It’s a liability

The precautionary and polluter pays principles are guiding values within the environment movement with which there can be little argument. So how is it that there has been such intense debate over a European directive that seeks in essence to “make the polluter pay”?

The proposed Environmental Liability Directive will establish a Europe-wide regime where operators are liable for any damage they cause to land, water and biodiversity. In keeping with the polluter pays principle, the bill for the remediation of this damage will lie with the operator responsible.

Groundbreaking but flawed

While the proposal is groundbreaking in establishing a regime across the whole of Europe, it was also pragmatic enough in its original form to seek to limit the potential for unquantifiable and unlimited liability. Businesses, seeking to ensure a workable solution, have vigorously supported this pragmatism.

But pressure from the environmental movement has seen the European Parliament seek to extend the scope of the proposals. MEPs now want to insert an amendment that will force operators to obtain compulsory financial security to cover them against any potential liability.

The Parliament is also seeking to remove the ability of operators to use compliance with permits or installation of state of the art technology in their defence when damage occurs. These proposals have met with stiff opposition from business and industry.

Reasons for complaint

At first glance, the business lobby’s opposition to these changes seems to reflect its usual anguish about further regulation and costs. Companies have cried wolf too many times in the past claim the sceptics.

However, on closer inspection there are justifiable concerns about the workability of such a wide-ranging directive and its potential to undermine the economic viability of Europe’s vital SME sector.

The introduction of a requirement for mandatory financial security presents a range of problems. For small businesses, financial security will mean taking out insurance policies, as most alternative methods of security are unavailable to them.

However, the insurance industry lacks experience in assessing the potential risks and value of damage to the environment, especially to biodiversity. Insurers will struggle to predict the frequency of claims, stifling the availability of policies and resulting in potentially prohibitive premiums and large excesses. UK government figures suggest that insurance cover for £1m worth of damage would cost in the region of £5,000-£10,000.

The UK Inland Revenue’s own estimate of the average income from self-employment is just £14,000. Such estimates represent crippling costs that would prove prohibitive and disproportionate for most SMEs, undermining the long-term economic viability of the small business sector.

Small firms have already experienced similar difficulties with employers’ liability insurance, a legal requirement in the UK. Irrespective of their claims history, many employers have been unable to obtain this compulsory cover – insurers apply a sector rate regardless of a company’s individual performance – forcing them to chose between operating illegally or going out of business. Others are facing a second round of huge premium increases well in excess of 200%.

If the European Parliament gets its way, businesses will be legally required to obtain environmental insurance, but insurers would not be bound by any such obligation. This would invoke a risk of under-provision and over-pricing.

Maintaining a strong defence

It is also important that businesses are able to invoke their compliance with permits and the use of state of the art technology as a defence.

Under the Parliament’s proposals these defences would be reduced to mitigating circumstances, but without them, the existing permitting regime is undermined and legal certainty is removed.

As a result, businesses will be unsure of their operating parameters. Deletion of the defences on the grounds that they represent a “carte blanche” to pollute is misguided, given that damage arising from incidents, accidents and breaches of permits would still result in prosecution.

The UK government has so far reflected the concerns of SMEs. With this support, the Federation of Small Businesses has been successful in ensuring that the European Council did not accept the Parliament’s amendments to the directive when it reached agreement in June.

With views polarised between Council and Parliament, as well as within each of the institutions, the intense debate will no doubt continue during the second reading in Autumn 2003. The prospect of a difficult conciliation next year to find a final resolution looks increasingly likely.