Liebreich: Climate Lawsuits – An Existential Risk to Fossil Fuel Firms?

By Michael Liebreich
Senior Contributor
BloombergNEF

As I fly in to New York for Climate Week (I know, flight-shame, more on that later), I have been reading about the bankruptcy of Purdue Pharma. Over the past 20 years the company has been hit with over 2,600 lawsuits because of the central role its Oxycontin painkiller played in the opioid crisis sweeping the United States.

For years Purdue fought the lawsuits, claiming that its products were legal, highly regulated, sought out by users and prescribed by doctors. However, it also undertook aggressive marketing campaigns and contributed to a decade of industry lobbying to the tune of around $90 million per year and employing an average of 1,370 lobbyists.

Last week Purdue reached a tentative settlement with most of its accusers, under which it would enter Chapter 11, put all its assets into a trust, and pay out up to $12 billion over time to states and individuals, including a $3 billion contribution by its majority owners, the Sackler family. Climate campaigners will no doubt be poring over the Purdue Pharma case study for lessons.

The first known lawsuit relating to climate change dates back to 1986, when the Natural Resources Defense Council and the City of Los Angeles sued the National Highway Traffic Safety Administration for not undertaking an assessment of climate change impacts before enacting a change to the vehicle mileage “CAFE” standards.

The lawsuit, which was eventually dismissed, is the earliest entry in a database of climate change-related cases maintained by the Sabin Center for Climate Change Law, part of Columbia Law School. As of today, it contains no fewer than 1,380 entries – 1,075 domestic U.S. and 305 international cases. The figures include, to be fair, some fairly peripheral lawsuits, as well as retaliatory actions filed by fossil fuel companies. What is clear, however, is that the pace of activity is accelerating: 90% of cases were filed in the past 10 years.

Irritant or worse?

The big question is whether climate lawsuits represent an irritant to fossil fuel companies, a meaningful drag on their business, or an existential threat.

Most of the lawsuits in the Sabin database are not directly about the impacts and costs of climate change mitigation or adaptation. Indeed they cover a bewildering variety of laws – the U.S. ones alone invoke 200 different Federal and State statutes, running the gamut from Administrative Procedures to Unjust Enrichment, and were filed with no fewer than 222 different Federal and State courts or agencies.

The most commonly -cited laws in the database are the U.S. Federal Clean Air Act (195 cases), the California Environmental Quality Act (149 cases), the U.S. Endangered Species Act (113), and U.S. Federal and State Freedom of Information Acts (71). Securities law and financial regulations have been the focus of 34 cases, with the majority dating to the past three years.

The international cases range across 29 different countries and a dozen multilateral courts or other bodies. Australia leads in terms of volume with 95 cases, followed by the U.K. (48 cases), EU (43 cases) and Canada (18 cases). International plaintiffs may have started filing complaints more recently, but the number of international cases is now growing faster than U.S. ones.

Eye-catching, but not systemically threatening

Only a tiny minority of the cases in the Sabin Center database have received much press coverage, often because they are veritable David versus Goliath battles. In 2008, the Alaskan village of Kivalina filed suit against ExxonMobil and other oil producers, demanding compensation for damage that they claimed was caused by climate-related sea-level rise and melting of permafrost. Kivalina’s arguments were rejected by the courts. The Pacific Coast Federation of Fishermen’s Associations is attempting to hold Chevron Corporation and other fossil fuel companies accountable for prolonged closures of the Dungeness crab fisheries off California and Oregon that provide their members’ livelihoods. They claim that climate change, caused in significant part by the defendants’ products, is responsible for the algal blooms which have been turning their catch toxic.

A few cases have yielded verdicts that have set important precedents. The 2003 suit by Massachusetts against the Environmental Protection Agency resulted in the 2007 Supreme Court decision that carbon dioxide is a type of pollution and must be regulated by the EPA under the Clean Air Act, a monumental victory for climate activists that many supporters of President Donald Trump would dearly love to see reversed today. Activist joy turned to dust in 2011 when the Supreme Court ruled in AEP versus Connecticut that utilities – and by extension fossil fuel companies – cannot be sued under State nuisance laws for damage caused by greenhouse gases because their emission is regulated at the Federal level by the EPA.

Another case that periodically hits the headlines is Juliana versus United States, named after one member of a group of 21 young people who – marshalled by U.S. non-profit Our Children’s Trust – in 2015 filed a constitutional suit against the U.S. government, asserting that it was violating their right to life and liberty by allowing greenhouse gas emissions to grow virtually unchecked.  In 2016 the U.S. District Court of Oregon ruled that access to a clean environment was a fundamental right, a finding the U.S. government has been disputing ever since – twice securing decisions from the Supreme Court to delay the case but so far not managing to get it dismissed.

A slice of tort with your CAFE standards?

Perhaps the most significant category of cases in terms of potential damages are those in the area of tort law called “nuisance”. A growing number of plaintiffs claim that, despite knowing about the damage that would be caused by climate change, fossil fuel producers nevertheless campaigned to throw doubt on the scientific evidence, while massively ramping up their sales of coal, oil and gas – in the process causing significant harm to the plaintiffs.

In July 2017, three local governments in California (San Mateo County, Marin County, and the City of Imperial Beach) filed suits in California Superior Court alleging nuisance (among other things) against a long list of defendants headed up by oil majors Chevron, ExxonMobil, BP, Shell, Citgo, ConocoPhillips, Total and ENI, plus Peabody Energy, Arch Coal and Rio Tinto – together responsible for over 20% of global greenhouse gas emissions since 1965 – as well as the American Petroleum Institute (API), the American Coalition for Clean Coal Electricity, the National Mining Association and other industry bodies.

Over the past two years, the case has gone through a mind-numbing series of hearings, appeals, letters and amicus briefs (by which third parties can voluntarily align themselves with one side or other of a case), most of them focusing on the single issue of which court, if any, has jurisdiction. In general, U.S. nuisance cases are heard at the state level, but the defendants are desperate to have them transferred to Federal courts, knowing that the 2011 AEP versus Connecticut finding makes a nuisance ruling against them extremely unlikely. The case is set to be heard by the Federal Court of Appeals for the Ninth Circuit District Court either late this year or early in 2020, but appears unlikely to succeed.

A similar case, also filed in 2017, saw the cities of San Francisco and Oakland file a nuisance case against BP, Chevron, ExxonMobil, and Shell. After a year of wrangling over jurisdiction it was dismissed by the California Federal Court, but not before the U.S. government stepped in to assert that it has “strong economic and national security interests in promoting the development of fossil fuels, among other energy resources.” The plaintiffs immediately appealed the dismissal, supported by 10 other states including New York and California; the appeal will soon be heard by the same panel of the Ninth Circuit as the San-Mateo-Marin-Imperial-Beach case, but it too is expected to be dismissed.

Rhode Island and Baltimore have had more luck – so far at least – with a case they filed in July 2018 against a list of oil and gas companies operating in the state and responsible for nearly 15% of global emissions between 1965 and 2015, along with the American Petroleum Institute and other oil and gas industry associations. Once again, the defendants asked for the case to be redirected to a Federal court, but in July this year Rhode Island District Court ruled that they had failed to present a compelling case. The defendants have asked for a stay, pending an appeal of that decision.

World tour of significant litigation

Of the international lawsuits in the Sabin Center database, one has already yielded a potentially significant preliminary verdict. In 2015, the Urgenda environmental charity and 900 citizens sued the Dutch government, demanding that it increase the country’s emissions reduction target vis-à-vis 1990 levels to 25% by 2020, contending that the existing 17% target did not constitute a fair contribution toward the country’s Paris Agreement commitment.

The District Court found in favor of the plaintiffs, based on Article 21 of the Dutch Constitution, which states: “It shall be the concern of the authorities to keep the country habitable and to protect and improve the environment.” The Dutch government also lost an appeal against the verdict in the Hague District Court in October last year; its final appeal to the Supreme Court was heard this summer and final judgement is expected to be handed down in the coming months.

As more countries pass legislation enshrining their Paris Agreement commitments in domestic law, or adopt more stringent targets such as net-zero emissions by 2020, the prevalence of this sort of lawsuit by nations’ citizens is likely to increase.

Another well-publicized international case is that of Lliuya versus RWE. Saúl Luciano Lliuya, a farmer and mountain guide from Huaraz, Peru, filed claims for nuisance in 2015 against RWE, Germany’s largest electricity producer, in a German court. Lliuya is pursuing RWE for 4.7% of the cost of protecting his property from flooding from a glacial lake being swollen by the climate-accelerated melting of a local Glacier. A lower court dismissed Lliuya’s requests for declaratory and injunctive relief and his request for damages, stating that there was no “linear causal chain” between RWE’s emissions and his claim. However, the Appeal Court found that the complaint was admissible, and the case continues.

Lliuya versus RWE illustrates the enormous challenge facing climate litigants in extracting damages. The science of attributing individual events to climate change is still in its infancy. In a 2017 paper, researchers Mark Risser and Michael Wehner of Lawrence Berkeley National Laboratory estimated that climate change increased the amount of rainfall dropped by Hurricane Harvey – which caused $125 billion of damage in the Houston area in 2017 – by an estimated 38%. Say you have figured out which court has jurisdiction and won your nuisance case – which as we have seen is not at all easy – you might expect it to be plain sailing to calculate damages of 37.7% of $125 billion, or $47.5 billion, and then to divide them up between the guilty parties pro rata to their historical emissions.

But it’s not so straightforward. Supposing the flood defenses would have been perfectly able to withstand normal rainfall, and only the extra 38% led to them being over-topped – should the emitters bear 100% of the loss? Conversely, what if the flood defenses were wholly inadequate and the losses would have occurred anyway? Or suppose the emitters are about to pay up their $47.5 billion when a second paper is published, based on a different climate model, stating that climate change contributed only 20% to Harvey’s rainfall. Does everyone go back to court?

Demanding corporate responsibility in concrete form

There should be no major problem establishing the remedy if the Conservation Law Foundation succeeds in its 2016 case against ExxonMobil. It is suing the company for allegedly failing to protect its marine terminal on the Mystic River in Massachusetts against climate-related risks. The low-lying terminal is likely to be heavily contaminated after many decades of industrial use, and at risk of flooding in the event of a severe storm.

In the past, if hit by a storm, a company may have simply argued force majeure. But as climate science and weather forecasting have improved, it becomes much harder to claim that storm flooding is an unforeseeable act of god. Shareholders have the right to expect that management take into account best available science; insurers are unlikely to cover claims for assets left exposed in the face of incontrovertible evidence of mounting risk.

ExxonMobil appears to be caught between denying that it is in possession of information on flood risk to its Mystic River site – opening it up to charges of negligence (or worse if evidence to the contrary emerges) – and admitting knowledge, but being found to have breached its duty of care to employees, investors and local residents by failing to act on it.

If ExxonMobil loses, it will be forced to invest considerable sums in flood protection at Mystic River, but the implications could have much wider implications across almost all energy, industrial and real estate companies.

Potential violations of securities law

Defending some of the suits that have been filed against them will require fossil fuel companies to claim they did not know about climate risks. Others, however, require them to claim they had diligently researched the science of climate change in order to fulfill their fiduciary duties and disclose material risks. The more documents they are forced to disclose during any of the cases against them, the harder it will be for them to thread the needle between competing claims of ignorance and knowledge.

Much troubling information, however, is already in the public domain. In 2015, Inside Climate News and the Los Angeles Times published almost-simultaneous exposés based on an extensive trove of internal ExxonMobil documents. They revealed that the company had extremely good scientific knowledge of climate science dating as far back as the 1980s – indeed it had made important contributions to developing the discipline – yet publicly continued to downplay climate risks and fund an operation to cast doubt on the science as recently as the mid-2000s.

The Securities and Exchange Commission opened an investigation in 2016 into the question of whether investors had been misled, examining over 4.2 million documents. It closed it two years later without laying charges, although their closure letter included standard terms stating that this should not be construed as exonerating the company.

In 2017 two Harvard professors, Geoffrey Supran and Naomi Oreskes, published a peer-reviewed analysis of ExxonMobil’s climate change communications between 1977 and 2014. They found that around 80% of papers published by Exxon scientists relevant internal documents to which they had access acknowledged that climate change was real and caused by humans. But over 80% of Exxon’s advertisements and advertorials targeting the general public projected doubts about climate change. In the words of Supran and Oreskes: “Exxon Mobil contributed quietly to the science and loudly to raising doubts about it.” In an emailed statement, Exxon described the paper as “inaccurate and preposterous.”

The question could soon be examined in court, because of a fraud case launched in October 2018 by the New York Attorney General, alleging that ExxonMobil had deceived investors over the risks posed by climate change regulations to its business. ExxonMobil spokesman Scott Silvestri, in an email to Bloomberg News last year, called the lawsuit “tainted” and meritless. “These baseless allegations,” he said, “are a product of closed-door lobbying by special interests, political opportunism and the attorney general’s inability to admit that a three-year investigation has uncovered no wrongdoing”. The case is set for trial beginning October 23 this year.

High stakes

The stakes in all this could scarcely be higher, though there is very little agreement on precise figures. In June this year, CDP presented analysis showing that the world’s largest companies were at risk of $1 trillion of climate-related damage. A Carbon Tracker study in 2015 found that fossil fuel companies risked investing more than $2 trillion over the coming decade in projects that could prove worthless in the face of international action on climate change and advances in renewables. A report in April this year by The Network for Greening the Financial System, a group of central banks working to manage climate risks, cites figures from the International Energy Agency and International Renewable Energy Agency ranging between $4 trillion and $20 trillion. All these figures fade into insignificance when compared with those in a recent Tyndall Centre briefing note for the t IPCC, which claims that the damage from 1.5°C of warming by the end of the century would be $54 trillion in today’s money, for a 2.0°C increase it would be $69 trillion, and a 3.7°C increase a stunning $551 trillion – more than all the wealth and assets in existence today.

What we do know, from a 2017 report based on CDP’s Carbon Majors Database is that the 25 largest corporations and state entities have been responsible for over half of global emissions since 1988. The top 100 accounted for 71%.  Leading the list of publicly-quoted emitters were ExxonMobil, Shell, BP, Chevron, Peabody, Total, and BHP Billiton – along with about-to-be-quoted Saudi Aramco. The market capitalization of all quoted fossil fuel companies is just around $2.5 trillion, less than even fairly conservative estimates of expected economy-wide climate damage in a 1.5°C warming scenario.

So if fossil fuel companies are ever found liable for the full extent of climate damage that could be caused by their products, and expected to make reparations, they would immediately be insolvent.

Lessons from the tobacco industry

If the idea of the potential bankruptcy of major oil and gas companies sounds fanciful, remember the fate of Purdue – driven to Chapter 11 last week by the cost of settling its opioid litigation.

It is far from the only example. In 1982 Johns Manville, long the global leader in asbestos-containing building products, entered Chapter 11. Dow Corning was forced into Chapter 11 in 1995 after it was hit by 20,000 lawsuits involving 410,000 litigants over its silicone breast implants.

If the oil majors appear to be at a whole different scale, so too does the potential impact of climate change as described in the scientific literature. And while a decade ago oil and gas companies lay visibly at the heart of the economy in every way, today they make up just 4% of the market capitalization of PwC’s Global Top 100, against 15% each for consumer services, telecommunications and healthcare.

The world’s big tobacco companies managed to avoid bankruptcy in 1998 by signing a $206 billion ($324 billion in 2019 money) Master Agreement with U.S. states that were suing them to recover healthcare costs. The companies calculated that it was worth doing a deal in order to remain in the cigarette business and they are still highly profitable today. Before citing the tobacco settlement as a template for the fossil fuel industry, activists would do well to note that it is only the ongoing sale of cigarettes that funds continuing payouts. No more unabated emissions, no reparations.

It is not implausible – particularly if they start losing nuisance cases and there is a pile-on of copycat cases and class action suits – for fossil fuel companies’ climate exposures to snowball very rapidly. This may be one of the reasons driving them to support a carbon tax. Yes, it helps them bolster their social license to operate, but behind the scenes you can be sure they are arguing for indemnity from nuisance claims as part of a grand carbon pricing settlement.

In defense of fossil fuel producers – a philosophical postscript

There is no doubt the oil majors will continue to defend themselves vigorously. Ted Boutrous, who represents Chevron but also frequently speaks on behalf of other oil and gas defendants, sums up their position: “Chevron accepts that the IPCC [Intergovernmental Panel on Climate Change] has reached consensus on science and climate change,” but says “it’s a global issue that requires global action”. He rejects the idea that civil lawsuits are the right way to change fossil fuel companies’ behavior or accelerate climate action, arguing that the IPCC agrees it is fossil fuel demand that has led to rising emissions, not fossil fuel supply.

Boutrous’s point cannot be ignored. After all, even climate activists are confused, placing guilt simultaneously on fossil fuel producers, consumers and every player in the value chain in between.

If I fly off on a weekend break, to what extent am I liable, or is it the airline’s fault for offering me a cheap deal? Or is it the fault of the oil company which sold the jet-fuel? What about the government of the country which produced it, or the government which failed to tax it? To what extent are the banks which financed the airline and the oil company guilty? What about the asset managers who hold their shares, or the asset owners who chose the asset managers? Does the calculus change if my flight is for work? Or to attend a funeral? Are these even legal questions?

In the end, whether fossil fuel companies and their investors are forced to disgorge their profits will come down to how they are judged by society. As long as the consensus view among the public is that the pollution caused by their products has been a reasonable price to pay for massive improvements in human wellbeing, it is hard to see them being effectively nationalized and their surplus directed at generating reparations. There may be a little more momentum behind directing them to invest in building a new clean energy system.

So while the rising tide of climate-related lawsuits is certainly more than an irritant, with significant potential to raise costs and increase fossil fuel companies’ cost of capital, it does not yet represent an existential threat.

Finally, let’s get back to my flight. Unlike Greta Thunberg, I wasn’t able to hitch a ride on a passing racing yacht. If I’m flying to Climate Week to do my bit to accelerate action on climate change, surely that means I get a free pass?

Michael Liebreich is founder and senior contributor to BloombergNEF. He is on the international advisory board of Equinor. He is a former advisor to Shell New Energies.

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