The Feasibility of an Environmental Assurance Program in North Carolina

Abstract

The financial cost of private industry’s pollution is often unfairly transferred to the public. Decades can pass between a pollution release and its discovery, making it very difficult for regulators to hold responsible parties accountable. In North Carolina, a prime example of the public shouldering this burden is the primarily publicly financed State Trust Fund for cleaning up after leaking underground storage tanks. One way to ensure polluters pay for remediation is to require financial assurances prior to permitting. There are several mechanisms available that do this, including surety bonds, environmental insurance, and cash accounts signed over to the regulator. In this study, the most commonly used assurance mechanisms were evaluated using a multi-criteria decision analysis and the criteria most important to regulators and industry: contractual strength, verifiability, flexibility, ease of acquisition, and availability/control of funds. These criteria were derived using each party’s core objectives. For regulators, these are protecting the environment and the public and doing so in the least costly way. For industry, these are making profit and meeting the necessary environmental regulations in the least costly way, so that they are allowed to do continuing business. Using North Carolina’s underground storage tank issue as an example, the mechanisms were then ranked by their performance for each criterion. Surety bonds ranked as the best instrument to meet both parties’ needs, providing regulators with a high degree of contractual strength while allowing industry freedom from needing to cover its entire environmental liability up front. Like surety bonds, insurance and letters of credit provide adequate contractual strength and flexibility, but they are not as easily verified by the regulator. Financial self-tests and corporate guarantees were found to be insufficient because they performed at the least preferable level for regulators in all criteria and provided industry with little flexibility. This evaluative framework should prove useful to policymakers as they try to address the unfair liability private industry’s pollution creates for the public. A statewide assurance program is a feasible solution to this problem given the satisfactory performance of several assurance instruments.