Liability Approaches2001 1438. Liability ApproachesThe purpose of liability mechanisms in environmental management is twofold: first,to give polluters an economic incentive to make more careful decisions; and second,to compensate the victims of pollution. The incentive effect is clear, sinceenvironmental values in effect become part of the overall cost of doing business.Avoiding harm to the environment is a good practice for companies when it reducesthe overall cost of doing business.Liability for harm to the environment acts as a financial incentive, much like a fee onemissions, with at least two important exceptions. One, liability for harm createsmuch greater uncertainty as to the magnitude of the payment that will be due for agiven release of pollutants. Two, liability for harm can generate relatively large costsin terms of assessing environmental damage and the amounts due. These concernsaside, liability is an important incentive mechanism, one that is seeing increasing usein environmental policy.8.1 IntroductionTwo federal environmental statutes, the Comprehensive Environmental Response,Compensation, and Liability Act (CERCLA) and the Oil Pollution Act of 1990(OPA), provide liability for the cleanup of releases of hazardous substances andpetroleum, respectively, that pose a threat to human health and the environment. Thestatutes also provide for compensation for the lost use of polluted natural resourcesand for the restoration of the environment.Several of the federal environmental statutes provide for civil and criminal liabilityfor failure to comply with environmental regulations. The incentive effect of civiland criminal liability is to encourage individuals to comply with what are largelytraditional forms of regulation. Such an incentive is qualitatively different from thesubject matter contained in this report: incentives that put a price on pollution thatharms health, the environment, or natural resources.No study has attempted to address whether the existing combination of liability,penalties, and enforcement produce the correct incentive effect, which wouldencourage an optimal level of investment in pollution control. Excessive investmentin pollution control is possible if entities seek to avoid penalties that are too harsh. Itis also possible that firms will expend too little effort at pollution control if penaltiesare low and enforcement is lax. One recent study found that some types of chemicalspills are more numerous in states that have imposed strict liability, an unexpectedfinding that calls into question many of the assumptions that policy makers havemade regarding the effects of liability mechanisms as a tool of environmentalmanagement.200In addition to liability for cleanup, and civil and criminal liability for violatingenvironmental laws, individuals may use tort law to seek compensation frompolluters for harm to their property or person. The difficulty of proving harm causedby pollution, particularly chronic health effects, creates a severe barrier to such cases.The U. S. Experience with Economic Incentives for Protecting the Environment144 JanuaryConsequently, tort law has serious deficiencies as a mechanism to make polluters pay for theharms they cause. In fact, it was largely the failure of tort law to address many types ofenvironmental harm that led to the passage of the principal environmental statutes.8.2 Liability for Cleanup CostsThe Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of1980 responded to an issue without precedent: the legacy of sites contaminated with hazardouswastes. Love Canal in New York was the most celebrated case, although others such as TimesBeach, Missouri, also attracted national media attention. CERCLA established a trust fund (theSuperfund) that was financed primarily by three mechanisms: (1) a tax on corporate income; (2)a tax on crude oil and certain chemicals; and (3) general appropriations. (The taxing authorityexpired in the 1990s, leaving the Superfund reliant on annual Congressional appropriations, costrecoveries, and interest on the existing fund.) EPA uses the fund to pay for cleanup andrestoration activities at sites where no solvent responsible party can be identified or at siteswhere an immediate response is deemed necessary.Section 107(a) of CERCLA provides for liability for anyone who caused, or threatened to cause,a release of a hazardous substance or for anyone who has threatened to cause a release thatcreates a need for cleanup actions. The courts have interpreted this section of the law as requiringstrict, joint and several liability for parties that have been deemed responsible for disposingofor generators that arranged for the disposal ofhazardous wastes that pose risks to humanhealth and the environment. The term “joint and several liability” means that if the governmentcan identify just one party out of many that contributed wastes to a site, then that one party canbe held responsible, potentially, for all cleanup costs. In turn, any potentially responsible partiesthat have been identified by the government may seek to involve other potentially responsibleparties. The term “strict liability” is a standard that holds parties responsible, regardless of thecircumstances of their action, e.g., without regard to whether the party acted negligently.The most important feature of CERCLA centers on the cleanup of hazardous waste sites thatpose a threat to human health and the environment. CERCLA is unique among the principalenvironmental statutes in that it looks backward, seeking to remedy problems stemming frompast actions, rather than forward by trying to prevent damage from current or future activities.Cleanup costs paid by the private sector under CERCLA could amount to several tens of billionsof dollars. The incentive effects of being held responsible for cleanup must lie outside of theactual costs of cleanup, since the actions that precipitated the need for cleanup are historical, notcontemporaneous. But the mere prospect of CERCLA cleanup liability is affecting current andfuture decisions regarding the disposal of hazardous waste.201 Large firms are managing most oftheir hazardous wastes on-site so as not to commingle their wastes with others and face thepossibility of strict, joint and several cleanup liabilities for wastes from other generators. Atpresent, minimizing wastes and preventing pollution are definitely more attractive strategies forbusinesses