An Inequitable Economic Disaster – Watts Up With That?

By Jason Scott Johnston

Recently, the Trump Administration filed lawsuits seeking to halt efforts by some states to impose liability on fossil fuel companies for their past greenhouse gas emissions. It will likely take some years for these lawsuits to be resolved. What is already clear are the serious and senseless economic consequences that will follow if states are allowed to punish fossil fuel companies for their lawful past production. 

States are meting out such punishment in two ways. The first is through common law tort suits. Some of these suits allege that past greenhouse gas emissions from oil and gas production constitute a public nuisance. In others, states allege that fossil fuel companies lied to consumers about the potentially harmful consequences of such emissions. The second way that states are trying to punish fossil fuel companies is through what are called “Climate Superfund” laws. Such laws, already enacted by New York and Vermont and on the road to passage in states such as Maryland and California, hold fossil fuel companies jointly liable for the supposed costs of past greenhouse gas emissions. New York’s law simply sets out an arbitrary $75 billion that fossil fuel companies must pay, with each company paying a share equal to its share of industry GHG emissions over the 2000-2018 period. Under Vermont’s law, producers are liable, again according to their share of emissions, for a virtually limitless set of expenditures – including everything from new roads and bridges to “preventive health care” — that Vermont incurs to address the harms of climate change caused by fossil fuel producer emissions over the period 1995-2004.

Were a large number of states to enact laws similar to those enacted in New York and Vermont, fossil fuel companies could be facing trillions of dollars in liability for past production. These laws impose a new form of liability, one previously virtually unknown in the law, liability for cumulative past emissions. As I show in a recently published peer-reviewed analysis, such cumulative liability – de facto fines for past emissions – will severely cut present and future fossil fuel production. The supply shrinkage comes about through two channels. The first pathway is that cumulative liability will cause some currently producing fields to be shut down. Cumulative liability will cause producers to shut some (generally older) wells because the longer an oil or gas field is in production, the bigger its cumulative production and therefore liability but the lower the present value of oil and gas that remains in the ground. Eventually, liability for cumulative past production (and emissions) must be bigger than the present value of remaining, unproduced oil and gas, meaning that a field becomes a  negative net value asset and should be closed. This is true even if the price per barrel is higher than the per barrel damages. By my rough calculations, imposing cumulative liability at even a relatively low per barrel damage level could cause a substantial fraction of Permian Basin fields to become such negative value assets. 

The prospect of future cumulative liability will also reduce oil and gas supply by causing firms to delay drilling new wells. The reason is that  the cost of delaying drilling – delaying the realization of net revenues – is lower when a potentially large portion of such revenues are diverted to paying Climate Superfund or common law damages. 

Crucially,  field closure and drilling delay are supply shocks that only impact supply from firms that are actually subject to state tort litigation or “Climate Superfund” laws. These are primarily U.S. producers. But by most estimates, over 70% of global oil and gas reserves are owned and controlled by OPEC+ countries such as Saudi Arabia and Russia. State owned or controlled enterprises who produce fossil fuels in such countries will likely be completely judgment proof with respect to state tort and Climate Superfund liability. Such liability will be borne entirely by U.S. (and possibly) European producers. Even worse,  the tort theories advanced and the Climate Superfund laws passed by the states impose joint liability – meaning defendants who are susceptible to legal judgment are together jointly responsible for all fines or damages. Because liability is joint, U.S. producers will be potentially liable for harms caused by total past greenhouse emissions, even emissions from production by OPEC+ members. Indeed, climate tort liability and climate superfund laws give OPEC+ producers a new competitive advantage from increasing production – by increasing production, they not only reduce global price, but increase the potential liability of U.S. producers. 

U.S. fossil fuel production, especially from the Permian Basin, has provided an important check on the ability of OPEC+ to increase oil and gas prices. A reduction in such U.S supply caused by state climate tort litigation and state Climate Superfund laws may thus lead both to higher U.S. prices and an increased dependence of the U.S. on OPEC+ supply with very little impact on global fossil fuel production and hence global greenhouse gas emissions from such production. Against such minimal or nonexistent benefits,  such laws will likely increase U.S fossil fuel prices to consumers, reduce production and employment in the U.S fossil fuel industry, and increase  U.S. dependence on foreign fossil fuel production. They will thus stand as only the latest in the series of foolish U.S. policies whose vast costs and minimal benefits are politically justified by the cry for a “war” on climate change. 

Jason Scott Johnston is Blaine T. Phillips Dsitinguished Professor of Environmental Law, Nicholas E. Chimicles Research Professor of Business Law and Regulation, University of Virginia Law School.

This article was originally published by RealClearEnergy and made available via RealClearWire.

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