In today’s Finshots, we talk about the most expensive climate catastrophe in US history and who might end up paying for it.

The Story

$150 billion!

That’s the jaw-dropping estimate of damage the wildfires in Los Angeles, California have caused so far. Thousands have been evacuated, hundreds left homeless as their homes turned to ash and tragically, many have lost their lives to this unforgiving disaster. Firefighters are still battling around the clock to bring the flames under control as you read this.

And this disaster is turning out to be one of the costliest in US history. To give you an idea, Hurricane Helene, which tore through six US states last year, caused about $250 billion in economic losses. And the damage from LA’s wildfires is dangerously inching close to that number.

So climate change advocates are saying, “Enough is enough!” And they believe it’s time for fossil fuel companies to pay for this heartbreaking damage.

Why do they think that?

To begin with, they believe that these corporations have spent decades polluting the environment, driving up global temperatures and accelerating climate change which fuels disasters like this.

You see, wildfires are actually a normal part of a forest’s life cycle. But in California, they’ve gotten much worse because of climate change and other human actions, like urban encroachment. On top of that, there’s something called ‘hydroclimate whiplash’ happening. This is when the weather swings wildly between very wet and very dry. Climate change is making this problem bigger and spreading it around the world.

Plus, California’s wildfire season used to last from May to October. But now, the weather is so arid that the state faces wildfires practically all year round.

Here’s where fossil fuels come in. Since the Industrial Revolution, burning fossil fuels has been a major source of pollution. In fact, scientists can now directly link extreme weather events like wildfires, floods, and heatwaves to climate change. And research suggests that emissions from the biggest fossil fuel companies have been responsible for nearly 40% of the forest damage in the western US and Canada over the last 40 years.

That’s exactly why climate advocates are calling on these companies to take responsibility for this disaster and pay their fair share to rebuild what has been lost.

But then, the fight against fossil fuel companies isn’t just about the climate havoc they’ve wreaked. It’s also because they’re being labelled as literal thieves!

Yup, you read that right. For decades, these companies have been accused of robbing California’s coffers — money that could’ve been used to tackle climate-change-driven wildfires.

Here’s how. You see, the US has a decentralised tax system. Unlike India, where we pay direct taxes to the central government, which then shares revenue with states, in the US, both federal and state governments have the power to tax. Federal taxes go towards national programmes like defence and infrastructure, while state taxes fund local needs like schools, roads and healthcare.

In the early 1980s, California had a system called ‘Worldwide Combined Reporting.’ This system taxed multinational companies based on their global profits, including money made by their subsidiaries. California used a formula to figure out how much of those profits should be taxed based on how much business the company did in the state.

For example, if a company made $1 billion globally and 20% of its sales, assets, and payroll were in California, the state would tax $200 million of those profits.

But you can imagine that this made Big Oil unhappy. Companies like ExxonMobil, Gulf Oil (now Chevron) and Shell found this system “burdensome” and cooked up a clever plan. They said it was unfair and hurt California’s ability to attract foreign investment. So, they lobbied the government for a new system called the ‘Water’s Edge election.’ This system allowed companies to exclude profits made outside the US from California’s taxes. It also made it easier for them to hide money in tax havens. (Tax havens are countries or regions with low taxes, where companies often move their money to avoid paying higher taxes elsewhere)

After years of lobbying, the oil companies got what they wanted. And essentially, the new method let big oil companies “elect” or choose to exclude offshore profits from their California taxable income.

What happened next was no surprise.

This shiny new loophole drained California’s budget by up to a whopping $146 million in tax revenue every single year. That’s a massive chunk of money gone. And by 2024, California was staring down a $46 billion budget deficit. The end result was that to fix this, the state had to make big spending cuts, including $9 billion from climate and clean air programs.

Now, think about it. If Big Oil hadn’t twisted the government’s arm to overhaul the tax system, the Water’s Edge election wouldn’t exist. And all that lost money could’ve been channeled into fighting the climate-change-driven wildfires raging through LA.

So it’s no wonder that climate change activists are adamant about holding Big Oil accountable. They’re not just asking these companies to pay up, they’re demanding justice for the destruction they’ve left behind.

Will that happen?

Well, it’s a long shot.

Just last year, these companies pulled out their old playbook and spent over $80 million lobbying in California to kill the “polluter pay” or “climate superfund” bill. This bill would’ve forced the biggest fossil fuel emitters to cover the costs of climate disasters with a fee for the damage caused by their polluting products. But thanks to their fierce opposition, the bill never saw the light of day in California. And that has left the state scrambling for funds to fight the devastating effects of LA’s wildfires.

There is a glimmer of hope, though. Similar laws have been passed in Vermont and New York, setting a precedent that could eventually nudge California in the same direction. And California hasn’t backed down completely. It’s suing oil companies for years of deceiving the public about the environmental and health damage caused by burning fossil fuels.

Even better, the US Supreme Court recently refused to hear an appeal from oil companies trying to block lawsuits holding them accountable for billions in climate damages. This means there’s still a chance that oil companies will be forced to pay up. And maybe, their lobbying efforts won’t win this time.

But if Big Oil pulls off another victory, it’s the insurance industry and taxpayers who will ultimately end up shouldering the cost for years to come.

Let’s hope it doesn’t come to that. 

Until then…

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