One of the most aggravating aspects of the climate crisis is the fact that fossil fuel companies are passing on huge financial risks to taxpayers and politicians are simply turning their backs on the problem instead of holding those companies accountable. At each stage of the fossil fuel product life cycle, taxpayers are increasingly burdened with a litany of costs such as those associated with fracking-induced earthquake swarms, pipeline explosions, abandoned infrastructure, water pollution and, of course, the costs of climate change. Fossil fuel risk bond programs – a policy innovation proposed by Center for Sustainable Economy – can help reverse this glaring inequity by shifting the economic risk back where it belongs: on the polluters.As set forth in our new report, fossil fuel risk bond programs are systematic efforts by state and local governments to evaluate and respond to the financial risks they face at each stage of the fossil fuel lifecycle in their jurisdictions. Specific fossil fuel risk bond program instruments can be grouped into two broad categories:
- The first category of risk bonding for fossil fuels would consist of conventional financial assurance instruments such as surety bonds and environmental liability insurance that would address discrete risks caused by particular entities in particular places – such as abandoned infrastructure, explosions, or localized pollution. Fossil fuel risk bond programs can expand the scale (i.e. required coverage amounts) and scope (i.e. types of hazards covered) of these conventional instruments.
- The second category of risk bonding for fossil fuels would consist of surcharge-based climate or natural hazard risk trust funds. These trust funds can be used by governments to offset public costs of climate-related natural disasters, to pay for the costs of climate adaptation, or to pay for economic damages associated with fossil fuel production and trade that are difficult to attribute to a single entity. They would be capitalized by a surcharge on all fossil fuel transactions in the local economy. The surcharge rate could be based on a jurisdiction’s expected costs associated with climate change, climate adaptation, and other pervasive risks such as earthquake swarms and pollution, and be levied on each ton of carbon dioxide equivalent (CO2-e) embodied in fossil fuels extracted, transported, stored, distributed, and combusted (at least by industry and power plants) by any source in a given jurisdiction.
The benefits could be huge for states, counties, and cities struggling with rising climate-related costs with no clear way to pay for them. For example, consider a county in which oil, gas, and coal extraction takes place that is also suffering the effects of a strengthening climate change signal in the form of regular 100-year floods. Climate risk trust funds maintained by that county could be used to: (1) compensate homeowners for fracking-related earthquake damage; (2) pay for the costs of filtering water contaminated by tailing pond leaks; (3) pay for the increased public service cost burden associated with oil or gas boomtowns; and (4) relocate infrastructure from floodplains.
CSE has begun work along the West Coast to promote this policy innovation as part of our work on a just transition toward a low-carbon and climate-resilient economy. In particular, fossil fuel risk bond programs provide a way to ramp up the funding necessary to put scores of people to work – including displaced oil, gas, and coal workers – while ramping down fossil fuel consumption, decommissioning obsolete fossil fuel infrastructure, restoring mines, oil platform sites, and gas well pads back into a natural condition and implementing climate adaptation projects to help make communities safe in the face climate disasters. In a 2012 analysis of oil platforms in Cook Inlet, Alaska, we estimated that decommissioning 16 active oil platforms and 160 miles of pipeline could inject over $1 billion into the local economy.
As our report goes to press, Fort McMurray, Alberta has experienced one of the scariest signals of climate change – an unprecedented wildfire of epic proportions that burned large portions of the city to the ground. Over 1,600 structures were lost. The economic toll is $1 billion and counting. The irony, of course, is that the city lies at the epicenter of the tar sands industry, producing oil that packs an enormous climate change punch. If fossil fuel risk bond programs were in place, the city, province, and federal governments would have adequate funding to respond to this disaster, help residents rebuild, and invest in a future beyond fossil fuels. Instead, they are left with a blackened landscape and a mountain of debt that has yet to be tallied.
For a copy of Fossil Fuel Risk Bonds: Safeguarding public finance from product life cycle risks of oil, gas, and coal, click here.