Financial Responsibility for Environmental ...

A bedrock principle of environmental law and regulation is that pollution costs should be borne by their creators. U.S. environmental laws and regulations gives this principle form by making polluters liable for property, health, and natural resource damages and unperformed resource reclamation obligations. Unfortunately, many environmental obligations, despite being well defined in theory and in law, are not always met in practice. Bankruptcy, corporate dissolution, and outright abandonment are a disturbingly common means by which polluters avoid responsibility for environmental costs.

Financial assurance rules, also known as financial responsibility or bonding requirements, address this policy problem. Assurance rules require potential polluters to demonstrate – before the fact – financial resources adequate to correct and compensate for environmental damage that may arise in the future. Accordingly, assurance acts as an important complement to liability rules, restoration obligations, and other compliance requirements. A benefit of assurance rules is that they can harness the expertise and scrutiny of private, third-party financial providers. The insurers, sureties, and banks who provide the financial products used to demonstrate compliance, for their own commercial reasons, train an extra, self-interested set of eyes on the financial and environmental risks posed by potential polluters. In this way, assurance rules can yield a flexible, market-based approach to compliance and monitoring.