15 Jun 2011

Extreme weather events and corporate financial responsibility

Research published this week by the Carbon Trust found that only 60% of companies in the FTSE 100 have set themselves clear targets to reduce their greenhouse gas emissions.  At the same time there is increasing alarm at the recent frequency and severity of extreme weather events occurring around the world.  It is now common to speculate on the link between extreme weather and human contributions to climate change.

What is the risk that companies operating in high-carbon industries might one day be held financially responsible for part of the costs of large weather events such as floods and windstorms, and what does this mean for their investors and liability insurers?

Climate scientists are usually very reluctant to make statements linking particular weather events to anthropogenic (or 'man-made') climate change.  Climate trends are only observable based on long series of historical data, and for individual events it is difficult to quantify the additional influence of human actions against a background of natural variability in weather.

For example last year, following a period of extreme weather that included severe floods in Pakistan, major floods in China, and high temperatures in Moscow, the UK's Met Office released the following comments from Chief Scientist Professor Julie Slingo:

It's very hard to attribute any particular extreme event to climate change and, as in all cases, there is a plausible explanation for the natural variability of our weather and climate.

However, there is evidence from observations, especially in India and China, that periods of heavy rain are getting heavier.  This is entirely consistent with our understanding of the physics of the atmosphere in which warmer air holds more moisture.  Our climate change predictions support this emerging trend in observations and show a clear intensification of extreme rainfall events in a warmer world.

So, although climate change is very unlikely to have been solely responsible for the recent extreme weather, it is likely that climate change is loading the dice and shortening the odds of heatwaves and heavy rainfall events around the globe.
This response is echoed by other climate scientists in similar contexts, and partly reflects the difficulties of explaining complex probabilistic modelling to the media and the public.

Yale Environment 360 recently asked a forum of eight climate experts whether human-induced climate change is producing more heat waves, floods, and extreme weather events.  The responses highlighted a range of current approaches to the question, but also that methods of studying weather extremes are becoming more sophisticated.

In February a research team led by Pardeep Pall at Oxford University presented findings in Nature (PDF) indicating that floods in England and Wales in 2000, which damaged nearly 10,000 properties at an insurance cost of £1.3bn, were made significantly more likely by 20th-century anthropogenic greenhouse gas emissions.  The researchers found that in nine out of ten runs of their computer model the risk of the 2000 floods had been increased by more than 20% by the emissions, and in two out of three cases by more than 90%.

Professor Carlo Jaeger of the Potsdam University for Climate Impact Research was quoted on the potential liability implications of the Oxford findings:
It is extremely important that we have a method which enables us to assess fractions of probability, to assess how strongly the dice was loaded because in court, that's actually how liability issues are settled. ...

If you have an accident, a court [might] ask:  "What was the contribution of the manufacturing supplier or whatever to this accident?"  Damages are then allocated by such proportions. ...

These methods are evolving and I have no doubt that we will be able to establish fractions of attributable risk and allocate fractions of damage.
Other researchers are developing the concept of 'fractional attributable risk' as a measure of human culpability for extreme weather events.  In testimony (PDF) before a US House of Representatives subcommittee in November Dr Benjamin D Santer, atmospheric scientist at Lawrence Livermore National Laboratory, said:
We are now capable of making informed scientific statements regarding the influence of human activities on the likelihood of extreme events. ...
Computer models can be used to perform the control experiment (no human effects on climate) that we cannot perform in the real world.  Using the "unforced" climate variability from a multi-century control run, it is possible to determine how many times an extreme event of a given magnitude should have been observed in the absence of human interference.  The probability of obtaining the same extreme event is then calculated in a perturbed climate -- for example, in a model experiment with historical or future increases in greenhouse gases, or under some specific change in mean climate.  Comparison of the frequences of extremes in the control and perturbed experiments allows climate scientists to make probabilistic statements about how human-induced climate change may have altered the likelihood of the extreme event.  This is sometimes referred to as an assessment of "fractional attributable risk". ...

We now apply rigorous statistical methods to the problem of estimating how human activities may alter the probability of occurrence of extreme events.  The demonstration of human culpability in changing these risks is likely to have significant implications for the debate on policy responses to climate change.
At the moment there are two main factors militating against the development of a regime for attributing financial liability for extreme weather events.  The first is simply the difficulty of negotiating the subject in open discussion, given the scientific sensitivities and the emerging nature of the legal arguments.

Writing last month in Earthzine, Christine Shearer of the University of California Santa Barbara and Richard B Rood of the University of Michigan set out the problems involved in discussing climate and extreme weather with the media, and made some very cogent suggestions on how scientists could further better communication and understanding of the questions involved.  However this comment from an earlier article by Professor Rood identifies a key reason for wariness on the part of climate scientists:
The practice of isolating a single event and attributing that event to climate change, is one of the most effective ways of opening up scientific investigation to effective scientific criticism. A single-event attribution claim is an open and appropriate invitation to those with knowledge of or interest in local information to investigate the attribution claim. Almost inevitably this leads to identification of more sources of uncertainty, which like the Aaron versus Ruth argument, are irreducible. This necessarily contributes to controversy, and controversy is the fuel of talk radio, blogs propagating around the world, and the maintenance of doubt.
The other factor against development of a liability approach is the availability of other, arguably more effective, policy options.  While there have been several attempts in the United States to sue companies for damages attributed to climate change (most notably a suit brought against ExxonMobil by the Inupiat Eskimo community of Kivalina in Alaska), these have been regarded by most legal observers mainly as an attempt to influence the political agenda on climate change.  In the UK and European Union, where governments are more willing to regulate environmental standards, there is less motivation to seek redress before the civil courts.

This is a quote from Paulino Fajardo of international commercial law firm Davies Arnold Cooper, interviewed last year for a Munich Re newsletter (PDF):
Companies in a number of industries, and their insurers, cannot realistically claim ignorance of their emission levels and environmental impact. Compliance with mandatory and self-regulatory restrictions may be a defence, but heightened political and media interest could mean companies will face litigation following the precedents of tobacco and asbestos claims. Insurers and reinsurers must consider the real possibility that their policyholders may face different types of liability claims related to global warming.
Companies in industries with high carbon emissions may therefore be able to future-proof themselves against liability for extreme weather by taking a two-fold approach:
  • demonstrating that they are doing all they can to make their operations as clean as possible within the reasonably achievable standards and practices of their industries, by investing in new technology and working practices and documenting their progress towards reduced emissions, and
  • supporting the ongoing development of a strong regulatory framework for managing climate change, so that perceived control and responsibility for carbon emissions at the macro level remains with policymakers.