Environmental Liability

An Analysis of the Preventive Effect of Environmental Liability

Environmental Liability, Location and Emissions Substitution: Evidence From the Toxic Release Inventory

Holding polluters liable for the environmental damage they cause should encourage socially efficient levels of prevention as firms faced with potential liabilities seek to minimize the total costs associated with their liabilities and with proper waste disposal and waste avoidance. Holding polluters liable is also likely to lead to less damage and a cleaner environment, compared with an otherwise similar no-liability policy.

However, the purpose of liability may be defeated by substitution effects whereby firms faced with potential liabilities substitute emissions into one environmental medium, or place, for emissions into some other medium, or place, that they perceive to carry greater risk of damage and/or detection. This behavior, if it becomes common, may jeopardize the effectiveness of liability since firms would then be diverting productive resources toward avoidance efforts without necessarily engaging in better prevention or reducing environmental damage associated with their activities.

This research examined whether such substitution effects were present in the US, in the context of different State-specific environmental liability standards. The findings suggest that no significant substitution is taking place. It is possible that the effects of state-to-state differences in liability policy have been muted by the earlier adoption of strict liability at the federal level. Such differences need not be a concern where there is a consistent, and consistently applied, liability policy that leaves little scope for regional policy differences to affect firm incentives.

The findings of the research suggest thus that an EU-wide common environmental liability framework, as the proposed draft directive on the prevention and restoration of environmental damage intends to establish, is necessary to ensure the cost-effectiveness of environmental liability in the EU.

The following documents are available:

Terms of reference of the study (pdf ~50K)
Executive summary (pdf ~60K)
Final report (pdf ~200K)
Final report - figures (pdf ~1,500K)