Law and Economics of Environmental Damage Assessment

Abstract

Traditionally, the environmental damage has been addressed by regulations, administrative and criminal sanctions. However, these tools have been found to be inadequate for the purpose of remedying and preventing harm to natural resources. As a result, environmental liability provisions have been increasingly introduced to address pollution caused by events such as oil spills and toxic leakages. A first innovation has been to grant public bodies with legal standing to file claims for compensation for damage to public natural resources. Another significant improvement in the field of environmental liability has been the extension of the notion of compensable environmental damage to include non-use or passive-use values in the final amount of compensation. This has been accompanied by a parallel development of environmental economic scholarship, which has informed not only ex-ante benefit-cost analyses for policies and projects, but also the ex-post valuation of environmental accidents. A significant challenge in this field since the 1970s has been the assessment of non-use or passive-use values, where traditional valuation methods based on observable behaviour are not applicable. New techniques to value the damage beyond market-based losses have been proposed and gradually refined. Economists have been debating the accuracy and reliability of these techniques for the past two decades. Concurrently, ecologists have been developing their own methods of valuation. In addition, an emerging tendency in the law is represented by the restoration-based compensation of environmental damage that appears to circumvent the contentious and time-consuming use of methods designed for non-use values (e.g., stated preference). Nevertheless, the exchange of information among these interconnected domains of knowledge is not as fluid and expeditious as it could be. Consequently, this research aims to provide an overview of the existing discrepancy between liability laws and economic scholarship. The specific research question is whether remedies for environmental damage at the international, regional and national levels are providing polluters with optimal care incentives to minimise the environmental costs of accidents while, at the same time, ensuring cost-effective restoration. Although limited, the resulting picture is quite diverse and comprises both positive and negative aspects. While some best practices have emerged at some levels of the law and in some countries, many challenges remain. They mainly relate to the notion of compensable environmental damage, the role of the economic valuation in the law and judicial practice, the multiple levels and branches of law intertwined in a single polluting event, and the private interests of all parties involved in the environmental damage assessment. Despite the complexity of the aforementioned issues, this research puts forward a novel theory of remedies for environmental damage that wishes to provide a smart solution to attain more efficient deterrence and adequate remediation.