examples of companies being targeted otherwise than through state regulation. Similar actions, also based on public nuisance, have been commenced in the USA by not for profit organisations that own ecologically sensitive and significant sites. Again they are targeting the major energy companies and are also seeking a reduction in emissions rather than monetary damages.

In Australia company directors are also being targeted by an environmental organisation seeking to put them on notice of future regulatory action or litigation against their companies and reminding them of their duties to shareholders to assess and react to risks to the company. The aim seems to be not only to create awareness and potentially achieve some action but also to prevent companies from subsequently raising arguments based on lack of knowledge or foreseeability should claims arise or tougher regulatory powers be developed.

Similar pressure is being brought to bear by the Carbon Disclosure Project which requests and coordinates information for a number of large investors on companies' approaches to managing climate change risks.

Are UK companies at risk: civil claims, increasing activism and tougher regulation?

As mentioned above, the claims emerging in the USA are based in the US law of public nuisance. However, some commentators and academics are predicting that a wider range of tort and product liability claims will become viable.

The UK courts are said to be less open to developing tort law to allow civil claims to succeed than the US courts and public nuisance in the UK cannot be used in the same way as in the existing US cases. Lawyers in the UK can point to a number of obstacles to proving a case in negligence or perhaps common law nuisance or statutory nuisance in the UK. However, if incidents attributed to climate change increase in severity and frequency it is certainly conceivable that the courts will develop jurisprudence to provide remedies.

Probably the most obvious obstacle that any lawyer would point to is the need to establish causation. Most of the immediate causes of damage in climate change cases would be natural phenomena. Clearly it is likely to be difficult to establish that, for example, a storm or series of storms are caused by climate change. It would also be difficult to then establish that the emissions of particular defendants caused that climate change and therefore the storms (i.e. is it necessary to prove that a particular company's carbon dioxide emissions cause particular damage?). However, the courts in the UK have shown themselves ready to respond to particular problems. If the available evidence increases the courts may be prepared to accept statistical evidence such as on the incidence and scale of storms. The courts have already developed the concept of material contribution to risk in order to establish liability in mesothelioma cases. To apply the same concept to climate change would be a very large step because, unlike mesothelioma, climatic events cannot be distinctly linked to a particular type or level of emissions and could have a wide range of contributing causes. Nevertheless it is not inconceivable that the courts will be prepared to establish causation if frequent or major climatic events create the need for legal remedies and the scientific evidence linking them to man made GHG emissions continues to grow.

Other difficulties would arise in UK in negligence cases. These include are the need to establish that the companies owe a duty of care to those who suffer loss as a result of climate change and to establish from when it was foreseeable that the emissions could cause climate change and therefore damage. While individual companies may have made a significant contribution to emissions throughout the 20th century only a small proportion of those emissions may be attributable to the time from when it can be said that the company knew about the risk. This same issue is presumably behind the decision of the US States and New York City's decision to demand emissions reductions on a prospective basis rather than, or as well as, damages.

A further point to consider is the fact that climate change is a truly global issue. Even if claims in the UK courts do not succeed it may be possible for claimants to forum shop and bring claims in other jurisdictions such as the USA where claims might have a better chance of succeeding. Of course, for forum shopping to be successful not only will the local courts have to be persuaded to accept jurisdiction but the claimants will have to be able to enforce any judgement in a jurisdiction where the defendants have assets or operations.

While, arguably, civil claims in the UK and the other EU Member States might be less likely to succeed than in the USA both the UK government and the EU have shown that they are prepared to take regulatory measures that are unpopular and costly for industry. If climate change proves to be causing significant costs for society the possibility should not be ruled out of a tough regulatory approach perhaps even imposing some kind of retrospective liability on major emitters of GHGs.

Risk Assessment and Pre-emptive Action

Companies would therefore be well advised to consider their current and also historic GHG emissions and consider whether steps over and above those required by current regulation are needed. When acquiring or investing in companies, current/historic GHG emissions, steps to reduce emissions and the public relations profile of the company may become important due diligence factors. Companies can also take steps to ensure that they are well prepared to defend the sorts of civil claims, particularly multi claimant actions that may arise.

For further information please contact Paul Sheridan on +44 (0) 207 367 2186 or at [email protected]; or Daniel Chappel on +44 (0) 207 367 2810 or at [email protected]