Read The Potential Economic Impact of Environmental Liability: The American a\nd European Contexts text version

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written by Janet Stone McGuigan at the request of the Economic Analysis Unit Environment Directorate European Commission December 2000

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Abstract Executive Summary Introduction A Brief Overview of Superfund The Economic Impacts of Superfund Cleanup Costs Transaction Costs Impacts on Selected Sectors of the American Economy A Further Breakdown of Costs of the Current Superfund Program Box: A Brief Note on Superfund Taxes Brownfields and Voluntary Cleanup Programs Box: A Brief Overview of the Resource Conservation and Recovery Act A Comparison of the European Commission's White Paper on Environmental Liability with Superfund Anticipated Number of Liability Cases Resulting in Cleanups Type of Liability, Limits and Exemptions Damages and Activities Covered Remedy Selection and Cleanup Standards Potential Plaintiffs Potentially Responsible Parties Conclusion

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7KH 3RWHQWLDO (FRQRPLF ,PSDFW RI (QYLURQPHQWDO /LDELOLW\ 7KH $PHULFDQ DQG (XURSHDQ &RQWH[WV Janet Stone McGuigan NJ, USA $EVWUDFW "The Potential Economic Impact of Environmental Liability: The American and European Contexts" was written at the request of the European Commission following the approval of a White Paper on Environmental Liability. The purpose of this report is to describe and assess existing evidence regarding the economic impacts of environmental liability, with a focus on the experience in the United States with the Superfund program. The report looks primarily at concrete cost data, such as cleanup and transaction costs, and well as at the distribution of these costs among the different sectors of the American economy. In addressing cost questions where hard data are not available or are incomplete, such as costs related to natural resource damages, the report acknowledges the data gaps, presents a framework for thinking about these questions, and to the extent possible indicates what data are available. The report does not consider how environmental liability may affect the number of economic actors within a given sector, or how a given sector may adjust commodity prices in response to the costs of environmental liability, as no such analyses exist. The report does not attempt to use cost data from the United States to make any predictions about the potential costs of environmental liability in Europe, but does compare and contrast the American regime with the proposed European regime, and then discusses what, if any, cost implications may derive from such similarities and differences. Although the current debate in Europe is limited to the regime proposed in the White Paper, the report has included brief discussions of several topics that are currently beyond the scope of the White Paper but that are nevertheless pertinent to any discussion regarding environmental liability in the American context. It is not within the scope of the report to consider any environmental liability regimes currently in place in Member States. This report draws upon the findings from existing studies, and does not contain any original research. Any factual or policy interpretations in this report should be understood to be those of the author, and not of the Commission. ([HFXWLYH 6XPPDU\ As Europe contemplates a proposed environmental liability regime, European decision makers and interested parties would like to learn from the American Superfund experience exactly how much environmental liability may cost Europe. While it must be understood that the picture Superfund research presents is incomplete, there are a number of studies that can help to put the question of costs into context, including "Footing the Bill: Who Pays and How?" the most authoritative study of Superfund costs to date. This report will summarise the key findings from these earlier Superfund cost studies, and explain how these findings might apply in a European environmental liability regime. Because it is of particular interest, this report will discuss the distribution of Superfund costs per industry sector, comparing these costs with industry profit levels, or, in the absence of profitability data, value-added data.

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The purpose of Superfund was and is to allow the Environmental Protection Agency (EPA) to identify contaminated sites that warrant cleanups, and then allow EPA to either initiate these cleanups and then compel the parties responsible for the contamination to pay for the cleanups through a liability process, or compel the responsible parties to undertake these cleanups directly. When the responsible parties cannot be identified or are insolvent, the cost of cleanup is covered by funds raised from a trust fund created from excise taxes on petroleum and specified chemical feedstocks and a corporate environmental income tax. It is this trust fund that gives Superfund its name. In 1999 there were 1233 sites currently on the National Priorities List (NPL), with a total of 1370 sites having been listed since Superfund's inception. The U.S. General Accounting Office testified in 1999 that more than 3000 potential NPL sites still needed to be evaluated, and that ultimately Superfund will need to cleanup 1800 sites. Several types of costs will be discussed in this report. The cost of cleanups, e.g. the cost of pumping contaminated groundwater for treatment, or the cost of removing contaminated soil from a site, is only one component of Superfund costs. Another is administrative costs, that is, the costs to EPA or other parties that are incurred as a result of administering the Superfund program. Such administrative costs include, for example, the cost of supervising cleanup contractors, and are not insignificant. And yet another component of Superfund costs is transaction costs, or the costs that are unrelated, directly or indirectly, to cleanups. Between 1980 and 1999, the federal government spent a total of $16 billion on Superfund. EPA estimates that responsible parties have spent over $15 billion on cleanups, not including administrative costs. Estimates for the total cost of cleaning up non-federal sites, excluding transaction and administrative costs, range from a 1991 estimate of $105.5 billion to $301.5 billion, assuming no change in policy, to a 1994 estimate of $106.0 billion to $462.9 billion. In 1995, Congress failed to reauthorize Superfund, and the law's taxing authority expired. While Superfund has not been shut down, its future is uncertain. As mentioned earlier, it is anticipated by both EPA and state governments that in the future, the states will assume more and more responsibility over the cleanup of hazardous sites. The authors of Footing the Bill concluded from their analysis that the projected annual costs of non-federal cleanups should not be unduly burdensome to most industries. In particular, the chemical and allied products industry was estimated to incur $492.0 million in annual cleanup and transaction costs over ten years, the highest of all industries included in the analysis. Specifically, this industrial sector would pick up a quarter of the total cleanup costs, and a slightly smaller percentage of the total transaction costs. These estimated annual cleanup and transaction costs represent less than one percent of the industry's added value in 1990. However, the one exception to the authors' findings is the mining industry. The authors estimated that over ten years, the mining industry would incur annual cleanup and transaction costs of $220.5 million. Annual profits for the mining industry in the years prior to the publication of Footing the Bill have flipflopped from red to black and back to red again. In 1991 before-tax profits for the mining industry amounted to only $300 million. After taxes in 1991 the industry reported losses of $300 million. Even in 1990, a much better year for the industry, after-tax profits amounted to only $1 billion. The conclusion would seem to be that the cost of the Superfund program is affordable for the American economy in the aggregate, albeit painfully expensive for a relatively small group of responsible parties. But to stop at that would not do much to inform the debate

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currently being held in Europe. What is of the greatest interest is how the proposed European liability regime compares to Superfund. All liability regimes share the same goal of getting polluters to pay for the damages they have caused, but in practice there may be significant differences in how the liability regimes work. These differences may indeed result in different costs. Any comparison will have to make a number of assumptions, or at least state explicitly that there are a number of unknowns that will need to be further considered before a meaningful comparison can be made. The first is that a cleanup performed in the United States that is identical in every way to a cleanup in Europe is assumed have the same costs. At this point, there is no way to verify whether or not this is true. Second, it is assumed that the universe of environmental damages ­ that is, the extent, severity and type of damages ­ is for the whole of Europe more or less the same as the universe of damages in the United States. Certainly, as damages continue to come to the public's attention on both sides of the Atlantic, it is clear that the universe of past damages is still not entirely known. And at this point in time, it would be very hard to make an accurate prediction regarding future damages. For that matter, whether the number of potentially responsible parties involved at sites in Europe is more or less the same as the number of potentially responsible parties at sites in the United States is an important consideration as well. Mostly, the number of potentially responsible parties is thought to influence transaction costs ­ that as the number of parties involved at a site increase, transaction costs as a percent of cleanup costs increase as well. Which raises the third assumption, which is whether litigious behaviour in Europe is similar to such behaviour in the United States. For the purpose of this report, it will be assumed that cleanup costs, the universe of damages, the number of potentially responsible parties involved at sites and litigious behaviour are the same in Europe and the United States, but whether this is true remains a policy question that should be researched further in future. Reviewed here are the key considerations that will influence the potential costs of a European liability regime. 7KH DQWLFLSDWHG QXPEHU RI OLDELOLW\ FDVHV UHVXOWLQJ LQ FOHDQXSV · According to the proposed European liability regime, the number of sites for which liability will fund cleanups will depend entirely on the number of cases that plaintiffs successfully bring to the courts. The proposed regime makes no commitment to cleaning up sites if the courts do not rule in favour of the plaintiffs, as Superfund does. This element of the proposed liability regime thus reveals little regarding the potential number of cases, and therefore potential costs, of a European liability regime. 7KH W\SH RI OLDELOLW\ OLPLWV DQG H[HPSWLRQV WKDW ZLOO DSSO\ · The proposed European liability regime will not be retroactive, as is Superfund. As a comparison, it should be kept in mind that up to 65% of Superfund's total cleanup costs can be attributed to prospective liability.

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Superfund employs strict liability across the board. The proposed European liability regime would employ strict liability for damage caused by inherently dangerous activities, and fault-based liability for damage to biodiversity caused by a nondangerous activity. Any confusion on the part of the courts as to which type of liability to apply may lower the number of cases ruled in favour of the plaintiffs. At the same time, though, the possible inclusion of damages caused by non-hazardous

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substances might lead to a higher number of cases than if it only covered damages caused by hazardous substances.

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At this point it remains unclear whether the proposed European liability regime will be proportional or joint-and-several. The interpretation of Superfund by the courts has been that it employs joint-and-several liability. This element of the proposed liability regime thus reveals little regarding the potential costs of a European liability regime. The proposed European liability regime thus far does not specify any exemptions. It is not clear whether the proposed regime would set any limits to liability, but it would allow for some defences, including force majeure, contribution to the damage or consent by the plaintiff, and intervention by a third party. The proposed regime would also allow for some alleviation of the plaintiffs' burden of proof and some equitable relief for defendants. The overall influence of these various elements on the potential costs of a European liability regime are not clear.

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7KH GDPDJHV DQG DFWLYLWLHV FRYHUHG E\ WKH UHJLPH · The proposed European liability regime would cover environmental damages that encompass both site contamination and damages to biodiversity. Should the proposed European liability regime inadequately define such damages, like Superfund it may experience high administrative costs, if cases are not dismissed outright due to confusion over the definition of damages.

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Unlike Superfund, the proposed European liability regime would cover damages to health and property. It should be understood, then, that some of the potential costs of the proposed European liability regime may not be due to cleanups alone.

7KH UHPHG\ VHOHFWLRQ DQG FOHDQXS VWDQGDUGV VSHFLILHG E\ WKH UHJLPH · The proposed European liability regime does not yet include comprehensive guidance for remedies, but it does state that criteria will need to be developed to assess and address different types of damages. This element of the proposed regime thus reveals little regarding the potential costs of a European liability regime. 7KH SRWHQWLDO SODLQWLIIV · Departing significantly from Superfund, the proposed European liability regime will be a two-tiered approach, meaning that Member State governments have primary responsibility in bringing cases to the courts, and that the public may bring cases if governments are negligent in fulfilling this responsibility. It is possible, though not at all certain, that this element of the proposed regime may lead to greater uncertainty in general regarding the regime and higher legal costs than would otherwise have been the case. 7KH SRWHQWLDOO\ UHVSRQVLEOH SDUWLHV · Unlike in Superfund, the emphasis of the scope of liability in the proposed European liability regime is on the operator in control of the activity that caused the damage. Further, it is not at all clear that the Commission, Member States or local governments would be subject to liability according to the proposed regime. Such a difference in the definitions of allowable defendants may mean that there is a narrower range of parties who can be potentially held liable for damages, and thus a smaller pool from which to fund cleanups than would otherwise have been the case.

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It is always desirable from the point of view of designing policy to be able to predict exactly how much the policy will cost. In the case of a liability regime, this is an extremely difficult endeavour, as the review of the various elements of the proposed regime indicates. While the design of some elements may push costs up, the design of others may keep costs down. And the influence of the design of some elements on the costs of the regime will not be known until it is implemented. Further, the design of each element may influence the distribution of costs throughout the economy, as well as the type of costs incurred. This report, then, should not be thought of as a predictive tool. Rather, it should be thought of as a framework for the consideration of each element of the proposed regime, individually and in the context of the other elements, and its potential influence on the cost of the regime.

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7KH 3RWHQWLDO (FRQRPLF ,PSDFW RI (QYLURQPHQWDO /LDELOLW\ 7KH $PHULFDQ DQG (XURSHDQ &RQWH[WV -DQHW 6WRQH 0F*XLJDQ 1- 86$ ,QWURGXFWLRQ Developed countries spend something like 1.5 to 2 percent of their GDPs to comply with environmental regulations.1 Therefore, it should come as no surprise that governments, industries and public interest groups on both sides of the Atlantic would like to know more about where these monies are going, as well as the benefits such expenditures achieve. These expenditures are thus being scrutinised to see if they can be justified by the resulting environmental benefits. In the United States, this concern is behind efforts by Congress to subject environmental legislation to stricter economic considerations by way of economic instruments, programmatic experiments (such as Project XL and environmental auditing), regulatory reform, and requirements that focus on program results. The truth is, however, that much more work needs to be done before the benefits of environmental programs can be assessed, and as yet there is no unassailable way to judge whether too much or too little is being spent on environment protection and restoration. In the absence of the perfect analytical framework, it may be easier to make the case that the polluters, and not taxpayers, should pay the bill for environmental protection. There are a number of laws in the United States that identify responsible parties and hold them responsible for the environmental damages they have caused. The best known of these laws is Superfund. As Europe contemplates its own White Paper on Environmental Liability, European decision makers and interested parties would like to learn from the American Superfund experience exactly how much environmental liability may cost Europe.2 But while the U.S. Environmental Protection Agency (EPA) is very good about prospective economic studies ­ as required by law ­ it has completed only five retrospective studies since 1981.3 Regarding the costs of Superfund specifically, a precise answer will prove elusive, first, because the United States Congress does not require private responsible parties to report their Superfund expenditures, and second, because the environmental liability regime under consideration in Europe departs from Superfund in a number of significant ways. While it must be understood that the picture Superfund research presents is incomplete, there are a number of studies that can help to put the question of costs into context, including "Footing the Bill: Who Pays and How?" (herein referred to as FTB in this

See "Pollution Abatement and Control Expenditure in OECD Countries, OECD 1996, Environment Monograph OCDE/GD(96)50.

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See "White Paper on Environmental Liability."

See "Environmental Protection: Assessing Impacts of EPA's Regulations Through Retrospective Studies (Letter Report GAO/RCED-99-250) 1999.

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report), the most authoritative study of Superfund costs to date.4 Most of these studies date from 1995, when Superfund was due to expire and such analyses were deemed necessary for its reauthorization. In the event, the Superfund law did expire and efforts to reauthorize it have thus far failed. New studies in anticipation of a renewed effort by Congress to reauthorize Superfund have not yet been completed, but are due out within the year.5 It would be ideal if Europe could weigh the findings of these new studies in the debates concerning environmental liability. Nevertheless, timeliness is of the utmost importance, and the findings from the earlier studies remain relevant and informative. Most of the anecdotal evidence demonises Superfund. Interested parties in Europe may be surprised that a more tempered look at the costs of Superfund will show that, on the whole, environmental liability is not at all likely to bankrupt an economy. But nor is it a quick fix for all environmental woes. More research is needed to better understand what drives the costs of cleanups, and even more research is needed to better understand the benefits of cleanups. But it remains that most of the attention garnered by Superfund is motivated simply because it is a big line item in EPA's budget. In fact, Superfund expenditures at their peak represented something less than 5 percent of the monies spent in the United States yearly to comply with all federal environmental regulations.6 Ideally, it would be of interest to calculate the economic impacts of all forms of environmental liability and similar approaches, but such a study has only been carried out for Superfund. Some responsible parties certainly have found the burden of environmental liability heavy, if not unbearable. But the bottom line is that, while the burden of liability varies greatly between individual parties and between industries ­ and that the pattern of burden to a large extent is a function of key features of Superfund that may not be present in the proposed European liability regime ­ liability hasn't broken the US economy and arguably has motivated economic actors to behave more responsibly. Certainly, the Superfund experience has demonstrated the complexity and controversy associated with environmental cleanups. Moreover, the Superfund experience should highlight the importance of conducting thorough policy studies, rather than allowing anecdote to inform complex policy decisions. This report will summarise the key findings from these earlier Superfund cost studies, and explain how these findings might apply in a European environmental liability regime. Because it is of particular interest, this report will discuss the distribution of Superfund costs per industry sector, comparing these costs with industry profit levels, or, in the absence of profitability data, value-added data. As the following discussion will indicate, in many ways it is very difficult to draw direct comparisons between the economic impacts of Superfund and the potential economic impacts of the proposed European environmental liability regime. But it is hoped that this report will at least create a

See "Footing the Bill: Who Pays and How?" Probst, Katherine N., Fullerton, Don, Litan, Robert E., and Portney, Paul R., The Brookings Institution and Resources for the Future, Washington, DC, 1995. See the web site for Resources for the Future (www.rff.org) for a listing of these forthcoming studies and anticipated publication dates.

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See p. 11 of FTB.

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framework to aid future debates. It should be noted that this report contains no original research, and assumes that the reader is familiar with the concepts of liability. $ %ULHI 2YHUYLHZ RI 6XSHUIXQG Superfund, officially known as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, was passed in response to public outrage over the discovery in the late seventies of a number of severely contaminated sites that threatened the health and well being of their surrounding communities and environment. However, Superfund was significantly amended by the Superfund Amendments and Reauthorization Act (SARA) in 1986, and many point to this date as the start of the current Superfund program. The purpose of Superfund was and is to allow EPA to identify contaminated sites that warrant cleanups, and then allow EPA to either initiate these cleanups and then compel the parties responsible for the contamination to pay for the cleanups through a liability process, or compel the responsible parties to undertake these cleanups directly. When the responsible parties cannot be identified or are insolvent, the cost of cleanup is covered by funds raised from a trust fund created from excise taxes on petroleum and specified chemical feedstocks and a corporate environmental income tax. It is this trust fund that gives Superfund its name. Sites designated as Superfund sites are referred to as National Priorities List (NPL) sites, and, broadly speaking, tend to be inactive or abandoned sites. Active sites requiring cleanup typically come under another law, the Resource Conservation and Recovery Act (RCRA). (However, in practice the distinction between active and inactive sites is a bit blurred.) Oil spills come under yet another law, the Oil Pollution Act (OPA). Traditional damages, such as damages to health or property, are not addressed under Superfund. Victims seeking restitution for such damages in general must take their cases to state courts. NPL sites are so designated because they are thought to be the worst in the nation, although it may be appropriate to qualify this description. Sites may avoid NPL designation by coming under the auspices of other cleanup programs, such as state voluntary cleanup programs. A number of studies argue that some of the most seriously contaminated sites have eluded cleanup altogether, and that some NPL sites really do not warrant cleanups.7 Contaminated sites that are not deemed hazardous enough to be placed on the NPL may be addressed through state cleanup programs in place in all fifty states, often known as "mini-Superfunds." It is anticipated by both EPA and state governments that, in future, more and more contaminated sites will be addressed through mini-Superfund programs.8 While Superfund has gained so much attention because of its liability component, the program's emphasis is as much on cleanup as on cost recovery. But whether or not Superfund is succeeding in cleaning up the sites on the NPL is in dispute. The number of sites on the NPL varies over time, as new sites are added and sites whose cleanups have

See "Superfund: Information on Current Health Risks" (Letter Report, 07/19/95, GAO/RCED-95-205) and "Hazardous Waste: Unaddressed Risks at Many Potential Superfund Sites" (Letter Report, 11/30/98, GAO/RCED-99-8). See "Superfund: Progress and Challenges" (Statement/Record, 05/25/1999, GAO/TRCED-99-202).

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been completed are removed. It is not clear how many sites have been cleaned up to date, although one source indicates that 535 sites have been removed to the construction completed list, meaning that their cleanup has essentially been achieved save for operations and maintenance.9 In 1999 there were 1233 sites currently on the NPL, with a total of 1370 sites having been listed since Superfund's inception. The U.S. General Accounting Office (GAO) testified in 1999 that more than 3000 potential NPL sites still needed to be evaluated, and that ultimately Superfund will need to cleanup 1800 sites.10 Some opponents argue that many cleanups are "gold-plated," that is, do not merit their costs. Others argue that most cleanups do not go far enough and take too long. And others point out that a number of sites removed from the NPL were so removed without any cleanups taking place.11 On average, cleanups take 12 years not including long-term maintenance (although EPA claims that recent cleanups have been completed in 8 years), and cost $30 million.12 However, such an average is a statistical construct at best, and it must be understood that different studies have calculated different "averages," mostly due to differences in estimating final cleanup costs ­ most cleanup costs are estimates since cleanups have been completed at less than half of all NPL sites. But the reality is that NPL sites vary greatly, for example, according to the nature of the contamination and the types of risks the sites pose, the activities that led to their contamination, the nature and complexity of the cleanups required and the types and numbers of the potentially responsible parties associated with the sites. Such differences will understandably lead to differences in the costs and lengths of cleanup. For instance, just under 200 NPL sites are federal sites, that is, sites where the parties responsible for their contamination are federal agencies.13 The Department of Energy (DOE) alone is responsible for over one hundred nuclear weapons sites, although not all of these sites are Superfund sites. Ultimately, the cleanup of these DOE sites is estimated to be between $150 and $200 billion, which translates to well above the average for non-federal sites.14

See "Congressional Research Service Issue Brief for Congress 97025: Superfund Reauthorization Issues in the 105th Congress" November 23, 1998.

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See "Superfund: Progress and Challenges."

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The US General Accounting Office reported in 1993 that only 60 percent of those sites deemed "construction complete" ­ that is, where the remedy had been completely implemented ­ were actually subject to a remedial action. At 19 percent of the sites studied, EPA determined that only a removal action was needed to address an immediate threat; no cleanup action at all was needed at another 21 percent. See p. 19 of FTB.

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See "Congressional Research Service Issue Brief for Congress 97025: Superfund Reauthorization Issues in the 105th Congress" and "Superfund: Progress and Challenges."

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See "Superfund: Information on the Program's Funding and Status" (Letter Report, 10/29/1999, GAO/RCED-00-25).

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See "Long-Term Stewardship and the Nuclear Weapons Complex: The Challenge Ahead" Probst, Katherine N. and McGovern, Michael H., Resources for the Future, Washington, DC, 1998.

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Cleanups can be categorised as either removals (either emergency or non-time-critical) or remedies. Removals involve reducing any immediate hazards posed by the site by fencing off the site, removing potentially explosive materials or leaking drums, removing contaminated soils or wastes, or providing bottled water if the sites have contaminated drinking aquifers. By law removals are limited to actions that cost less than $2 million and take less than 12 months to complete. Remedies are longer-term cleanups that are designed to be permanent in nature. Remedies of course vary from site to site, but very often involve restoring contaminated groundwater and somewhat less often surface water, as well as removing or containing contaminated soil in order to prevent further groundwater or surface water contamination. Depending on the complexity of the site, it may not at all be unusual for its remedy design to take longer than the execution of the remedy itself.15 For the sake of clarity, it should be understood that when critics of Superfund complain that cleanups take too long, generally they are referring to the amount of time that elapses from a site's NPL designation until its removal from the NPL, and not, strictly speaking, the amount of time it takes for a removal or remedy to be executed. To date, relatively few NPL sites have been associated with the restoration of natural resources, in part because defining natural resource damages, and developing a framework for their restoration, has been no easy task. These resources are defined broadly under the law to include land, fish, wildlife, groundwater, and other resources belonging to, managed by, or otherwise controlled by federal or other governmental entities.16 By law, a natural resource restoration project cannot begin at a site until its cleanup has been completed. As of 1996 such restoration was ongoing at seven sites and had only been completed at one site, and settlements reached at 62 sites.17 As explained earlier, there are essentially two sources of funding to cover Superfund costs: the taxes that fund the trust fund, and contributions from responsible parties through the liability process. (This report will not address how states cover the costs they may incur because of Superfund or the operation costs of their mini-Superfund programs.) Since Superfund's taxing authority expired in 1995, Congress has supplemented these revenue sources with appropriations from general revenues. Liability has been interpreted by the courts as strict, joint-and several, and retroactive. Responsible parties are broadly defined as generators of hazardous substances at a site, transporters who selected the facility for disposal of hazardous substances, and current and former owners and operators of the site. Thus, responsible parties are not restricted to corporate entities, but include private citizens, small businesses, landfill and recycling operations, and the municipalities that contributed waste to those landfills, to name just a few types of responsible parties. SARA allows EPA to release from liability GH PLQLPLV parties, or those parties responsible for only a small amount of the contamination at a site. SARA also limits the liability of insurance companies to the amount of coverage specified in their policies, and protects lenders from liability so long as they do not

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See "Superfund: Progress and Challenges."

See "Superfund: Outlook for and Experience with Natural Resource Damage Settlements" (Letter Report, 04/16/96, GAO/RCED-96-71).

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See "Superfund: Status of Selected Federal Natural Resource Damage Settlements" (Letter Report, 11/20/96, GAO/RCED-97-10). This report includes a disclosure of these selected settlements.

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participate in the management of a facility contaminated with hazardous substances, although lenders at times have incurred liability after foreclosing on a contaminated property. All federal agencies are subject to Superfund, and indeed, as mentioned earlier, not a small number of Superfund sites are federal facilities.18 When no parties can be held liable for the cleanup of a site, either because none can be found or those found are not financially viable, the site is referred to as an orphan site. In certain cases, a portion of a site may be declared orphaned and EPA will pay for the cost of cleaning up such a portion with trust fund monies. Anecdotes abound of sites with over one hundred responsible parties, and in fact there are sites with well over one hundred responsible parties, but the majority of Superfund sites have ten or fewer responsible parties. While almost any party can be a responsible party, generally speaking only the Department of Justice, working with EPA, can bring Superfund cases to court. If civil parties do not agree with EPA regarding its decision to bring or not bring a case to court, federal law allows such civil parties to take EPA to court.19 Superfund and its implementing regulations designate federal, state and tribal authorities as trustees for natural resources; only natural resource trustees can file suits under Superfund against parties responsible for injuring natural resources.20 In an attempt to reduce legal costs, SARA allows for the mediation of out-of-court settlements, but almost always such settlements are spurred by at least the threat of a court case. The focus of this report is the estimated economic impacts of Superfund, and a discussion concerning the costs of Superfund will be presented later in this paper. However, it is important to mention here that there are several types of costs that will be discussed. The cost of cleanups, e.g. the cost of pumping contaminated groundwater for treatment, or the cost of removing contaminated soil from a site, is only one component of Superfund costs. Another is administrative costs, that is, the costs to EPA or other parties that are incurred as a result of administering the Superfund program. Such administrative costs include, for example, the cost of supervising cleanup contractors, and are not insignificant. And yet another component of Superfund costs is transaction costs, or the costs that are unrelated, directly or indirectly, to cleanups. While transaction costs are not limited to legal costs incurred by parties as liability issues are sorted out by the courts, indeed legal costs account for most of the transaction costs of Superfund. It is fairly straightforward to calculate the sum of money that the federal government has spent on Superfund since its creation in 1980. Between 1980 and 1999, the federal government spent a total of $16 billion on Superfund, $5 billion of which is considered unrecoverable because financially viable responsible parties could not be found at all sites, and because at some sites EPA agreed during settlement negotiations that parties did not have to pay all past costs owed to it. Of the remaining $11 billion, some part of this may still be recovered from responsible parties.21 What is much more difficult to

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See the Federal Facilities Compliance Act of 1992 (P.L. 102-386). See the National Environmental Policy Act of 1969.

See "Superfund: Outlook for and Experience with Natural Resource Damage Settlements."

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See "Superfund: Progress and Challenges."

calculate is the sum of money that non-federal parties, including the parties held responsible for cleanups, have spent on Superfund ­ an important figure considering that the point of Superfund is to assign cleanup costs to responsible parties rather than to the public. EPA does not require responsible parties to disclose what they have spent on Superfund cleanups, and generally settlements are confidential and thus cannot be used in the calculation of such a sum. EPA estimates that responsible parties have spent over $15 billion on cleanups, not including administrative costs.22 Of course, these figures do not address what interested parties probably most want to know ­ the ultimate total costs of Superfund. This total varies depending on assumptions about the number of Superfund sites that will eventually be cleaned up, and the average total costs of cleanup per site. Estimates for the cost of cleaning up non-federal sites, excluding transaction and administrative costs, range from a 1991 estimate of $105.5 billion to $301.5 billion, assuming no change in policy, to a 1994 estimate of $106.0 billion to $462.9 billion.23 Approximately half of EPA expenditures are for support activities, and GAO estimates that EPA lost the opportunity to collect almost $2 billion since the program began because it did not assess parties more of the costs the agency incurred to run the program.24 Of all Superfund costs, transaction costs are probably the most difficult to estimate. Based on several different studies, estimates of the transaction costs incurred between 1980 and 1998 range from $3.2 billion to $7.6 billion.25 How much parties will ultimately spend on transaction costs is difficult to say. Transaction costs will be discussed in further depth later in this paper. While the cost of natural resource restoration has largely been omitted in estimates for the total cost of cleanup, prima facie such costs are unlikely to greatly increase Superfund costs. Still, it must be pointed out that very little data concerning natural resource damages exist in the public domain. The Department of the Interior and the National Oceanic and Atmospheric Administration estimate that, ultimately, as many as twenty sites may have natural resource damages exceeding $50 million each, and another forty sites may have claims between $5 million and $50 million each.26 These sites include but are not restricted to the sites cited earlier in this paper where settlements have been reached. After discussing the costs of Superfund, it would be logical to balance such a discussion with a discussion about the benefits of Superfund. In particular, it would be useful to know whether cleanups result in reduced risks to human health, healthier ecosystems, or improved property values (although it is often the Superfund designation, rather than any contamination per se, that devalues property near Superfund sites). Several reports by GAO have indeed focused on the health risks at both Superfund sites and potential

22 23 24 25 26

See "Superfund: Progress and Challenges." See p. 18 of FTB. See "Superfund: Progress and Challenges." See "Superfund: Information on the Program's Funding and Status."

See "Superfund: Outlook for and Experience with Natural Resource Damage Settlements."

7

Superfund sites.27 However, little is known about such benefits. As the authors of FTB point out: "With respect to the benefits of cleanup, it is inherently difficult to quantify the reduction in risks to human health that cleanups achieve. This is largely because of the lack of consistent information on the extent of contamination at most Superfund sites, and on the nature of individual exposures. Even if such information did exist, estimating health benefits would be difficult because of the long latency periods of most diseases or other physical harms that could arise from exposure to many hazardous materials. Nor can other benefits of site cleanup, such as ecological and aesthetic gains, be easily quantified."28 Clearly, a twenty-year-old federal cleanup program costing billions of dollars cannot adequately be described in so few words. Further, the overview above does not capture the changes to the Superfund program that have been implemented over the years. It is not unusual for Congress to set expiration dates in environmental legislation, the idea being that legislation needs to be reviewed from time to time in order to evaluate whether any amendments are needed, and that funding should be withdrawn from programs that do not demonstrate their worth. Superfund is no exception to this tendency. The law was first reauthorized and expanded through SARA, which extended Superfund until 1991. While the shape of the current Superfund program dates back to this reauthorization, the program almost came to a halt while the debates in Congress were raging. Therefore, when the next expiration deadline approached, Congress simply extended Superfund's taxing authority through 1995 with the Omnibus Budget Reconciliation Act of 1990. A number of administrative reforms were carried out in 1993 intended to streamline the program and make it fairer, but the reforms did not dispel criticisms of the program. In 1995, Congress failed to reauthorize Superfund, and the law's taxing authority expired. Every Congress since then has made a major effort to reauthorize Superfund, so far without success. In 1999, the unappropriated balance in the trust fund was estimated to be $1.4 billion.29 In the same year, GAO estimated that an additional $8.2 to $11.7 billion in government funding was needed to complete Superfund cleanups.30 (It should be noted that these figures do not include costs to private responsible parties.) While Superfund has not been shut down, its future is uncertain. As mentioned earlier, it is anticipated by both EPA and state governments that in the future, the states will assume more and more responsibility over the cleanup of hazardous sites. 7KH (FRQRPLF ,PSDFWV RI 6XSHUIXQG As one can easily imagine, piles of statistics have accumulated regarding Superfund since the program was created in 1980. Even so, it can be rather difficult for an audience not immersed in Superfund minutiae to understand its cost and economic impact issues. To

27

See "Superfund: Information on Current Health Risks" and "Hazardous Waste: Unaddressed Risks at Many Potential Superfund Sites."

28 29 30

See p. 24 of FTB. See "Superfund: Information on the Program's Funding and Status." See "Superfund: Information on the Program's Funding and Status."

8

recap, Superfund generates three broad types of costs. Cleanup costs are those costs incurred directly by cleanup efforts, that is, the removal or remediation of contamination at sites. Such costs include pumping and treating contaminated groundwater and removing or containing contaminated soil. Transaction costs, including legal costs, are those costs that do not directly result in cleanups. Because Superfund depends upon the courts to assign liability, it necessarily generates transaction costs. And finally, because the Superfund program requires administrative support, it also generates administrative costs ­ including the costs of creating the (sometimes electronic) paper trail that allowed the studies highlighted in this paper. Generally, the costs that are of the greatest interest to interested parties are the cleanup costs incurred at individual sites and how these costs are distributed among responsible parties, the transaction costs incurred by responsible parties, and the aggregates of these costs. Administrative costs tend to be overlooked, and that will be reflected in this paper by its sparse treatment of the subject. But these figures alone do not go very far in explaining the impact Superfund has on various sectors of the American economy. As mentioned earlier, Footing the Bill (FTB) is the study that best presents not only questions concerning costs, but also the potential economic impacts of the program. Thus, this paper will summarise the findings from FTB that may shed light on the potential economic impacts of a European liability regime. In particular, this paper will review the findings of FTB with regard to the average cost of cleaning up individual sites and how this average varies depending upon the type of site being cleaned up; how much on average responsible parties pay in transaction costs and how this average varies depending upon the number of responsible parties involved at a site; aggregate cleanup and transaction costs by industry and how these aggregates compare to the value added by each industry; and finally, the share of Superfund costs attributable to retroactive cleanups and the cleanups of closed landfills. Since FTB draws from the findings of other studies, this paper will briefly discuss these studies as well. Of course, in no way should reading this paper be considered a substitute for reading FTB itself. Since several years have passed since the publication of FTB, this paper will highlight some of the findings from reports and studies that have been released to the public since the publication of FTB. In particular, this paper will discuss recent findings on the transaction costs incurred by the largest American firms, and the Superfund costs incurred by small businesses. While a number of interest groups have expressed interest in the potential costs of liability to insurers, this paper will not address this complex question. Unfortunately, the findings that are discussed in this paper still don't indicate the total economic impacts of Superfund. At best, most of these findings are estimates. And they don't say much about the impacts on parties that are not responsible parties ­ for instance, how much parties spend on preventative measures in order to avoid liability. Still, these findings together establish an important starting point, and will go a long way to inform future studies. Before launching into a discussion of the findings of FTB, it is worth taking some time to explain the assumptions and methodology behind this study. FTB looked at all sites on the NPL at the time the study was being conducted (the 1993 fiscal year), except for federal facilities. Because information concerning natural resource damages was so incomplete at the time of the study (and still is), such costs were not included in its analyses.31 The authors assigned an estimated total cleanup cost to each site in the study

31

This report is limited in scope to a discussion based upon existing studies. Unfortunately, though the potential liability costs due to natural resource damages are of

9

based on the type of facility at the site (e.g. a chemical manufacturing plant or a landfill). Again, such costs must be estimated because cleanups have been completed for so few sites. The authors assumed that the transaction costs incurred at each site would be equal to a predetermined percentage of the total responsible party expenditures; they assumed that as the number of responsible parties at a site increased, the transaction costs as a percentage of the estimated total cleanup costs would also increase. When information was available, the authors assigned financial responsibility to specific industries based on ownership of sites and contributions of hazardous substances to them. Because of an emphasised interest in annual Superfund costs, the authors calculated this number by totalling estimated cleanup costs and dividing this total by ten, thereby assuming that all cleanups, but not necessarily operation and maintenance activities, would be completed by 2003. The authors did not include in their analyses any sites that might be added to the NPL after 1993, nor did they discount cleanup costs over time. Finally, the authors did not assume any increase of administrative costs as private responsible parties are released from liability and cleanups come under the oversight of EPA, but because there is evidence that cleanups overseen by responsible parties cost approximately 20% less than cleanups overseen by EPA, the authors did assume a reduced cleanup cost for sites managed by responsible parties.32 &OHDQXS &RVWV

great interest, the lack of collected literature on this subject means that this report cannot shed much light onto this matter. Interested readers should read the GAO documents regarding natural resource damages already cited in this report. For further information readers may also wish to refer to an earlier GAO report, "Superfund: NRD Claims: Statement of Keith O. Fultz, Assistant Comptroller General, Resources, Community, and Economic Development Division" (GAO/T-RCED-95-182). Mr. Fuller states: "As of April 1995, federal agencies had settled 98 natural resource damage cases for an estimated total of $106 million...In comparison, through fiscal year 1994, responsible parties had settled Superfund cleanup agreements valued at an estimated $10.2 billion ­ nearly 100 times the total value of the natural resource damage claims...Federal and state officials told us of three future settlements that could involve hundreds of millions of dollars. They also indicated that there may be other future instances where claims will exceed $50 million per geographic area." Although Superfund generally does not address oil spills, readers still may also be interested in reading "Putting Response and Natural Resource Damage Costs in Perspective," Helton, Douglas and Penn, Tony, Paper No. 1999 International Oil Spill Conference, (www.darp.noaa.gov/pdf/costsofs.pdf). The paper presents and discusses the costs for a number of incidents representing a range of spill volumes and locations. The paper generally concludes that costs associated with natural resource damages comprise only a small portion of total liability from an oil spill.

32

See p. 36 of FTB.

10

The authors had at their disposal two estimates for cleanup costs at individual sites. A study by the University of Tennessee estimated that on average, cleanups would cost $50 million each. Estimates by EPA and the Congressional Budget Office (CBO) estimated that average cleanups would cost $25 million. The authors chose as their average $29.1 million, based on the estimate of EPA and CBO, which was the more recent. The authors used a slightly higher average, however, because evidence indicated that site studies and operation and maintenance activities could cost more than EPA or CBO had accounted for.33 As mentioned earlier, an "average" Superfund site is at best a statistical construct. Based on the findings of a number of earlier studies, the authors weighted their average cleanup cost for various types of sites.34 Average cleanup cost by type of site35: Site type Asbestos Chemical Manufacturing Drum Recycling Electrical Landfill Leaking Container Manufacturing Metalworking Mining Plating Radiological Tailings Surface Impoundment Waste Oil Wellfield Wood Preserving 7UDQVDFWLRQ &RVWV Those critical of using liability to fund cleanups point out that liability generates transaction costs ­ costs that do not go towards cleanups. However, how much exactly is being spent on transaction costs is rather difficult to say. EPA does not require responsible parties to disclose such expenditures, and some of the transaction costs generated by Superfund-related activities are incurred by third parties. For example, contributing parties who were not identified as such by EPA may incur transaction costs if they are sued for cost recovery by those who were, as may insurance companies if they are sued by policy holders hoping to be reimbursed to cover their liabilities. Further, transaction costs can be incurred at any time in the cleanup process but tend to be Estimated average cost in millions of dollars 12.7 41.1 18.9 26.4 29.0 34.4 13.5 13.0 170.4 14.0 75.4 24.9 32.3 14.9 40.6 Number of sites in study 3 93 10 21 322 15 196 10 30 7 9 80 19 65 53

33 34 35

See p. 20 of FTB. See p. 36 of FTB. See p. 36 and p. 130 of FTB.

11

incurred early in the process, while cleanup costs tend to be incurred later in the process. Since few cleanups have been completed, current figures do not represent total costs, and may overestimate transaction costs as a percentage of total (cleanup SOXV transaction) costs. But for all the concern about transaction costs being high, few studies have looked into this question in depth. In preparing their analysis for FTB, the authors could support their assumptions based on findings from two studies published by RAND Institute for Civil Justice. This discussion will briefly summarise the findings of the RAND studies, as well as some of the findings of a later survey of Fortune 500 companies by GAO. The first RAND study examined the transaction costs ­ connected to both NPL and nonNPL sites ­ of five very large industrial firms with annual revenues of more than $20 billion. At the time the study was performed, transaction costs amounted to 19 percent their expenditures (including cleanup and transaction costs) at the 49 NPL sites at which the firms had been named responsible parties. For the NPL and non-NPL sites together, transaction costs for the same firms averaged 21 percent of all expenditures. Legal costs accounted for 75 percent of the transaction costs. In the second RAND study, the costs to smaller firms (those with annual revenues of less than $20 billion) were analysed at 18 sites. Firms with annual revenues between $100 million and $1 billion had up to that point spent 15 percent of their total costs on transaction costs, and firms with annual revenues between $1 billion and $20 billion had spent 19 percent on transaction costs. Firms with annual revenues of less than $100 million had spent 60 percent on transaction costs. Based on these findings, the RAND researchers estimated transaction costs for all responsible parties prior to 1992 to equal on average 32 percent of total costs.36 It must be noted that the RAND studies did not consider transaction costs incurred by federal and state governments. Further, the studies only looked at a small number of NPL sites ­ 67 in total. Nevertheless, the RAND studies presented the best estimates available at the time FTB was written, and their analyses are still relevant in Superfund debates. Based on the two RAND studies, as well as a 1993 RAND paper that considered methodologies for estimating final transaction cost percentages (for completed cleanups), the FTB authors assumed that, for sites where responsible parties contribute to some or all of the cleanup costs, the transaction costs incurred would average 21% of their total expenditures for completed cleanups.37 The authors further assumed that, from site to site, transaction costs would be a function of the number of responsible parties identified at each site and cleanup costs. Transaction costs as percent of total costs by number of responsible parties at site38:

36

See pp. 21-22 of FTB. The FTB authors note: "It is not surprising that RAND found higher transaction cost shares for smaller companies. Part of the transaction cost share is a fixed cost at each site that is not directly related to the total amount spent on cleanup by each company. Because smaller firms are likely to have spent less in absolute terms than larger ones on site cleanups, a higher percentage of their total costs is likely to be for transaction costs. Larger firms, such as those examined in the earlier RAND study, are more likely to incur substantial cleanup costs. Thus the resulting transaction costs, even if large, constitute a smaller percentage of their total costs."

37 38 12

See p. 22 of FTB. See p. 37 and p. 38 of FTB.

Number of parties orphan 1 2 to 10 11 to 50 over 50 unknown

Transaction costs as percent Percentage of sites studied of total costs 0 0 5 17 20 42 25 18 30 19 15 4

In 1994, too late to be included in FTB, GAO published a letter report to Congress with survey results from the Fortune 500 industrial and the Fortune 500 service corporations regarding any cleanup and legal expenses these corporations may have incurred.39 Approximately two-thirds of the corporations surveyed responded, and about half of the respondents, 367 corporations, responded that they had had at least some involvement at Superfund sites. Since 1987 (the year after SARA was passed), these respondents had spent on average $1 million on cleanup costs, and $500,000 on legal costs (incurred in connection with negotiation or litigation with EPA, other responsible parties, and/or insurance companies), with a wide variation in the sample responses. On average, each had been involved at 17 sites, again with a wide variation in the sample responses. Generally, legal costs increased with cleanup costs, but not as rapidly. Parties with only GH PLQLPLV involvement at any site (19 percent of the respondents) spent on average almost $32,000 on legal costs since 1987, representing 46 percent of the total costs they incurred, while parties playing a major role at three or more sites (35 percent of the respondents) spent almost $3.5 million on legal costs, representing 28 percent of their total costs. Three factors were identified by the respondents as contributing to high legal costs: the failure on the part of EPA to identify all the responsible parties at sites, the failure on the part of EPA to being enforcement action against all appropriate responsible parties ­ accusations EPA contests, and the lack of good volumetric information. According to the respondents, good volumetric information was available at only 170 of the 570 sites examined in further depth by the survey. A significant number of respondents felt that alternative dispute resolution processes helped to keep legal costs down, but it is not clear in the report how many respondents were involved in alternative dispute resolution processes. While the report provided useful information regarding the impact of Superfund on the largest corporations in the United States, it did not indicate how far along the sites in question were in the cleanup process, or how much more the respondents estimated they would need to spend on cleanup and legal costs. ,PSDFWV RQ 6HOHFWHG 6HFWRUV RI WKH $PHULFDQ (FRQRP\ The authors of FTB concluded from their analysis that the projected annual costs of nonfederal cleanups should not be unduly burdensome to most industries. They looked at aggregate annual cleanup costs, aggregate annual transaction costs, and, in some cases,

39

See "Superfund: Legal Expenses for Cleanup-Related Activities of Major U.S. Corporations" (Letter Report, 12/23/94, GAO/RCED-95-46).

13

aggregate annual total costs relative to the industries' annual profits.40 However, the authors observed that, although Superfund liability is best compared to profits in each industry, data on profits were not available for every industry. Therefore, the authors indicated the size of each industry by using data on value added from an input-output model they developed in separate analysis, as well as liability as a percentage of the value added. Readers interested in a more detailed discussion of these findings should refer to pages 34 through 53 in FTB. The authors did not try to assess the financial burden to any individual responsible party, and they noted that, because their analysis focused on annual costs, any changes to their assumptions about the pace of cleanups could alter their findings significantly. Costs by industry41: Industry Estimated annual responsible party cleanup costs in millions of dollars (percentage of total) Estimated annual responsible party transaction costs in millions of dollars (percentage of total) Value added in 1990 in billions of dollars (estimated annual cleanup and transaction costs as percent of value added) 32.2 (0.7) 25.8 (0.5) 126.7 (0.4) 37.6 (0.3) 47.3 (0.3) 71.8 (0.1)

Mining Lumber and wood products, except furniture Chemicals and allied products Petroleum refining and related industries Primary metals industries Fabricated metal products, except machinery and transportation

174.5 (11) 98.1 (6) 394.4 (25) 75.3 (5) 118.0 (8) 79.7 (5)

46.0 (11) 21.8 (5) 97.6 (23) 22.0 (5) 30.8 (7) 19.0 (5)

40

A note regarding the economic model used in FTB: the authors, assuming conditions of perfect competition and observing that liability affects individual economic actors very differently, therefore assumed that the costs of environmental liability will come out of industry profits, and will not be recouped through higher product prices. The authors did assume that the taxes contributing to the Superfund trust fund, which do affect industries consistently if not uniformly, will be reflected by higher product prices. This paper will discuss these taxes briefly later in this paper. FTB did not discuss the costs associated with preventing liabilities ­ such as reducing hazardous releases, or remediating damages before they become liabilities ­ that economic actors might voluntarily incur. But, because all economic actors will share the same cost information regarding preventative measures, they logically should make the same decisions regarding the level of prevention costs they are willing to incur, and therefore these costs should be reflected in higher product prices.

41

See p. 44, p. 49 and p. 53 of FTB.

14

equipment Electronic and other electrical equipment and components, except computer equipment All other manufacturing Miscellaneous Recycling Not attributed

57.7 (4)

12.4 (3)

93.7 (0.1)

Total

94.7 (6) 91.4 (6) 157.9 (10) 217.4 (14) 1559.1 (100)

22.9 (5) 23.1 (6) 53.9 (13) 68.9 (16) 418.5 (100)

In particular, the chemical and allied products industry would incur $492.0 million in annual cleanup and transaction costs, the highest of all industries included in the analysis. Specifically, this industrial sector would pick up a quarter of the total cleanup costs, and a slightly smaller percentage of the total transaction costs. Yet these estimated annual cleanup and transaction costs represent less than one percent of the industry's added value in 1990. Further, the chemical and allied products industry reported after-tax profits of $21 billion in 1991 and $24 billion in 1992.42 Using an average of these profits, the estimated annual cleanup and transaction costs represent just over two percent of the industry's after-tax profits. Thus there is no doubt that the chemical and allied products industry foots a higher share of the cleanup bill than any other industry, but at the same time it is also clear that as a whole the industry should be able to manage such a share. Based on liability as a percentage of profits, however, the one exception to the authors' findings is the mining industry. The authors estimated that over ten years, the mining industry would incur annual cleanup and transaction costs of $220.5 million. Annual profits for the mining industry in the years prior to the publication of FTB have flipflopped from red to black and back to red again. In 1991 before-tax profits for the mining industry amounted to only $300 million. After taxes in 1991 the industry reported losses of $300 million. Even in 1990, a much better year for the industry, after-tax profits amounted to only $1 billion. And in 1985, after-tax losses in the industry amounted to $6.1 billion.43 $ )XUWKHU %UHDNGRZQ RI &RVWV RI WKH &XUUHQW 6XSHUIXQG 3URJUDP Several analyses that the authors of FTB performed regarding options for reforming Superfund are revealing, although the reform options themselves would not be applicable to the proposed European liability regime. In particular, the authors looked at a liability release for pre-1987 wastes at multiparty sites, and a liability release for pre-1980 wastes at multiparty sites. The two cut-off dates refer to the creation of Superfund, and the passage of SARA, which greatly expanded the Superfund program. According to some critics of Superfund, holding parties liable for activities retroactively is not fair, since these parties could not have known at the time these activities were carried out that they

42 43

See p. 51 of FTB. See pp. 50-51 of FTB.

15

might be held liable for damages stemming from these activities. The authors also looked at a liability release for closed landfills that received both municipal and industrial solid wastes. Such sites may involve large volumes of waste and high numbers of responsible parties, including the towns and cities that contributed wastes to these landfills. Finally, the authors did not look at how much of Superfund's costs are incurred by small businesses, but in a more recent study, RAND did. This paper has therefore included some of the highlights from this RAND study. The authors calculated that, if the Superfund program remained unchanged, the remaining cost of cleaning up the nonfederal sites then on the NPL would be $21.4 billion spread out over ten years, 27% of which would have to be covered by the trust fund.44 Further analysis showed that multiparty sites contaminated before 1980 account for 35% (or 374) of the 1134 sites on the NPL, and multiparty sites contaminated before 1987 account for 55% (or 624) of the sites on the NPL.45 If costs are not correlated with the date of contamination, and there is no evidence that they are, then these percentages should also represent the percentage of Superfund costs attributable to these sites. Sites contaminated by a single responsible party are not included in these numbers because it was not anticipated that they would be exempted from liability; if such sites were included in these numbers, the percentage of costs attributable to retroactive liability would increase slightly. The authors assumed that responsible parties found guilty of negligence or wrongdoing would not be released from liability. However, this analysis could not identify specifically which sites were contaminated as a result of negligence or wrongdoing. The authors assumed that seven percent of wastes at multiparty sites were disposed of illegally, but the percentages above do not take this assumption into account.46 Closed landfills that received both municipal and industrial solid wastes accounted for 19% (or 220) of the sites on the NPL.47 It must be emphasised that these findings assume that no additional nonfederal sites would be added to the NPL in future, an assumption that, five years after the publication of FTB, has not been supported by an expanding NPL. Further, the authors' conclusions are very much dependent upon the mix of NPL sites being studied. As new sites are added to the NPL, undoubtedly this mix will change. Nevertheless, the analysis includes a look at the distribution of cleanup costs among major industrial sectors that, even though it is only a snapshot of the NPL at one moment in time, is very useful. The authors point out that the chemical industry has the largest share, 25%, of the cleanup costs covered by responsible parties under the current Superfund program. The mining industry has the next largest share, 11%, and recycling facilities account for 10% of the cleanup costs. The remaining cleanup costs are distributed fairly evenly among other key industrial sectors.48 Allowing any liability releases predictably would result in a reduction of the cleanup costs covered by each industrial sector, and a change in the

44 45 46 47 48

See p. 40 of FTB. See Appendix B of FTB. See p. 140 of FTB. See p. 139 of FTB. See pp. 42-43 of FTB.

16

distribution of cleanup costs among industrial sectors as well. That said, if the trust fund were to expand to cover the cleanup costs otherwise covered by responsible parties, industry will necessarily find itself paying higher taxes to cover such an expansion; inevitably some responsible parties will see their liabilities decrease ­ at the expense of other parties who have no liabilities, who will see their tax bills increase. Predictably, while the transaction costs incurred by responsible parties decreased on an absolute level when certain types of sites were assumed released from liability, responsible parties were found to continue to incur more or less the same percentage of transaction costs as a share of their cleanup costs. This finding necessarily resulted from the assumptions made by the authors. However, as more sites were assumed released from liability, transaction costs as a share of the total cleanup costs for all nonfederal NPL sites (that is, those incurred jointly by the responsible parties and the trust fund) were found to decrease, from 16% of the total cleanup costs for the 1134 NPL sites, or $2.6 billion, to 4% of the total cleanup costs when all pre-1987 multiparty sites were released from liability.49 But, it must be emphasised that any reductions in transaction costs were offset by the increase in cleanup costs when the federal government implements cleanups. Again, this makes intuitive sense since transaction costs were assumed to equal 21% of the responsible parties' cleanup costs, and cleanup costs were assumed to increase by 20% when EPA oversees the cleanup, almost the same percentages. It has often been asked what impact Superfund has on small businesses, and the question has been raised in the debates regarding the proposed European liability regime as well. In 1998, RAND conducted a study for EPA that attempted precisely to address this question.50 The RAND study defines small businesses in a number of ways: firms with annual revenue less than $3 million, firms with annual revenue less than $10 million, firms with fewer than 25 employees, and firms with fewer than 50 employees. The study analysed the number of responsible parties that would be released (using data from 114 nonfederal NPL sites), and the cleanup costs that presumably would need to be transferred to EPA (using data from 35 nonfederal NPL sites) if small businesses were exempted from Superfund liability. The study found that between 38 and 56 percent of the responsible parties at the sites studied have annual revenue less than $3 million, and between 46 and 68 percent have annual revenue less than $10 million.51 Similar estimates resulted for responsible parties with fewer than 25 and 50 employees, and the study further concluded that the responsible parties defined as small businesses based on annual revenue more or less overlap with the responsible parties so defined based on the

49 50

See p. 46 of FTB.

See "The Financial Implications of Releasing Small Firms and Small-Volume Contributors from Superfund Liability," Dixon, Lloyd S., RAND Institute for Civil Justice (DRU-1366-2-EPA) August 1998.

51

The study estimates that the number of responsible parties with less than $10 million in annual revenue at all NPL sites would be between 40,000 and 59,000, if the sites examined in its study are representative. However, number of small businesses represented by these figures is probably lower, since an individual party can be named a responsible party at more than one site.

17

number of employees. The study then went on to estimate the share of cleanup costs attributable to small business responsible parties based on the percentage of their contribution to the volume of waste at the sites studied. Estimates ranged from 11 to 22 percent for firms with annual revenues under $3 million, and from 12 to 24 percent for those with annual revenues less than $10 million. The ranges based on the number of employees were somewhat higher. It is not clear that cleanup costs are driven by the volume of cleanups. Further, the study notes that there remains uncertainty in the share of volume-based cleanup costs attributable to small businesses, and that the figures calculated in the study, if applied to the entire universe of NPL sites, may overstate the actual volume-based cleanup costs for small businesses.52 It should be noted that volumetric information does not exist for many NPL sites, but that an analysis of actual cost contributions by small business responsible parties at sites where this information was available suggests that they contribute much less than their volume-based cleanup costs.

$ %ULHI 1RWH RQ 6XSHUIXQG 7D[HV One of the major arguments against funding cleanups through liability is that liability generates significant transaction costs. But if liability cannot be employed to fund cleanups, generally some form of taxation must be used to fund cleanups. At the moment, Europe is not contemplating the imposition of any taxes as part of its liability regime. Further, Superfund's taxing authority has expired, and efforts to renew it have so far failed in Congress. However, underscoring several conclusions drawn by the authors of FTB concerning Superfund taxes may be very useful in putting the costs of Superfund in context.53 It should be kept in mind that these conclusions were made in 1995, when Superfund's taxing authority was still in effect. Further, the authors estimated that, at that time, annual Superfund expenditures by government and private parties for cleanup, transaction and administrative costs was something like $6 billion. The authors note that "the three existing Superfund taxes ­ excise taxes on chemicals and petroleum, and a corporate environmental income tax ­ have an almost imperceptibly small effect on the economy as a whole. Not only do these taxes raise minuscule amounts of money each year in relation to gross domestic product ($1.3 billion in a $6 trillion economy), but they are also broadly distributed throughout the economy so that no one industry is overly burdened. The effect of existing Superfund taxes on product prices is negligible, and this conclusion would not change even if these taxes were increased significantly to stock an enlarged trust fund."

52

With such uncertainties in mind, the study estimates that the volume-based cleanup costs for responsible parties with annual revenues less than $10 million are between $1.1 billion and $3.9 billion, and for responsible parties with fewer than 50 employees the volume-based cleanup costs are between $2.6 and $5.0 billion. The same study estimates that responsible parties will ultimately pay $15.5 billion in cleanup costs at the 1,126 non-federal sites on the NPL as of mid-1993. It should be noted, however, that the study bases this figure on a mean expected cleanup cost of $13.8 million for the sites in its sample, an estimate that is lower than the estimates used in other studies.

53

See p. 10 of FTB.

18

However, the authors go on to note that there are transaction costs associated with paying taxes. Even as some transaction costs may be eliminated when cleanups are funded through taxation, other transaction costs will be generated if new taxes are created to provide such funding. The level of transaction costs will of course depend upon how the tax is designed. "It takes time and money to administer and comply with any tax. For each individual tax, each firm must fill out a full set of forms to calculate a separate tax base. Most of these administrative and compliance costs are fixed, however, and vary little with the tax rate or the amount of revenue raised. In some sense, then, the fewer taxes the better. The Superfund trust fund needs relatively little revenue, yet Superfund legislation has introduced three separate taxes ­ the chemical feedstocks tax, the petroleum excise tax, and the corporate environmental income tax. The corporate environmental income tax is particularly complicated. It is inefficient in the sense that the annual administrative and compliance costs to which it gives rise may be as large as the revenues it raises.54 This suggests that a better approach at the inception of the Superfund program in 1980 might have been to use general revenues to create the trust fund. It also suggests that the corporate environmental tax, created in 1986 under the Superfund Amendments and Reauthorization Act, should perhaps have been rethought."55

%URZQILHOGV DQG 9ROXQWDU\ &OHDQXS 3URJUDPV In response to the high perceived costs of the Superfund program, two alternative cleanup approaches have become popular as means to address such cost concerns. The first approach that this paper will discuss is the brownfields program, which EPA established in 1994. The second approach relates to the voluntary cleanup programs created by states that rely on incentives rather than enforcement orders to accomplish cleanups. While neither approach is part of the Superfund statute, both are important components of the big Superfund picture. Although their costs are not nearly as high as the costs of Superfund, they are not negligible either. While it may be a bit early in the European liability debate, Europe would do well to think about why these programs were created, and whether a future European liability regime won't give rise to some of the same problems that these programs are meant to address. As well as to reduce the cost of cleanups, in particular these programs are designed to reduce the economic costs associated with the uncertainties surrounding liability. Brownfields are defined as abandoned, idled, or under-used industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived environmental contamination.56 Most brownfields are located in economically depressed

54

Stated in other words, the transaction costs associated with this tax is equal to 100% of the revenue it raises. The estimated transaction costs associated with liability are not thought to be anywhere near that rate (see the discussion related to transaction costs).

55 56

See p. 10 of FTB.

See "Superfund and the Brownfields Issue," Reisch, Mark, Congressional Research Service, Washington, DC, July 22, 1997.

19

urban areas, and there seems to be a sense that if these sites could be redeveloped, such areas might be revitalised. Developers have avoided redeveloping these sites because of the high costs of the required environmental assessments of the sites, and out of fear that they may be held liable if contamination is found on these sites. The brownfields program is an administrative program rather than one authorised by legislation, and derives its support from Superfund appropriations. EPA primarily uses its brownfields funds to help state, local and tribal governments build their capacities to assess, clean up, and revitalise brownfields sites.57 Some of these funds go toward expanding state voluntary cleanup programs, which will be discussed further below. Under brownfields programs, developers generally face limited liability connected with any future damages stemming from redevelopment. At the moment no national registry of brownfields sites exists, but states have identified thousands of such sites, and researchers have estimated that there may be well over 150,000 acres of abandoned or underused industrial land in major U.S. cities.58 For fiscal years 1997 and 1998, EPA had $126 million in brownfield funds, and in 1997 more than 28,000 sites were removed from consideration for the NPL as a result of brownfields programs.59 The reason for the reluctance to redevelop brownfields sites is that there is uncertainty regarding the risks they pose. It makes sense that a mechanism should exist to streamline the Superfund process and keep those brownfield sites that do not pose serious environmental threats out of that process. But it is also important that, regarding those brownfield sites that are found to pose serious environmental threats after further investigation, the brownfields programs do not promote inferior cleanups that prioritise redevelopment over remediation. More research into the costs and benefits of the programs, as well as an evaluation of the checks and balances built into the programs, will need to be done as state, local and tribal governments gain more experience with brownfields programs. In the late 1980s, states began to establish voluntary cleanup programs. In 1997, GAO surveyed the program managers of voluntary cleanup programs in fifteen states, who responded that the program accomplishments include identifying, evaluating, and cleaning up many contaminated sites that would not have been addressed under other federal or state cleanup programs, although almost all of the programs deal with sites that could qualify as NPL sites.60 A few of the programs are responsible for nearly all the cleanups in their states. The programs are co-operative in nature, meaning parties have an incentive to come forward in return for at least some relief from state liability once cleanups are completed, reducing the need for states to take enforcement actions. However, volunteers are still subject to Superfund liability, although EPA has been working with states to determine when further action at sites is no longer necessary.

57

See "Superfund: EPA's Use of Funds for Brownfield Revitalization" (Letter Report, 03/19/98, GAO/RCED-98-87).

58

See "Superfund: Barriers to Brownfield Redevelopment" (Letter Report, 06/17/96, GAO/RCED-96-125).

59

See "Superfund and the Brownfields Issue" and "Superfund: EPA's Use of Funds for Brownfield Revitalization."

60

See "Superfund: State Voluntary Programs Provide Incentives to Encourage Cleanups" (Chapter Report, 04/09/97, GAO/RCED-97-66).

20

Voluntary cleanups are less costly and take less time than Superfund cleanups, primarily because voluntary cleanups are subject to reduced requirements. Funding for the programs come mostly from the states and the federal government, as well as fees paid by participants. Voluntary cleanup programs often complement brownfields programs, since voluntary cleanups have allowed the redevelopment of many such sites. As in the case of brownfields programs, it should be asked whether voluntary cleanup programs help to streamline the Superfund program, or whether these programs promote inferior, albeit less costly, cleanups. Again, more research is needed to address this question.

$ %ULHI 2YHUYLHZ RI WKH 5HVRXUFH &RQVHUYDWLRQ DQG 5HFRYHU\ $FW Superfund is not the only regulation in the United States designed to address contaminated sites. In 1976 Congress passed the Resource Conservation and Recovery Act (RCRA), and amended RCRA in 1984 with the Hazardous and Solid Waste Amendments (HSWA). RCRA regulates active sites that treat, store or dispose of (TSD) hazardous wastes. HSWA requires the cleanup (referred to as a corrective action) of contamination at active (or soon-to-be-active) sites that stem from improper waste management practices prior to the passage of RCRA, as well as from potential future releases. According to the law, parties seeking permits to treat, store or dispose of hazardous wastes must perform corrective actions at their own expense regardless of when the contamination occurred. Accidental releases are also addressed through corrective actions. EPA has authorised thirty-three states to run their own corrective action programs. There are currently 3700 facilities in the corrective action workload.61 A central component of RCRA is the regulation of underground storage tanks (USTs). It has been estimated that there are well over a million USTs storing fuel petroleum in the United States, and that that leakage rate may be as high as 35 percent. RCRA requires UST owners to demonstrate financial responsibility for corrective action and potential liability in the form of collateral or insurance, $500,000 for small volume operators and $1 million for operators dispensing 10,000 or more gallons per month. Prior to 1995 there were 185,000 confirmed releases, and the total cost of UST corrective action was estimated to be $30 to $40 billion.62 While RCRA and Superfund are autonomous programs, it should be noted that there are some cases where former RCRA sites have become Superfund sites, and where RCRA corrective actions and Superfund remediations are being carried out simultaneously at some sites. It is not clear how much the RCRA program has cost the American economy, but like Superfund, RCRA has attracted numerous criticisms: a priority on process and paperwork over progress toward real results, overly conservative cleanup goals, and the absence of meaningful public participation. EPA is currently re-evaluating the RCRA program with reforms in mind. Nevertheless, Europe may wish to consider RCRA as an alternative or complementary approach to an environmental liability regime.

61 62

See EPA's Office of Solid Waste web site (www.epa.gov/epaoswer/osw).

See "Retroactive Liability and Future Risk: The Optimal Regulation of Underground Storage Tanks," Boyd, James and Kunreuther, Howard, Resources for the Future (Discussion Paper 96-02) October 1995.

21

$ &RPSDULVRQ RI WKH (XURSHDQ &RPPLVVLRQ¶V :KLWH 3DSHU RQ (QYLURQPHQWDO /LDELOLW\ ZLWK 6XSHUIXQG The above discussion focuses on the impact of Superfund on the American economy. The conclusion would seem to be that the cost of the program is affordable for the American economy in the aggregate, albeit painfully expensive for a relatively small group of responsible parties. Further, the net cast by Superfund over responsible parties is a tight one ­ Superfund employs a very strict standard of liability. But to stop at that would not do much to inform the debate currently being held in Europe. What is of the greatest interest is how the proposed European liability regime compares to Superfund. All liability regimes share the same goal of getting polluters to pay for the damages they have caused, but in practice there may be significant differences in how the liability regimes work. Of course, the proposed European liability regime has not yet become a Directive, and so any comparison must be with an anticipated European regime that may or may not be implemented. Still, it seems likely that if the European regime is implemented, there will be a number of significant differences between it and Superfund. These differences may indeed result in different costs. Any comparison will have to make a number of assumptions, or at least state explicitly that there are a number of unknowns that will need to be further considered before a meaningful comparison can be made. The first is that a cleanup performed in the United States that is identical in every way to a cleanup in Europe is assumed have the same costs. At this point, there is no way to verify whether or not this is true. As imperfect as Superfund cost data are, there are at least a number of compilations of such data. In the absence of a European cleanup program, it may make sense to look to the Member States for cleanup cost information, keeping in mind that this report is in no way evaluating Member State cleanup programs or drawing any comparisons between Superfund and Member State cleanup programs. However, while all Member States of the European Union have cleanup programs, there are no cost compilations comparable to those that have been made for Superfund, and no analyses to assess whether the cleanup costs in one Member State can be compared to the cleanup costs in another. The existing analyses that allow for a comparison of the hazardous waste management costs in some Member States with those in the United States are limited in scope.63 Second, it is assumed that the universe of environmental damages ­ that is, the extent, severity and type of damages ­ is for the whole of Europe more or less the same as the universe of damages in the United States. Certainly, as damages continue to come to the public's attention on both sides of the Atlantic, it is clear that the universe of past damages is still not entirely known. And at this point in time, it would be very hard to make an accurate prediction regarding future damages. Since the total costs of cleanup are very much dependent upon the universe of damages that will need to be cleaned up, whether this assumption holds is an important consideration in making any kind of comparison. For that matter, whether the number of potentially responsible parties involved at sites in Europe is more or less the same as the number of potentially

63

For an example see "Comparative Analysis of Hazardous Waste Management Programs in Selected Countries," Probst, Katherine and Beierle, Thomas, World Bank and Resources for the Future, Washington, DC, 1999.

22

responsible parties at sites in the United States is an important consideration as well. Mostly, the number of potentially responsible parties is thought to influence transaction costs ­ that as the number of parties involved at a site increase, transaction costs as a percent of cleanup costs increase as well. Which raises the third assumption, which is whether litigious behaviour in Europe is similar to such behaviour in the United States. Anecdotes abound that America is a litigious society, but it is simply not clear that, faced with a strict environmental liability regime, plaintiffs and responsible parties in Europe wouldn't fight their cases in the courts as hard as their American counterparts. This assumption needs to be considered carefully when trying to predict the number of cases and transaction costs that might be prompted by a European liability regime. So for the purpose of this discussion, it will be assumed that cleanup costs, the universe of damages, the number of potentially responsible parties involved at sites and litigious behaviour are the same in Europe and the United States, but whether this is true remains a policy question that should be researched further in future. The discussion below will focus on differences between the American and proposed European liability regimes regarding definitions that will have significant implications about the operation of the programs, and thus their costs. Specifically, it would seem that these differences might lead to a different number of cleanups, and thus very different total cleanup costs. It is also likely that the differences in the regimes will lead to different total transaction costs. That said, both regimes seek to minimise transaction costs, and yet transaction costs may be the cost component of liability that is the most difficult to predict. The most obvious difference between the regimes is that Superfund is a comprehensive cleanup program that employs liability as one of its funding approaches. The proposed European liability regime, should it become a Directive, would allow Member States to hold parties liable for the environmental damages they have caused, but it would not create a comprehensive cleanup program. It is solely about liability. Superfund's trust fund, and the taxes that support it, would thus have no corollary in the proposed European liability regime. The discussion below does not address administrative costs. Any future liability regime that Europe adopts will have to incur some administration costs. Superfund, as already mentioned, has generated significant administrative costs. It is unlikely that such high costs would apply to the European context, because they stem more from the scope of Superfund and its emphasis on comprehensive cleanup than from liability per se. Nevertheless, any liability regime will have to establish liability and cleanup guidelines, provide support to courts that may not have experience with environmental liability cases, enforce court decisions related to cleanups and resource restoration, as well as track the progress of cases in order to periodically evaluate the regime. All of these activities will generate administrative costs. One could argue that such activities might not be necessary if only a few environmental liability cases are brought to the attention of the courts. But if that is the case, one could also argue that such a regime could be better designed, since it is thought that the universe of environmental damages in Europe could be substantial. Thus Europe may at some point wish to further explore the potential administrative costs associated with implementing a liability regime. In addition, the discussion below will not address the cost of preventing environmental damages from happening in the first place. It is important that responsible parties be compelled to compensate for any damages they have caused, but compensation alone is not an ideal way to protect the environment. Ideally, parties should be given an incentive to prevent damages from occurring in the first place, up to the point that the cost of

23

prevention equals the cost of the damages prevented. Such an incentive can be provided in the form of regulations or market incentives, but to be efficient such forms assume that the costs and benefits of preventive measures can be known by regulators or the market. However, it is often only the responsible parties who have this information. But the threat of liability may serve as such an incentive as well, and may work particularly well because it allows the responsible party alone to decide how much prevention to invest in. How the threat of liability is perceived depends on a number of factors, and it is the perception rather than the threat per se that will influence how much prevention is taken. For instance, the number of cases brought, the number of cases that result in cleanups, and the cost of the cleanups, will all serve to send a message to responsible parties that they are likely, or unlikely, to be held liable for the damages they have caused. When the perceived threat of liability is very low, it is unlikely that responsible parties will take the necessary precautions to prevent damages. But if there is a perception that the threat of liability is unfairly high, it may mean that responsible parties take more precautions than are economically warranted. Some economic activities, even if they result in high economic benefits to society, may be significantly curtailed if they are associated with even low levels of environmental damages. In designing an environmental liability regime, then, it is important to balance the message sent to the economic actors who may be potentially held liable for damages. The costs of prevention that have been incurred because of the threat of Superfund liability have not been measured, but it is believed that the threat can nevertheless be credited with motivating economic actors to take greater precautions, and resulting in at least some damage prevention. According to competition theory, the costs of prevention are passed on to consumers, since these costs may be incurred by any economic actor, rather than targeted individuals. Again, then, Europe may wish to further explore the potential costs associated with the preventive effect of a liability regime. $QWLFLSDWHG 1XPEHU RI /LDELOLW\ &DVHV 5HVXOWLQJ LQ &OHDQXSV Because Superfund is a federally administered, comprehensive cleanup program, EPA has some control over the number of sites on the NPL. To some extent, EPA can set targets for its capacity to cleanup sites, as well as targets for the pace of cleanup ­ although that is not to imply that it will necessarily meet these targets. But what is most important to the immediate discussion is that once a site is on the NPL, it is reasonable to believe that, at least at some date, it will be cleaned up. Because EPA is committing to clean up all NPL sites, before liability is assigned in some cases, this means that once enough data exists to be able to predict the costs of cleanup at individual sites, the total cleanup costs of the program in some sense can be predicted as well. What can be predicted only with much less accuracy is the distribution of cleanup costs between the trust fund and responsible parties. But, while transaction costs therefore cannot be easily predicted, Footing the Bill makes a persuasive argument that any savings in transaction costs will be offset by increases in cleanup costs due to government inefficiencies. Thus, regardless of the distribution of costs, the total costs to the program should remain more or less predictable. The proposed European liability regime, on the other hand, makes no commitment to cleaning up sites. There are no targets with regard to the number of sites cleaned up through liability, or the pace of cleanup. The number of sites for which liability will fund cleanups will depend entirely on the number of cases that plaintiffs bring to the courts. It can be presumed that if environmental damages are not brought to the attention of the

24

courts, or if the defendants of an environmental liability case are not found liable, such damages will not be cleaned up. Then, it is very difficult, a priori, to make a judgement regarding how the number of sites being cleaned up under Superfund will compare with the potential number of sites that might be cleaned up under a European liability regime. It is possible that, if the proposed European liability regime were to be implemented, plaintiffs might be eager to bring cases against responsible parties. But it must also be remembered that transaction costs will be incurred every time a case is brought, whether or not the defendants are ultimately found liable, and that plaintiffs understandably might be reluctant to bring cases unless they can be fairly certain that they will win their cases. We do know that, in the time since the German environmental liability law was enacted, only two cases have been brought. Like the proposed European liability regime, the German liability regime depends on cases brought to the courts by the initiative of the plaintiffs. But that said, the proposed European liability regime is not identical to the German liability regime. Such differences between Superfund and the proposed European liability regime lead to a number of observations about the predicted costs of the European liability regime. It is not possible to make an accurate prediction regarding the number of cases that will be brought in Europe. But one might predict that transaction costs, as a function of the number of cases that result in cleanups, will be higher in Europe than they are in the United States, all other factors held equal. This observation stems from the fact that, for the most part, all cases brought under Superfund will result in some sort of cleanup, and not all cases brought under the European liability regime will result in cleanups, but all will generate at least some transaction costs. 7\SH RI /LDELOLW\ /LPLWV DQG ([HPSWLRQV Superfund and the proposed European liability regime differ with regard to the types of liability each employs, limits to liability, and exemptions. This paper is not meant to be a legal analysis. However, where differences in the law exist, it would seem likely that the ensuing costs of cleanups would be different as well. Most significantly, the proposed European liability regime will not be retroactive. As the earlier discussion indicated, multiparty sites contaminated before 1980 account for 35% of the total cleanup costs of Superfund, and multiparty sites contaminated before 1987 account for 55% of the remaining total cleanup costs of Superfund. Since the authors assumed that only multiparty sites would be released from retroactive liability, the remaining total cleanup costs accounted for by sites contaminated prior to the passage of CERCLA or SARA is even greater than these numbers suggest. But these findings aren't really so startling, especially when one considers that the purpose of Superfund is LQGHHG to clean up existing sites. An analysis of the economic impacts of RCRA, which may come closer to the proposed European liability regime with regard to prospective liability, would be helpful in shedding more light on the possible costs of the proposed European liability regime, but none has been performed to date. But it should not be lost that up to 45% (or 65% depending on the cut-off date that is being used) of Superfund's total cleanup costs can be attributed to sites that were contaminated after Superfund was enacted. The costs in absolute terms are still quite large. Europe should anticipate, then, that passing an environmental liability law will not put a complete stop to environmental damages, and that serious resources may still be required to remedy them, even if devoting such resources to cleanups will not result in significant economic impacts. It

25

should be noted that it is not always clear when damages were caused. Responsible parties may choose to take issue with the date damages were caused in court, risking higher transaction costs in the hopes that the damages could be proven to have been caused before the regime took effect. Thus, while a prospective liability regime may be considered fairer than a retroactive liability regime, prospective liability may result in higher transaction costs, and perhaps fewer cases resulting in cleanups, than if the law specified retroactive liability. The type of liability proposed by the European liability regime differs from the type of liability employed by Superfund in another significant way. The American courts have interpreted Superfund's liability as strict ­ that is, parties can be held responsible for the damages they caused whether or not any laws were broken in causing such damages. The proposed European liability regime would employ strict liability for damage caused by inherently dangerous activities (to be defined further based on relevant EC legislation), and fault-based liability for damage to biodiversity caused by a non-dangerous activity. Presumably, non-dangerous activities could include activities that do not involve hazardous substances but nevertheless result in damages to biodiversity (e.g. erosion that destroys an endangered habitat). If this were so, the proposed European liability regime would differ significantly from Superfund, which only addresses contamination caused by hazardous substances. While defining liability in such a way may be considered fairer than employing strict liability across the board, it is not clear exactly how this definition will influence the number of cleanups or transaction costs that result. Any confusion on the part of the courts as to which type of liability to apply may provide responsible parties with an opening to contest their liability. Responsible parties facing strict liability may argue that in fact fault-based liability is more appropriate to their cases. If responsible parties facing fault-based liability contest their liability by arguing that the damages were not caused through fault, fewer cleanups, and higher transaction costs per cleanup, may result. At the same time, though, the possible inclusion of damages caused by nonhazardous substances means that the proposed European liability regime would cast a wider net than does Superfund, which might lead to a higher number of cases than if it only covered damages caused by hazardous substances. Finally, the type of liability proposed by the European liability regime may differ from the type of liability employed by Superfund in that the American courts have interpreted Superfund's liability as joint-and several ­ because parties can be held responsible for all damages when the damages are indivisible, even when the parties in question were responsible for only a portion of such damages. At this point it remains unclear whether the proposed European liability regime will be proportional or joint-and-several. Jointand-several liability often leads to high transaction costs because responsible parties then turn to sue third-party contributors in the hopes of recouping some of the cleanup costs. Proportional liability does not create an incentive for third-party suits, per se. But at the same time, proportional liability may lead to fewer cleanups and high transaction costs because parties may contest the portion of the damages assigned to them. If the regime is proportional, then, fewer cleanups may result, but whether the transaction costs such cleanups generate are higher or lower than if the regime were joint-and-several is not clear. While critics of Superfund contend that its liability is too uncompromising, in fact the law does allow for some exemptions, namely for damages identified ex-ante in

26

environmental impact statements, for damages caused by registered pesticide products, and for damages caused by federally permitted releases.64 The proposed European liability regime thus far does not foresee similar exemptions. Further, Superfund does set some limits to liability.65 That said, it is not always clear how these exemptions and limits are taken into account when liability is assigned to the responsible parties ­ to make this clear would require a dedicated investigation, since most court documents are confidential. Nor, for that matter, can it be known how these exemptions and limits influence costs. Rationally, responsible parties could be expected to use such exemptions and limits to contest liability, thereby driving up transaction costs. At the same time, it is possible that EPA simply does not go after exempted parties in the first place (although exempted parties may still be held liable under other laws). It is not clear that the proposed European liability regime would set any limits to liability, but it would allow for some defences, including force majeure, contribution to the damage or consent by the plaintiff, and intervention by a third party. Superfund allows similar types of defences. The proposed European liability regime would also allow for some alleviation of the plaintiffs' burden of proof and some equitable relief for defendants (e.g. for permitted releases) subject to the discretion of the courts ­ allowances that are not present in the Superfund law as such. 'DPDJHV DQG $FWLYLWLHV &RYHUHG Liability regimes have to define the damages or activities for which parties can be held liable. Trying to describe, precisely, the environmental damages that Superfund sets out to repair is rather difficult. Superfund sites are really defined based upon the risks they pose, and not on the damages per se. The clearest way that removals and remedies differ is in cost and duration, rather than the damages they address. And both remedies and natural resource restoration can address contaminated groundwater, so even the distinction between remedies and the restoration of natural resources may be murky at times. The distinctions made by the proposed European liability regime between the types of damages it would cover may also be a bit blurry. The proposed European liability regime would cover environmental damages that encompass both site contamination and damages to biodiversity. Site contamination is defined as significant contamination ("significant" has not yet been defined) of soil, groundwater and surface water. Damages to biodiversity are defined as damages to resources that are protected under the Natura 2000 network (established by the Wild Birds and Habitats Directives).

64

It should be noted that federal environmental impact statements did not exist before the National Environmental Policy Act of 1969 was enacted.

65

Limits to liability [under Superfund] are set as follows: (1) for vessels (except incineration vessels) carrying hazardous substances as cargo or residue, the greater of $300 per gross ton or $5 million; (2) for other vessels (except incineration vessels), the greater of $300 per gross ton or $500,000; (3) for motor vehicles, aircraft, pipelines, or rolling stock, $50 million or a lesser amount set by regulations, but in no event less than $5 million; and (4) for incineration vessels and for any other facility nor specified in (3), the total of all costs of response plus as much as $50 million for any damages.

27

The Natura 2000 areas have yet to be established, but are anticipated to cover ten percent of EC territory. How biodiversity damage might differ from site contamination has yet to be elaborated. As is the case under Superfund, the proposed European liability regime would require that site contamination be remedied before biodiversity is restored. It is understood that much more work must be done before the proposed European liability regime can become a directive. However, it is worth pointing out that failing to adequately define the damages that the regime will cover may have some cost implications. In part, the slow pace of Superfund cleanups stems from the difficulties, at least initially, experienced by EPA in developing the guidance that sets out the appropriate cleanups for particular damages. And it seems self-evident that the high administrative costs of Superfund are in part a consequence of the slow pace of cleanups. It would follow, then, that should the proposed European liability regime inadequately define damages, it too may experience high administrative costs, if cases are not dismissed outright due to confusion over the definition of damages. Further, Superfund does not impose liability for victims of exposure to hazardous substances. Generally speaking, such victims must seek restitution for damages, in accordance with other U.S. laws, in state courts. The proposed European liability regime, however, would cover damages to health and property. For this reason, it should be understood that some of the potential costs of the proposed European liability regime may not be due to cleanups alone, but to compensation for damages to health and property, which are not covered under Superfund. 5HPHG\ 6HOHFWLRQ DQG &OHDQXS 6WDQGDUGV It is not entirely clear what drives the costs of Superfund. One might assume that the costs correlate to the types of remedy chosen or the standards applied to cleanups. That is, a more permanent remedy should cost more than a less permanent remedy, a remedy that cleans up greater quantities of soil and water should cost more than a remedy that cleans up smaller quantities of soil and water, and a remedy that cleans up higher concentrations of contaminants should cost more than a remedy that cleans up lower concentrations of contaminants. However, there aren't any econometric analyses to prove this, much less to explain any cost differentials. But keeping this caveat in mind, it still may be fruitful to briefly discuss how differences between Superfund and the proposed European liability regime regarding remedy selection and cleanup standards may result in different costs. The National Contingency Plan (NCP) provides guidance regarding Superfund cleanups. For instance, Superfund remedies should be permanent, and involve the treatment, rather than the containment, of contamination, whenever possible. That said, treatment technologies do not exist to address all types of contamination. In addition to the guidelines that are specific to the Superfund program, Superfund cleanups are subject to other federal and state regulations, known as "applicable or relevant and appropriate requirements," or ARARs. Since state regulations vary from state to state, it has been argued that subjecting Superfund cleanups to ARARs has resulted in costly and inconsistent cleanups. Further, it has been argued that the application of federal regulations to remedy selection has not always been appropriate. For instance, at some Superfund sites, contaminated groundwater is cleaned up to meet standards required by

28

the Safe Drinking Water Act of 1974, even though the standards articulated by this law are intended to be applied at the tap, and not at the point of remediation.66 In response to criticism that some cleanups are too costly because they are inappropriately stringent, EPA has allowed some pilot sites to employ more flexible remedy selection processes. Namely, these cleanups may take land use into consideration in the remedy selection process. Such a consideration is thought to be key to selecting appropriate remedies. For instance, if the contamination on an idle site has been contained, and the site is anticipated to remain idle in the future, it may not make sense to treat the site to the extent appropriate for residential use. But critics of land-use based remedies argue that land use often changes with time, and further, legal mechanisms to enforce land use restrictions are generally weak. There is an assumption, though not confirmed by any study, that residential use demands the most stringent cleanups. But since 80 percent of all NPL sites are adjacent to residential neighbourhoods, residential use may serve as the most appropriate goal after all. Critics have also pointed out that it may not be possible to select a remedy that satisfies all interested parties when communities are divided, which is not an unusual situation. At a few selected sites, EPA has allowed the surrounding communities to participate in the remedy selection process, but generally speaking such participation is not a common element of the remedy selection process. The proposed European liability regime does not yet include comprehensive guidance for remedies, but it does state that criteria will need to be developed to assess and address different types of damages. The standard that has been articulated in the proposed regime states that cleanups are necessary only when damages pose serious threats to man and the environment. The objectives that have been articulated state that cleanups should remove such serious threats through the employment of best available technologies (as identified under the IPPC Directive), and that cleanups should render soil fit for actual and future use under economically and technically viable conditions. Where possible, numerical standards should determine the soil and water quality to be achieved. When these standards are not feasible, full or partial containment might be a possibility. It would seem that, at least in part, such a set of standards and objectives anticipate, and attempt to address, some of the controversies encountered in the Superfund program related to remedy selection and cleanup standards. Still, some aspects of this process may remain problematic, no matter how well they are anticipated. For instance, no matter how "serious threats" are defined, it seems likely that there would be significant debate behind the definition, as much will ride on it. Any confusion associated with the definition initially may lead to high legal costs until the courts establish case law. But even if the definition is crystal clear, high legal costs may be incurred as parties wrangle over whether the damages in question are indeed "significant" according to the established definition. If the objectives of the regime do employ actual and future land use to guide remedy selection, it is likely that many of the disadvantages of this approach that apply to the American context will also apply to the European context. However, if a European regime could establish a single set of numerical standards that would apply in all Member States, the difficulties posed by the American ARARs may not surface in Europe.

66

See p. 16 of FTB.

29

Whether or not the damages are irreparable, the proposed European regime states that an economic valuation of the damages is important. When damages are irreparable, an economic valuation is important to determine the level of compensation that should be made by the responsible party. When restoration of the damages ­ which should aim for the return to the state of the natural resource before the damage occurred ­ is feasible, valuation criteria are important in order to avoid disproportionate restoration costs. To determine if the damages are reparable, the proposed European regime states that a costbenefit or reasonableness test will have to be undertaken in each separate case, where the starting point of either test would be the restoration costs; a methodology for a benefits valuation still needs to be elaborated. Clearly, such considerations have been articulated out of concern that remedies not be needlessly expensive. In places, the Superfund law also includes such economic language, but at the end of the day the decisions behind remedy selections tend to be driven by the risks posed by the damages in question. The two reasons for this are that the law places public health concerns over cost concerns, and that resource valuation remains a complicated endeavour. Not the least challenging has been the problem posed by defining the benefits of cleanups, followed by placing a value on such benefits. 3RWHQWLDO 3ODLQWLIIV A significant way that the proposed European liability regime will differ from Superfund concerns the parties who will be able to bring cases. Under Superfund, the plaintiff is primarily the Department of Justice, in co-operation with EPA. If the public is unhappy with the government's decision to bring or not bring a case to the attention of the courts, the public has the right under the National Environmental Policy Act to take the government to court. In this way, the public can directly hold the federal administration accountable. But at the moment there is no corresponding law in Europe.67 Departing significantly from Superfund, the proposed regime will allow the public to bring liability cases. It is not clear whether the public may bring cases against the Commission, Member States or local governments if it can be shown that such governments are responsible for damages (for further discussion, please refer to the section entitled "Potentially Responsible Parties.") Specifically, the proposed regime indicates that it will be a two-tiered approach, meaning that Member State governments have primary responsibility in bringing cases to the courts, and that the public may bring cases only if governments are negligent in fulfilling this responsibility. In such cases the public will be represented by public interest groups promoting environmental protection and meeting relevant requirements under national law. Further, such parties wishing to oversee the restoration of damages, should they win their cases, must ensure that they have sufficient expertise to do so. There are a number of questions raised by this suggested approach, and with each question, cost implications. Should the public be allowed to bring cases, governments may have an incentive to avoid the costs of bringing cases by encouraging the public to foot the legal bills. However, public interest groups may find the cost of mounting a case too high a barrier, even though they may be willing to get involved in a liability case.

67

There may be such a European law in the foreseeable future. Convention.

30

See the Arhus

Should public interest groups become involved despite the potentially high costs, this begs a different question. Undoubtedly, some potentially responsible parties will object that an access to justice component will leave them vulnerable to costly nuisance suits, although nuisance suits too would be expensive to mount. But namely, it is not clear that cases brought by different parties will be consistent from case to case. Liability by its nature can be subject to inconsistencies because different courts can produce very different judgements, even when they are subject to the same guidelines. Introducing another variable in the form of public plaintiffs may make it difficult for courts to establish clear precedent, and that may lead to greater uncertainty in general regarding the regime and higher legal costs than would otherwise have been the case. 3RWHQWLDOO\ 5HVSRQVLEOH 3DUWLHV Just as Superfund and the proposed European liability regime differ significantly regarding plaintiffs, they differ significantly regarding the parties who may be designated defendants. It is often thought that the typical Superfund defendant is an industrial or corporate entity. In truth, Superfund defines responsible parties very broadly, so that, put simply, a potentially responsible party is any party that is even remotely connected to the transportation of hazardous materials to, disposal or generation at, or past or present ownership of the site. Lenders and insurers are immune under Superfund to a certain extent, but otherwise few parties are.68 Certainly, federal responsible parties are not immune ­ the Federal Facilities Compliance Act of 1992 made this quite clear ­ and state and local governments have been subject to Superfund law since its creation.69 It may be surprising to some observers, but a small but significant number of responsible parties at Superfund sites are municipalities or recycling operations, parties who are usually thought of as providers of public services, and whose mission may indeed be in part to protect the environment ­ but whose activities nevertheless resulted in environmental damages. Generally speaking, homeowners are not named as responsible parties, but there have been exceptions. Further, it is worth pointing out that even when communities are not held liable for damages, they may still experience significant financial losses because of their proximity to Superfund sites. Namely, in some neighbourhoods where Superfund sites are located, it is known that property values have decreased, although it would be hard to quantify such loss. The proposed European liability regime departs from Superfund primarily in two ways. First, the emphasis of the scope of liability in the proposed regime is on the operator in

68

The exception tends to be when lenders take on direct control of the property in question, possibly through loan default. Even though few insurers have had to reimburse policy holders for cleanup costs, many have incurred transaction costs as a result of their being named by responsible party policy holders in third-party suits. See FTB.

69

The Federal Facilities Compliance Act of 1992 (P.L. 102-386) states that all federal agencies are subject to all substantive and procedural requirements of federal, state and local solid and hazardous waste laws in the same manner as any party.

31

control of the activity that caused the damage.70 And second, it is not at all clear that the Commission, Member States or local governments would be subject to liability according to the proposed regime. While at first glance it seems unlikely that the Commission could be linked to environmental damages, there are probably at least a small number of sites where Member States themselves are responsible for damages, and probably quite a few sites where municipalities may be responsible for damages (especially if, as in the United States, they are the operators of municipal landfills).71 Such a difference in the definitions of allowable defendants may mean that there is a narrower range of parties who can be potentially held liable for damages, and thus a smaller pool from which to fund cleanups than would otherwise have been the case. &RQFOXVLRQ As this paper has shown, it is rather hard to make any direct comparisons between an established cleanup program and a liability regime that at this point is only in the proposal stage. Nevertheless, this paper has aimed to underscore some of the general cost trends that could apply to the proposed European liability regime, based on the American experience with Superfund. As is always true when making generalities, there is a limit to how far such observations hold, but hopefully they aid in creating an overall context of how an environmental liability regime may work in Europe. It may be helpful, then, to review here the key considerations that will influence the potential costs of a European liability regime. 7KH DQWLFLSDWHG QXPEHU RI OLDELOLW\ FDVHV UHVXOWLQJ LQ FOHDQXSV · According to the proposed European liability regime, the number of sites for which liability will fund cleanups will depend entirely on the number of cases that plaintiffs successfully bring to the courts. The proposed regime makes no commitment to cleaning up sites if the courts do not rule in favour of the plaintiffs. This element of the proposed liability regime thus reveals little regarding the potential number of cases, and therefore potential costs, of a European liability regime. 7KH W\SH RI OLDELOLW\ OLPLWV DQG H[HPSWLRQV WKDW ZLOO DSSO\

70

"One way to ensure that better caution will be applied to avoid the occurrence of damage to the environment, is indeed to impose liability on the party responsible for an activity that bears risks of causing such damage. This means that, when such an activity really results in damage, the party in control of the activity (the operator), who is the actual polluter, has to pay the costs of repair...where the activity is carried out by a company in the form of a legal person, liability will rest on the legal person and not on the managers (decision makers) or other employees who may have been involved in the activity..." See p. 2 of the White Paper on Environmental Liability.

71

If a case against a Member State were to arise, the question would not be whether the Member State properly transposed the Directive into national law and correctly implemented and enforced the law, but whether the Member States would be subject to the law in the same manner as any private party.

32

·

The proposed European liability regime will not be retroactive. As a comparison, it should be kept in mind that up to 65% of Superfund's total cleanup costs can be attributed to prospective liability. The proposed European liability regime would employ strict liability for damage caused by inherently dangerous activities, and fault-based liability for damage to biodiversity caused by a non-dangerous activity. Any confusion on the part of the courts as to which type of liability to apply may lower the number of cases ruled in favour of the plaintiffs. At the same time, though, the possible inclusion of damages caused by non-hazardous substances might lead to a higher number of cases than if it only covered damages caused by hazardous substances. At this point it remains unclear whether the proposed European liability regime will be proportional or joint-and-several. This element of the proposed liability regime thus reveals little regarding the potential costs of a European liability regime. The proposed European liability regime thus far does not specify any exemptions. It is not clear whether the proposed regime would set any limits to liability, but it would allow for some defences, including force majeure, contribution to the damage or consent by the plaintiff, and intervention by a third party. The proposed regime would also allow for some alleviation of the plaintiffs' burden of proof and some equitable relief for defendants. The overall influence of these various elements on the potential costs of a European liability regime are not clear.

·

·

·

7KH GDPDJHV DQG DFWLYLWLHV FRYHUHG E\ WKH UHJLPH · The proposed European liability regime would cover environmental damages that encompass both site contamination and damages to biodiversity. Should the proposed European liability regime inadequately define such damages, like Superfund it may experience high administrative costs, if cases are not dismissed outright due to confusion over the definition of damages.

·

Unlike Superfund, the proposed European liability regime would cover damages to health and property. It should be understood, then, that some of the potential costs of the proposed European liability regime may not be due to cleanups alone.

7KH UHPHG\ VHOHFWLRQ DQG FOHDQXS VWDQGDUGV VSHFLILHG E\ WKH UHJLPH · The proposed European liability regime does not yet include comprehensive guidance for remedies, but it does state that criteria will need to be developed to assess and address different types of damages. This element of the proposed regime thus reveals little regarding the potential costs of a European liability regime. 7KH SRWHQWLDO SODLQWLIIV · Departing significantly from Superfund, the proposed European liability regime will be a two-tiered approach, meaning that Member State governments have primary responsibility in bringing cases to the courts, and that the public may bring cases if governments are negligent in fulfilling this responsibility. It is possible, though not at all certain, that this element of the proposed regime may lead to greater uncertainty in general regarding the regime and higher legal costs than would otherwise have been the case. 7KH SRWHQWLDOO\ UHVSRQVLEOH SDUWLHV

33

·

Unlike in Superfund, the emphasis of the scope of liability in the proposed European liability regime is on the operator in control of the activity that caused the damage. Further, it is not at all clear that the Commission, Member States or local governments would be subject to liability according to the proposed regime. Such a difference in the definitions of allowable defendants may mean that there is a narrower range of parties who can be potentially held liable for damages, and thus a smaller pool from which to fund cleanups than would otherwise have been the case.

It is always desirable from the point of view of designing policy to be able to predict exactly how much the policy will cost. In the case of a liability regime, this is an extremely difficult endeavour, as the review of the various elements of the proposed regime indicates. While the design of some elements may push costs up, the design of others may keep costs down. And the influence of the design of some elements on the costs of the regime will not be known until it is implemented. Further, the design of each element may influence the distribution of costs throughout the economy, as well as the type of costs incurred. This report, then, should not be thought of as a predictive tool. Rather, it should be thought of as a framework for the consideration of each element of the proposed regime, individually and in the context of the other elements, and its potential influence on the cost of the regime.

34

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The Potential Economic Impact of Environmental Liability: The American a\nd European Contexts

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