Natural Resource Damages: The New Wave of Environmental Liability

Environmental Law & Property Rights Practice Group Newsletter - Volume 2, Issue 1, Spring 1998

May 1, 1998

Richard B. Stewart

Natural resource damages (NRD) are an awakening "sleeping giant" of environmental liability that poses serious threats for U.S. business and federal taxpayers. Until recently, the focus of attention and controversy over environmental liabilities has been the Superfund scheme for remediation of toxic waste sites, and the unprecedentedly harsh and sweeping standards of liability asserted by government to finance cleanup. NRD liability, created by the federal Superfund statute (the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA), the Oil Pollution Act (OPA), and other federal and state statutes represents an important new wave of environmental liability, on top of cleanup liability. NRD has received much less attention than cleanup liability, in large part because the federal, state, and tribal officials designated as natural resource trustees to bring NRD claims have until recently been slow to seek recoveries for injury to resources under their jurisdiction as a result of hazardous substance releases or oil spills. Trustees are now mobilizing to assert ambitious NRD claims, threatening U.S. businesses and insurers and federal agencies such as the Departments of Energy and Defense with potentially enormous liabilities and massive transaction costs that go far beyond those recognized in any other country. Unless prompt steps are taken to reform the NRD programs, they will spin out of control just like the cleanup program has.

Like Superfund cleanup liability, natural resource damage liability extends to past and present owners and operators of sites where hazardous substances release have occurred and to generators, and transporters of hazardous substances as well as those responsible for oil spills. Liability is strict, and defenses are extremely limited. Trustees claim that NRD liability is fully retroactive, extending to wastes disposed of decades or even more than a century ago as the result of industrial activities that were lawful and proper when undertaken and in many cases were actively encouraged by local communities and governments.

Federal natural resource agencies such as the Departments of Interior and Agriculture and the National Oceanic and Atmospheric Administration (NOAA), state environmental and natural resource agencies, and tribal authorities are authorized to recover NRD for resources under their jurisdiction. Trustees have not limited NRD claims to resources owned by government. For example, courts have allowed trustees to obtain damages for contamination of groundwater underlying private land.

Basic Elements of NRD Liability

Responsible parties are liable for NRD in addition to cleanup costs. Cleanup costs at some sites have been enormous, running to hundreds of millions or even billions of dollars. NRD can be equally enormous. Trustees claim as NRD the costs of restoring a resource once cleanup is completed; plus any past or interim diminution in the value of a resource or the costs of "compensating" for impaired past uses, resource-to-resource services, and non-use values; plus the costs of trustee restoration planning and assessment of damages.

Liability for Restoration Costs. The federal NRD statutes authorize trustees to rely on natural recovery or to acquire replacement or equivalent resources as means of restoration in addition to on-site measures to rehabilitate the particular resources injured by a spill or release. Despite this wide range of restoration options, trustees often focus narrowly on aggressive and costly on-site rehabilitation measures in an effort to replicate the precise physical, chemical and biological condition that a resource would be in if an oil spill or release of a hazardous substance had never occurred. They ignore other options that can often achieve restoration at far less cost. Also, many trustees reject the common-sense goal of focusing restoration on reinstating public resource uses, such as fishing, hiking, or bird-viewing, that have been impaired. Instead, they deem any "adverse" change in the condition of a resource -- such as the presence in sediments of low levels of residual oil or chemicals that do not affect natural populations or human uses -- as "injury" warranting costly restoration efforts. Further, trustees have rejected any requirement that they select the most cost-effective means of restoration, or that the costs of restoration are justified by the benefits provided to the public. In some cases trustees have claimed restoration costs running to hundreds of millions of dollars at a single site.

Additional liability for lost uses and resource-to-resource services. Over and above restoration costs, trustees seek recovery, running in some cases to additional hundreds of millions of dollars, based on diminished public uses of a resource stretching back over many years. Regulations issued by NOAA under OPA also authorize recovery for the costs of measures to compensate for past reductions in the "services" provided by one resource to another resource -- for example, a reduction in the availability of certain sources of food supply for fish -- even though neither fish populations nor human uses of resources have been adversely affected. Under the label of "compensatory restoration," NOAA regulations authorize trustees to use such recoveries to acquire new land or to solve other environmental problems not caused by the responsible party from whom NRD are sought

Additional "non-use" liabilities. Trustees also seek substantial further recoveries, running in some cases to hundreds of millions of dollars, based on diminished "non-use" or "existence" values, based on the monetary value that the public supposedly places on preserving a resource in its existing state quite apart from any use that they make of the resource. Such claims, based on the assertion that non-use recoveries are necessary to make the public "whole," ignore that the public’s interest in long-term resource preservation is already being met by restoration. Liability for non-use values is often based on contingent valuation ("CVM") studies: public opinion surveys that ask a sample of people how much they value a resource based on how much they say they would pay to preserve it, even though they do not actually have to pay anything. The average amount reported is then multiplied by what trustees deem the relevant population, which in some cases has been the entire population of the United States. CVM surveys have claimed non-use values for resources ranging from tens of millions to billions of dollars. Potentially responsible parties (PRPs) have attacked CVM-based non-use damages as unreliable and punitive in nature.

Coordination Problems. The NRD system is not coordinated with the cleanup liability system. The government agencies that are plaintiffs in the two systems are different, and have different interests. Cleanup authorities such as the federal EPA have sometimes required cleanup measures that injure natural resources, increasing PRPs’ NRD liabilities. On the other hand, in a number of cases trustees have required additional levels of costly clean-up beyond the cleanup already required by EPA as necessary to protect health and the environment in the guise of "restoration." In some of these "Cleanup I, Cleanup II" cases, EPA has told PRPs to cap and contain soils containing hazardous substances, then trustees have come along and demanded that these same soils be excavated and transported elsewhere. Further, in many cases more than one federal, state, and tribal authority asserts trusteeship over the same resource. The NRD statutes provide no guidance for deciding what authorities have trusteeship over what resources, leading to overlapping, duplicative, and conflicting trusteeship claims. The involvement of several different government cleanup and restoration agencies at the same site causes delay, increases costs, impedes timely restoration, and makes it more difficult for PRPs to achieve a satisfactory overall settlement of liabilities.

The Rising Tide of NRD Liability Problems

It is only fairly recently that trustees have begun aggressively to assert NRD claims. NRD claims are often asserted after cleanup; the delays in the Superfund cleanup program have therefore caused delays in NRD claims. In addition, it is only recently that a fairly complete set of damage assessment regulations under CERCLA and under OPA have been established. Also, the Exxon Valdez case helped put NRD on the map. Exxon paid nearly $1 billion for natural resource damages, over and above more than $2 billion in oil removal and cleanup costs. In other cases, the government has collected tens of millions of dollars for NRD. These victories have spurred trustee interest in asserting claims. For example, the federal Fish and Wildlife Service has targeted hundreds of rivers and harbors and many thousands of wetland sites for potential NRD claims.

An important incentive for aggressive trustee pursuit of NRD claims are provisions in CERCLA and OPA that authorize federal trustees to spend NRD recoveries without further congressional appropriation. Freed from accountability through the normal congressional budget processes and controls, trustees can effectively use "off-budget" NRD money to support and expand their ongoing operations.1 Accordingly, trustees have a strong financial self-interest in maximizing NRD recoveries, including in particular surplus lost use, resource-to-resource service, and non-use recoveries which trustees have great discretion in spending.

The threat of natural resource damage liability extends beyond the chemical, mining, and oil industries, and includes a wide variety of manufacturing, resource-based, and transportation businesses as well as local, state and federal government entities. EPA has recently completed an inventory of thousands of sites involving aquatic sediments containing water pollutants discharged from publicly owned sewage treatment works and industrial and commercial point sources; many of these sites are ripe for NRD claims. Lenders, insurers, and those acquiring businesses or industrial properties also have good reason to be concerned about NRD liability because such liability can impair the value of collateral, lead to coverage claims on top of claims for cleanup costs, and pose a threat of ongoing liability to acquirers. Moreover, most Superfund settlements that have been reached to date do not include a release for natural resource damages. Accordingly, businesses and, potentially, their insurers remain liable for such damages even though they have paid large sums to settle clean up liabilities. NRD liability has also not been addressed in many purchase and sale, investment, loan, and other transaction agreements, creating the prospect of unanticipated liabilities for the parties.

Certain federal agencies, including the Departments of Energy, Defense, and Interior, face massive NRD liabilities because of waste created by past operations on lands that they manage. The Energy Department faces the most acute liability problem because of the extensive wastes at its nuclear weapons facilities. The Defense Department has hundreds of facilities with wastes giving rise to NRD liabilities. The Clinton Administration, which has consistently advocated expansive NRD liability against private PRPs, has sought to minimize the problem of federal NRD liability and its implications for the federal budget. Although the law requires that the same liability rules apply to governmental and private PRPs, the administration has followed much more narrow rules of NRD liability in the case of federal PRPs. If federal PRP agencies were subject to the same expansive NRD liability rules as private sector PRPs, federal NRD liabilities could run to a hundred billion dollars or more.

In cases where trustees have focused on cost-effective measures to reinstate impaired public uses of resources, for example by acquiring alternative fishing sites for public use while an injured fishery is recovering, cooperative trustee-PRP measures to achieve restoration in a timely manner have been adopted. But in cases where trustees have sought enormous restoration costs based on wholesale removal of low levels of chemicals remaining after cleanup, and also sought huge additional surplus recoveries based on lost use, resource service, and non-use claims, PRPs have predictably resisted such claims strongly. Conflict, mistrust, delay, and litigation have been the inevitable results.

Thus far, the number of court decisions construing the federal NRD statutes is limited, in part because the NRD program is still gearing up and in part because some of the cases involving the largest NRD claims are pending or are in the early trial stages. Disputes over natural resource damages involve extraordinarily complex scientific, technical, and economic issues relating to injury, causation, restoration, and the measurement of damages, including damages for "non-use" values. Transaction costs are therefore extremely high.

As a result of these developments, the NRD programs are recreating many of the problems that have plagued the Superfund cleanup program: long delays in accomplishing program objectives, enormous transaction costs, wasteful use of scarce resources on environmental problems of marginal importance, divisive litigation and controversy, and creation of potentially massive, uninsurable liabilities that chill productive economic activity. As trustees gear up to file large numbers of additional claims, the problems with the NRD program will only get worse unless corrective steps are taken now.

Reform of NRD

In the last several years Congress has debated reauthorization and reform of CERCLA. Until very recently, the legislative debate has focused almost exclusively on cleanup liability, ignoring the NRD program. As a practical matter, however, cleanup liability and NRD liability are inextricably intertwined. The problems with the cleanup program cannot be fixed without also dealing with the problems in the NRD program. The "Cleanup I, Cleanup II" problem noted earlier is a prime example. More rational cleanup standards like those being proposed in CERCLA reauthorization would direct EPA to endorse remedies well short of complete removal of contamination from groundwater or soils or sediments where such lesser remedies will adequately protect public health and the environment because there is a low risk of any harm from residual contamination. This change is an important step towards a more rational environmental policy that targets limited societal resources on the more serious risks. But changing the cleanup standards that EPA uses will not prevent NRD trustee agencies from asserting enormous additional liability, based on the costs of additional cleanup, in the name of natural resource restoration. Thus, the NRD program must be reformed at the same time as the cleanup program.

The Clinton administration, however, has failed to undertake any meaningful reform of the NRD program, and has in fact taken a number of initiatives to make matters even worse. The administration has stoutly defended trustee authority and discretion to claim huge restoration costs based on replicating the exact physical, chemical, and biological condition that a resource would have absent a spill or release, and to claim enormous additional damages based on lost uses, resource-to-resource services, and non-use.2 In addition, the administration has sought to undermine or eliminate many of the important limitations and procedural safeguards of the NRD programs. For example CERCLA’s NRD provisions, unlike its cleanup provisions: impose limitations on retroactive liability based on activities prior to CERCLA’s enactment; impose a $50 million cap on NRD; and provide a statute of limitations for NRD claims. The Clinton administration, like predecessor administrations, has interpreted these provisions in a highly restrictive and artificial manner that effectively makes NRD liability fully restorative, eliminates any cap, and eliminates any statute of limitations. The administration has also asked Congress to enact legislation that would explicitly revive stale NRD claims which, on any normal reading of the limitations provisions in the existing statute, have already lapsed.

In addition, and of particular importance, CERCLA requires that trustees prove their NRD claims through a de novo trial in federal district court.3 This provision appropriately recognizes that trustees, who have a strong financial self interest in maximizing recoveries which they can keep and spend free of normal budget controls and accountability, are tort plaintiffs and should, like any tort plaintiff, be required to prove their claims through competent evidence presented in open court to an impartial and independent trier. The Clinton administration has sought to eliminate an NRD PRP’s right to a de novo judicial trial by arguing that NRD claims for damages should be decided by trustees on the basis of an administrative record, subject to only limited, highly deferential judicial review under the "arbitrary and capricious" standard. The Clinton Administration has also asked Congress to explicitly amend CERCLA to so provide. This unprecedented change in the rules governing tort liability for property damage and related losses would effectively make financially self-interested trustees judges of their own claims, subject to only quite limited judicial review based on a record generated by the trustees. Such an arrangement would be patently unfair, and present serious constitutional due process and separation-of-powers issues.

The administration has also sought to circumvent trial and other safeguards in CERCLA’s NRD provisions by issuing an Executive Order granting federal trustees like the Interior Department and NOAA authority under

Section 106 to issue unilateral administrative orders to PRPs requiring them to undertake remedial action.4 Previously, only the federal cleanup authorities -- EPA and the Coast Guard -- enjoyed such authority. Section 106 orders are not subject to judicial review unless a PRP chooses to disobey the order and the government brings an enforcement action; in such a situation, the PRP is potentially subject to a penalty of $25,000 for each day of noncompliance. Such arrangements place enormous pressure on a PRP to comply with an order even if its legality is questionable. While the administration maintains that trustees will not use Section 106 order authority to compel PRPs to undertake restoration activities, as opposed to cleanup, the line between cleanup and restoration is a blurred one. Accordingly, there is acute danger that self-interested trustees will exploit their new Section 106 authority to circumvent the protections enjoyed by PRPs under CERCLA’s NRD provisions.

Thus far the courts have done little to restrain the excesses of the NRD programs. In its 1989 decision in Ohio v. U.S. Dep’t of Interior,5 the D.C. Circuit overturned, at the instance of states and environmental groups, provisions in the original Interior Department NRD assessment regulations limiting recoveries to the lesser of the cost of restoration or the diminution in the value of a resource, and making market measures of resource value (if available) controlling. The court struck down the "lesser of" rule, finding that CERCLA evinces a congressional presumption in favor of restoration, and that trustees may therefore recover the costs of restoration even if they exceed the diminution in a resource’s value. The court cautioned, however, that restoration measures should be cost-effective and that their costs should not be "grossly disproportionate" to value. The court also invalidated Interior’s priority for market measures of value as arbitrary. Thereafter Interior revised its regulations, authorizing trustees to obtain, in addition to restoration costs, lost use and non-use recoveries. When these regulations were challenged by an industry coalition, the DC Circuit upheld them in most respects, under the deferential "arbitrary and capricious" standard of review. Among other matters, it held that Interior need not require trustees to choose restoration measures that are cost-effective or have costs that are reasonable in relation to benefits, and that Interior could give trustees wide discretion in determining which damage assessment methods to use, notwithstanding that assessments complying with the regulations are entitled to a rebuttable presumption.6 An industry challenge to the NRD assessment regulations under NOAA, which gives even wider discretion to trustees in restoration and damage assessment decisions, is pending before the D.C. Circuit.

At the present time the main prospect for basic reform of NRD is through legislation. As noted above, Congress has been actively considering changes in CERCLA. Until recently, the near-exclusive focus of congressional attention has been the cleanup program, but in the last year the problems in the NRD program have received increasing attention. Reforms of the CERCLA NRD program could be extended to the OPA NRD program. The most important changes that are needed are as follows:

Elimination of surplus recoveries. The statutory objective of the NRD programs is to restore injured resources. Some trustees have diverted the programs from their original goal by aggressively seeking surplus recoveries, over and above the costs of restoration, based on novel, speculative and controversial claims for lost use, impaired resource-to-resource services, and non use. Trustee pursuit of these surplus recoveries is a primary engine of litigation and delay at the expense of timely restoration. Congress should specifically rule out these surplus recoveries in order to refocus the NRD program to achieve the fundamental objective of timely restoration.

Rational specification of restoration objectives. Given that clean-ups already ensure that health and the environment will be protected against threats of significant harm, scarce resources should not be spent on attempting to return affected natural resources to the exact physical, chemical, and biological conditions that would exist absent a spill or release. Congress should accordingly provide that replication of pre-industrial conditions is not the objective of restoration. Rather, the focus should be on measures that reinstate, on an interim and permanent basis, ecosystem functions that will again provide and support the public uses that the injured natural resources supported in the past. Trustees should not base NRD claims on human health concerns that have already been addressed by EPA and other cleanup authorities and are beyond the competence of natural resource trustees. The basic principle of cost-effectiveness requires that trustees be directed to select those restoration alternatives that will accomplish reinstatement of ecosystem functions and public uses at least cost. Economic rationality also dictates that restoration measures be cost-reasonable: the incremental costs of such measures should not exceed their incremental benefits.

Prohibition of double recovery. Basic fairness dictates that a liable party not be required to pay more than once for the same injury. Under current practice, however, PRPs face multiple liabilities because they are subject to multiple claims by different government authorities under different laws. For example, EPA may require a given level of cleanup to protect health and the environment, and then one or more trustees may demand additional cleanup of the same resource as restoration. Different federal, tribal trustees may bring different claims for NRD or similar damages under one or more federal statutes or state statutes or laws. While CERCLA currently contains a provision limiting double recovery, its wording is ambiguous and trustee interpretations have rendered it largely meaningless.

Further, trustees have refused to agree to binding procedures that would ensure unified presentation of different claims in a single proceeding. Congress should therefore enact an effective prohibition on double recovery.

Foreclose administrative efforts to circumvent or abolish the right to judicial trial of NRD claims. As previously explained, basic principles of fairness as well as separation of powers considerations require that financially self-interested trustee agencies be required to prove their NRD claims before an impartial Article III tribunal. Congress should therefore specifically reject the administration’s proposals to amend CERCLA to authorize trustee NRD recoveries on the basis of their own administrative record, subject to only limited judicial review. For the same reason, it should reverse the administration’s extension of Section 106 unilateral order authority to federal trustees in an effort to circumvent the statutory safeguards in the NRD program.

Reaffirm CERCLA’s cap on NRD and limitations on retroactive liability. OPA liability is not retroactive and is subject to explicit caps. Trustees, however, have exploited ambiguities in CERCLA in order to eviscerate its $50 million cap on NRD and its limitations on retroactive application of NRD liability to disposal or other activities undertaken before CERCLA’s enactment. Congress should adopt clarifying language to ensure that the cap and limitations on retroactive liability that it originally adopted are effective.

Restore trustee budget accountability. Finally, Congress should eliminate the existing provisions in OPA and CERCLA that exempt federal trustee agencies from normal budget processes and authorize them to expend NRD recoveries without further appropriation. These provisions were adopted on the "public trust" rationale that recoveries for injury to public resources should be used to reinstate the injured resources. In practice, however, many NRD recoveries have been spent in a wasteful and parochial manner. The normal mechanisms to ensure democratic accountability for bureaucratic agencies should be reinstated.

*Richard B. Stewart is a professor at New York University Law School.

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   1. Although CERCLA and OPA require federal and state trustees to spend recoveries on "restoration," in practice trustees enjoy broad discretion in spending recoveries. A GAO report found that hundreds of millions of dollars in initial NRD recoveries in the Exxon Valdez case were spent by trustee authorities to pay for their own operations rather than on measures to improve the environment.
   2. The NRD assessment regulations issued in 1995 by NOAA pursuant to OPA made a largely semantic change from the regulations issued by Interior under CERCLA. The Interior regulations authorize trustees to recover monies (which are to be spent on additional "restoration" measures beyond restoration of the injured resource) based on the diminution in use and non-use value of a resource. The NOAA regulations use the concept of "compensatory restoration" under which trustees seek to recover from PRPs the costs of additional measures, beyond what is needed to restore the public services provided by the originally injured resources, in order to enhance other existing public resources, acquire new public resources, or fix environmental problems caused at other sites by other parties. These measures are supposed to "compensate" for past impairments of use, resource-to-resource, and nonuse services. While certain aspects of the NOAA regulations were described by the agency as more desirable in providing trustees and PRPs greater flexibility in seeking cooperative solutions, the changes are largely semantic, as trustees can still seek to impose enormous additional liabilities on PRPs, over and above the cost of restoring the injured resource.
   3. Trustee NRD assessments conducted in accordance with assessment regulations ensured under OPA or CERCLA enjoy a rebuttable presumption in litigation; such assessments establish a prima facie case on the part or the trustee, but once the defendant comes forward with rebuttal evidence, the presumption disappears and the court decides the case de novo.
   4. Executive Order 12016 of August 28, 1996, 61 Fed. Reg. 45871 (August 30, 1997).
   5. 880 F.2d 432 (D.C. Cir. 1989).
   6. Kennecott Utah Copper Corp. v. U.S. Dep’t of Interior, 88 F.3d 1191 (D.C. Cir. 1996). The court, however, invalidated a provision in the Interior’s regulations indefinitely postponing the running of a CERCLA statute of limitations provision, and also remanded a portion of the rule governing the objectives of restoration. It also rejected a state claim that CERCLA establishes a preference for on-site rehabilitation over off-site restoration measures such as acquisition of replacement or equivalent resources.