Environmental Law and Economics in U.S. and E.U.

:
A Common Ground?

Anna Rita Germani1

Department of Financial and Management Studies
School of Oriental and African Studies
University of London

JUNE 2004

ABSTRACT:
This paper analyses the general framework of the law and economics theory applied to
environmental issues. An overview of the law and economics literature is provided
focusing, in particular, on the comparison between legal and economic instruments to
control environmental risk, and on the implications between ex-ante regulation and ex-
post liability. Taking into consideration the differences in the law and economics
approach between common and civil law systems, the analysis imparts some motives in
order to employ an integrated government choice of enforcement, liability design and
regulatory policy. The main conclusion of this survey is that the choice of a regulation
framework and a legal framework to implement an environmental policy is a difficult
task, which requires structured analysis to model the interactions between governments,
firms and regulators.

JEL Classification: K10, K32

Keywords: law and economics, environmental law and economics, environmental law.

1
Centre for Financial and Management Studies, SOAS, University of London, Thornhaugh Street, London
WC1H 0XG, [email protected]
Environmental Law and Economics in U.S. and E.U.: A Common Ground?

2 SOAS, University of London

 Discussion Paper 45

Environmental Law And Economics In U.S. And E.U.: A Common

Ground?

1. SOME BASIC CONSIDERATIONS2

Primary objective of this contribution is to discuss the law and economics with respect to
environmental regulation. In order to do that, an overview of the literature within the
traditional economic analysis of law approach is provided focusing, in particular, on the
comparison between legal and economic instruments to control environmental risk.
Environmental law and economics deals with, among other topics, “legal” instruments
(such as liability rules and the traditional command and control mechanisms like
environmental standards and targets) and “economic” instruments (such as taxes and
marketable pollution rights). However, this terminological distinction can be misleading in
view of the fact that the legal instruments are also economic, in the sense that they
provide an incentive to comply with certain policy goals. Likewise, the economic
instruments are also legal in the sense that a system of taxes or marketable pollution
rights needs a legal framework to be effective (Faure, 1998).
As it is well known, the earliest roots of the law and economics movement have
to be found in economists like Adam Smith and Jeremy Bentham, Pigou A.C. (1932) and
Ronald Coase (1960), as well as Max Weber (1978). The idea of applying economic
concepts to gain a better understanding of law helps either in explaining how legal rules
evolve, or what might be the consequences of alternative rules. One of the most
controversial principles of law and economics is the so called “efficiency criterion” which
emphasizes that the primary objective of a legal system has to be efficiency and that rules
have to be evaluated for their capability of supplying incentives for the maximization of
the society’s aggregate benefits; in fact, the “wealth maximization” principle proposed by
Posner is a mean of applying the efficiency test (Posner 1972, 1983, Landes and Posner,
1987).
It is important to premise that there is a big hiatus in the law and economics
movement between United States and Europe, both for methodological aspects and legal
frameworks. The major differences between common law and civil law systems can be
identified mainly in the systematization of law, the method of judicial construction, and
the differences between judge made law and statute law. These issues deserve a specific
analysis, but it is not objective of this contribution to deepen the implications deriving
from these crucial matters. Just to give some flavor of the importance that these
approaches can have in the different legal systems, it is worth noting that 1) systematiza-
tion of law is alien to common law, which consists of case law, derived from hundreds of
thousands of cases (Kerkmeester and Visscher, 2003), that 2) the method of judicial
construction in common law systems works case to case, while in civil law systems it
works subsuming a concrete case under a general rule, and that 3) common law is
dominated by judge made law, while civil law is characterized by statute law. Taking into
account these structural differences between common law and civil law, it is not possible
to give a general opinion regarding the superiority in efficiency of one system relative to

2
I am particularly grateful to Cesare Imbriani that provided the inspiration for this contribution. The
responsibility for any errors or omissions remains obviously only mine.

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Environmental Law and Economics in U.S. and E.U.: A Common Ground?

the other. Nor is there reason to assume that one system is better or worse suited for
economic analysis than the other.
In any case, it is worth noting that, the law and economic theory, at its first
steps, was restricted to antitrust issues and to contract law. Nowadays in the United
States, law and economics has led to remarkable and innovative methods for analyzing
legal rules in all areas of law, from contract law, tort and property law to commercial law,
constitutional law, criminal law and environmental law. Among the several potential
definitions for economic analysis of law; one largely accepted is “the application of
economic and econometric methods to examine the formation, structure, processes of law
and legal institutions” (Rowley, 1989).
The most important characteristic is, however, that “the economic analysis of
law is an inter-disciplinary subject, bringing together the tools of two great fields of study.
Economics allows us to perceive the legal system in a new way, one that is extremely
useful to lawyers and to anyone interested in issues of public policy. If economists will
listen to what the law has to teach them, they will find their models being drawn closer to
reality” (Cooter & Ulen, 1988).
The present tendency is to subdivide law and economics in two branches of
studies (Posner, 1983). The “old” law and economics is interested in studying the
legislation regulating the market (i.e. the behavior of individuals and organizations in the
market), and dates back to Adam Smith;3 the “new” law and economics is interested in
studying the legislation regulating nonmarket behavior (e.g. criminal law and family law),
whose objective is to apply “economics to core legal doctrines and subjects such as
contract, property, tort and criminal law” (Duxbury, 1995). Ronald Coase and Gary
Becker are pioneers of this field of study.4
It is important to underline the fact that, this study area is developed in a com-
mon law system, the United States, where it has been extremely influential, but it has
gained popularity in a number of civil law countries in Europe; due to the increasing
process of convergence of the common law and the civil law,5 the law and economics
approach might be able to bridge the gap between the two different legal systems.
Law and Economics in Italy still requires more theoretical and empirical effort in
order to develop a common ground of knowledge with the U.S. law and economics
movement. The Italian bibliography on law and economics lists only few contributions by
Italian economists6 and the wish is that the present situation will change in the near
future. In the United States, this field is considered “the single most influential
jurisprudential school”.7 The reason why economics smoothly expanded into law and has
produced significant results can be attributed, mainly, to the combination of two factors;
the first one is that economics and law have a high degree of commonality; the second one

3
For an exhaustive history of law and economics movement, see Mackaay E.
4
It is often said that we are now in the third generation of law and economics (Dari Mattiacci, 2000). The
first generation was the one of the founding fathers, and was dominated mainly by lawyers with some
understanding of economics. The second generation was characterized by economists who put more
emphasis on mathematics, with a consequent shift towards a dialogue between economists and lawyers. The
third generation is the actual generation of young professors and researchers, who have studied both law
and economics, and of lawyers and economists who have become able to share issues of mutual interest.
5
For a more detailed discussion about the pros and cons of convergence, see Funken K. (2003).
6
For an extensive discussion on the different perspectives of legal scholars or lawyers and economists in
Italy, see Pardolesi and Bellantuono (1999).
7
Remarks of Anthony T. Kronman, The Second Driker Forum for Excellence in the Law, 42 Wayne Law
Review 115, 160 (1995).

4 SOAS, University of London

 Discussion Paper 45

is that economics offers a solid analytical framework of human behavior that conven-
tional legal studies do not have.8
In this work, then, both the two strands of literature, the economic and the legal,
are reviewed. In section 2, the main issues arising in environmental law and economics
literature are presented. In section 3 and 4, the legal and economic instruments and the
different alternatives for controlling environmental risk are discussed. Considering a law
and economics approach allows choosing among instruments that have an incentive
objective (the efficient deterrence of environmental degradation) and a remedy objective
(the efficient clean-up of damages and the proper compensation of victims). The
economics literature, on one side, helps understanding how an incentive regulation
framework should be designed, while the legal literature, on the other side, analyzes how
a system of legal liability can provide compensation to victims, internalizing the social
cost of hazardous activities. In section 6 some characteristics of the criminal enforcement
of environmental laws are presented, focusing, in particular on the theory of deterrence
and the application of criminal sanctions. The differences in the law and economics
approach between common and civil law system are outlined in section 7 and some
conclusive considerations are proposed.

2. ENVIRONMENTAL LAW AND ECONOMICS ISSUES

Laws and regulations play an increasingly significant role in the determination of
particular environmental issues and the development of the appropriate polices, but
economics is also very important in order to provide society with the right strategies and
instruments according to a sustainable development criterion. As argued by Boyer and
Laffont (1999), one advantage of the regulation instrument is that policy makers, using
their knowledge of the economy, could choose the more appropriate regulation policy.
It might be difficult to delineate the boundaries of the environmental law and eco-
nomics literature, since the legal literature, by one side, mainly deals with environmental
laws and does not address the issue of controlling environmental risk from an economic
perspective (i.e. pollution taxes, tradeable permits); the environmental economics
literature, by the other side, analyses the effects of economic instruments to control
environmental pollution but the legal instruments (i.e. nuisances, liability law) are not
usually considered (Faure, 1998). However, it is essential to mention few of the textbooks
on environmental economics, some of which also discuss the relevance of the legal
instruments, such as Ackerman et al. (1974), Baumol and Oates (1979), Eide and Van
den Bergh (1996), Endres (1985), Field (1994), Kahn (1995), Oates (1996), Pearce and
Turner (1990), Portney (1990), Revesz (1997), Richardson, Burrows and Ogus (1982),
Tietenberg (1992) and Ward and Duffield (1992).
In the economic literature, the early contributions to the regulation of environ-
mental risks have considered models in which the regulator maximizes a welfare function
decreasing with the level of damage and the level of abatement costs. The regulatory
policy is typically formulated in a single period and remains in effect afterwards (Roberts,
Spence, 1976; Kwerel, 1977, Dasgupta, Hammond and Manskin, 1980, Baron, 1985).
More recently the literature presents models that take into account asymmetric
information (Laffont, 1995).

8
Hsiung Bingyuang, The Success of Law and Economics: A Methodological Interpretation, Working Paper,
National Taiwan University, 2000.

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Environmental Law and Economics in U.S. and E.U.: A Common Ground?

The law and economics literature has focused mainly upon the role of legal institu-
tions and common law rules in achieving efficiency and distributive goals (Calabresi,
1970; Landes and Posner, 1987; Shavell, 1987), in particular in the area of environmental
policy (Polinsky 1980; Landes and Posner, 1984; Tietenberg, 1989; Kornhauser and
Revesz, 1994). With this approach, liability has been analyzed in terms both of its
capacity to provide (ex ante) incentives to avoid environmental damage and of its
capacity to guarantee (ex post) the proper compensation of victims. The courts are then
ultimately responsible for meeting these objectives.
Many studies have addressed the effectiveness of specific environmental regula-
tions, focusing, in particular, on their enforcement. Shavell (1987) stressed that one of the
weaknesses of regulation in comparison with tort law is that whereas in tort law a victim
will usually have an incentive to sue (if he is injured, the damage is sufficiently large and
the injuries can be identified), the effectiveness of environmental regulation will be greatly
dependent on the possibilities of enforcement. Enforcement issues have been addressed
for example by Hawkins (1984), McKean (1980), Richardson, Ogus and Burrows (1982),
Russell, Harrington and Vaughan (1986) and Russell (1990).
The question of what kind of penalties have to be used to deter inefficient emis-
sions has been addressed by Segerson and Tietenberg (1992). They more specifically
address the question how an optimal penalty structure can be achieved in case of
corporate environmental crime, addressing the question under what kind of circumstances
there should be individual or criminal penalties or a combination of both.
The effectiveness of criminal liability for environmental offenses has also been
addressed in the many publications in this field of Cohen (1987, 1992a, 1992b). He
argues that the magnitude of criminal sanctions should be based on harm, thereby
criticizing the current American sentencing guidelines, which hold that the fine should be
based on the illegal gain. Furthermore, Cohen argues, as many other authors do, that
criminal sanctions are only one part of the total picture, since civil sanctions and private
settlements must be taken into account as well. Deterrence of environmental harm has
been investigated as well by Epple and Visscher (1984), developing a model to measure
the effectiveness of enforcement efforts. Recently Gren and Kaitala (1997) examined the
possible gains for the enforcing agency from disseminating information as its skill on
detecting and convicting violators.
Another piece of literature aims to understand judicial behavior, by analyzing the
incentives faced by judges in their judicial role. Explanation of the behavior of judges is
one of the most important but also most difficult problem facing law and economics
scholars. This is because judicial opinions are the result of utility maximizing behavior
and economists are unable to specify the details of judges’ utility functions (Posner,
1994). One of the most discussed issues in the judicial literature is why judges rule the
way they do. In the existing empirical literature there is disagreement over the role of
discretion and over the extent to which discretion affects criminal justice outcomes (Rubin
1977, Priest 1977, Goodman 1978, Landes and Posner 1979). Discretion is one of the
most controversial concepts in criminal justice; the everyday discretionary actions of
prosecutors, judges, police officers, among others, ultimately result in either justice or
injustice. Evaluating whether discretion is a positive or negative concept and the threshold
for discrimination and disparity are just some of the issues that are taken into
consideration by the law and economics scholars.
The question of which cases to pursue criminally is left to the discretion of the
prosecutor. What showing of intent is necessary in order to classify a case as a criminal
one? Environmental criminal cases do not necessarily require that the defendant possess

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 Discussion Paper 45

an intent to commit a crime; a principle of “general intent” is instead applied. Conse-

quently, there is little practical difference between the standard for proving a civil and
a criminal violation. The environmental criminal prosecutor, therefore, has enormous
discretion.
The remainder of this contribution shows how the basic literature on externalities
and how the various instruments to control environmental risk, such as environmental
liability, are applied to the pollution problem.

3. “ECONOMIC” VERSUS “LEGAL” INSTRUMENTS

Traditionally environmental damage resulting from production activities are included
among cases of market failure essentially because 1) the environment is a “public good”
that may not be appropriated and has no market price, and 2) the damage to the
environment is a case of “externality”, in that it is a social cost that is not internalized
into the accounts of the parties causing it.9 Thus a market malfunction does not allow for
proper internalization of the damage related to the specific category of accidents that
cause harm to the environment. This malfunction and the subsequent inefficiencies result
into the need for some sort of regulation (Alberton, 2003).
Much of the environmental law and economics literature deals mainly with the
two fundamental questions:
1. What is the optimal level of emissions? and
2. How can the law give incentives to comply with this optimal level?
Environmental law and economics employees the so-called command and control
regulatory instruments, such as environmental standards and targets, together with other
administrative obligations and prohibitions, which are often referred to as legal
instruments. The command and control approach is often used in contrast to economic
instruments; when economists refer to economic instruments they usually mean incentive-
based mechanisms, such as taxes or marketable pollution rights.
To the question “what is the optimal level of pollution”, traditional economists
would answer that the right incentives can be given by imposing a tax (Pigouvian tax) on
the polluting activity. By equaling the marginal tax rate to the marginal costs caused by
the harmful activity the polluting firm would get incentives to reduce pollution in an
optimal way. However, Coase, in his seminal article “The Problem of Social Cost”,
showed that if transaction costs are zero an optimal allocation of resources will always
take place irrespective of the contents of the governing legal rule (Coase, 1960). The main
question, therefore, is not how the law should give incentives to induce the firm to reduce
emissions, but which of the two actors (firm or victims) should be limited in their activity.
The Coase theorem is used as a starting point for discussing the role of environmental law
and, more generally, the need for legal instruments to control environmental pollution
(Baumol and Oates 1979, Oates 1983). A shortcoming of the Coase theorem is that in real
life the situation given in the example of one polluting firm that would affect just one or
two victims never happens. Usually there are cases of multiple victims where transaction
costs will be very high, Coasian negotiations, thus, will not occur and some intervention of
the legal system will then remain necessary to reach an internalization of the externality
(Mishan 1971, and Kapp 1970).

9
As noted by Cropper and Oates (1992), “the source of basic economic principles of environmental policy is
to be found in the theory of externality”.

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Environmental Law and Economics in U.S. and E.U.: A Common Ground?

Baumol and Oates (1971) proposed the use of standards and prices for protection
of the environment, but with the standards arises the problem of how to set them
efficiently. It is opportune to distinguish between different standards. Economists usually
refer to “target standard” or “quality standard”. This standard defines the optimal
environmental quality for a certain environmental component and is also referred to as an
ambient standard.
A second type of standard often used in environmental policy is the “emission
standard” that usually determines the amount and quality of the substances that can be
emitted into the environment (the quality and quantities of the emissions are regulated,
too). A third category of standard is the “production standards” that regulate, at an
early stage of the production process, the firm’s production technology. Besides the
importance of property rights in providing protection against environmental pollution,
another common-law instrument is liability law. In fact, environmental liability is now
used as one of the important legal instruments to deter environmental pollution.

4. ALTERNATIVE APPROACHES TO THE CONTROL OF

ENVIRONMENTAL RISK
There are two forms of environmental protection policies: the "command and control"
strategy is, as said before, a direct regulation of activities that discharge pollutants, while
the "economic incentive" policy encourages polluters to reduce pollution voluntarily by
providing economic incentives, such as tax benefits and subsidies. Under the command
and control policy, the authority sets specific environmental standards for activities that
may cause pollution, and requires polluters to satisfy these standards. Law punishes
violators of these standards. The economic incentives employ the market mechanism and
aim to reduce environmental pollution through the provision of economic incentives. The
authority induces polluters to reduce pollution by imposing specific costs or taxes on
activities that generate pollution.10 The task for public policy is to define an acceptable
risk by balancing the costs and benefits of controlling the use of hazardous substances.
Therefore, “if society is to make the most of its cares resources, it should compare
what it receives from pollution control and environmental protection activities with what
it gives up by taking resources from other users. It should measure the values of what it
gains (the benefits) and what it loses (the costs) in terms of the preferences of those who
experience these gains and losses” (Freeman 1997).
Fortunately, a variety of efficient control alternatives exist, at least in principle.
In fact, it is important to distinguish between privately and state-initiated controls, and
between ex ante and ex post control (Shavell 1987). A control is privately initiated if it is
employed only after victims take some legal action or report their situation to a social
authority. State-initiated controls are employed by the state at its discretion, regardless of
any actions taken by victims. A control is ex ante if it is applied before, or at least,
independently of the occurrence of harm while ex post controls are applied after the fact.
Several legal, administrative, and economic factors suggest that privately initiated
controls may not be sufficient to ensure that potentially polluting activities are managed
non-negligently. First of all because the damages are generally disperse; second, detection

10
The most widely used form of economic incentives is the Pigouvian tax, in the form of emission charges and
pricing that incorporates the cost of items to the environment, tradable emission permits and a deposit-
refund system. Emission charges should be calculated on the volume of emission discharged by the pollution
source, but it is technically very difficult and requires considerable administrative costs.

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 Discussion Paper 45

and assessment of pollution and its related risks require extensive monitoring, testing, and
scientific expertise. Frequently a social authority will be better positioned to conduct
proper inquiries about risks and to document the occurrence and source of harm. Once a
determination has been made that state-initiated control measures will be required, the
application of the controls must be addressed. As with state- and privately-initiated
controls, ex ante and ex post approaches are not mutually exclusive.
In the U.S., the activity of the EPA (Environmental Protection Agency) provides a
clear example of ex ante regulation by an independent environmental authority. This
agency acts through the setting of preventive standards and their enforcement, the
performance of inspections and, possibly, of actions brought to the federal courts. With
respect to ex ante regulation we cannot mention the E.U. experience given that a standard
setting system has not been established at a European level and that the European
Environmental Agency (EEA) plays only a very limited role.11
At the ex post regulatory level, the U.S. experience can be again considered as an
example, given that the issue of environmental damage liability has emerged since the
early 80’s, when the Congress enacted the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) and created a Superfund for the quick and
effective clean-up of dangerous waste sites.12 The U.S. liability system for environmental
damages considers all operators retroactively, strictly, jointly and severally liable for all
damages through a system of extended liability (Boyer and Porrini, 2002).
The U.S. liability system, administered by the courts and governed mainly by state
law, played an extensive role in regulating, among other environmental risks, air pollution,
water pollution and hazardous waste disposal. It provides a mechanism for compensat-
ing victims, property, and health injuries by a strict liability system.13
The European Community has been trying for many years to define a common sys-
tem of assignment of liability for environmental damages. In 1993, the European
Commission published the Green Paper on Remedying Environmental Damage.14 The
Commission published a detailed environmental liability model for the EC in March 1999
and finally the White Paper on Environmental Liability in February 2000.15 The EC White
Paper liability system is similar to the U.S. system because both of them are based on a
strict liability regime, but they are also different regarding several aspects. For example,
while the CERCLA provisions cover every damage including the damage to natural

11
The European Environment Agency was formally established by EEC Regulation 1210/90 in 1990
(amended by EC Regulation 933/1999 and EC Regulation 1641/2003). The decision to locate in Copenha-
gen was taken in 1993 and the Agency has been operational since 1994. The European Environment Agency
is the leading public body in Europe dedicated to providing timely, targeted, relevant and reliable
information to policy making and the public, to support sustainable development and to help achieve
significant and measurable improvements in Europe’s environment. The EEA mission statement is “to
provide decision-makers with the information needed for making sound and effective policies to protect the
environment and support sustainable development”. The Agency ensures this information is available to the
general public through its publications and website (www.eea.eu.int). The EEA does not make or enforce
European Union environmental policy or legislation: this is the responsibility of the European Commission
and the other EU institutions.
12
The Superfund enabled the government to begin cleaning-up of priority sites placed on the National Priority
List NPL) with money generated principally by taxes on cruel oil, corporate income, petrochemical
feedstocks, and motor fuels.
13
Beside the tort system, there exist a system of private and public insurance, both for the firms’ liability and
for the consequences on individual health.
14
Commission of European Communities, Communication from the Commission of the Council and Parliament:
Green Paper on Remedying Environmental Damage, COM (93) 47 final, Brussels, 14 may 1993, OJ 1993 C
149/12.
15
Commission of European Communities, “White Paper on Environmental Liability”, COM (2000), 66 final,
Brussels, 9 February, 2000.

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Environmental Law and Economics in U.S. and E.U.: A Common Ground?

resources, the White Paper covers only traditional damages, such as personal injury and
damage to property. In the U.S. system, the Superfund was created to quickly clean-up
the environmental damage, while no such fund is established by the White Paper.
Differences exist also in the definition of lender liability and financial responsibility.
One of the major differences in environmental law between the E.U. and the
U.S.A. can be seen in the area of compliance. The U.S. has mandatory compliance that is
strictly enforced by the EPA and the court system. The E.U. has only voluntary
compliance because of a lack of a binding enforcement mechanism.
Under the economic theory there are two potential candidates for imposing liabil-
ity, strict liability and fault-based liability. Arguments for and against fault-based, as
opposed to strict liability thresholds are many. Issues along these lines are many and the
associated literature is vast. Both strict liability and fault based liability lead to socially
desirable levels of care. To efficiently control accident risks, it is necessary to limit the
expected damages, allowing society to escape the burden of substantial clean-up costs,
while minimizing the total costs of taking care.
Efficient risk control requires that the level of care be chosen such that the marginal
costs of care are offset by marginal reductions in expected damages. Therefore, an
efficient policy should promote decision-making that weighs the costs of taking care
against the reductions of expected damages. Under strict liability, injurers are liable for
damages they cause regardless of the level of care they exercise. Injurers will be induced to
choose the socially optimal level of care since they know that they will be held liable for
any damage caused by their use of pollutants. Under strict liability, the injurer is assumed
to pay for all damages suffered by victims, whereas, under negligence, he has to pay for
damages only if his level of care is less than the due care level.
Under an economic perspective, in the short run, efficiency can be reached by ei-
ther making the injurer strictly liable for all damages or imposing a negligence rule under
which the injurer would be liable for damages only if he had not met the standard of due
care.16 The negligence rule is efficient, provided that the standard of due care set by the
court is the efficient level of care (Segerson 1990). Even from a deterrence efficiency
viewpoint there is no difference between strict and fault liability; under either regime,
individuals will take care if doing so is cheaper than paying for environmental damages.
Whether strict liability produces superior deterrence incentives has not any relevant
evidence. Recent empirical evidence suggests that strict liability, in comparison to fault-
liability, does not result in less spills; in fact, it may cause more spills than fault liability
(Alberini and Austin 1999).
But any attempt to establish the general theoretical superiority, in efficiency terms,
of either of the instruments over the other is destined to failure, since there is no
compelling case showing the most desirable liability regime. Therefore, political feasibility
represents the only factor that could determine the choice of moving toward a strict
liability regime. Issues of distributional justice as well as equity should be considered.
Policies adopted to control environmental risks cannot be evaluated only on the basis of
efficiency criteria. Both approaches, generally, can get adapted for practical and political
feasibility, but the conceptual differences remain a primary source of tension between
those focused on economic policymaking and those focused on environmental policy-

16
This symmetry between strict liability and negligence does not hold when the injurer can also modify his
activity level in a way that can affect expected damages. Strict liability, on the other hand, would provide
an incentive for both increased care and decreased use of pollutants, since either of these would reduce
expected damages and thus reduce expected liability. In the long run, only strict liability is efficient since the
number of injurers is allowed to vary.

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 Discussion Paper 45

making. Using the considerations outlined above would sensitize an analyst to the wide
range of factors that would determine the political feasibility of either a strict liability or a
fault-based regime.Liability possesses unique advantages where a regulatory authority
will not be expected to have good information about risk or the occurrence of harm, and
where the deterrence inherent in liability will not be weakened by injurers’ inability to pay
for harm or the possibility that they will escape suit (Shavell 1987).
“A complete solution to the problem of the control of risk evidently should involve
the joint use of liability and regulation, with the balance between them reflecting the
importance of the determinants” (Shavell 1987). Between an ex post regulatory system
which works throughout the attribution of liability and an ex ante regulatory system which
works throughout the imposition of standard, there exists a complementarity’s and not a
substitutability’s relationship (Kolstad, Ulen & Johnson 1990).

5. CRIMINAL ENFORCEMENT OF ENVIRONMENTAL LAWS

The debate over the use of criminal sanctions in environmental enforcement actions is
more intense now than ever. In particular, at the center of public attention is the question,
as to whether environmental criminals should be sentenced to prison? Should they be
treated as other criminals? Is it justice the evidence of cases in which individual offenders
received a jail time sentence, and cases in which for some egregious violations that caused
significant environmental harms, only a mere monetary sanction was imposed?
The frequency and intensity of criminal enforcement have increased dramatically
in recent years. In spite of the fact that the number of criminal environmental cases is still
small when compared to the impressive rise in the number of civil enforcement cases, the
criminal cases have been receiving increased attention. Today, it is possible to identify
situations that five years ago would not have been viewed as criminal, being looked at for
possible prosecution. The debate over what role criminal sanctions should play in
environmental regulation and enforcement began in the early 1970s but no clear agreement
emerged. Numerous good reasons were emphasized in favor of a minimal role for criminal
enforcement. It was argued, for example, that the use of criminal sanctions in the
environmental framework was generally not appropriate, and diminished agency
resources without an equivalent benefit.17 Various reasons were given for the inefficacy of
criminal sanctions. Criminal proceedings were viewed as more complex than administra-
tive or civil proceedings, and not really appropriate for enforcement of regulatory
provisions. Despite diverse impediments, the federal government initiated to prosecute
criminally in the early 1970s for water pollution using the provisions of the Refuse Act of
1899 (Kovel 1969).
Public enforcement of environmental laws has been characterized by the increased
use of criminal sanctions over the past decade. In the United States, this sanctioning trend
has developed in direct response to the passage of the Sentencing Reform Act (SRA),
which dramatically altered federal criminal sentencing for the express purpose of
controlling judicial discretion. New sentencing guidelines were established in 1987 under
which courts were required to impose sentences which reflect the seriousness of the
offense, provide just punishment for the offense, and afford adequate deterrence to
criminal conduct. Judges were once free to impose any sentence from probation to the
statutory maximum and were not subject to appellate review regarding the length of that

17
See Kovel, A Case for Civil Penalties: Air Pollution Control, 46 Journal of Urban Law, p. 153, 1969.

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Environmental Law and Economics in U.S. and E.U.: A Common Ground?

sentence. However, they are now bound by the sentencing guidelines and subject to
appellate review of the sentences they impose. Criminal penalties for environmental
violations can be harsh. Maximum fines for criminal violations of environmental statutes
theoretically can reach $1 million per violation. Convicted individuals can face up to 15
years of imprisonment.
In Europe, after the Council drafted a convention on the protection of the envi-
ronment through criminal law, more importance has been given to the aspects of control
and enforcement in the field of criminal law. It is important to mention the proposal for a
recommendation of the Council concerning minimum criteria for environmental inspections
in the member states, but more importantly there have been various initiatives recently to
harmonize environmental criminal law as well. The most important one is definitely a
proposal for a directive on the protection of the environment through criminal law (COM
(2001), 139) by the Commission. This proposal states that the proposed directive wishes
to ensure a more effective application of community law on the protection of the
environment by establishing throughout the community a minimum set of environmental
offences. The underlying idea is that the member states should ensure that when certain
offences constitute a breach of the environmental rules, a criminal enforcement should
take place. The need to introduce criminal sanctions comes from the fact that now this
type of measures seems adequate to achieve proper implementation of environmental law.
Consequently, the correct sentencing approach requires a strong emphasis on how
discretion should be exercised in order to treat equally similar environmental violations
and to achieve a uniform and coherent sentencing policy. The requirements of deterrence,
rehabilitation, punishment and restorative justice, do not generally point in the same
direction and that is why the sentencing task is such a complex process characterized by
overlapping, and sometimes, contradictory objectives.
In the American experience of ex ante regulation, the Environmental Protection
Agency’s activity represents an example of regulation by an independent authority.
Throughout the establishment of environmental standard, the imposition of emission
limits, inspections and legal actions, the EPA accomplishes its main tasks. Starting from
the ‘70s, in the U.S. have been employed different approaches to face the risk of
environmental accidents, trying to regulate the emission of toxic or hazardous substances
by setting up standards. As regards to ex post regulation, the Congress in 1980
promulgated the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA) to provide the decontamination of sites exposed to environmental
dangers through a system of attribution of liability on an objective basis, following the
“polluter pays principle”.
In Europe, the different regulatory systems and the extreme fragmentation in each
member state does not allow to talk in a homogeneous and single way. At the ex ante:
regulatory level, there exists the European Environmental Agency (EEA) but it plays a very
limited role. At the ex post regulatory level only recently (2000) the European Commission
adopted the White Paper on Environmental Liability, which explores how the polluter
pays principle, can best be applied to serve the aims of the Community environmental
policy. According to the White Paper, the most appropriate option would be a
framework directive providing for strict liability for damage caused by EC-regulated
dangerous activities, with defenses, covering both traditional and environmental damage,
and fault-based liability for damage to biodiversity caused by non-dangerous activities.
The adoption of a proposal for a Directive on environmental liability (2002)18 aims both

18
For the full text of the proposal, see http://europa.eu.int/eur-lex/en/com/pdf/2002/en_502PC0017.pdf

12 SOAS, University of London

 Discussion Paper 45

to prevent and restore environmental damage. The pollution of water, damage to

biodiversity and land contamination which causes serious harm to human health would
all be covered by this Directive. Operators of certain risky or potentially risky activities
who cause environmental damage would be held responsible for restoring the damage
caused, or made to pay for the restoration. All operators causing damage to biodiversity,
by fault or negligence, would equally have an obligation to restore the damage. The idea
that the polluter must pay is a cornerstone of EU policy; this is the first concrete step
towards establishing a comprehensive European environmental liability regime.

6. DIFFERENCES IN ENVIRONMENTAL CRIME PROSECUTION

PATTERNS IN EUROPE AND UNITED STATES
U.S. environmental policy has developed during the last 30 years and can be considered
one of the most successful models that provide a well-balanced environmental
management system, an effective legislative framework and modern institutional
settings.19 The U.S. has pioneered environmental legislation that has inspired the EU.
Also Europe, over the past 30 years, has developed a considerable body of environmental
laws and has enforced environmental crime laws with varying degree of intensity. The big
challenge, within the European Union, is to make enforcement effective at both the
national and the EU level. Moreover, the upcoming accession means that 10 new member
states must also implement EU legislation.
In Europe it is possible to observe a certain degree of reluctance to pursue a com-
pany or individual under criminal law. There are few cases brought, particularly in
relation to the population and number of companies. The ratio is higher in the U.S., where
after two warnings, and if there is insufficient compliance, automatically a civil case is
initiated; if some knowing intent or fraud is found, then, the individual or company is
pursued under criminal law. In the last decade, in the U.S. there has been a dramatic
increase in the number of prosecutions, convictions, criminal fines and jail time and the
EPA is continuing to expand its criminal enforcement effort. In understanding why
criminal prosecutions in Europe are less frequent and in analyzing the differences in
enforcement strategies in the U.S. and Europe, several considerations have to be made.
First of all, probably the public opinion regarding the criminalization of pollution and the
public desire for prosecutions is different in the two countries. Then, instead of employing
criminal sanctions, Europe has preferred to use administrative and civil enforcement,
more flexible than a lengthy criminal trial, to ensure regulatory compliance by its
industries. Thus, criminal enforcement has not been as necessary in Europe where the
principal methods of inducing compliance with environmental regulations have been civil
remedies. Civil enforcement, however, generally has focused on achieving compliance with
emission standards and criminal enforcement is still needed to deter violations by
companies that handle environmentally harmful substances.
These issues and the profound historical differences between the regulatory sys-
tems of the United States and Europe have played an important role in the different
patterns of environmental crime prosecutions. One of the most important differences
between the environmental crime enforcement consists in their integration into the

19
In the U.S. during the 60-70s, the environmental legislation has been developed mostly at the states level,
then, in the 70-80s there was a period of the federal environmental policy development. Since the 90s, there
is a decentralization phase that is remarkable with reducing of federal program financing and development
of state and local initiatives.

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Environmental Law and Economics in U.S. and E.U.: A Common Ground?

traditional criminal justice system of the respective countries. Environmental criminal

enforcement in Europe is managed largely by police officers who report and investigate
reported crimes, and by local prosecutors who bring criminal charges against violators. In
the United States, the investigation of most environmental crimes is handled by federal
authorities and not by local police,20 and is prosecuted at the federal level by the
Department of Justice and the United States Attorney’s Offices. A variety of factors,
therefore, can contribute to explain this divergence in enforcement strategy, including
cultural differences, different organizational structures, the timing of major pollution
accidents, and different regulatory approaches related to the essence of common law and
civil law systems.
A longstanding debate focuses on the best way to achieve compliance with the
many complex provisions of environmental statutes and regulations. Is it the EPA’s effort
necessary to assure national enforcement or the single states could lead to the same level
of compliance? Moreover, the Agency is characterized by a surprising degree of regulatory
discretion (whether to initiate a hazardous waste inspection, for example, or whether to
proceed criminally or civilly; whether to bring an enforcement action administratively or in
federal court; whether to impose a high monetary penalty or to accept a defendant's
performance of an environmentally beneficial project) and is relatively unsupervised in its
exercise (Susskind and Secunda, 1999).
This dispute deals with, among others, the issue on the efficacy of national and
local environmental enforcement. On one hand, the federal government’s criminal
environmental enforcement programs have been accused of inconsistency and lack of
policy coordination (Starr, 1991; Gaynor and Bartman, 1991), but on the other hand, local
governments may lack the political will to pursue environmental violators with persistence
and may prove inappropriate (Mintz, 1991). The efficiency of the EPA’s enforcement
efforts has varied significantly over the course of the Agency’s history. This variability has
been mostly explained by the different political parties that have prevailed in its
administration and by the different management styles of EPA’s top managers (Mintz,
1988).
In Europe, an example of success of local environmental enforcement is repre-
sented by the Netherlands (Paddock, 1991). The Netherlands is a much smaller and much
more homogeneous nation than the United States, but it is a model of how local regulatory
agencies, local law enforcement officers and local prosecutors may well play a useful role
in improving enforcement and environmental compliance. “Localization” of environmental
enforcement authority could, therefore, bring benefits, but, nowadays in the United States,
while some local governments could be able, in practice, to increase their responsibility for
enforcement programs, others are not yet prepared and some may never be.
Recently, Europe has been overwhelmed by large oil spills and illegal industrial
waste dumping, many of which were caused by intentional or negligent conducts and
were, thus, avoidable. In order to deter these sources of pollution, Europe throughout the
stronger deterrent effect on potential polluters deriving from large fines, public stigma and
incarceration could enhance its criminal enforcement program and strengthen deterrence of
preventable acts of pollution.
One of the main differences between the U.S. and the E.U. has to be found, as
said before, in the enforcement system of environmental laws. While the U.S. provides for

20
The federal government has a specialized group of environmental crime investigators in the EPA's Office of
Criminal Enforcement. These investigators are sometimes assisted by the Federal Bureau of Investigation
("FBI")

14 SOAS, University of London

 Discussion Paper 45

action to enforce the law in court, including the imposition of severe penalties, Europe has
less of a legal framework to ensure compliance. It is important to underline, therefore, the
fact that a common environmental policy is vital for the E.U. because environmental
problems are often transboundary and also because the internal market requires
homogenous environmental standards.
The main conclusion of this survey is that the choice of a regulation framework
and a legal framework to implement an environmental policy is a difficult task, which
requires structured analysis to model the interactions between different decision makers,
such as governments, firms and regulators. It is essential, then, to combine the economic
literature and the legal literature under one comprehensive framework in order to take into
consideration, in a social welfare perspective, among others, the social value of
environmentally risky activities, the cost of care, the asymmetric information of the
different actors and the liability system efficiency.

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Environmental Law and Economics in U.S. and E.U.: A Common Ground?

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