The Financial Implications of Releasing Small Firms and Small-Volume Contributors from Superfund Liability
Jan 1, 2000
Small-size firms account for the bulk of businesses bearing Superfund liability. Over the last few years, Congress has made several proposals to exempt these firms with the goal of cutting transaction costs, speeding cleanup, and reducing the financial burden on small firms and small-volume contributors. Analyses of current proposals show that they would indeed significantly reduce the number of firms liable at Superfund sites. Furthermore, the costs of releasing these firms from liability would be low in proportion to the number of firms released.
For example, the Environmental Protection Agency estimates that cleaning up all 1,210 sites on the Superfund National Priorities List will cost $36.3 billion. If the most generous of the current plans were adopted, the cost of releasing between half and three-quarters of small firms would fall between $6.4 and $12 billion, less than a third of the total.
A new report provides information about proposals to exempt small firms and small-volume contributors, including the number and proportion of business firms that would be released, the proposals' dollar costs, and their effect on firms that would remain liable. This work helps policymakers assess the effects of modifications to Superfund's current liability provisions. The research was jointly funded by the Environmental Protection Agency and the RAND Institute for Civil Justice.
The Superfund program was established in 1980 to provide for the cleanup of the nation's worst inactive hazardous waste sites. Congress adopted a liability approach to funding it: Parties that generated or transported the hazardous material at a site or that owned or operated the site—potentially responsible parties—were held liable for cleaning it up. The rationale for this approach was to make polluters pay for cleanups, to shift the burden to the private sector, and to create strong incentives for firms to handle hazardous substances carefully in the future.
Although Superfund has produced benefits, the program has long been criticized for being slow, inefficient, and unfair—in part because potentially responsible parties determine their shares of cleanup liability among themselves, a slow process that generates transaction costs and sometimes leaves parties that played minor roles at a site with big bills. Consequently, policymakers have been considering modifications to Superfund's liability provisions. These proposals would release firms from liability, and to varying degrees they would transfer the associated cleanup costs to the Superfund Trust, a fund made up of general appropriations and tax revenues from oil and chemical companies.
Most current reform proposals grant firms exemption based on two criteria: the firm's size and its role at a particular site (e.g., whether it is an owner or operator of a site or a generator and/or transporter of waste to a site). Proposals typically define a small firm in one of two ways: having $3 million or less in annual revenue or 75 or fewer employees. But because a small firm might be an owner at one site and a generator at another, exemption would be determined on a site-by-site basis. Depending on a firm's role at a site and on the specifics of a plan, it may be released from liability at one site but not at others.
Superfund sites are of two basic types: owner/operator (O/O) sites and generator/transporter (G/T) sites. O/O sites are sites at which no hazardous substances were contributed by parties other than those that owned or operated the site. G/T sites are sites where waste was generated or transported by parties other than owners and operators of the site. G/T sites make up 53 percent of Superfund sites. Also, the vast majority of firms (125,700 out of an estimated 127,000) are involved at G/T sites, which account for about 75 percent of total cleanup costs. Researchers analyzed the costs of releasing firms at these two types of sites separately because they differ in expected cleanup costs and because some proposals exempt firms at one type of site but not at the other.
An alternative plan exempts only small-volume contributors to sites. In this case, only generators at G/T sites—those whose only role at a site was to contribute a small amount of waste—would be exempted. Firm size would not be a factor at all in determining a firm's eligibility because even very large firms may have contributed only small amounts of waste at particular sites.
How can the cleanup liability of exempt firms be estimated? In keeping with the proposals' concept of "fair-share allocation," RAND researchers developed two measures of cleanup costs: volume-based cleanup costs for generators (only at G/T sites) and equal-share cleanup costs for all other firms. Volume-based cleanup costs are calculated by multiplying a generator's share of the total volume of waste at a site by the expected total cleanup cost of all generators at the site. For the non-generators at G/T sites, equal-share cleanup costs are calculated by dividing the cleanup liability of non-generators by the number of non-generators. At O/O sites, equal-share cleanup costs are determined by dividing the overall expected site cleanup cost by the number of firms that have ever owned or operated the site.
Volume-based measures provide a reliable estimate of costs; however, equal-share measures probably overstate small firms' fair shares because a firm's level of involvement at a site is likely to be correlated with its size. Consequently, the researchers estimated ranges for cleanup costs instead of average dollar figures. Although the resulting ranges are large, they are likely to contain the magnitude of cleanup costs that would actually be exempted and transferred to Superfund.
By either definition—annual revenue or number of employees—small firms account for a substantial share of the businesses at G/T sites. The top panel of the figure illustrates that between 44 and 63 percent of firms involved at G/T sites have $3 million or less in annual revenue. Estimates for the share of firms with 75 or fewer employees are higher (57 to 72 percent). These percentages translate into between 40,000 and 57,000 small firms, using a $3 million annual revenue cutoff; 52,000 to 65,000 firms would be released by the employee cutoff measure. Some firms are involved at multiple sites, so the estimates count firms for each site they participated in.
Despite their large numbers, small firms account for a modest share of the cleanup costs at G/T sites. As shown in the top panel of the figure, estimates of the proportion of generator cleanup costs that would be transferred to Superfund by the $3-million cutoff range from 17 to 29 percent (and 34 to 43 percent for firms with fewer than 75 employees). Estimates for non-generators (e.g., owners, operators, and transporters) range from 5 to 51 percent (or 13 to 60 percent for the employee measure).
The cleanup costs potentially transferred to Superfund at G/T sites would fall between $3.1 billion and $8.9 billion if firms with $3 million or less in annual revenue were exempted at G/T sites. (See the bottom panel of the figure.) The range rises to between $6.4 billion and $11.8 billion for firms with 75 or fewer employees.
The proportion of firms released and the cleanup costs potentially transferred to Superfund by exempting small firms at O/O sites are lower than at G/T sites. Cleanup costs for all O/O sites are only about one-third of those at G/T sites, but the costs potentially transferred to Superfund remain a sizable $400 million to $900 million for the $3-million cutoff and $1.2 billion to $1.7 billion for the 75-employee criterion.
Small-volume generators account for the majority of generators at G/T sites but only a small share of the volume-based cleanup costs. At a subset of G/T sites for which data were available, 96 percent of the generators contributed 1 percent or less of the waste at the site. Taken together, these generators account for only 22 percent of the volume-based cleanup costs. Even more startling, nearly three quarters of generators have volumetric shares less than 0.01 percent (each accounting for less than 1/10,000 of the waste at the site) and total only 0.3 percent of the volume-based cleanup costs. Exempting generators who contributed 0.01 percent or less of the waste at a site would cost between $49 million and $65 million; an exemption for generators who contributed 1 percent or less would cost between $3.6 billion and $4.8 billion.
If an exemption proposal is adopted, the estimates for the selected plan will need to be adjusted to account for firms' current cleanup commitments. Doing so may lower the costs transferred to Superfund by as much as half because firms have already agreed to perform cleanups worth over $15 billion through 1998. A deciding factor will be whether Congress grants exemptions only to firms at sites where cleanup plans are not yet in place.
If the best option is to release the most firms for the least in per-firm costs transferred to Superfund, exempting firms at G/T sites is cheaper than exempting those at O/O sites. (See the table.) The total dollar cost for exempting firms at G/T sites, however, is much higher than costs for exempting firms at O/O sites because 99 percent of firms are involved at G/T sites. Nonetheless, exempting small firms at G/T sites may be attractive if policymakers want to adopt a reform that would have the greatest effect on the system. In either case, exempting firms with $3 million or less in annual revenue is cheaper per firm released than releasing those with 75 or fewer employees.
Most cost-effective of all is targeting firms that contributed only a small proportion of waste to a site. For example, releasing generators that generated less than 0.01 percent of the waste at a site would release a large number of firms but transfer only $600 to $800 to Superfund per firm released.
|Liability Cutoff||O/O Sites||Generators||Non-Generators||All firms|
|Firm Size Cutoff|
|Volumetric Share Cutoff|
The effect of small-firm exemptions on firms remaining liable will depend on whether exempted costs are transferred to Superfund and how they compare with what exempted firms would have paid at the site under the current system. If liability reforms do not transfer all the costs of exempted firms to Superfund, actual losses to remaining firms are likely to be less than estimated small-firm costs for two reasons: Large firms often pay more than their share, and losses are likely to be at least partially offset by savings in transactions costs. On the other hand, if exempted costs are transferred to Superfund in full, large firms are likely to benefit because the per-firm cost estimates for small firms are higher than amounts that small firms have historically paid. Large firms would save the difference.
Before an exemption proposal can be implemented, policymakers need to resolve several problems. First, about one-quarter of the potentially responsible parties in the study sample appear to be individuals. Whether these individuals are eligible for exemption is unclear in many cases, and investigations to determine whether they acted on behalf of a firm may be costly.
Second, liability shares for released firms will need to be calculated. This task will be problematic for volumetric and "fair-share" plans because many Superfund sites lack waste-in and other data. Since resolving these issues will undoubtedly take time and generate contention, policymakers must decide whether the additional transaction costs these issues would produce are worth the benefits of liability reform.