Wednesday, December 16, 2009

How Much Should We Pay The Victims of Global Warming?

Posted by Mike Dorf

Here in the U.S., talk of addressing global warming--when it does not involve the all-too-widespread belief that man-made global warming is a hoax--concerns what measures the U.S. and other countries should undertake to limit emissions of greenhouse gases.  But much of the "north/south" wrangling over how to deal with global warming considers the size and distribution of transfer payments from countries (such as the U.S. and the members of the EU) that industrialized using fossil fuels--thus creating much of the mess in which we all find ourselves--to developing countries.  Such transfer payments would serve two broad categories of purposes.

First, rapidly industrializing countries such as China and India say that we in the West got to industrialize by burning dirty fuels, and that much of our advantage today rests on that base.  If we want developing countries to cut their own emissions by using cleaner fuels more efficiently, they say, we should pay them something like the difference in cost between doing that and simply burning coal.  I don't have a strong view on this claim, although I think there are serious baseline issues.  China is the most populous nation in human history and so the pollution cost of its industrialization to current US/EU levels would be enormous.  Perhaps a more sensible approach would be to cap all emissions for all countries going forward but to require already-industrialized nations to pay into a fund for the damage they have already done.  That too would have measurement problems, I realize, and I'll just acknowledge them and move on.

A second kind of transfer payment would go to countries that will bear large costs of global warming without having caused much of it.  For example, a Bangladesh state-run think tank says that rising sea levels due to global warming will displace 20 million inhabitants, unless the country receives billions of dollars in aid to raise embankments and plant them with forests.

Which brings me to today's question: How do we monetize the money owed to countries that are victims of global warming?  There are many such countries, with many examples of harm already occurring, as illustrated by this tragic story about Bolivia.  However, to make matters simple, I'll make up some facts (but not too unrealistically).  Let's consider the Solomon Islands, which has a population of roughly half a million.  Let's assume (not too unrealistically) that the most likely steps taken to curb global warming will be insufficient to prevent a rise in sea level that literally inundates the Solomons, drowning or displacing all of the inhabitants.  Let's also assume (less realistically) that the already-industrialized countries want to compensate the inhabitants fairly.  Suppose that it would cost $20,000 per Solomon Islander to resettle him or her in another country, Australia, let's say.  That's a total of $10 billion.  Now suppose that the cost of protecting the Islanders in place--by creating embankments, dredging to increase the mass of the islands, etc.--would be $20 billion.  Assuming (unrealistically), that the developed countries are going to pay the bill based on what is truly owed rather than as the product of a complex and highly politicized negotiation, what is the right amount: $10 billion, $20 billion or some figure in between?

It turns out that this issue--or a related one--comes up frequently in contracts and torts cases.   First the contracts issue.  Suppose that Owner hires Builder to build a house.  The contract calls for the use of copper pipes but Builder mistakenly uses iron pipes.  (Pretend you've never heard of pvc.)  Assume that the cost difference was $5,000, and that if sold on the open market, the house as built with the iron pipes would fetch $5,000 less than the same house with copper pipes.  Now assume that it would cost $35,000 to rip apart the walls, remove the iron pipes, replace them with copper pipes, and then restore the walls and finish work.  Builder is clearly liable to Owner for using the wrong pipes but for how much: diminution in value ($5,000) or cost of completion ($35,000)?

My recollection of contract law (confirmed by a discussion with a contracts expert) is that most courts will only award diminution in value, absent an express term in the contract making completion cost the measure of damages.  The core idea here is avoiding economic waste: Judges do not want to award damages based on the notion of spending $35,000 to make an improvement worth $5,000.  Indeed, we also might suspect that if a court were to order the payment of $35,000, Owner might well decide to pocket the $30,000 surplus rather than actually spending it to replace the pipes.  Certainly if Owner intends to turn around and sell the house that is the most likely outcome.

Now consider the same issue in tort.  Suppose that Plaintiff loses a pinky as a result of using a badly designed can opener.  Plaintiff sues Manufacturer and establishes liability for design defect.  Plaintiff recovers for medical costs of immediate treatment, pain and suffering, and lost wages.  Plaintiff is also entitled to be compensated for the loss of the pinky itself.  How much?  Suppose that the average person values his pinky at $50,000 (as established, say, by asking how much extra money unionized workers need to be paid to take on additional risk of losing their pinkies) and that Plaintiff is, in this respect, average.  Meanwhile, there is a prosthetic pinky that is fully functional and indistinguishable to the naked eye from a real pinky, which could be attached for $250,000.  Does Manufacturer owe $50,000 or $250,000 for the pinky?  I put this question to a remedies expert, and was told that a good plaintiff's lawyer will argue that Plaintiff is entitled to the $250,000 as a medical expense, even though having a replacement pinky is, in some sense, not truly "worth" that much.  This remedies expert thought the preference of courts for avoiding economic waste that one sees in the contracts cases involving property would not apply to a personal injury.  And that would hold even though the Plaintiff, upon being awarded the $250,000, could decide to use it all to buy a new house (with copper pipes!) rather than to replace the pinky.

Now obviously the U.S. law of remedies differs from state to state, and has no application whatsoever to compensation for global warming, but, if we think that the principles underlying the foregoing distinctions are sound, we might see how they apply in our case involving the Solomon Islands.  If living on the Solomon Islands rather than in Australia is like living in a house with copper pipes rather than a house with iron pipes, then one will be tempted to say that the industrialized countries only need to pay the Solomon Islanders the $10 billion to relocate to Australia.  But if losing their ancestral homeland to the ocean is like losing a body part, then it would seem that the Islanders are entitled to the full $20 billion it would take to keep them in place and above water--even if they then pocket the money and head for Australia.  Recognizing the limits of this analogy--and that it is only a thought experiment because the real issue will be resolved through international politics rather than the cold application of legal analysis--I find the pinky analogy more apt in this case.

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