The question whether countries can be held liable for climate change damages has become an important issue in the UN climate negotiations. The discussion currently revolves around fairness in the light of historical responsibility and possibilities how to finance effective loss and damage. In a new paper published this week in Climate Policy, we argue that a liability mechanism including compensation could also help countries to agree upon and enforce more ambitious emission reductions.
The average number of natural catastrophes and natural disaster losses has sharply increased in 2016. Most scientists attribute a great part of this increase to climate change. Overall, economic loss and damage from natural disasters in 2016 totaled around US$ 175 billion, and were at their highest for four years . Impacts have been particularly devastating in poor, developing countries. At the same time, climate change is commonly attributed mostly to the high carbon emissions of the past two centuries in rich, industrialized countries.
Rules for Loss & Damage: Justice and Effectiveness
Due to this responsibility gap, developing countries are pushing a mechanism to deal with loss and damage including clear compensation rules . Those efforts originate in the idea that developed nations can be held liable for climate change-related damages based on their historical responsibility for carbon emissions. Loss and damage is often seen as a means to restore “climate justice” between developing and developed countries .
Although loss and damage has been a subject of debate among Parties to the UNFCCC for years, the Paris Agreement was the first to devote a full article to loss and damage . While presently the article provides no basis for any legal liability or financial compensation, we argue, the existence of a compensation mechanism could also help to achieve more ambitious climate cooperation and thus more effective climate policies. Developing countries might be more willing to reduce their own emissions and invest in adaptation when industrialised countries acknowledge their historical responsibility by signing up to a liability mechanism. Industrialised countries in turn might reduce their emissions further, because they see developing countries also willing to share in the payment for climate protection and want to avoid paying compensation if climate change continues unchecked.
How Liability Rules can Help to Reduce Emissions
We tested this premise in an online experiment with more than 1200 participants from the US and India. We designed a “game” where players were grouped into pairs, with one player having a higher starting capital than the other, mirroring the rich and poor nations divide. Each player decided whether to invest a part of their capital into climate protection. Via their investment, players could reduce the probability of a climate catastrophe able to negatively affect the capital endowment of the poorer player.
We imposed different liability rules for different groups of player pairs. We found that without any liability rule, few players decided to invest in climate protection. With a “strict liability” rule forcing the rich player to compensate the poor player for any damages, substantially more rich players chose to invest – but only few poor players. In two other groups we introduced distinct “negligence” liability rules: only if the rich player had not invested in climate protection did she have to compensate the poor player; or the poor player could only receive compensation if she had also invested in climate protection. These two groups achieved the highest reductions in the likelihood for climate damages, with most rich and poor players investing in climate protection. Importantly, this outcome also meant that in these two groups very few poor players actually suffered damages, and very few rich players had to pay compensation. Negligence liability rules were thus most likely to lead to an effective “micro climate agreement” in our experiment.
Our results suggest that policymakers would be well advised to further intensify negotiations on a compensation mechanism for loss and damage in preparation for the 23rd session of the UNFCCC conference (COP 23) by the end of this year. The Fijian presidency may help to sharpen the focus and expand the scope of loss and damage and establish more stringent institutional arrangements as small island states such as Fiji are at the forefront of climate change impacts.
Indeed, we find that a rather simple negligence rule makes cooperation more attractive and rewarding, leading rich and poor nations to boost their investments in mitigation and adaptation for climate protection. Far from opening up a Pandora’s box of endless compensation claims towards industrialized countries, a liability mechanism could make global climate cooperation more effective and less costly in the longer run.
About the Authors
Elisabeth Gsottbauer is a Postdoctoral Researcher at the Institute of Public Finance, University of Innsbruck
Robert Gampfer completed his PhD at the research group for International Political Economy, ETH Zurich
 Munich Re, 4. January 2017
 UNFCCC Loss&Damage
 Paris Agreement, Article 8
*This blog post originated from an earlier version published online at ETH Zukunftsblog, 19.08.2014