Daniela Russi

1. Introduction

The term “environmental liability” has a curious origin, and like the concept of ecological debt, it derives from the language of economics. In a company, the term “liability” refers to the section of the fiscal year balance sheet where all debts and encumbrances that diminish the assets are expressed. Used in environmental terminology, the word refers to the entirety of environmental damages made without compensation, and compensatory costs transferred by the company to the community throughout history.

Often the legal context means that companies do not consider pollution or the environmental damage produced as a cost, and thus do not exercise any limitation on their exploitation activities other than those strictly motivated by economics. Naturally, in most cases companies only include costs for the effects of their activities on the environment and communities if a law exists that forces them to pay reparation or compensation for such activities. Such a condition is often missing.

A first step to correct this imbalance would be to suggest a legislative system that obliges companies to include in their liabilities not only financial debt, but also environmental debts that the company invokes with the community and the environment outside of any contract. Thus two kinds of issues arise: legal responsibility and the valuation of environmental liabilities.

When a company causes damage to a community the moral responsibility is clear, but to whom does the legal responsibility belong? Who should take responsibility for the cost of cleaning up these contaminated places and repairing the damage, when it is possible? And who has to pay the victims when damage is irreversible - society as a whole or whoever caused the pollution? Are environmental liabilities a public or private responsibility?

As far as valuation is concerned, how do you determine the impact of a polluting activity in a complex and highly uncertain context? And, given that in the majority of cases are about goods that are non-exchangeable on the market, how do we value environmental damage?

Thus the concept of environmental liabilities has social importance in that it can gather together consensus in different fields. Its success is being increasingly being confirmed in the context of the struggle of indigenous peoples and peasants, communities and NGOs; it is also becoming included in institutional and business spheres. Some Latin American environmental consultancies are starting to offer environmental liability estimate services. Furthermore, traditional economists could accept the idea of environmental liabilities as a synonym for external costs1; their internalisation in business accounting is indispensable to achieving efficiency, the objective of their models.

Naturally, the influence of environmental responsibility on company decisions depends upon the possibility of establishing an obligation to pay for environmental liabilities. It is for this reason that it is necessary to individualize and strengthen the legal instruments that allow the more and more frequent vindication of the damage victims, so that companies consider the cost and risk of their environmental impact as something to be minimized

2. The problem of legal responsibility. Who has to pay for environmental liabilities?

2.1. How can you force companies to take responsibility for environmental liabilities?

The generation of environmental liabilities by companies would be reduced if a series of laws were created to require progressive reductions in pollution that they produce, through decontamination technology and increased efficiency in the use of materials and energy. Obviously, laws alone are insufficient and must be accompanied by institutions that guarantee respect for them, and by a system of sanctions for those who fail to respect them.

A national and international legislative system on environmental responsibility would create a strong incentive to produce less pollution, as it would contribute to companies’ internalisation of part of the environmental costs and risks in their accounting. As a consequence, natural resources will not be considered as free goods, but would have a cost to be minimized. This system would mean that for companies it would be more expensive to create environmental damage than to invest in pollution reduction, and in this way they would be given the incentive to take measures towards minimizing their environmental impact.

Obviously the internalisation of environmental external costs as a way of achieving sustainability has its limitations: on the one hand a certain degree of pollution associated with economic activity is inevitable; on the other hand, as is explained in the third paragraph, a significant part of environmental damage is irreversible and very difficult to evaluate in financial terms.

However, it is the political factor that must be taken into account above all. It is of course clear that the progressive inclusion of environmental external costs in companies’ accounting has a very relevant economic and political price, and thus it requires a strong commitment on behalf of the institutions themselves. Furthermore, in the moment of suggesting an environmentally responsible regime, governments are submitted to pressure by powerful lobbies interested in keeping environmental legislation as loose as possible.

It is for this reason that the process of making companies responsible is very slow. For example, during the Johannesburg World Summit in 2002, “voluntary agreements” were given much more space than discussion about environmental legislation.

Nevertheless, the institution of legislation on environmental responsibility is a very important step towards greater sustainability and environmental justice. We can cite one example of national legislation as a good model: the Superfund.

2.2. The Superfund and the European directive proposal

The USA is the most advanced country in terms of environmental responsibility, thanks to the CERCLA legislation (also known as Superfund), a programme that imposes strict responsibility laws for cases of site pollution and deposits of dangerous residues. If the company that caused the damage is identifiable and still in activity, the Superfund obliges it to clean up the area. The onus of proof falls upon contaminating companies, who, if they do not want to pay, have to prove that not only is there no significant pollution, but also that no risk exists.

The problem of individualizing responsibility is particularly difficult when companies go through several owners or when they close down. In such cases, neither the old or new owners want to take responsibility for damage caused in the past and the State rarely has the resources or political will to do so (in this respect, legislation that is being passed in Chile relating to the closure of mining work is very interesting[1]).

The Superfund resolves this question. In the case of dangerous residue deposits that are closed or abandoned on national territory (“orphan” sites, for whom nobody accepts responsibility), the Superfund finances cleaning operations through a surcharge imposed on oil and chemical industries. In over 20 years activity and with a budget of $1.6 billion between public and private capital, the Superfund has cleaned hundreds of contaminated sites^[2].

In Europe, a proposal for a European Directive on environmental responsibility was presented in January 2000[3]. This is an innovative document compared to current legislation, but still with many limitations, among them the non-retrospective nature of responsibility (as opposed to that of the Superfund). Moreover (once again in contrary to the Superfund), it does not cover damages unanticipated within the context of contemporary scientific and technical knowledge, that is, the time in which polluting activities are carried out.

With regard to the evaluation of costs, it is very difficult to determine the amounts that should be paid in reparation for environmental damage, as can be seen in the following section. The Superfund and the European Directive proposal are based on reparation costs that are relatively easy to quantify through economic valuation methods based on simulated markets. The Directive proposal also refers to some (not very specific) “equivalent alternatives”, which the responsible party would have to provide to those affected by the damage, if the reparation ends up to be too expensive. Nevertheless, the problem of irreversible damage remains in place.

The problem of jurisdiction also remains, in both the Superfund and the European Directive, as they are only valid within the confines of the USA and the EU. In other words, the Superfund and the future European Directive will not be able to be used to validate environmental liabilities outside the USA and the EU. A notable deficiency can thus be observed in international laws on the subject.

The ideal scenario would be for countries that have not already done so, to adopt integral legislation on environmental responsibility, perhaps using the Superfund and the proposed European Directive as possible models, especially if they were capable of imposing this legislation on foreign companies operating in their territory. Such legislation would have to be as homogenous as possible, in order to avoid the phenomenon known as “ecological dumping” – that is, the sale of a product at a very low price that does not include environmental costs, in order to ruin competition[4]. Perhaps in an ever more globalised economy a kind of “International Superfund” should be established, that is to say, an international legal system of environmental responsibility.

2.3. Environmental damage

The judicial process is a necessary complement to the legislative process for two reasons: in the first place, it can be the only way of partly compensating victims for environmental damage; in the second place a lawsuit for environmental damage can set a precedent that provides an incentive for companies to take measures that reduce their risk of ending up in a similar process.

Environmental damage can be pursued under criminal and civil legislation and in some countries through the legal definition of environmental damage[5]. Criminal legislation also typifies “ecological offences” in some countries. In all such regimes the contaminating party must be individualised and a cause/effect relationship must be established; cases of pollution of an imprecise nature, coming from multiple sources are not considered. Normally responsibility is not applied retrospectively: only activities prohibited at the time of the mission are pursued under law, despite the fact that the perception of pollution changes with time and progresses with scientific investigation, information and awareness about risks.

Some cases exist of local communities starting to bring cases under civil legislation against companies for damage caused. One very recent example is that of Neuquén, an Argentinean province where the Mapuche people have sued Repsol-YPF for $445 million for the damage they suffered in their territory as a consequence of hydrocarbon exploitation. Out of this figure, $138 million correspond to compensation for the impact on psychophysical health, vegetation, fauna and the sociocultural environment and $307 million to the cost of recovering the affected surface area[6].

The problem is that often the national juridical systems of Southern states are not sufficient to protect their inhabitants; due to a lack of political and economical willpower and strength, businesses enjoy impunity. This means that in many cases it is more convenient for Western companies to transfer their most contaminating or dangerous activities to Southern countries, where environmental and labour legislation is less strict, salaries are lower and in the case of accidents, compensation to victims is lower. Often Southern States do not have the political strength with which to impose severe environmental norms due to the threats of poverty, external debt and the ease with which companies can transfer their production abroad.

The globalisation of production and commercialisation processes causes a political vacuum as transnational companies, who increasingly control the flow of resources between countries, have an enormous economic and political power; it is thus very difficult to impose respect for environmental laws upon them.

For this reason, in an ever more globalised economy, international law mechanisms that are the same for all countries (in spite of their unequal political power and wealth) should complement national legislation; in this way multinationals would be legally recognized and penalised as responsible for environmental damage.

Unfortunately, international jurisdiction is still very scarce and wields little power. For example, the International Criminal Court, instituted in 1998, could be an adequate base to which appeals for environmental damages could be made, but its statute only allows it to judge individuals.

Today there is no existing international forum that can offer protection in a case of environmental damage. However, there have been cases in which victims of environmental damage have sued those responsible through the US legislation known as ATCA. It is a partially unexplored field, but one that could be a way of bringing to trial companies responsible for environmental abuse[7].

2.4. The “Alien Tort Claims Act”

The ATCA (Alien Tort Claims Act)[8], was introduced in 1789, but was hardly used before 1980. It hands to federal courts the right to concern themselves with cases of civil responsibility in cases of injury, which can be perpetrated by foreigners in harm to other foreigners, committing a violation of international common law (law of nations)[9].

The ATCA is a potentially useful mechanism for suing transnational companies, as often conditions in the damaged area are not right for impartial justice. There are cases of environmental abuse judged under the ATCA jurisdiction, although unfortunately up to now with little success.[10].

One of these cases is that of Freeport-McMoRan, a mining company that works in Irian, in Jaya or Western Papua, part of Indonesia’s sovereignty. This mine is the world’s main gold producer and third copper producer. The company has razed over 120 metres of the highest part of a mountain sacred to the local Amungme population, destroying thousands of hectares of tropical jungle, devastating lakes and polluting water. The mine currently discharges around 120,000 tons of untreated toxic waste per day into the watercourse and plans to increase its discharges to 200,000 tons per day[11]. The health and livelihood of the local population is seriously threatened. This case was presented to the Louisiana District Court under the ATCA legislation, but was rejected.

Another relatively recent case is that of Bhopal in India, where a second attempt under the ATCA was made in 1999. This is the case of Union Carbide, which in 1984 suffered a serious accident in one of its pesticides factories, directly killing 5,000 people and more than 20,000 through exposure to toxic emissions. Apart from this it caused chronic illnesses in approximately 120,000 – 150,000 people[12]. Union Carbide rejected all responsibility for the accident and only accepted to compensate victims after five years of legal battles, granting $350 to each affected party, an unquestionably derisory sum. The New York District Court rejected the judicial claim presented under the ATCA in March 2003 and today the sentence is awaiting appeal.

The most interesting case is against Texaco, the transnational company that extracted oil from the Amazonian jungle in Ecuador over 20 years (until 1992), digging 300 wells and creating almost 300,000 km of roads through the tropical jungle. Texaco has discharged massive quantities of highly toxic products into the water used by the local population to drink, fish and wash. It has filled storage tanks of extraction water with highly toxic residue. These deposits have often ruptured or overflowed, seriously polluting the environment and causing health damage in the local population[13]. The US court rejected the case, arguing that the Ecuadorian court would be a more suitable forum in which to decide on the case due to the greater ease with which it could access evidence and communicate with witnesses and victims.

There are two reasons for the frequent rejection of such cases under the forum non conveniens (inadequate forum) doctrine. The first is that the evidence and witnesses to the damage are not in the official home country of the company, but in the country in which the damage occurred, thus the trial should be carried out there. The second is that the environmental offences are not immediate violations of international law and thus cannot be judged under the ATCA.

The ATCA is a very advanced piece of legislation, but is characterised by extreme arbitrariness. Whether the cases reach a judge or not depends upon many circumstances. For example, it is often the lawyer (who in a successful case wins a percentage of the compensation) who contacts the complainant and looks for evidence. Judges have a very strong decision-making power, and at the moment of deciding if they will concede jurisdiction to US courts, or send the case back, they refer to past cases (up to now unfavourable). Unfortunately in the USA (and less so in Europe) there is still no homogeneous legislation that regulates the whole area of environmental damage produced abroad by translational companies.

3. The valuation problem: how much should be paid?

3.1. Limitations of financial valuation

There are many difficulties to be encountered in the financial evaluation of environmental damage. In the first place, ecosystems and the interaction of ecosystems with human society are characterised by their complexity and strong uncertainty, which must be taken into account. The effects of certain types of pollution on nature and humanity are very difficult to predict. Naturally the interaction between different parts of the said systems can exacerbate any disturbance in the balance and lead to irreversible changes.

Contamination is transmitted and accumulated along a tropic chain, and factors that increase the risk of illness are multiply and act cumulatively, often in the long-term28. It is therefore very difficult to isolate the effect of every contaminating element and to establish a linear correlation between cause and effect. Our knowledge of the working of ecosystems and the human body is too scarce for our estimates about the effect of polluting substances to be accurate, especially in the long term. For this reason, many warnings about contamination endangering the natural environment or human health that were not listened to within time, and thus the “precautionary principle” was not applied. Famous examples are DDT and asbetos29.

Secondly, the expression of environmental damage in financial terms has inevitable structural limitations if we accept the idea of the immeasurability of values, or rather the “absence of a common unit for measurement” applicable to plural values30.

What is the financial value of human life? Economists use a diversity of methods to express loss in financial terms, related for example with the price of life insurance, or the cost/opportunity of lost work. Obviously these measurements only reflect one part of the losses associated with death, and many other important aspects are not included. Furthermore, these estimates are all questionable as they clearly depend on income (thus the loss of life of a professional is much higher than a wageless worker). In this way we could pose the question, what is the financial value of the degradation of a landscape, reduction of biodiversity, loss of cultural roots, forced emigration, or illnesses suffered?

For these reasons it is clear that the financial evaluation of environmental damage is highly arbitrary. The figures that come out of such evaluation depend highly on suppositions and the methodology employed, and most likely do not reflect many other values of losses suffered.

Immeasurability destroys the very root of the concept of compensation. Can financial compensation be adequate in response to health damage and death, to the destruction of a cultural context, and irreversible environmental degradation? There are many cases of local populations refusing to discuss the amounts of money that would be offered to them in return for leaving their land to companies or to mines. For example, the U’Wa of Colombia, as many indigenous populations, refused financial compensation offered by the Occidental Petroleum Company for the oil drilling and extraction, which they conceptualise as the “rape of the sacred body of our Mother Earth””[14]. It is evident that the issue is about two different value systems that happen to be incompatible32. The U’Wa have managed to get Occidental Petroleum to leave not by threatening to make compensation demands for environmental damage in the future, but by arguing for the value of what to them is sacred, and also for their indigenous territorial rights.

3.2. When and why can financial evaluation be useful?

The choice and evaluation of an instrument must of course depend upon the objective for its use. If its purpose is the vindication of rights and making demands, it could be more effective to show the public a web of impacts, with both qualitative and quantitative indicators, each one in its own unit of measurement.

On the other hand, on a business and institutional level it could be effective to talk a quantitative and financial language. To present values in money could help to represent environmental damage in a way that would mean their true magnitude would be perceived in contexts in which financial language is normally used.

In the same way, financial evaluation of environmental liabilities is useful in a judicial context. In order to ask companies for compensation for their environmental liability it is essential to have carried out a valuation of environmental impact expressed in financial terms. Of course, in the civil and administrative law of any country, reparations for damages are conceived in monetary terms (while in criminal law there are sentences involving imprisonment, not redeemable in money).

Monetary compensation can be the only way of ensuring that victims of damages receive something, and that the crime does not remain unpunished. It can be used as a way of redistributing earnings produced through the contaminating activity, as a partial internalisation of the external costs.

Another reason worth mentioning is that financial evaluation of environmental damage works as an incentive to business people not to start polluting, or at least to take precautions and introduce technological innovations that reduce environmental impact.

Furthermore, financial compensation and the process or negotiation that makes it possible, has a very strong symbolic value. It reaffirms the rights of local populations over their territory.

Nevertheless, there are some caveat. Financial compensation must be carefully managed so as not to create strong imbalances within the community receiving it, such as unexpected inequalities in income, corruption and conflicts. For example, it can often be more effective if the compensation money received is put towards trying to repair damages or offering services to the community than to if it is granted directly to individuals.

It is also worth ensuring that financial compensation is sufficiently high for it not to be seen as a pigouvian tax[15], or as a pollution permit, but rather as a fine for damage caused. In other words, it must work to dissuade companies and seriously affect their balance sheets. Thus, the large fine imposed upon Exxon for the Exxon Valdez spill in Alaska in 1989 meant a considerable economic effect on the company, as well as providing a boost to the environmental movement[16].

4. Conclusions

Financial valuation uses a very arbitrary calculation and the result depends, among other things, on the existing power structure. Normally the poor are compensated very cheaply. If an accident such as the one in Bhopal had happened in Western Europe, the compensation provided to victims would have been much higher than $350 per person, and this not just due to differences in acquisition power.

Furthermore, much environmental damage is irreversible and cannot be repaired. Damage to health, forced migration, the destruction of cultural contexts cannot be compensated. To a person that has been diagnosed with cancer, the amount of compensation offered by the company responsible is not the most important issue at stake.

Nevertheless, to ask for financial compensation for damages produced could be a way of making environmental liabilities ever more expensive and problematic, and at the same time, of recognising the right of individuals to live in a clean environment and have full use of their own territory.

The expression of environmental liability in financial terms, although it involves a significant loss of information (as well as being questionable from many points of view) could possibly become very effective politically and socially in that it is more immediate and simple. In this way the vindication of injustice could be accepted in governmental and business sectors, where the use of financial language is the norm. Above all, financial calculation is indispensable in a forensic context.

Nowadays, courts in Southern countries often do not have enough power to ensure justice to victims in the case of environmental damage; on the other hand an international forum in which companies could be sued for their environmental liabilities still does not exist. There is a long way to go to be able to force companies to take responsibility for their own environmental liabilities. A collective reflection between local populations, NGOs, and Northern and Southern institutions is necessary to be able to identify the most suitable legal mechanism to make the rights of the weakest be afforded greater value.