Climate Change Risk Management: Part One

This is the first of a two-part update on climate change risk management and how it might create business risks - ranging from supply chain interruptions to third-party claims for economic damages caused by unusual weather events. In part one, we discuss how climate change may create legal liabilities. Part two will discuss the use of insurance to manage these risks.

Introduction

The potential impact of global climate change has generated proposals for new U.S., Canadian and international laws and regulations, and it is likely that North American companies soon will incur costs to reduce their greenhouse gas (GHG) emissions. Weather conditions, rising sea levels and changing snow and rainfall patterns may also affect operations, supply chains and profitability. Corporations may face investor claims for losses blamed on company operations, and directors and officers may face similar claims for failure to adequately anticipate the effects of climate change or greenhouse gas regulation on company prospects.

Senate Climate Change Legislation

In a related climate change matter, on May 10, 2010, U.S. Senators John Kerry (D. Mass.) and Joseph Lieberman (I. Conn.) released their version of a climate change/energy bill for Senate consideration. Their bill is similar in many respects to the American Clean Energy and Security Act (ACES), H.R. 2454, passed by the House in June 2009.

The Kerry-Lieberman bill would create a federal cap-and-trade program that would reduce U.S. GHG emissions 17% by 2020 and 80% by 2050. Unlike ACES, it would create a federal Renewable Portfolio Standard (a requirement imposed on electric utilities to use electricity generated from renewable resources for a specified portion of the electricity supplied to their customers). It pre-empts state GHG cap-and-trade programs that have been developed to facilitate utility compliance with state GHG control programs (ACES would pre-empt such state programs from 2012 through 2016 only). It also stops EPA regulation of GHG emissions as pollutants causing climate change. Electric utilities would start compliance in 2013 (one year later than under ACES). Large industrial source compliance would not start until 2016. In the early years, GHG allowances would be distributed free to utility emitters to reduce rate increases to customers. It is too early to predict whether ACES or the Kerry-Lieberman bill will become law or even be considered by the Senate before the November U.S. elections.

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