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United States Experience with Economic Incentives for Pollution Control

The purpose of liability mechanisms in environmental management is twofold: first, to give polluters an economic incentive to make more careful decisions; and second, to compensate the victims of pollution. The incentive effect is clear, since environmental values in effect become part of the overall cost of doing business. Avoiding harm to the environment is a good practice for companies when it reduces the overall cost of doing business.

Liability for harm to the environment acts as a financial incentive, much like a fee on emissions, with at least two important exceptions. One, liability for harm creates much greater uncertainty as to the magnitude of the payment that will be due for a given release of pollutants. Two, liability for harm can generate relatively large costs in terms of assessing environmental damage and the amounts due. These concerns aside, liability is an important incentive mechanism, one that is seeing increasing use in environmental policy.

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