Reparation for Climate Change: The Successes and Limits of Litigation
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- Helen Keller, Corina Heri
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- Reparation for Climate Change: The Successes and Limits of Litigation 073
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Part One Modeling and Valuing Climate-Related Harms
— S. 23 —Francesca Leucci
Chapter 1: Remedying the Immeasurable — The Economic Perspective on Climate Damages
1.Introduction
As the impacts of climate change intensify, the question of legal accountability has progressively moved from scientific debates to courtrooms across the globe. Most climate-related lawsuits seek declaratory and injunctive relief against state and corporate failures to address the climate crisis, while many have also been filed to claim compensation for damage. The latter seek damages due to the role of public and private actors in contributing to global warming. In light of these litigation trends, legal scholars have largely investigated issues related to the “an,” ie legal standing, and the “quo modo,” ie procedures to sue for the increase in global warming. However, the topic of the “quantum,” ie how much a responsible actor should pay for climate-related damage, remains quite unexplored in the legal scholarship. To give an example, in February 2021 the Administrative Court of Paris for the first time declared that the French State had failed to reduce global emissions and ordered it to take all the necessary measures to repair the resulting ecological damage by 31 December 2022.1 The case is well known as “l’affaire du siècle” for its expected impact on national environmental policies. However, the fact that the claimants (four NGOs) originally requested that the state be ordered to pay only one Euro as a symbolic amount of money either for moral or ecological damage did not receive sufficient attention in the legal doctrine. Drawing on the economic theory of remedies for environmental liability, the amount of damages claimed by the plaintiffs is crucial to induce polluters to optimally invest in care and accident prevention. More specifically, if polluters pay for all the losses caused to society, they receive optimal care incentives to minimize the occurrence of harms. Conversely, if the amount of monetary compensation grossly deviates — S. 24 —from the real losses, polluters do not receive optimal care incentives and more damage than what is socially acceptable ultimately occurs.2 Therefore, this chapter aims to shed light on damage calculation in climate lawsuits from a Law and Economics perspective. It first provides a brief overview of the economic theory of liability (section 2). Then, it illustrates the social costs of climate change (sections 3, 4 and 5) and the methods available to quantify them in climate economics (section 6). Three scenarios of climate-related damage compensation in litigation are then analyzed to determine whether and to what extent the employment of specific calculation methods is preferable from an efficiency perspective, particularly when compensation concerns difficult-to-quantify losses, such as those of species and ecosystems devoid of financial measurability (section 7).
1Association Oxfam France et al v État de France nos. 1904967 et al (Tribunal Administratif de Paris, 14 October 2021).
2.The Economic Theory of Liability
In the economic jargon, “accidents” generally refer to the harmful outcome (ie loss of utility) of events that neither the injurer nor the victim wanted to occur, although they might have affected its likelihood and severity.3“Accidents” occur without being intentionally induced and between parties that are not previously bound by a contractual relationship.4 Moreover, they hold a peculiar reciprocal nature, meaning that both parties (injurer and victim) are responsible for the resulting harm.5 In environmental cases, injurers (eg the polluting companies) cause harmful effects whose probability and scale could have been reduced ex ante through optimal decisions on the levels of care and activity. Other important terms to define are those of “damages” and “expected liability.”. With “damages,” we mean the amount of monetary compensation for which the injurer is legally liable towards the accident’s victims, whereas the “expected liability” is the amount of monetary compensation multiplied by the probability of paying.6 According to the theory, injurers are expected to behave optimally if the amount of monetary compensation — S. 25 —(damages) equals (or is approximately the same as) the real damage caused to the victim(s).7 If, for instance, there is more than one possible level of damage and the damages equal the actual level of damage, the expected liability will also match the expected damage8 and parties’ behaviors will be optimal.9
2Steven Shavell, Foundations of Economic Analysis of Law (Harvard University Press 2004). However, injurers must pay for all the losses they caused only under a strict liability regime, whereas under negligence the optimal magnitude of damages can be higher or lower compared to the magnitude of harm. In the latter case, injurers can avoid liability by taking due care (as long as the due care is set optimally).
3Steven Shavell, Economic Analysis of Accident Law (Harvard University Press 1987) 1.
4For instance, the decision of a victim to buy a house close to a polluting factory might raise the probability of an accident.
5Ronald Harry Coase, ‘The Problem of Social Cost’ (1960) 3 The Journal of Law & Economics 1, 13.
6Shavell, Economic Analysis (n 3).
3.The Economic Perspective on Climate Damages
From an economic perspective, climate change is a cost. More technically, climate change “has a negative aggregate effect on economic growth and welfare,”10 meaning that all the well-known impacts of climate change lead to the imposition of costs for the society.11 For instance, air pollution leads to human diseases that necessitate healthcare treatments or to shorter lives that represent a loss of social welfare, as well as individual suffering and moral damage (broadly speaking, human health damages).12 In order to understand — S. 26 —how economists look at the consequences of climate change, we may look to scholarship on the “economics of climate change” (or climate economics), which includes the economic study of the significance of such change for human well-being, on one hand, and the study of the actions taken to manage changes in the climate (like mitigation and adaptation), on the other hand.13 The goal of this section is therefore to present the state of the art on the economic impact of climate change. The first point to clarify is that, for economists, climate change is the cause of both economic and non-economic (ie monetary and non-monetary) losses. Secondly, specific methods have been developed to quantify all total costs of climate change. Yet, none of them can be regarded as fully accurate and uncontroversial. Thirdly, a concept that became crucial for policy-making is the social cost of carbon. Its computation is also quite debated. Fourthly, and in light of this discussion, the calculation of marginal abatement costs has gained momentum in climate economics. All these issues will be investigated in the following sections.
7Ibid. 236. However, under the negligence rule the optimal magnitude of damages can be even higher or lower compared to the magnitude of harm, because injurers can avoid liability by taking due care (as long as the due care is set optimally). For this reason, Law and Economics scholars agree that only under a strict liability regime economic efficiency requires that the injurers pay for all the losses they caused. See Robert C Cooter, ‘Prices and Sanctions’ (1984) 84(6) Columbia Law Review 1523, 1542; William M Landes and Richard A Posner, The Economic Structure of Tort Law (Harvard University Press 1987) 64; Richard A Posner, Economic Analysis of Law (Aspen Publishers 1986) 176; A Mitchell Polinsky, An Introduction to Law and Economics (Little, Brown 1983).On the other hand, even under negligence a too-low level of expected liability might induce injurers to prefer being liable rather than taking due care.
8Shavell, Foundations (n 2) 236. The underlying assumption according to rational choice theory is that parties have an optimal amount of information about the level of harm and they know in advance if the accident may result in more possible levels of harm.
9Louis Kaplow and Steven Shavell, ‘Economic Analysis of Law’ in Alan J Auerbach and Martin Feldstein (eds), Handbook of Public Economics, vol 3 (Elsevier 2002) 1661.
10Richard SJ Tol and others, ‘How Much Damage Will Climate Change Do? Recent Estimates’ (2000) Working Paper FNU-2, Research Unit Sustainability and Global Change. But consider that the costs of moderate global warming are not negative everywhere: “[p]oorer countries are likely to be net losers, richer countries may gain from moderate warming” (ibid. 17).
11In the words of Tol, “climate change is the mother of all externalities” (Richard SJ Tol, ‘The Economic Effects of Climate Change’ (2009) 23(2) Journal of Economic Perspectives 29, 51).
12Moral or non-material damage occurs when people (or entities) suffer in their feelings, beliefs, reputation, privacy as a consequence of an illegal act. Compensation of moral damage is allowed in many countries for both natural (individuals) and legal persons (entities), despite its non-pecuniary nature. For a Law and Economics perspective on non-pecuniary damages, see Siewert D Lindenbergh and Peter PM van Kippersluis, ‘Non Pecuniary Losses’ in Michael Faure (ed), Tort Law and Economics (vol 1, Edward Elgar 2009) 215.
4.Economic and Non-economic Losses
Traditionally, when trying to account for climate change losses, economists make a general distinction between economic and non-economic damage or losses, ie the monetary and the non-monetary.14 The former refer to goods and services traded in markets and are therefore easy to quantify in monetary terms.15
13Marshall Burke, Melanie Craxton, Charles D Kolstad and Chikara Onda, ‘Some Research Challenges in the Economics of Climate Change’ (2016) 7(2) Climate Change Economics 1650002, 1650002-1.
14In the economics of climate change, the debate specifically focused on the distinction between economic and non-economic losses is better known as the “Loss and Damage” (L&D) debate. It examines in-depth the consequences of extreme weather events. Within that discussion, the term ‘losses’ refers to monetary harms, such as damages to buildings and private property, whereas “damages” relate to non-monetary and irreversible effects, such as human health diseases, loss of life, coastal erosion and ecosystem impacts. In this article, the terms “loss” and “damage” are employed indifferently for both monetary and non-monetary consequences of climate change. For an overview of the L&D debate, see Reinhard Mechler and others (eds), Loss and Damage from Climate Change: Concepts, Methods and Policy Options (Springer 2019). See also Reinhard Mechler and others, ‘Loss and Damage and Limits to Adaptation: Recent IPCC Insights and Implications for Climate Science and Policy’ (2020) 15(4) Sustainability Science 1245, 1251.
15On 14 October 2024, the European Environment Agency reported that weather- and climate-related events caused economic losses exceeding EUR 790 billion across 38 European countries from 1980 to 2023, with a significant insurance protection gap where many losses remain uninsured. See European Environment Agency, ‘Economic Losses and Fatalities from Weather- and Climate-Related Extremes’ (14 October 2024).
Economic losses may thus include damage to land, crops, homes or infrastructure.16 Agricultural losses and damages caused by Invasive Alien Species are part of this category, given that relevant data are available and regularly updated by environmental authorities. The same applies to the expenses for climate displacement, which is the movement of people because of climateinduced changes of ecosystems and urban environments (ie costs of hotels and relocation). On the other hand, non-economic losses relate to negative impacts of climate change that are more difficult to measure and quantify in monetary terms. They may include harm to human health, loss of cultural heritage, loss of indigenous and local knowledge, and damage to biodiversity and habitats.17 Despite the large amount of evidence available in the natural sciences, research has primarily focused on the impacts of climate change on human beings rather than on ecosystem services and non-market losses. This gap in the literature on climate change is mainly due to the complex challenge of quantifying ecological losses in monetary terms but also to the difficulties of identifying causal links between climate change and ecosystem degradation.18 For these reasons, non-economic losses are often left neglected in climate risk and cost estimates (despite their probable high magnitude) and only partially or not internalized by climate policies19 (in the sense of losses — S. 28 —that count but are not counted).20 Therefore, more research is needed to represent these types of damages and incorporate them into assessments of the costs of climate change.
16Clearly, extreme weather events, such as droughts or severe floods determine a decline in economic growth with more adverse consequences in poorer regions. Let’s take an example. From June to August 2022, large parts of Pakistan were flooded as a consequence of increased monsoon rainfall due to climate change. The two southern provinces of Sindh and Balochistan received seven or eight times their usual rainfall in August. Over 33 million people were affected by the rains and resulting floods, around 1500 people lost their lives and more than 2 million houses were damaged. Preliminary estimates of losses and damages were around USD 30 billion, which included crop losses (mainly cotton and rice crops) of USD 2.3 billion, plus industrial losses, damages to infrastructure (bridges, roads, schools and health facilities), to private properties and lifesaving needs. In addition, the killed livestock and the spread of human diseases (cholera) due to stagnant flood waters had to be considered. For more information, see the scientific report by Friederike EL Otto and others, ‘Climate Change Likely Increased Extreme Monsoon Rainfall, Flooding Highly Vulnerable Communities in Pakistan’ (2022).
17For a recent overview of non-economic losses of climate change, see UNFCCC, ‘Noneconomic Losses: Featuring Loss of Territory and Habitability, Ecosystem Services and Biodiversity, and Cultural Heritage’ (2024).
18Other factors, like the management of natural resources and investments in infrastructures, may raise the risk of losses and damages. Moreover, some empirical evidence shows that losses and damages occurred even where adaptation measures were implemented, hence raising the need for more research on appropriate actions and new methods. See Mechler and others, ‘Recent IPCC Insights’ (n 14).
19The term “non-economic loss and damage” emerged in the negotiations under the United Nations Framework Convention on Climate Change (UNFCCC). For an overview of challenges and policy implications, see Olivia Serdeczny, Eleanor Waters and Sander Chan, ‘Non-Economic Loss and Damage: Addressing the Forgotten Side of Climate Change Impacts’ (2016) German Development Institute.
5.Adaptation and Mitigation Costs
All the costs mentioned above will almost certainly increase in the future, but mitigation and adaptation measures can considerably limit their magnitude. Related expenses for adaptation and mitigation may be thus deemed as an additional category of climate-related costs.21 For instance, the costs of sea level rise can be expressed as the sum of the economic value of the lost land and structures, plus the costs of coastal protection.22 More precisely, mitigation refers to actions to limit the severity of climate change impacts by reducing emissions of greenhouse gases (GHG) or enhancing the sinks of emissions.23 Adaptation is instead the process of adjustment to actual or future effects of climate change, rather than a one-time emergency response, a risk-management strategy24 to maintain human-ecological systems in “a safe operating space.”25 For instance, adaptation includes large-scale infrastructure changes, — S. 29 —building defenses to protect against sea-level rise and any measures to cope with hazardous, exposure and vulnerability effects of current and future climate change conditions.26
20Losses and damages that are difficult to express in monetary terms cannot be addressed by insurance tools either. See Laura Schäfer, Koko Warner and Sönke Kreft, ‘Exploring and Managing Adaptation Frontiers with Climate Risk Insurance’ in Mechler and others (eds), Loss and Damage from Climate Change (n 14) 317.
21For a reflection on the costs of mitigation and adaptation policies, see Richard SJ Tol, ‘The Social Cost of Carbon’ (2011) 3 Annual Review of Resource Economics 435, 443.
22Tol and others, ‘How Much Damage’ (n 10).
23Mitigation is about using new technologies, more renewable energies, more efficient energy equipment, changing consumer behaviors and storing gases through reforestation projects.
24According to the Glossary of the IPCC, adaptation options can be categorized as structural, institutional, ecological and behavioral. See JB Robin Matthews and others (eds), ‘Annex VII: Glossary’ in Valérie Masson-Delmotte and others (eds), Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (CUP 2021).
25Johan Rockström and others, ‘A Safe Operating Space for Humanity’ (2009) 461 Nature 475. The correlation between risk levels for physical, biological and human systems and climate adaptation scenarios were first analyzed and illustrated by the IPCC in 2014. See Rajendra K Pachauri and Leo A Meyer (eds), Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2014).
Despite its influence on the severity of climate damage, adaptation was initially the least explored area in climate economics.27 However, it has recently gained more relevance especially in the science-policy interface debate.28 It is important to stress that, while damages from climate change are estimated using damage functions, the debate around the proper economic method to assess adaptation is extensive and there is still little guidance on how it should be built into damage functions.29 Moreover, adaptation certainly increases public and private expenditures. Large differences between damage costs with and without adaptation surely require more research.
Lastly, it is common to distinguish between avoidable and unavoidable damages, where “avoidable” refers to those damages that can be prevented through mitigation and adaptation measures.30 For instance, the adverse effects of droughts may be prevented by planting drought-resistant crop seeds. Likewise, the damage to property caused by high tide and coastal storms may be avoided by measures to adapt to sea level rise. Yet, there are losses that are unavoidable because technical, financial or political obstacles make it impossible to mitigate and adapt. To provide an example: if sea levels continue to rise, the costs of building the infrastructure necessary to protect an island might become prohibitive. For this reason, losses are avoidable only within adaptation limits31 and to the extent that they can be efficiently prevented through mitigation measures (without too-high costs).
26European Commission, Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Forging a Climate-Resilient Europe: The New EU Strategy on Adaptation to Climate Change [2021] COM 82 final.
27Burke and others (n 13) 1650002-6.
28United Nations Environment Programme, Adaptation Gap Report 2024: Come Hell and High Water — As Fires and Floods Hit the Poor Hardest, It Is Time for the World to Step Up Adaptation Actions (Nairobi 2024).
29Anil Markandya and Mikel González-Eguino, ‘Integrated Assessment for Identifying Climate Finance Needs for Loss and Damage: A Critical Review’, in Mechler and others (2019) (n 14) 343. The authors argue that there has not been sufficient discussion on models to estimate optimal adaptation.
30Kees van der Geest and others ‘The Impacts of Climate Change on Ecosystem Services and Resulting Losses and Damages to People and Society’, in Mechler and others (eds), Loss and Damage from Climate Change (n 14) 221.
31According to the IPCC, adaptation limits are reached when adaptation is no longer able to prevent existing risks and losses. See Hans-Otto Pörtner, Debra C. Roberts and (IPCC 1995) 178). Then Fankhauser and Tol proposed the first equity weighting corrected social cost of carbon estimates (Fankhauser and Tol [n 56]). See overall Anthoff and others (n 57).
6.Methods of Damage Calculation
“A key challenge when assessing the impacts of climate change is synthesis, i.e. (…) to identify a set of indicators that can summarize and make comparable the impacts in different regions, sectors or systems in a meaningful way.”32
a. Total Damage Calculation The first studies on the total welfare effects of climate change date back to the 1990s.33 Their goal is to synthetize all physical impacts of climate change with estimates of their economic impacts34 on the gross domestic product in order to obtain the total present value of future costs35 of climate change in utility36 units.37 For that, they require specific assumptions related to future scenarios, the pattern of warming and changes in sea levels and rainfall. Moreover, they employ a variety of methodological approaches ranging from enumerative to statistical to a combination of both.38 Admittedly, none of these methods is fully accurate, as the assessment of each category is incomplete.39 From an economic standpoint, all external
others, Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (CUP 2022). The same point was already highlighted in Richard JT Klein and others, ‘Adaptation Opportunities, Constraints, and Limits’ in Christopher B Field and others (eds), Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects, Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (CUP 2014).
32Samuel Fankhauser, Richard SJ Tol and David W Pearce, ‘The Aggregation of Climate Change Damages: A Welfare Theoretic Approach’ (1997) 10(3) Environmental and Resource Economics 249, 266.
33For a review of the scholarship on this topic, see Tol, ‘The Economic Effects’ (n 11), 51.
34Physical metrics serve to measure the impact on natural systems, but when applied to systems under human management they are ultimately linked to human welfare. Therefore, indicators of human welfare changes are needed.
35The process of valuing future costs and benefits in terms of their value today (present value) is commonly defined as ‘discounting’.
36Changes in individual utility are then aggregated to obtain global welfare effects.
37Paul Watkiss, Tom Downing, Claire Handley and Ruth Butterfield, ‘The Impacts and Costs of Climate Change’ report commissioned by the European Commission (DC Environment) (2005).
38Tol, ‘The Economic Effects’ (n 11).
39Richard SJ Tol, ‘Why Worry About Climate Change? A Research Agenda’ (2008) 17(4) Environmental Values 437, 470.
effects40 should be monetized, but this is highly unlikely to occur for the following reasons. Primarily, knowledge about the magnitude of physical impacts caused by global warming is still insufficient.41 Some effects are quite certain and they have been proven by detailed modeling, such as impacts on agriculture, forestry, water, coastal zones, air quality and human health.42 Others, which may potentially be extremely damaging, are not yet fully understood and, thus, only partially or not at all included in the models. Moreover, there are what Tol defined as three “big unknowns” (extreme climate scenarios,43 the effect of climate change in the very long term44 and the impact of climate change on biodiversity45) that have been largely ignored so far simply because they cannot be sufficiently quantified.46 Last but not least, adaptation measures may be often neglected under the damage cost approach although they have the potential of considerably lowering the total costs.
b. Marginal Damage Calculation Compared to the studies on the total costs of climate change, the scholarship on marginal climate damage functions is much richer.47 These functions differ from total damage functions because they measure the incremental damage (marginal change) in just some complex sectors. In this way, they provide a more simplified and less resource-intensive basis for estimating the so-called — S. 32 —Social Cost of Carbon48 (SCC),49 which is indeed a central concept in the economics of climate change. The SCC can be simply defined as the “monetary value of the damage done by emitting one more ton of carbon at some point in time.”50 More precisely, it refers to “the change in the present (or discounted) value of economic welfare from the emission of an additional unit of CO2 (or equivalent greenhouse gas)”51 given a certain prediction of future global emissions (climate scenarios),52 of economic and demographic growth.53 The concept has been surrounded by much controversy on how it should be computed54 and a range of different values may be obtained depending on the chosen discount rate or other factors, such as the impact of extreme events.55
40“External effects” or “externalities” refer to costs (negative externalities) and benefits (positive externalities) of economic activities falling upon third unrelated parties. The most common example of negative externality is pollution.
41In addition to those effects whose magnitude is uncertain, there may be catastrophic effects (eg the melting of the polar ice caps in Greenland or West Antarctica or changes in climate subsystems) that are partially or not incorporated in the relevant analyses because their causal links with climate change is still controversial.
42The best-studied impact categories are agricultural impacts and the costs of sea level rise.
43Models are not often calibrated for higher temperature variations, plus they do not take into account weather variations that are crucial for agricultural productivity. See also Richard L Revesz and others, ‘Global Warming: Improve Economic Models of Climate Change’ (2014) 508 Nature 173, 175.
44“During the historical record, climate has varied far too little for us to be able to estimate its economic consequences, let alone predict the consequences of a change way outside anything that has ever been seen by humans” (Geoffrey Heal, ‘The Economics of the Climate’ (2017) 55 Journal of Economic Literature 1046, 1053).
45Tol, ‘The Economic Effects’ (n 11).
46Ibid.
47For a review of scholars developing climate damage functions, see James E Newman and others, ‘Climate Damage Functions for Estimating the Economic Impacts of Climate Change in the United States’ (2020) 14(1) Review of Environmental Economics and Policy 25, 43.
48CO2 is the major GHG implicated in global warming, but it is not the only one. For this reason, emissions from GHG other than CO2 need to be converted into “CO2-equivalent” emissions in order to be included in the SCC. To compare CO2 emissions and non-CO2 emissions as far as their lifetime and potency are concerned, a tool to make the different types of emissions equivalent is needed. In the EU, this is represented by the Global Warming Adapter (GWP): “[t]he GWP is a relative measure, which compares the amount of heat trapped by a certain mass of gas to the amount of heat trapped by a similar mass of CO2 over a certain period of time (eg 100 years). The GWP of CO2 is standardized to 1. In the IPCC’s latest Assessment Report (IPCC, 2013) the GWP over a 100-year time period of [methane] and [nitrous oxide] are 34 and 298 respectively. This implies that the same amount of [methane] is 34 times more potent than the same amount of CO2, when looking at a period of 100 years.” Thanks to the GWP, it is possible to compare CO2 emissions with nitrous oxide emissions, for instance, for road, rail, inland waterways and maritime transport. See European Commission, ‘Green Taxation and Other Economic Instruments: Internalising Environmental Costs to Make the Polluter Pay. Annex D’ (2021) 76. As a consequence, the social cost of carbon shall be intended as the social cost of all GHG and not only of CO2.
49National Academies of Sciences, Engineering, and Medicine, Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide (2017).
50David Pearce, ‘The Social Cost of Carbon and its Policy Implications’ (2003) 19(3) Oxford Review of Economic Policy 362, 384.
51William D Nordhaus, ‘Revisiting the Social Cost of Carbon’ (2016) 114(7) Proceedings of the National Academy of Sciences USA 1518, 1518.
52One type of scenario is the optimal one where the sum of discounted benefits minus costs is maximized; the second type is the one under the policy target of keeping global warming below 2°C; the third type is the one where no climate policy is introduced (baseline). All these scenarios can be computed by sets of Integrated Assessment Models, which are based on a lot of assumptions. See John CV Pezzey, ‘Why the Social Cost of Carbon Will Always Be Disputed’ (2019) 10(1) WIREs Climate Change e558.
53Nordhaus (n 51), 1523.
54British Department for Environment, Food and Rural Affairs, ‘The Social Cost of Carbon (SCC) Review — Methodological Approaches for Using SCC Estimates in Policy Assessment. Final Report’ (December 2005).
55For an overview of possible estimates under different scenarios, discounting rates and at different times, see the early paper: William D Nordhaus, ‘Estimates of the Social Cost of Carbon: Concepts and Results from the DICE-2013R Model and Alternative Approaches’ (2014) 1(1) Journal of the Association of Environmental and Resource Economists 273, 312. Also: Brian C Prest, ‘Disentangling the Roles of Growth Uncertainty, Discounting, and the Climate Beta on the Social Cost of Carbon’ (23 October 2023) Resources for the Future Working Paper. And: Frances C Moore and others, ‘Synthesis of Evidence Yields High Social Cost of Carbon Due to Structural Model Variation and Uncertainties’ (2024) 121(52) Proceedings of the National Academy of Sciences e2410733121.
For these reasons, it has been maintained that “no scientific consensus on SCCs can be reached for many decades, if ever”56 due to uncertainties related to the validity of sectoral models, to the emission-temperature relationship, to discounting and other causes of inaccuracy. An additional source of uncertainty is equity weighting between poor and rich countries. In economics, it is a well-known fact that the impacts (and so, the costs) of climate change differ across countries with different levels of economic development.57 This is because standard economic theory assumes a declining marginal utility with increasing levels of consumption: for the same loss of utility a poor person suffers more than a rich one and for the same increase in utility a rich person gains less utility than a poor one.58 Therefore, when calculating marginal damage functions, the different income levels and their interactions with climate impacts should be taken into account.59 The process to account for these income differences is called “equity weighting.”60
56Pezzey (n 52), 2. Some scholars argued that the early estimates of SCC provided by the IPCC (1996) for which the global costs of climate change were in the order of 1.5% and 2% of GDP were based on a “relatively small body of economic assessment studies” produced by Fankhauser, Tol and Pearce and based on US and Western European estimates. A central point of criticism was the existence of substantial differences between regions, with plausibly much higher damages in developing countries due to severe life costs (more vulnerable countries). See: David Demeritt and Dale S Rothman, ‘Figuring the Costs of Climate Change: An Assessment and Critique’ (1999) 31(3) Environment and Planning A: Economy and Space 389, 408; Samuel Fankhauser and Richard SJ Tol, ‘Figuring the Costs of Climate Change: A Reply’ (1999) 31(3) Environment and Planning A: Economy and Space 409, 411.
57David Anthoff, Cameron J Hepburn and Richard SJ Tol, ‘Equity Weighting and the Marginal Damage Costs of Climate Change’ (2009) 68(3) Ecological Economics 836, 849.
58A richer person derives less utility from extra money available than a poorer person because the curve of marginal utility is descending. This is of course true within the framework of the utilitarian welfare theory according to which human beings take “rational” decisions, ie they choose the options that maximize their utility given certain expectations based on the optimal amount of information previously gathered. See Thomas S Ulen, ‘Rational Choice Theory in Law and Economics’ in Boudewijn Bouckaert and Gerrit De Geest (eds), Encyclopedia of Law and Economics: Volume I. The History and Methodology of Law and Economics (Edward Elgar 2000) 790.
59That means weighting damage costs more in poor countries, so that they become equal to costs of the same magnitude in rich countries.
60The concept was first introduced by Pearce and others (David W Pearce, William R Cline and others, ‘The Social Costs of Climate Change: Greenhouse Damage and the Benefits of Control’ in James P Bruce, Hoesung Lee and Erik F Haites (eds), Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change
It consists of adjusting monetary values of damages with the global average discount rate or, by contrast, using regional weights.61 Scholars have pointed out that equity weighting leads to higher damage estimates than an approach where equity weighting is not considered.62
Lastly, the baseline scenario is barely considered in models of SCC, although it should be essential to determine the marginal costs of additional GHG emissions. To explain it better, some models on climate change impacts do not include the so-called status quo ante, ie the economic conditions before climate change started to have a negative impact on welfare. As a consequence, final estimates of climate change damage costs might not be so reliable and accurate. Likewise, damage functions include centennial scenarios (the impact of climate change in one hundred years) that are so fundamentally uncertain that there will always be disputes about the SCC.
Nevertheless, the SCC has been largely adopted for policy purposes63 and, namely, to estimate the optimal tax on carbon (tax internalizing the externality of carbon and bringing the market back to efficiency) or the optimal mitigation policy (where the marginal damage cost of climate change equals the marginal cost of emissions reductions or marginal abatement cost).64
7.Scenarios of Damage Calculation
After having illustrated the main economic methods to quantify climate-related damages, this section aims to analyze selected scenarios of damage compensation in climate litigation to determine whether the employment of the methods above is feasible from an efficiency perspective.
An important point emphasized by Law and Economics scholars is that the amount of monetary compensation should not grossly and systematically deviate from the total social costs of accidents.65 The economic rationale for this — S. 35 —theoretical point is that polluters tend to invest in care up to the point where the marginal cost of risk reduction (or precaution) equals the marginal benefit (avoided loss or expected liability). In other words, if the amount of monetary compensation is lower than the true harm, potential polluters will underinvest in care, which turns into underdeterrence and a higher likelihood of accidents.66 On the other hand, the achievement of a certain degree of accuracy in damage assessment increases the administrative costs of handling cases, which might discourage plaintiffs from bringing a case in the first instance.67 Therefore, from an efficiency perspective, abstract assessments should be preferred to the extent that they provide a good approximation of real losses.68 This is also applicable to climate-related non-economic losses:69 difficult-to-estimate components of harm should be replaced by average estimates to the extent that the cost of their estimation outweighs the benefit of their inclusion (ie not assessing them would yield a serious underestimation of the total losses caused).70
61Friedrich Soltau, ‘Fairness and Equity in Climate Change’ (SJD dissertation, Pace University School of Law, April 2008).
62Fankhauser and others, ‘The Aggregation’ (n 32).
63Burke and others (n 13) 1650002-3.
64In the words of Pearce, “[c]ost-benefit analysis would set the optimal amount of greenhouse gas reduction at the point where this social cost just equals the incremental cost of controlling emissions. The higher the value for the social cost of carbon, the more control is warranted.“ See Pearce (n 50).
65Michael G Faure and Louis T Visscher, ‘The Role of Experts in Assessing Damages — A Law and Economics Account’ (2011) 2(3) European Journal of Risk Regulation 376, 378.
Drawing on this theoretical perspective, it is clear that alleging in a case that climate change caused economically quantifiable impacts, such as lost profits from arable lands (scenario 3), does not imply high administrative costs either for the parties or a court: it is an easy-to-estimate loss and it can be easily repaired. Conversely, if applicants allege that climate change caused important ecological losses, such as decline of marine species, coral bleaching and ocean acidification (scenario 2), loss of a forest (scenario 7), or damage to maritime environments (scenario 6), these kinds of ecological losses are pretty difficult-to-estimate and thus hard to fully repair.
When it comes to maritime disasters, it might be useful to recall a 2004 study by Hay and Thébaud that collected evidence of total costs after major oil spills across the globe. By comparing the amount of estimated, claimed and granted damages, the study shows that the environmental damage (intended in a narrow sense, as damage to non-use values and indirect use values of nature) represents the less frequently assessed share of monetary damages under both US and international liability regimes.71
66For more detailed examples, see Kaplow and Shavell (n 9).
67Ibid. 379.
68Ibid.
69Steven Shavell, ‘Contingent Valuation of the Nonuse Value of Natural Resources’ in Jerry A Hausman (ed), Contingent Valuation: A Critical Assessment (Contributions to Economic Analysis, vol 220, 1993) 371.
70Louis T Visscher, ‘Tort Damages’ in Michael G Faure (ed), Tort Law and Economics (vol 1, Edward Elgar 2009) 160.
71Julien Hay and Olivier Thébaud, ‘Including Ecological Damage in the Monetary Valuation of Oil Spill Impacts: An Assessment of Current Practice’ (2006) 32(3/4) Océanis 297, 301–2.
Despite this general trend, the above suggests that there is room to improve judicial practices of damage assessment by looking at the economic methods of climate damage assessment. For instance, the SCC could be employed in case of transboundary harm and historical emissions based on illegal deforestation (scenario 7). This is indeed a common practice in Brazil.72 In a Brazilian case, initiated in 2021, the Public Prosecutor’s Office (Ministério Público Federal or MPF) filed a lawsuit on behalf of the Amazon Task Force73 against a Brazilian farmer (de Rezende) for causing the deforestation of 2,488.56 hectares in the Amazon from 2011 to 2018.74 Moreover, the MPF claimed monetary damages for up to 85.4 million Brazilian Reais (precisely, BRL 85,399,448.75, corresponding to more than 15 million Euros) for property damages (the costs of restoring the environment to the status quo ante),75 material and intermediate climate damage, intermediate and residual damage of other natural resources, economic gains from deforestation76 and, finally, moral damage on the whole community.77 Interestingly, the plaintiff claimed “climate damages,” intended as a measure of the permanent and temporary
72Ex multis, Ministério Público Federal and INCRA v Dauro Parreira de Rezende, no. 1005885- 78.2021.4.01.3200 (7th Federal Environmental and Agrarian Court, Judicial Section of Amazonas, pending); São Paulo State Public Defender’s Office v São Paulo State Land Institute Foundation (ITESP) et al, no. 0000522-11.2014.8.26.0172 (7th Federal Environmental and Agrarian Court, Judicial Section of Amazonas, 29 December 2023), under appeal.
73The Amazon Task Force has been set down by the federal public prosecutors to combat illegal deforestation in Amazonia.
74Illegal deforestation was in this case caused by an agroextractive settlement project. It is quite common in Amazonia to have extractive reserves, such as chestnut trees, rubber tappers and babassu coconut breakers which might be distorted through land grabbing in order to implement practices of deforestation and erosion of natural resources. The advance of deforestation then causes not only environmental damage but also damage to entire communities that depend on the deforested areas.
75More specifically, the MPF’s Technical Note in the case calculated the cost for the recovery of each hectare at EUR 1,941.89, bringing it to a total of EUR 4,832,534.66 for 2488.56 hectares.
76This is the reimbursement of economic profits gained from the degrading activity, better known as disgorgement of profits.
77‘In short, from the material point of view, the fact of illegal deforestation includes both the obligation to restore the original condition of the environment in natura and the obligation to indemnify for intermediate and residual damages caused and for illicitly obtained gains, internalizing the negative effects of the offense under the environmental and social aspects. In this specific case, considering (i) the cost of restoring the environment to the status quo ante, estimated at BRL 26,732,111.50, (ii) the necessary compensation for intermediate material and residual climate damage, estimated at BRL 44,779. 679.32, (iii) intermediate and residual damages of other natures, estimated at BRL 8,019,633.45, and (iv) economic gains arising from deforestation, which must be refunded to the community, arbitrated, according to technical criteria, at BRL 5,868,024.48, the final material damage is calculated at BRL 85,399,448.75, to be repaired by the defendant.’ (translation from the 2021 Petition, 34).
disturbance of the climatic services provided by the impaired forest.78 Climate damages specifically referred to the value of GHG emissions that the illegal deforestation caused.79 The value adopted by the Amazon Fund for calculating the climate impact of deforestation was USD 5.00 per ton of CO2 (corresponding to almost EUR 5 per ton of CO ).80 Based on that, intermediate and resid- 2 ual climate damages were calculated as more than EUR 8 million (equivalent to almost 45 million Brazilian Reais). Comparing this amount with the almost EUR 5 million claimed as mere costs of restoration, it is possible to infer that the cost of returning the area to the baseline is much lower than the value of climate change damages and that the exclusion of the latter from the final amount would lead to a gross calculation error. In April 2021, the Brazilian Federal Court issued a preliminary injunction ordering the removal of the cattle herd from farms linked to the deforestation in question, pending the resolution of the claim for damages. When comparing the Brazilian case with the French one (l’affaire du siècle, see section 1 above), it can be inferred that the judicial practice of climate damage assessment could be improved drawing on the Brazilian example. In the French case, no specific methodology of climate damage assessment was either proposed by the plaintiffs or adopted by the Court. In Brazil, a separate head of damages called “climate damages” was developed in the courtroom — S. 38 —and it relates to GHG emissions released by damaged forests. Even if the law in Brazil does not mandate a specific method to quantify climate damages, the claimant relied on the SCC (a fee for every ton of carbon released). It may be still argued that the value adopted to calculate the climate impact of deforestation (USD 5.00 per ton of CO2) was too low and in any case discretionary. However, given its widespread use in policymaking, including the SCC in other claims for climate-related damages could increase the accuracy of total calculations and lead to a better internalization of the social costs of climate change. Furthermore, in light of the scholarship available in climate economics, the final amount should not exclude adaptation and mitigation costs to avoid gross and systematic mistakes (see section 5 above).
78“It should be noted that, both in the category of residual damage and in that of intermediates, climate damage can be introduced, corresponding to permanent disturbance of the climatic services provided by the forest. If deforestation causes the emission of greenhouse gases, the emissions derived from this act and which will not be offset by the reforestation of the area correspond to residual climatic damage. On the other hand, for what can be compensated by restoring the environment to a condition as close as possible to the status quo ante, there is intermediate climate damage that is perpetuated until this ideal condition is reached in proximity to the natural state. As already mentioned, national jurisprudence admits the relevance of indemnifying intermediate and residual damages, cumulatively with material damages that can be repaired by restoring the environment to the status quo ante” (translation from the 2021 Petition, 31).
79“In the Amazon, deforestation already causes, locally and regionally, climate change associated, for example, with the decrease in the duration of the rainy season in the south of the Amazon, with an already verified impact on agricultural productivity” (translation from the 2021 Petition, 21).
80“As for these, under the climate aspect, the value adopted by the Amazon Fund for carbon pricing, of USD 5.00/ton, can be used as a basis for calculating the respective impact. As Brazil does not yet have a reference value for the price of carbon, either to compensate those who avoid emissions or to tax those who promote them, here we suggest using, as a reference value, the one that was practiced in the scope of the Fund-do Amazonia (USD 5.00/ton CO2)” (translation from the 2021 Petition in Portuguese, 34).
8.Conclusions
The aim of this contribution was to shed light on climate change damage calculation in courts. Particularly, the state of the art in climate economics was compared with the judicial assessment of claims for compensation of climaterelated damage in specific scenarios. The comparison aimed to determine whether the economic perspective concerning the calculation of climate damages can be applied in litigation.
Based on a review of the main economic scholarship, some interesting insights emerged. Traditionally, economists make a general distinction between economic and non-economic losses. Moreover, to help policymakers define climate policies, they developed concepts such as the SCC. Despite the limitations of this tool, there is currently sufficient consensus in climate economics regarding its use for policy purposes.
Considering the deterrent effect of liability claims as well as the principle of full reparation, it is crucial to aim for more accurate, comprehensive but easy damage assessments. This is specifically needed for the compensation of pure ecological harm that is unrelated to human uses and more difficult to estimate. Arguably, the approaches employed by judges in climate change lawsuits do not always reflect the state of the art in climate economics. Building on the example of the Brazilian judicial approach, adding the SCC to other claims for climate-related damage could increase the accuracy of the total calculation, determine a better internalization of social costs of climate change and, in turn, lead to more optimal deterrence of climate-related harm, especially when they are difficult to quantify in monetary terms.