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3.3.2. Liability Provisions

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Savings from Economic Incentives


Two federal environmental statutes, CERCLA and OPA, provide liability for harm caused by releases of hazardous substances and petroleum, respectively, to the environment. Both CERCLA and the Clean Water Act hold parties responsible for the costs of cleanup. The incentive effects are clear, since environmental values in effect become part of the overall cost of doing business. Avoiding harm to the environment is good practice when it reduces the overall cost of doing business.

Several of the federal environmental statutes provide for civil and criminal liability for failure to comply with the law and implementing regulations. The incentive effect of this form of liability is to encourage individuals to comply with what are largely command and control regulations. Such an incentive is qualitatively different from the subject matter for this report: incentives that put a price on pollution that harms health, the environment, or natural resources. No study has attempted to address whether the existing level of penalties and enforcement produce the correct incentive effect (an optimal level of investment in pollution control). Excessive investment in pollution control is possible if entities seek to avoid penalties that are too harsh. Also possibility is too little effort at pollution if penalties are low and enforcement is lax.

Tort law is a third means through which liability encourages behavior that improves the state of the environment. Under tort law, individuals may seek compensation from polluters for harm to their property or person. The difficulty of proving harm caused by pollution, particularly chronic health effects, creates a severe barrier to such cases, meaning that many environmental costs will not be internalized through a liability mechanism. In fact, it is largely the failure of tort law to address many types of environmental harm that led to the passage of the principal environmental statutes.

Cleanup Liability

Enacted by Congress during the change-over from a Democratic to a Republican administration in 1980, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) responded to an issue with no precedent: the legacy of contaminated sites containing hazardous wastes. CERCLA established a trust fund (the Superfund) which is financed primarily by a tax on corporate income, crude oil and certain chemicals. EPA uses the fund to pay for cleanup and restoration activities at sites where no solvent responsible party can be identified or where immediate response is deemed necessary. The most important feature of CERCLA centers on the cleanup of hazardous waste sites posing a threat to human health and the environment.

CERCLA is unique among the principal environmental statutes in that it is backward looking, seeking to remedy problems stemming from past actions, rather than forward looking and trying to prevent damage from current or future activities. The incentive effects of CERCLA cleanup responsibility must lie outside of the actual costs of cleanup, since the actions that precipitated the need for cleanup are historical not contem- poraneous. But the mere prospect of CERCLA cleanup liability can affect current and future decisions regarding the disposal of hazardous wastes. Section 107(a) of CERCLA provides for liability for anyone who is did something from which there is a release (of a hazardous substance), or threatened release.

The courts have interpreted this to require strict, joint and several liability for parties deemed responsible for disposing of hazardous wastes that pose risks to human health and the environment. Joint and several liability means that if the government can identify just one party out of many that contributed wastes to a site, potentially the one party can be held responsible for all cleanup costs. In turn any potentially responsible parties identified by the government may seek to involve other potentially responsible parties. Joint and several liability appears to some to be a recipe to ensure litigation over who is responsible for what. Strict liability is a standard that holds parties responsible regardless of the circumstances of their action.

Private sector cleanup costs under CERCLA certainly have run into the tens of billions of dollars already and eventually may amount to several hundred billion dollars. Cleanup of defense wastes, particularly radioactive wastes, could cost at least $500 billion. Transactions costs associated with determining liability run high under this program.

The Clean Water Act holds parties responsible for the costs of cleanup following a release of petroleum or hazardous substances into the nation's waters. While future oil spill cleanup expenditures are more difficult to predict, these costs have ranged from a few tens of millions of dollars in years with few large incidents to more than $2 billion in particulary difficult years.

Liability for Damage to Natural Resources

By 1996, under provisions of CERCLA, OPA, and the Clean Water Act, federal agencies had settled more than 100 natural resource damage cases for a total of well over $700 million. million. By that date state agencies acting as trustees also had settled several cases on their own for a total of at least another $20 million. In comparison, cleanup settlements by that date under CERCLA alone totaled at least $10 billion, or approximately 100 times the magnitude of the natural resource damage settlements. A number of large NRDA cases are still pending, at least three of which could amount to at least $500 million. Several important cases involving the federal government as a responsible party also are outstanding.

The specter of paying large claims for natural resource damages already is affecting industry behavior. Some firms have decided to use only double-hulled vessels, despite a several year period during which they could continue to transport oil in single-hulled vessels. Other firms have altered the routes that vessels follow to reduce the chances of accidental groundings and collisions. In certain harbors, firms are adding additional tug escorts. All of these voluntary actions are taken by firms in the belief that they are cost-effective. These measures appear to be having an impact on volumes spilled. Apart from 1989, when the Exxon Valdez ran aground, the volume of oil spilled in recent years has been about one-half of comparable periods in the 1970's or early 1980's, despite increases in volumes shipped.

In theory, the same level of care that results from OPA liability rules could be achieved through a set of operating protocols specified by a regulatory agency. Since industry is likely to be better able than a regulatory agency to identify which measures are cost-effective, the liability approach is likely to be less expensive for the same level of pollution avoidance.

Over the past five years, liability rules have resulted in damage assessments and cleanup costs that averaged about two-tenths of a cent per gallon of petroleum products consumed in the U.S. ($.5 billion annually). The possibility that nonuse values could be included in future, as endorsed by a "blue ribbon" National Oceanic and Atmospheric Administration advisory panel, could result in larger damage awards in the future. A direct regulatory approach would be almost certain to cost more, since petroleum shippers are in a far better position to understand relative risks than are regulators. While the exact savings from the liability approach is largely unknowable, it appears reasonable to assume that a direct regulatory approach could cost at least one cent per gallon to achieve comparable effectiveness, or an additional $2.0 billion annually.

Civil and Criminal Liability

Congress first decreed pollution of the environment to be a federal crime in the Refuse Act of 1899, which made it a misdemeanor to "throw, discharge, or deposit" into navigable waters of the United States refuse of any kind other than runoff from streets and discharge from sewers. Violators convicted of violating the act could be punished by fines not less than $500 nor more than $2,500, or by imprisonment for not less than 30 days nor more than one year. The court had the discretion to reward persons who provided information leading to conviction with one-half of the fine.

More recently, the 1970 Amendments to the Clean Air Act punished violations of the Act as a misdemeanor. The 1970 Amendments to the Federal Water Pollution Control Act established misdemeanor penalties for "negligent or willful" release of pollutants into navigable waters without a permit or in violation of a permit. The Resource Conservation and Recovery Act of 1976, as amended by the Solid Waste Disposal Act Amendments of 1980, provides felony penalties for treatment, storage or disposal of hazardous waste without a permit.

Continuing through the 1980s, Congress further refined the scope of environmental crimes, as well as the maximum fines and terms of imprisonment, in the Hazardous and Solid Waste Amendments of 1984, the Superfund Amendments and Reauthorization Act of 1986, and the Water Quality Act of 1990. In the Clean Air Act Amendments of 1990, Congress increased the penalty provisions to felonies.

By 1995 the Justice Department had indictments against 443 corporations and 1,068 individuals, and had recovered $297 million in criminal penalties. Sentences for individuals totaled 561 person-years of prison for those convicted. Cooney

State and local prosecutors also can pursue environmental crimes, since they are required to demonstrate such a capacity in order to obtain EPA authorization to administer locally programs of the Clean Air Act, the Clean Water Act and RCRA. While most states were not active in pursuit of environmental crimes, there are a number of important exceptions. New Jersey, Ohio, Pennsylvania and California are active in the prosecution of environmental crimes. Los Angeles maintains its own team of investigators and prosecutes cases.

An important sanction in addition to fines and sentences is mandatory "blacklisting" of contractors under the CAA and the CWA. Both statutes prohibit the federal government from entering into new contracts with or issuing grants to any organization convicted of environmental crimes under these laws. Federal agencies and all states also have the authority to temporarily disqualify contractors from new work pending receipt of further information, when a contractor is violates a permit and is suspected of harming the environment. Consequently, environmental violations can adversely affect a firm or individual even if no criminal conviction is imposed.

Do liability rules create incentives to avoid harm to the enviornment? Unquestionably. The petroleum industry invested voluntarily several hundred million dollars in oil spill prevention following the Exxon Valdez incident. Did this expenditure result in cost savings? And measured how? Economic theory suggests the industry invests voluntarily in pollution prevention only when it anticipates that the investment produces positive returns comparable to alternative investment opportunities. That is one form of cost savings -- cleanup and environmental damage costs averted above and beyond the costs of pollution prevention. If traditional command and control measures were taken to encourage oil spill prevention they are unlikley to be as cost-effective as what the industry can design on its own. That is a second avenue for cost savings. Neither of these sources of potential cost savings is easily measured and no estimate can be provided at this time.

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