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12 CCLR 285 (2018)
Parametric Insurance as an Alternative to Liability for Compensating Climate Harms

handle is hein.journals/cclr2018 and id is 320 raw text is: CCLR 412018 Parametric Insurance as an Alternative to Liability for Compensating Climate Harms Joshua B Horton* Interstate compensation for climate change based on legal liability faces serious obstacles. Structural incongruities related to causation, time, scope, and scale impede application of tort law to climate change, while political opposition from developed countries prevents in- tergovernmental consideration of liability as a means of compensating for climate damages. Insurance, however, in particular parametric insurance triggered by objective environmen- tal indices, is emerging as a promising alternative to liability. This is manifest in the UNFC- CC and the Paris Agreement, which ruled out recourse to legal liability, and in the forma- tion and expansion of regional sovereign climate risk insurance schemes in the Caribbean, Africa, and the Pacific. Theory and early practice suggest that parametric insurance exhibits five key advantages compared to legal liability in the climate change context: (1) it does not require that causation be demonstrated; (2) it has evolved to provide catastrophic coverage; (3) it is oriented toward the future rather than the past; (4) it is contractual, rather than ad- versarial, in nature; and (5) it provides a high degree of predictability. Compensation based on parametric insurance represents a novel climate policy option with significant potential to advance climate politics. 1. Introduction Efforts by some states to obtain compensation for cli- mate change from other states on the basis of liabil- ity are unlikely to succeed. Climate lawsuits have failed in multiple jurisdictions largely due to judicial determinations that climate change is a non-justicia- ble 'political question.' Beyond this, a number of structural incongruities exist between tort law and climate change, including issues related to causation, duty of care, temporal proximity, and scale of dam- ages. At the international level, political recognition of such obstacles has effectively been institution- alised with the adoption of the Paris Agreement. Yet developments in and around the Paris Agree- ment, rooted in discussions that predate the United Nations Framework Convention on Climate Change (UNFCCC), also point toward a potential alternative to liability as a basis for intergovernmental compen- sation for climate damages: parametric insurance. DOI: 10.21552/cclr/2018/4/4 Joshua B Horton, Research Director, Geoengineering, School of Engineering and Applied Sciences, Harvard University. For corre- spondence: <horton@seas.harvard.edu> While traditional loss-based insurance in which in- demnities are tied to actual losses is a familiar com- plement to many tort systems, parametric insurance, in which payouts are determined by the value of an independent index, is a recent development that may under some circumstances serve as a substitute for liability law. Compared to loss-based insurance, para- metric insurance alleviates problems of moral haz- ard and adverse selection but introduces the new problem of 'basis risk.' In this article, I argue that parametric insurance avoids the incongruities likely to impede future application of legal liability to cli- mate change while offering additional advantages in terms of institutional culture and predictability, all of which make parametric insurance a promising al- ternative basis for interstate compensation for cli- mate change. The analysis presented here is restricted in two important ways. First, it is focused on potential com- pensation for climate harms among states, that is, on an intergovernmental basis. Clearly, existing interna- tional liability law is based on tort systems developed in various domestic settings; while national tort laws will thus inform the analysis, the focus will be square- ly on their implications for interstate relations. And | 285

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