November 29, 2023

Reallocating Environmental Risk

[Cross-posted from Evironmental Law Prof Blog]

By Karrigan Bork and Keith Hirokawa

Living the good life has often meant finding ways to allow for growth and construction while ostensibly protecting the natural environment on which we depend. Want to build a housing development, but there’s a wetland in the way? Mitigate the harm by building a new one somewhere else. Want to dam a river, but there’s a salmon run in the way? Build fish passage around the dam. If that’s not feasible, build a hatchery instead. Want to log a forest, but worried about loss of downstream ecosystem services? Allow the harvest, with buffers and a few trees left behind to maintain essential services. Techno-optimism and overconfidence makes it easy to say yes and assume we can mitigate the impacts. Saying yes is much easier than saying no.

Unfortunately, these creative approaches often fail. Constructed wetlands fail to reproduce the essential hydrologic or biodiversity or other functions of natural wetlands. Fish passage fails to get enough fish up and down stream to keep populations viable. Hatcheries can’t sustain fisheries over the long term in the same way that habitat can. Even regulated logging can degrade downstream ecosystem services.  As a result, our good environmental intentions have paved a path to widespread degradation.

Sometimes it is due to a lack of effort or an unwillingness to spend the necessary funds, but often mitigation fails despite the best intentions. It is difficult to predict how natural systems will respond to perturbation, and recreating systems is even harder. The uncertainty of these allow-but-mitigate decisions is critical: we depend on functional natural systems, and failed mitigation risks our future. But our current approach allocates the risk of bad decisions to the environment. That is, when mitigation fails, the environment and the public, not project proponents, pay the price. There are very few consequences to the parties responsible for mitigation if they get it wrong.

Successful mitigation requires that mitigation associated with a regulatory approval be designed to effectively neutralize the damage, rather than simply to ensure that permits are issued and construction commences. Embracing some form of the precautionary principle might help, but we seem unwilling to put off decisions or simply deny projects with uncertain impacts. Iterative adaptive management with long term monitoring might help, but this approach often stumbles due to the difficulty in refashioning policies. If we’re going to keep relying on engineering or policy fixes to soften the blow (and all evidence suggests that we will), we need a better way to allocate environmental risk.

Fortunately, we have faced this problem in other contexts, and policy makes have developed productive ways to manage uncertainty. Applying these approaches more broadly might reallocate environmental risk away from the environment and the public and place it on project proponents. Such a reallocation internalizes the risk for project proponents, leads to better environmental outcomes, and should lead to better environmental decisionmaking.

For example, local governments often require developers who seek approval for new developments to provide needed public infrastructure improvements (e.g., roads, traffic control devices, sidewalks, water and sewer pipes, etc.) to reduce new congestion and defray the public costs of the new development. Because new development brings in higher use of public infrastructure, these improvements allow cities to ensure that developers pay more of the public costs of their developments. But if these improvements are poorly constructed or otherwise prone to failure, they can make the community worse off than before—more people, more expenses, and failed mitigation. This parallels the problems with failed environmental mitigation projects.

Local governments sometimes address this risk by requiring developers to post performance bonds. The developer purchases a performance bond from a third party, called the surety, a company that is “ensuring” the developer’s infrastructure work will meet relevant requirements. If the developer’s work fails to meet the requirements the government recovers funds from the surety which (ideally) are sufficient to bring the work up to par. Thus performance bonds allow developers to proceed with building their projects by guarding against the uncertainty of whether the required improvements will perform. The local government approving the project no longer bears the risk of the developer’s failure.

Financial assurances, in the form of bonds, insurance, or other mechanisms, could similarly play a more significant role in other areas of environmental law. New fish passage projects required for dams could carry insurance that would fund additional construction or even dam removal if functional fish passage proved impossible. Logging projects could require bonds that would pay for downstream remediation if efforts to mitigate impacts to the forest’s ecosystem services proved inadequate.

The idea of environmental performance bonds or other financial mechanisms to ensure performance is not new, but it has been vastly underutilized. For example, an assurance approach is also used in wetland mitigation and stream mitigation for Section 404 permitting under the Clean Water Act. Under regulations issued in 2008, 404 permits issued by the Corps of Engineers require financial assurance based on performance standards for newly constructed wetlands, which should ensure that the new wetlands adequately mitigate the wetlands lost through the permitted dredge and fill. The financial assurances, which may take the form of bonds, insurance, or other mechanisms, are generally only required for 5-10 years, however, a time frame too short to determine whether the new wetlands will actually achieve their mitigation requirements. Bonding for mine reclamation and financial assurances for hazardous waste treatment facility closure provide other examples, although such assurances are often insufficient to cover actual reclamation costs (sometimes by an order of magnitude).

We tend to assume success and proceed in face of uncertainty when other parties bear the risk of failure. We will also continue to get many mitigation decisions wrong. Thus, we need to reallocate the environmental risk away from the public and the environment. In this context, performance bonds or other financial assurances can reallocate the risk and increase the likelihood that mitigation will succeed, but this approach has been vastly underutilized to curb the current risk of loss in environmental permitting.