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New EU Requirements Can Add a Layer of Complexity or Pave the Way for a Cohorent Regulatory Scheme

The transposition of the EU Environmental Liability Directive, 2004/35/CE, in Central Europe affects a broad range of companies in complex ways. The Directive generally is prospective, i.e. directed toward events that occur after April 30, 2007, the date it must also be transposed by Member States. The Directive creates liability for environmental cleanup and damages to natural resources, specifically habitats protected by EU Directives. Unlike some directives, the ELD leaves many issues to the Member States’ discretion. The scope of liability, the legal defenses available, the scope of habitats covered, and the financial security provisions are all largely open issues. Any business that handles chemicals or produces waste will face a new set of national rules arising out of the transposition process for the ELD. One UK small business organization commented: “The Directive is one of the most controversial, and potentially far-reaching, pieces of environmental legislation negotiated by the EU to date.”

There are also immediate effects of the Directive that extend to situations besides these future incidents. First, the Directive also encourages Member States to adopt financial security mechanisms for assuring that the operators of activities that handle potential pollutants have the financial means to address the future problems. The scope of this can be seen by the draft Spanish proposal that would require one million Euro for the lowest risk, covered activity in either insurance, a bond, or cash reserve. Similarly, the draft Czech law compels mandatory insurance, which is not now available (and may not be by 2010 according to the UK Environmental Minister). Without insurance, the mechanism for operators, if compulsory, will be prohibitively expensive. Alternatives do exist, as discussed below, that promote the objective of creating a market for these financial arrangements and satisfy the Directive without the major economic impact.

Second, the practical difficulties of determining when damage occurred, and what event caused them, make the cut-off date somewhat illusory. If a leaking petroleum tank in discovered in late 2007, is all of the damage at the site covered, even what occurred before 2007? Practically speaking, it is probably impossible to make distinctions within the same contaminated area over when the pollution occurred. Past damage from intentional dumping or inadvertent releases is vastly larger than the prospective releases after 2007; these cumulative problems will often get “bumped” into the “prospective” regulatory scheme of the ELD. The problem is added to by some member states’ proposed legislation, such as Poland, which
suggests that the date of “discovery” of the problem will be the controlling event (potentially limiting the April 30, 2007 date’s significance). The ELD also requires notification of the “competent authorities” when contamination is discovered by the operator, creating a new requirement that can open up issues related to old sites of contamination.

Third, there is an opportunity to use the ELD transposition to address other issues in national laws relating to existing contaminated sites. In Poland, for instance, the existing soil contamination standards are rigid numeric criteria that are unrealistically expensive. The ELD uses risk assessment procedures to make this determination, which are much more cost-effective. There is a logic and appeal to making the existing law use the same criteria, now advocated by the EU. In the Czech Republic, as in Bulgaria, there is no clear soil and groundwater contamination law; authorities use existing laws on water resources and other rules to provide some “make-shift” coverage. Using the transposition law to create an integrated, coherent legal scheme is also appealing.

So there are several issues in the transposition of the ELD that each have major financial impact to facility operators, transporters, and the insurance industry. Generally, speaking the interest of all business groups are virtually identical. Everyone wants a responsible regulatory scheme that will allow for the risk to become commercially insured on a realistic basis.


1. JOINT AND SEVERAL LIABILITY AND APPORTIONMENT

The EU Directive broadly makes the “operator of an occupational activity” covered by the Annex liable for cleanup and environmental damages. Article 8 makes the terms of this liability up to the Member States. Liability can be “joint and several,” i.e. any one party can be held liable for the full amount of the claim, or it can be “apportioned” among multiple parties. Who bears the burden of proofing “apportionment” – if it is applied - is also an open question. Whether a party singled out by the Government can join other parties or file a subsequent claim against them for contribution is also left for member states to decide.

The argument is that the “polluter pays” principle requires that the polluters pay, not simply the deepest pocket the Government can identify regardless of their degree of fault and responsibility. The solution is likely to be provisions allowing the “joinder” of other others in the administrative procedures; this eliminates the expensive and unpopular notion of private litigation among respective parties. Others argue that the Government cannot be require to find everyone involved and only pursue each’s proportionate share. Allowing polluters to join other parties and proof relative apportionment among themselves is a reasonable compromise. This is not not possible under existing Polish law nor it the proposed changers to transpose the ELD.


2. WHO IS LIABLE

The Directive uses the term “operator” very broadly and seems intended to cover every party who is actually involved in causing contamination. Some language in the Directive (Article 9) even suggest that a producer of a chemical sold and used by third-parties might end up with liability of its eventual disposal. The national legislation will largely decide the scope of liable parties and whether the liability is truly “strict” or based on fault.

The new law should clearly state who is liable on the basis of fault, ownership of the land, or negligence. This should be done clearly and plainly and should be applicable to both existing sites and those covered by the ELD. One needs to remember that both the existing national laws and the ELD transposition law will cover the same “new” sites after April 30, 2007. Clear liability rules are essential in the development of an insurance market and there should be no inconsistencies between the two laws. This is major opportunity to clean up “bad law” in various CE countries.

3. DEFENSES TO LIABILITY

The EU Directive envisions a defense based on: (1) independent actions by a third-party causes the damage; (2) discharges of contaminants approved under permits or government orders; (3) the “state-of-the-art” defense that injury was an foreseeable given the technical knowledge then available. The battle in Brussels over whether to include these in the Directive itself was resolved by making them optional with the Member States. The Commission did state that: “An operator should not be required to bear the costs of preventive or remedial actions taken pursuant to this Directive in situations where the damage in question or imminent threat thereof is the result of certain events beyond the operator's control.” Finding 20, supra.

The possible exception to this principle is that owners of the land seem to have an obligation to address any condition of their land that adversely affects their neighbors, regardless of their fault, once they are on notice of the condition. This principle is centuries old and seems enshrined in European law. If the pollutant release in question was under a permit and within limits, then there is some equity in finding that the Government cannot come back and make a claim for cleanup or damages based on a release that it authorized.

The problem that exists in pubic policy for each of the defenses is that the alternative is for the Government to pay for the cleanup and damage. One solution may be the national fund approach (used in Sweden and Holland) to add a charge to each permit of an activity related to the ELD and to pool the money. If this is a supplemental mechanism to private liability, the fees might be reasonable and this mechanism might be a good “trade-off” for some relaxation of the liability rules.


4. EFFECTIVE DATE

Some national laws use very creative ways of addressing the cut-off date of the Directive. The Polish draft law on the ELD proposes that it will be effective on all contamination “discovered” after April 30, 2007. The “discovery” trigger is inconsistent with the EU Directive [no application to “damage caused by an emission, event or incident that took place before..” April 30, 2007, Article 17]. Damages from such prior acts are excluded, even if they were discovered later. Other national drafts have been confused about whether effects of a prior event are technically covered by the ELD. The Commission seems to have plainly intended that damage “caused by an emission, event or incident” before April 30, 2007 is excluded and, moreover, damage “that derived from a specific activity” before that date is excluded. Article 17, supra.

The issue is complicated by the fact that contamination itself moves and that the identification of the event that caused it is often difficult or impossible. This means that many “new” ELD sites will have potential elements of an “old” site involved. In any event, the existing national legislative scheme will continue to apply to “new” sites covered by the ELD. For example, unless the Polish Contaminated Land Law is amended to conform to the ELD, it will apply different standards to cases “discovered” after April 30, 2007. See Finding 29, Directive 2004/35/CE [“This Directive should not prevent Member States from maintaining… more stringent provisions…”]. Poland is set to have two remedial regimes and companies would have to meet whichever is the most stringent on a case-by-case basis. The transactional burden on companies and the Government will be simply doubled.

Absent provisions that conform existing law to the obligatory portions of the ELD, there will be two sets to requirements and rules for contaminated sites after April 30, 2007. Frankly, lacking the trained and experienced personnel to administer one set of rules, most CE countries will be buried by this burden and the resultant confusion. Obtaining a government sign-off on a remedial plan will be significantly more difficult than it already is.

5. FINANCIAL ASSURANCE MECHANISMS

The EU Directive does not require insurance or other specific financial mechanisms for operators. A compulsory insurance provision was deleted from the draft in Brussels. The Directive only broadly states that: “Member States should take measures to encourage the use by operators of any appropriate insurance or other forms of financial security and the development of financial security instruments and markets in order to provide effective cover for financial obligations under this Directive.” Findings Para. 27.

This provision has a major impact under many national proposals across the whole range of covered industries (irrespective of whether there are any incidents within the scope of the ELD). The easiest approach for a policy maker is to simply “require” compulsory insurance (Spanish draft, Czech draft, etc.). Since the commercial insurance industry cannot be obligated to issue these policies, then other substitute means must be authorized. They involve bonds or cash reserves which are prohibitively expensive because they do not result in any pooling of the risks. The Spanish proposal last year included a minimum one million Euro financial assurance for the “low risk” operators. The Czech draft mandates insurance or cash equivalents. The Polish draft simply authorizes the Ministry to create rules that require insurance or other forms of financial security (This follows the German proposal from 2005). It makes no decision of what will be required or how the rules will help the “development of financial security instruments and markets.” The UK Environmental Minister just stated in May that he did not feel that environmental insurance for these problems would be available there until after 2010. The Danish EPA commissioned a study by KPMG on the subject which concluded: “Markets for financial security should be developed gradually and as a statistical basis becomes available.” KPMG makes recommendations on the steps necessary to develop this market for insurance and its approach should be incorporated into the national legislation.

5. CLEANUP STANDARDS

Poland currently uses rigid numeric standards for soil cleanup under the Contaminated Land Law. These standards require removal of all soil above the numeric concentrations regardless of the risk, or lack of risk, at the specific site. This approach has proven unworkable in Poland and in other countries that initially tried it. The ELD uses risk assessment procedures to determine the levels of cleanup as do virtually all EU member states in their existing national laws and administrative rules.

Both the ELD law and the existing Polish Contaminated Land Law will apply to sites “discovered” after April 30, 2007 in Poland. See above. This creates an administrative nightmare and needless burden of all the parties involved, since both sets of procedures must be followed at every “new” site. The existing law should be amended to adopt the same cleanup rules as the ELD. This will encourage remedial actions by being more reasonable and will reduce the burden on responsible parties as well as the government agencies involved. Some other CE countries do not have clear risk assessment legal mandates in their national legislation (Bulgaria) and the ELD transposition is an opportunity to create one coherent set of common rules of the scope of remedial action.

6. HABITAT DAMAGE

The EU directive caused quite an uproar on the issue of damages to “biodiversity.” The Directive in the end only applied this concept to narrowly defined habitats protected by prior EU Directives, the so-called Natura 2000 sites. These represent a small part of most CE countries, even if the national conservation and protected wildlife sites are added (discretionary with member states). It is unlikely that most of this land will be the subject of industrial operations covered by the Directory. Moreover, if established protocols are used to evaluate the habitats, the amount of financial exposure will be relatively small. The United States has allowed natural resource damage claims for about twenty years and has developed extensive experience with evaluation methodology. Generally, a “Habitat Equivalency Analysis” is used to find the price of land with the same natural features and wildfire. Thousands of US claims have been made and paid and they generally do not involve large amounts.

The rational apporach is to simply put into the Polish law that “established methodologies” for habitat evaluation will be utilized. This will help to avoid some wild-eyed theory about habitats that could create financial havoc.

CONCLUSION

Of course, there are other issues with the ELD, but these are the major ones. The number of businesses affected is very large and the impact of some of the rules, especially the financial assurance schemes, will affect everyone. Companies with existing, known contamination will likely face the issue of reporting it under the ELD (depending on the circumstances and the national law). Any company with existing contamination issues should also be extremely interested in using the transposition process to get a single set of workable and cost-effective requirements that will apply to all cleanup activities.


For more infpormation, CONTACT: "Randy Mott"