Based on the bills legislators are considering, policymakers are learning the wrong lessons. Consider SB 222 (the Affordable Insurance and Climate Recovery Act) introduced by state Sens. Scott Wiener and Sasha Renée Pérez. By allowing plaintiffs to sue oil and energy companies for the costs created by natural disasters, SB 222 is attempting to shift “the burden of increasing insurance costs from California ratepayers to fossil fuel companies.”
Proponents justify the policy by arguing that oil and gas companies knew about global climate change for decades but failed to ring the alarm bell or change their operations. This premise is fatally flawed. As reported by the LA Times, Californians have been aware of the dangers associated with greenhouse gas emissions since 1989. Yet even today, Californians continue to demand fossil fuel created energy. The reality that we continue using fossil fuels while being fully aware of global climate change undermines SB 222’s premise.
This bill is also anti-growth. As we illustrated in a recent Spending Watch column, the policy imposes exceptionally large costs on Californians. Our analysis estimated the potential economic impacts if SB 222 enabled the victims to sue fossil fuel companies to recover the projected $164 billion in property and capital losses from the recent L.A. wildfires, including an estimate for the potential punitive damages. Over five years our analysis estimates that
- The state economy would be 1.2 percent smaller
- Nearly 140,000 fewer jobs would be created
- The state government would lose over $8.3 billion in tax revenues, and
- The purchasing power of the median household (including the additional energy costs) would be more than $2,900 smaller than otherwise.
In other words, allowing individuals to sue companies for damages from natural disasters as promoted by SB 222 worsens the economic consequences without addressing the actual problem. Our negative assessment is not unique.
An analysis of the potential consequences by the California Business Roundtable evaluated the impact should annual claims reach $384 billion (including punitive damages). Their analysis estimates that the bill would raise gasoline prices 63 percent to $7.38 per gallon, diesel prices 69 percent to $8.23 per gallon, and raise natural gas prices 76 percent. Overall, the Roundtable estimates that “households could lose up to $6,200 per year in disposable income.”
Rather than incentivizing more litigation, legislators should implement policies that help minimize the economic and environmental damage when the next wildfire occurs. There are many beneficial reforms possible.
One essential change would reduce the burdens from CEQA and zoning regulations. Current policies overburden developers and push families to live in lower cost Wildland Urban Interface (WUI) areas – the WUI is the “zone of transition between unoccupied land and human development.” As a result of these incentives, 45 percent of California’s housing units built between 1990 and 2020 were in WUI areas even though these regions account for only 7 percent of California’s land area. Building more housing units and supportive infrastructure that include powerlines and roads in WUI zones increases the risks and damage from wildfires. In fact, 80 percent of the buildings destroyed by wildfires between 1985-2013 were located in WUI designated areas.
Reforms that reduce the costs and restrictiveness of CEQA and other zoning regulations will encourage greater development outside of the WUI areas. The increased housing supply will address the housing affordability problems plaguing the state while decreasing the risks of dangerous and costly wildfires.
Deficient insurance regulations have also worsened the problem. As our colleague Steven Greenhut noted in recent Congressional testimony, Proposition 103 (passed in 1988) effectively prevents insurance companies from properly pricing a property’s actual wildfire risks. Underpricing these risks encourages excessive building in WUI areas exposing more infrastructure to wildfires.
Over time, the inability to properly price the risks of fire has driven insurers out of the state, pushing homeowners to the state insurer, the California FAIR plan. The FAIR plan is undercapitalized, however, putting taxpayers on the hook to cover a large portion of the costs. Reforming the insurance market to ensure that rates are actuarily appropriate is imperative to both discourage excessive building in WUI areas and protect taxpayers from having to backstop the costs of wildfires.
Minimizing the housing infrastructure in the WUI areas is insufficient. California must also invest in wildfire prevention strategies that include conducting tactical burns and effective brush clearing. Lessening the alternative energy mandates on utility companies would also free up resources so these companies can focus on decreasing the risks that their infrastructure could spark wildfires. Relatedly, investments in proper fire hydrant and reservoir maintenance should be prioritized to ensure that the systems are operating as the Cal-Fire professionals need and expect.
Future wildfires are inevitable. The priority in Sacramento should be to minimize the destructiveness of future conflagrations. Empowering lawyers through legislation like SB 222 does not help achieve this goal. Instead, policymakers should implement reforms that reduce the risks of future fires while promoting more construction in less risky areas. Such an approach would reduce the destructiveness of future wildfires while promoting greater housing affordability.
Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute. Nikhil Agarwal is a PRI research associate.
