The Stern Review (the Review) concluded that (i) carbon emissions have already pushed up global temperatures by half a degree Celsius; and (ii) if no action is taken on emissions, there is more than a 75 per cent chance of global temperatures rising between two and three degrees Celsius over the next 50 years and a more than 50 per cent chance of a rise by five degrees.

With the anticipated temperature increase, the Review predicts extreme weather patterns, an increased risk of flood, a decline in crop yields, rising sea levels (which could leave 200 million people permanently displaced) and up to 40 per cent of species could face extinction.

It remains to be seen whether these long term predictions come true. However, recent years have certainly seen a dramatic increase in windstorm and flood-related losses to the (re)insurance industry. Whilst such losses have had an impact on (re)insurance rates, the global economic impact is yet to be experienced. The Review predicts that global economic output would fall between 3 per cent and 10 per cent depending upon the temperature increase.

The Climate Change Bill is being considered in the UK as a solution to the temperature increase and associated implications identified by the Review. The Bill proposes the introduction of a long-term framework for greenhouse gas emissions reductions. There are four key elements:

  1. Clarification of the Government’s longterm goal to reduce emissions by 60 per cent by 2050;

  2. Establishment of the Carbon Commission which will advise on emissions reductions;

  3. Creation of powers which will enable the introduction of emissions-reduction measures;

  4. Improvement of monitoring and reporting arrangements related to climate change.

Although the Government is now taking further steps to address issues of climate change, many query whether it is enough and if it is too late. (Re)insurers are already paying out on a regular basis for extreme weather and flooding which is indicative of climate change. An isolated UK response is also not enough.

Similar criticisms have been made in the US, where environmental groups and States claim the Federal Government is not doing enough to accept or address the problem of climate change, and so have initiated lawsuits to try and force action. An example is the lawsuit pending in the US Supreme Court against the Environmental Protection Agency (Massachusetts v EPA) seeking to force it to take regulatory action under the Clean Air Act to reduce greenhouse gas emissions from motor vehicles.

Government intervention to prevent and attempt to reverse the effects of global warming does not yet go so far as to propose a level of responsibility on polluters for historical contributions to climate change. The Review concludes that "those who produce greenhouse-gas emissions are bringing about climate change, thereby imposing costs on the world and on future generations, but they do not face the full consequences of their actions themselves". Most of the world’s producers of greenhouse gases are not public bodies, they are private companies involved in transport and manufacturing businesses. In fact, it is thought that 80 per cent of all CO2 emissions are from only 122 corporations. It is to these corporations that those directly affected by climate change might ultimately turn for redress and the (re)insurance market may end up footing the bill.

In one recent high profile case, the State of California has commenced legal proceedings against six major automobile manufacturers who are alleged to be responsible for 30 per cent of greenhouse gas emissions in California. The genesis of the State’s case is that it has had to and will need to continue to spend millions of dollars mitigating the effects of climate change and the damage suffered by the natural resources of the State. In particular, it is alleged that the snow pack in the Sierra Nevada region is reducing in size and this, coupled with rises in sea levels, will cause flooding and the reduction and contamination of the State’s fresh water supplies. To combat this, substantial investments will need to be made by the State in flood defences and to secure and supplement fresh water supplies.

A number of legal issues arise. These include:

  1. What is the nature of the legal relationship between the companies and the State in these circumstances?

  2. Was there any Federal or State legislation in place that sought to restrict or control the emission of greenhouse gases in California? If so, had the defendants complied with this?

  3. Can the State prove that 30 per cent of emissions in California came from automobiles sold by the defendants?

  4. What evidence is there that the emissions from the defendants’ automobiles caused the damage now complained of by the State?

As to any argument that the defendants have always complied with Federal/State law on emissions, to the extent that it existed, it must be remembered that legislation controlling emissions in a number of jurisdictions only came into effect during the last decade or so. In addition, issues of contributory negligence may arise in circumstances where carbon emission controlling legislation was in place but was not stringent enough and the claimant, such as the State of California, is the legislative body responsible for such law.

In any climate change litigation causation will be a particularly difficult issue. If you are hit by a car as you cross the road and suffer injury, it is clear that that injury has been caused by the impact of the car. However, if a company has emitted greenhouse gases into the atmosphere it is very difficult to link those particular emissions to, for instance, a particular windstorm and prove that those emissions caused the storm to create greater damage than would have otherwise occurred. Taking the California litigation as an example, under English law, the State would have to prove a direct causal link between the emissions of the defendants’ automobiles and the reduction of the Sierra Nevada ice pack. Query, in the absence of emissions resulting from the defendants’ automobiles, would the State still have incurred the same expenditure due to global warming generally? Stated differently, what role have the defendants played in causing a half degree increase in the world’s temperature?

That said, similar difficulties were encountered when claims were made in relation to tobacco and asbestos but advances in scientific knowledge and the willingness of courts to adapt the rules of causation have led to large payments being made to settle these claims by the companies involved and their insurers.

Governmental reaction to the Review and the progress of climate change litigation will be watched with keen interest by (re)insurers. If the litigation is successful, other States or governments may feel under pressure to pursue equivalent public nuisance actions against other producers of greenhouse gases and may feel that they themselves are legally exposed if they do not take such action. Such actions may not be limited to producers within a particular State, and cross-State actions or even multijurisdiction proceedings may be commenced against those seen to be the largest contributors.

No doubt the Californian defendants if liable will, to the extent they were insured, seek to make a recovery from their insurers. This may lead to problems in identifying which insurer is on risk and which policy is to pay out in circumstances where greenhouse gases have been emitted from cars sold over many years. The effectiveness of pollution exclusions could also be an issue. If insurance is not in place, producers of greenhouse gases may seek it in the future not only to cover any potential liability but also the cost of defending any litigation. It is not only large direct contributors to carbon emissions that are at risk. Every company that is indirectly contributing by not taking steps to be energy efficient could potentially be at risk of litigation.

Directors and officers could also be in the frame where it can be shown that they have not managed their company’s contribution to, or exposure to the effects of, climate change.

The threat of potential legal action in the US has been described as 10 times that experienced with asbestos. Given the impact of asbestos claims on the London market, climate change could have similar catastrophic effects if not properly managed and underwritten.

Clearly there needs to be an international solution to this international problem and the (re)insurance market will need to play its role in managing exposure for the damage already done whilst mitigating the future impact of climate change. As is usual with the (re)insurance market, it is stepping up to the mark by offering new innovative solutions and as ever a watchful eye should be kept on developments.

Defra Issues Consultation on Implementation of the Environmental Liability Directive

On 1 December 2006, Defra issued the first of two consultations on the implementation of the ELD (currently set for 30 April 2007). The deadline for responses is 16 February 2007. The ELD seeks to harmonise environmental liability law across the EU by establishing a framework for the prevention and remediation of damage to protected species and natural habitats, water and land. Liability for some operators is strict, for others fault based. In summary, where land has been damaged, it must be remediated to remove any significant risk of human health being adversely affected. Where protected species, natural habitats or water have been damaged, they must be returned to their baseline condition, including by way of "compensatory" and "complementary" remediation. The consultation sets out a series of implementation options together with some firm implementation proposals for comment. Draft legislation is anticipated to be the focus of a second consultation. Defra’s task of weaving the ELD’s requirements into the existing complex network of law relating to environmental liability has not been easy. Where existing domestic law is stricter than the ELD, Defra appears to propose maintaining the existing law. Where it is less strict, Defra proposes tightening it up to the extent necessary to achieve minimum compliance with the ELD (absent exceptional reasons for tightening it further). Implementation is sufficiently far advanced for businesses to start addressing their additional exposure to environmental liability, including assessing the extent to which new environmental liabilities are or can be insured against. Policies designed specifically to cover environmental risks are one option. Public liability policies may provide some coverage, although the extent of their coverage for environmental liabilities has long been the subject of debate. It seems more than likely that new liabilities arising from the implementation of the ELD, like many existing environmental liabilities, are not covered by typical public liability policies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.