How does policy make it into mainstream thought? Sometimes, very slowly. But John Talberth of the Center for Sustainable Economy (CSE) has been working with colleagues on a concept that, when put into play, will shift financial responsibility for fossil fuel infrastructure disasters away from taxpayers’ dollars and back to those responsible for the original problem.
Based on economics, the premise makes simple and perfect sense once broken down.
In a recent article on the organization’s website, Talbert co-authored a piece quoting stats from the International Renewable Energy Agency, which found that air pollution and climate change caused by fossil fuel consumption generated externalized damages of $2.2–$5.99 trillion each year.
That’s an enormous amount of money.
What are externalized damages? Talberth described it as when “the cost of your product doesn’t include all of the costs.” I wanted to know more. The International Monetary Fund had a succinct explanation. Ironically, pollution is considered a “traditional example of a negative externality.” Thomas Helbling, an advisor in the IMF’s Research Department, wrote:
“A polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The social … costs of production are larger than the private costs. Those indirect costs—which are not borne by the producer or user—include decreased quality of life … higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. In short, when externalities are negative, private costs are lower than social costs.”
Now the model was coming into focus. This point of view is a mindset where companies consider what is profitable to them and their shareholders without regard to society at large, which pays for the downside of their activities. Think “profits over the planet.” This calculus makes risky endeavors like offshore drilling, fracking, and transporting toxic materials doable for industries because they can offload financial liability onto the public.
As the article points out, the White House is well aware of how these matters impact the US economy, which is why they have allotted funds for “unprecedented risks we face from the climate crisis.”
Here is where Fossil Fuel Risk Bonds come into play. The premise is to “safeguard public finances from the product life cycle risk of oil, gas, and coal.”
I returned to the 2016 report to fully understand the backstory. It was discouraging to read findings from over a decade ago, showing that in 2012 the United States paid $110 billion in weather-triggered property claims, with private insurance only covering one-quarter of the cost. The public paid the remaining 75%. That remaining $96 billion outstripped the federal government’s spending on education and transportation.
The writers explained how the five-part life cycle of fossil fuels creates the most significant incidences of public monetary risks. Each part has its particular concerns and challenges. Broken down, they are as follows:
- Extraction: This covers gas, oil, and coal unearthed by any means. It is primarily associated with abandoned mines and wells, infrastructure problems, leaks, blowouts, water pollution, spills, and earthquakes. A prominent example was the British Petroleum Deep Water Horizon fiasco in the Gulf of Mexico. Under the radar was the fact that BP got an out-of-court settlement for damages amounting to $20.5 billion. However, it claimed a tax write-off for $5.35 billion. BP shifted that amount back to the American taxpayers. Talberth explained that BP could maneuver out of the total payment with an “army of lawyers” in their corner. (With the implementation of Fossil Fuel Risk Bonds, they wouldn’t be able to do that.)
- Transport: Fossil fuels and coal are moved by trucks, pipelines, ships, and rail. When “accidents” happen, the residents of communities in these “transportation corridors” are at risk. Hazardous vapors, like those impacting East Palestine, Ohio, when a Norfolk Southern train derailed, is a most recent example.
- Refining and storage: This includes contamination disasters, abandoned toxic infrastructure, and pollution. It creates a particular financial burden for local governments. For example, when a petrochemical plant exploded in Louisiana (Williams Olefins, 2013), all residents within a radius of two miles were ordered to shelter in place. First responders rushed to the scene, and the ensuing costs were exorbitant. Additionally, toxic site abandonment leads to the creation of Superfund sites. When polluters declare bankruptcy or can’t be located, the federal government must step in to protect the residents by “dismantling, removing, and restoring” the vicinity.
- Combustion and climate change: The impacts of climate change will affect every area of life. EPA has put together six sectors that will bear the most significant economic adversity. They are health, infrastructure, electricity, water resources, agriculture/forestry, and ecosystems.
How Fossil Fuel Risk Bonds Work
The CSE Mission statement defines its goal as “accelerating the transition to a sustainable and just society.” Based on a ground-up approach, the success of their principles relies on an informed electorate, businesses, and consumers. CSE utilizes economic concepts to deal with environmental problems. John Talberth, who I spoke with to get additional insights, qualified CSE as a combination “think tank and do tank.”
Understanding how the public was subsidizing the cleanup of fossil fuel disasters (see above) made understanding Fossil Fuel Risk Bonds (FFRB) accessible.
Presently, established insurance “mechanisms” aren’t doing the job. The FFRB entities build on preexisting instruments with vast improvements, like covering the total economic value (TEV) of worst-case accidents. They also eliminate the option for self-bonding or self-insurance. Those methods were useless in the cases of industry bankruptcies or lack of evidence pointing to clear company ownership.
Simply put, FFRBs require that fossil fuel industry players must demonstrate before undertaking a project that they have adequate financial resources to pay for potential environmental damages, regardless of the scope or the extent. They must verify they have the monies to cover a worst-case scenario amount as the bottom line starting figure for fees.
Talberth spoke about the importance of beginning with a methodical approach. Local and state governments need to evaluate and plan for potential economic risks they might be challenged by in their jurisdictions—addressing every phase of the fossil fuel product life cycle.
FFRBs differ from traditional solutions because they are specifically aimed at “public financial risks” and embody two central approaches for internalizing that threat. The first involves expanding the scale of conventional financial assurance mechanisms to safeguard public finances against dangers associated with extraction, refining, storage, and transport.
The second establishes surcharge-based trust funds that can cover the costs of climate-related disasters, climate adaptation, air and water pollution, earthquakes, and other pervasive hazards associated with fossil fuels. The country had that in play beginning in 1980 when Congress set up the Comprehensive Environmental Response Compensation and Liability Act, known as the Superfund. It served as a national trust fund to collect taxes from industries responsible for pollution. But Congress allowed the program to lapse in 1995. In 2021, US Rep. Earl Blumenauer (D-OR) initiated the Superfund Reinvestment Act. In this session, the legislation has yet to be reintroduced.
There is some traction in states like Oregon and Washington. But I asked Talberth, what about areas like West Virginia, Sen. Joe Manchin’s home turf?
Here is where the issue of “political will” comes in. Talberth describes this phenomenon in his 2016 paper, underscoring “the political influence wielded by fossil fuel interests.”
When I interviewed him, Talberth pointed out that being conservative used to be all about being “fiscally responsible.” He added, “Elected officials at all levels must step up their game if we’re going to have any hope of avoiding the most catastrophic consequences of climate change. Even for the most conservative, an easy thing for them to do is to push back on the subsidies and loopholes that allow wealthy fossil fuel corporations to pass on the costs of accidents, spills, abandoned infrastructure, and climate disasters to taxpayers. It’s a matter of fairness and economic efficiency.”
I asked if he had found any support with lawmakers in Washington, DC. He said, “We’re hoping to get traction on a federal bill soon. Both Sen. Elizabeth Warren and Sen. Bernie Sanders embraced the fossil fuel risk bond concept in their presidential platforms. More recently, CSE worked with Rep. Jamie Raskin’s office to assemble a first draft of what a federal bill would look like.”
My final question to Talbert pinpointed why he believed an approach based on economics could hold the key to a viable solution and to shift the equation. He responded:
“For decision-makers still immune to the science of climate change, economics provides another compelling reason to act. Nobody wants to bankrupt their communities, yet this is exactly what is happening by allowing fossil fuel corporations to escape financial responsibility for cleaning up their messes and paying their fair share of the costs of dealing with climate disasters.”