| Cato Policy Analysis No. 247 | December 18, 1995 |
Privatizing Superfund: How To Clean Up Hazardous Waste
by James V. DeLong
James V. DeLong is a lawyer and an adjunct scholar of the Competitive Enterprise Institute.
Executive Summary
Superfund is not a program devoted to the protection of public health. It is an expensive mechanism for reclaiming a limited amount of land for general use. The number of par- cels of real estate covered by the law or otherwise need- ing remediation runs into the hundreds of thousands (though the level of contamination of the vast majority is probably minimal), yet federal policy is to clean up the 1,238 sites on the National Priorities List to operating-room standards and ignore the others.
The effort to justify that policy results in exaggera- tion of the risks to public health posed by Superfund sites. Those risks are trivial and could be contained at low cost. Furthermore, the effort to "make the polluter pay" has en- meshed over 32,000 people in a regime of injustice, waste, inefficiency, and bloated transactions costs and is discour- aging the redevelopment of properties.
The policy of concentrating on NPL sites ignores the arbitrary nature of the process by which sites are listed. There is no convincing evidence that those sites are signifi- cantly more threatening than are many non-NPL sites. The focus on the NPL also ignores the growing burden of private litigation, which is becoming an increasing drain on national economic resources and represents a significant reallocation of property rights.
The present law should be repealed and site remediation privatized so that decisions are made by market processes, not bureaucratic ones. Existing federal sites and abandoned sites should be auctioned off to private parties for either a positive or a negative price. The buyers should be obligated only to contain the contamination and prevent harm to public health. Whether a site is cleaned up for use or left idle should be determined by the market for the property.
Introduction
Superfund--the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)--is often described as "broken." That description is not quite accurate, since it implies that the program was once in good repair. In fact, Superfund has never worked. The law, based on misunderstanding and distortion, was zipped through a lame-duck Congress in 1980 in a spirit of vengeance against "the polluters." It has been amended and operated on the same principle and stands as a sad reminder that revenge mixed with hypochondria is a poor basis for public policy. Watching the program evolve is like watching the characters in a Greek tragedy move to a doom compelled by their hubris. Perhaps a better metaphor is an English farce, in which nonsense is normal and expected.
At this point, the wreckage is too complete to be fixed by tinkering. Because Superfund is a bipartisan problem-- the vote in favor of stringent amendments in 1986 was 88 to 8 in the Senate and 386 to 27 in the House--perhaps both parties can recognize that the best course is to repeal it, take steps to provide rough justice to those who have been caught in its traps, and rethink the problem.
Superfund is actually five different programs with five different goals. It is
* an emergency response program to protect public health against urgent hazards;
* a public health program to protect neighbors of waste disposal sites and users of drinking water against possible long-term harm associated with the escape of hazardous substances;
* a program to complement the Resource Conservation and Recovery Act (RCRA), which governs the generation and disposal of hazardous wastes, by imposing severe consequences for failure to control such wastes;
* a program to reclaim polluted land, returning it to productive use and enhancing the property values of its neighbors; and
* an expression of the belief that contaminated land is aesthetically offensive and that the quality of public life will be improved by cleanup (that belief that can also be cast in stronger, religious terms--some people seem to regard pollution as a sin that must be pre- vented or atoned for, regardless of costs or bene- fits).(1)
Many of Superfund's problems are due to miscommunication and confusion generated by the intermingling of the different goals. The law was originally sold as a broad public health measure (in pursuit of the first three goals above), and the Environmental Protection Agency's public rhetoric and formal criteria for decisionmaking are still phrased in terms of public health protection. Yet in the course of its evolution, Superfund has become a land development and aesthetic enhancement program. Its connection to the protection of public health is exceedingly tenuous.(2)
The beginning of good policy is to recognize that each of the five goals requires its own approach. The first objective of Superfund--emergency response--can be pursued effectively by a government agency (although not necessarily at the federal level) concentrating on protection of public health. The second--long-term containment--is best handled by private landowners acting under the lash of legal responsibility for the escape of hazardous substances. The third--enforcing RCRA--may be important in the future, but it has nothing to do with the current problems of Superfund, which involve cleaning up releases that predate the passage of RCRA.
The fourth and fifth goals, which concern land reclama- tion and the development of property for productive or aes- thetic purposes, cannot be pursued effectively by a govern- ment agency. Those efforts should be ruled by market proc- esses, not bureaucratic ones, and should be governed by three principles:
* For government-owned and orphan sites, the government should establish a regime of private decisionmaking by auctioning off contaminated sites (for either a positive or a negative price) on the sole condition that the buyer prevent the spread of contaminants. For privately owned sites, the law should require only that hazardous substances be contained.
* For both kinds of sites, cleanup should occur when economic forces dictate it as a step toward returning the site to industrial, commercial, residential, or recreational use, and decisions about the type of use and the timing of cleanup should be left to the owner.
* Ideally, specification of the levels of cleanup would be based on rules governing liability for harm to others. However, the current liability system contains many imperfections, and for the time being those specifications will have to be the product of government decisions. They should be based on realistic risk assessment methods, not the worst-case approach that dominates current decisionmaking, and should vary according to the use to which the owner decides to put the site.
The balance of this study examines those basic points. Two major Superfund topics, however, are not covered in this analysis. The first is the transition from the current regime to a more rational system. That will require special transition rules to avoid penalizing people for decisions made in reliance on rules that would be rendered obsolete. Developing transition rules is an important and complicated subject, but it raises issues different from those taken up in this study and needs separate discussion.
The second topic not analyzed in detail is the role of Superfund with respect to wastes generated after the passage of RCRA's controls on hazardous wastes. The problem that now commands the most attention is application of Superfund to the wastes generated over the past century, and that problem is different from the one posed by post-RCRA contamination. Many discussions of Superfund simply assume that the problems of Superfund relate only to pre-RCRA contamination and that the statute as it stands is all right for more recent waste. Given the breadth of the statute (as laid out in the next section), that is not necessarily so, and the issue needs more attention than it is getting in the current debate.
Genesis of Superfund
The beginnings of CERCLA were straightforward. Until 1980 the disposal of chemical waste on land was controlled only by some state laws plus private tort doctrines of nuisance and trespass.(3) Those doctrines and the legal system implementing them were found wanting in the rush during the 1970s to federalize environmental law. Thus, the RCRA laws of 1976 and 1984 were designed to impose cradle-to-grave controls on chemical wastes created in the future.
RCRA did not address the many chemical wastes that had been disposed of inadequately (by present standards) in the past or the fact that, by the late 1970s, some sites presented significant problems. Chemicals had spread or were in danger of spreading into groundwater or neighboring property or were perceived as presenting a danger. To engender support for a federal program to control and clean up those substances, a standard government-by-anecdote script was followed. Horror stories were broadcast, such as Love Canal in 1978 and, around the same time, the "Valley of Drums" in Kentucky. Dire predictions were made about the menace to public health. The problem was considered so serious that no time could be wasted in getting the facts.
By now Superfund has been subjected to so much criticism that it is easy to forget that Congress was dealing with a real problem. Although much of the hysteria was fostered by the EPA as part of an effort to reposition itself as a protector of the public health (and not just of the environment), some of the stories were true, even if atypical, and public concern was understandable.(4) Certainly a program to allow emergency action to forestall any immediate risks made sense. In Elizabeth, New Jersey, for example, authorities found a site with 40,000 rusting drums full of TNT; nitroglycerin; phosgene; and other, unknown, chemicals that eventually went up in toxic flames. The "Valley of Drums," a seven-acre site with 17,000 drums of chemical waste, did indeed pose some degree of hazard.(5)
The 1980 law authorized the EPA to spend up to $1 million per site on emergency response, a ceiling raised to $2 million in 1986. In 15 years the EPA has used that emergency authority to remove wastes at about 948 sites and to compel private parties to act at an additional 2,436 sites. States have conducted at least another 3,527 removal actions.(6) That emergency authority has been interpreted a little too freely and the numbers overstate the number of real emergencies, but that is a relatively minor quibble.(7) Little criticism is made of that aspect of Superfund, and it is generally regarded as a substantial success.
In 1980 a program focused on responding to real emergencies followed by a study of the longer term problems and soberly considered legislation would have made excellent sense. But that did not happen. The statute as passed is not limited to emergency response or to remediation of a few major waste dumps. It is not even limited to sites that received hazardous wastes as the term is defined in RCRA. Instead, Congress enacted a vacuum cleaner that applies to all "releases" of "hazardous substances" from "facilities." Each of those terms is given a broad meaning. "Release" includes any sort of escape or threat of escape into the environment. "Hazardous substance" includes any chemical regulated under any environmental statute, except petroleum and a few other specific wastes, which are partially exempted.(8) "Facility" encompasses every type of man-made artifact from a building to a storage drum and is then expanded to include any patch of dirt on which a substance has "come to be located." The operator of a municipal sewer system was recently held responsible under Superfund for the escape of hazardous substances that had been flushed down the drain by a research laboratory.(9) In fact, liability extends to the ocean bottom. One court recently ruled that Superfund covers the cost of recovering barrels of arsenic trioxide that washed off a cargo ship during a storm, and another held that lead shot deposited in Long Island Sound by the shotguns of a gun club is hazardous waste.(10)
Before the passage of Superfund, the EPA's ballpark estimate was that between 30,000 and 50,000 sites contained hazardous waste and that 1,200 to 2,000 might present significant problems.(11) That estimate is impossible to square with definitions contained in the law. Superfund's defined scope, applied literally, sweeps in hundreds of thousands, and perhaps millions, of sites. The implications of that were not considered at the time and have received little consideration since. The breadth of Superfund's formal coverage and uncertainty about the EPA's intentions hang over all reform proposals like a potential avalanche.
The National Priorities List
The all-encompassing nature of Superfund's definitions was tempered by the establishment of the National Priorities List (NPL). The EPA was required to develop a National Contingency Plan for discovering and assessing sites where hazardous substances might be found.(12) The plan contains criteria for determining priorities for cleanup based on possible harm to human health or the environment, and the EPA is to use those to compile the NPL. The full weight of the program is applied only to the sites placed on the NPL. The federal super "fund" can be used to clean up hazardous wastes only on NPL sites, and only those sites are subjected to government-forced cleanup actions, potential responsible-party investigation, the preparation of formal risk assessments, and in general the full panoply of Superfund.
Contaminated sites not on the NPL are in limbo. They are subject to the EPA's emergency authority, which can be invoked to support cleanup orders to private parties or expenditures from the fund. Otherwise, non-NPL sites are not subject to EPA cleanup orders, and money from the fund is not spent on them. However, those are matters of EPA discretion, not law, and the EPA could make an exception for any particular site. All contaminated sites are also subject to Superfund provisions allowing private parties to sue anyone who might be liable for contamination. Those sites are also subject to possible state action, and most states have enacted cleanup statutes, modeled on Superfund, that cover thousands of non-NPL sites.
The vagaries of the division between NPL and non-NPL sites confuses debate greatly. Many discussions refer to "Superfund sites" when they mean "NPL sites." The NPL is not a list of the sites subject to Superfund. It is only a list of the contaminated sites to which priority will be given. In theory, the program should go on until all contaminated sites, whether there are hundreds of thousands or millions, have moved onto the NPL and been remediated.
A lot of ink has been used debating whether the number of sites on the NPL will ultimately reach 2,000, 6,000, 10,000, or even more. The breadth of the statute's definitions makes the supply of sites virtually limitless, so the question is pointless.
Creating the NPL
The NPL is created by three different processes. The first is fiat. Each state can designate a top-priority site, which is added to the NPL summarily and without further evaluation. The second is protection of public health. Sites posing immediate threats may be added peremptorily.(13) The third is a multistep formal evaluation. Candidate sites come from a list called CERCLIS, which stands for CERCLA Information System. Sites are added to CERCLIS on the recommendation of state officials, private citizens, or officials of other federal agencies.
Sites on CERCLIS are subjected to a preliminary assessment (PA), which is a desk audit. The use of the site is analyzed, any records of releases or contamination reviewed, and the basis for the report to CERCLIS considered. The PA eliminates almost 40 percent of the CERCLIS sites from further consideration for the NPL. Those sites that survive receive a more detailed site inspection (SI), which eliminates another 25 percent. A site that remains after the SI is then subjected to a formal evaluation under the EPA's Hazardous Ranking System (HRS). Note that elimination of a site as a result of a PA or an SI does not mean that the site is uncontaminated or that those who own it or disposed of chemicals there are not liable for cleanup. It means only that the site is not given a high priority.
The HRS is based primarily on the possibility of hazard to human health. It is a complex score sheet designed to produce a numerical estimate of a site's potential for harm.(14) It examines the various pathways by which contamination spreads, the nature of the contamination, and whether any releases have occurred. The system seems to be designed according to the EPA's penchant for worst-case analysis: the question is, how risky is this site if everything that could go wrong does go wrong?
The cutoff for placing a site on the NPL is an HRS score of 28.5 out of a possible 100, and the highest score actually given as of 1991 was 75.6.(15) The 28.5 cutoff has no significance in terms of risk to health or the environment. In the original law Congress specified that there must be at least 400 Superfund sites (at the time, Superfund was still viewed as desirable pork, and the 400 figure tallies closely with the number of congressional districts). The 28.5 score, when applied to the candidate sites identified as of 1983, produced an NPL of 406 sites. The 406-site requirement disappeared in the 1986 amendments, but 28.5 remains the cutoff.
Unmasking the NPL
As of March 1995, CERCLIS contained 39,692 sites. Their status is given in Table 1. The latest version of the NPL contains 1,238 sites, 155 of which belong to the federal government, primarily the Departments of Energy and Defense;
| Table 1 Status of Sites on CERCLIS as of March 31, 1995 |
||
| Status | Percentage | Number |
| Placed in archive: preliminary assessment and, if necessary, site investigation completed; no further response action planned (NFRAP) |
60.3 | 23,937 |
| Removal only and other (no site investigation) | 1.8 | 728 |
| Preliminary assessment needed | 4.6 | 1,837 |
| Site investigation needed | 5.5 | 2,182 |
| Site investigation plan needed | 5.9 | 2,346 |
| Additional assessment activity ongoing | 0.5 | 206 |
| Recommended for the NFRAP archive | 11.2 | 4,433 |
| Awaiting National Priorities List (NPL) decision | 6.0 | 2,380 |
| Placed on NPL (includes final, proposed, deleted) | 3.4 | 1,364 |
| Included in another site on NPL | 0.5 | 195 |
| Removed from NPL | 0.2 | |
| Total | 39,692 | |
| Source: EPA Superfund CERCLIS Hotline. | ||
| Table 2 Types of Facilities on the NPL as of August 1993 |
||
| Type of Facility | Percentage | Number (est.) |
| Industrial (a) | 38 | 431 |
| Codisposal of municipal and industrial waste |
20 | 226 |
| Miscellaneous b | 10 | 119 |
| Contaminated areas c | 8 | 96 |
| Commercial waste handling and disposal |
8 | 89 |
| Recyclers | 8 | 88 |
| Captive waste handling and disposal |
7 | 76 |
| Municipal waste only | 1 | 9 |
| Source: Katherine Probst et al., Footing the Bill for Superfund
(Washington: Brookings Institution and Resources for the Future, 1994), p. 35. Notes are from pp. 122-24. The book provides only percentages; the numbers have been estimated. |
||
(a) Includes manufacturing, mining, and oil refining. Also includes captive disposal sites colocated with the facility.
(b) Includes agricultural, dry cleaning, military-related, multiple-operations, educational, warehouses, and all other sites that fit no other single category.
(c) Sites at which the source of contamination is unknown or is located offsite and is difficult to identify. Many of those were illegal dump sites.
1,083 are private. An additional 44 private and 7 federal sites have been proposed, which would bring the total to 1,289.(16) Seventy-five sites have been deleted from the NPL because no further response is necessary.
The sites on the NPL represent a mixed collection of facilities--factories, municipal dumps, hazardous waste disposal facilities, and so on. Table 2 shows the distribution of the 1,134 nonfederal sites listed as of August 1993.
NPL Centrism
Participants in the discussion of Superfund reform seem mesmerized by the 1,238 sites on the NPL. Occasionally, a comment is made to the effect that attention is overly focused on the NPL to the exclusion of other sites, but the usual assumption is that the NPL defines the core of the problem, that the CERCLIS and the NPL identify all the sites that meet some objective standard of severity, and that the non-NPL sites do not present significant problems. Estimators of the cost of Superfund agonize over whether 2,000, 3,000, or 6,000 sites will ultimately reach the magic HRS score of 28.5, as if that score actually meant something. According to that view, resolving the issue surrounding the NPL sites, however many there may ultimately be, will break the back of the "Superfund problem."
Such assumptions are not justified. In fact, the relationship of the NPL to the size and severity of the overall universe of contaminated sites is a mystery because, as the Congressional Budget Office said in 1994, "little is known about the ultimate size of the [contamination] problem."(17) The mishmash of available information about the number of sites covered by Superfund and the extent to which the CERCLIS and the NPL identify the most important of them is reviewed in the appendix. The appendix also addresses two closely connected issues: (1) contaminated sites that are not covered by Superfund at all, a category that includes such potential problems as mining wastes and petroleum releases; and (2) contaminated sites covered by a special corrective action program created under RCRA even though they are also subject to Superfund.
The following conclusions are drawn from the information given in the appendix.
* Superfund probably covers somewhere between several hundred thousand and several million sites.
* Neither CERCLIS nor the NPL provides the basis for a reliable estimate of the number of contaminated sites or the levels of contamination.
* Contaminated sites will certainly present a continuum of contamination levels. Most are probably minor; some unknown number are severe. Existing data provide no basis for judging how many might ultimately reach the arbitrary HRS score of 28.5, or any other level.
* Neither CERCLIS nor the NPL necessarily selects the most contaminated sites, and they certainly do not select the sites that would provide maximum returns on cleanup investment dollars.
* Contaminated sites not covered by the Superfund program could generate substantial cleanup activity and could possibly dwarf Superfund.
States have produced estimates of non-NPL sites requiring remediation, but the estimates are so idiosyncratic as to be inscrutable. A 1993 survey identified over 100,000 non-NPL sites, 40,000 of which "need[ed] attention."(18) California shows 26,000 sites with 350 in need of attention; New Jersey shows 18,519 of which 12,894 need attention. Illinois has 147 sites in need of attention out of a total 1,400; and Michigan has 9,785, every one of which needs attention.(19) A New York study found that 26 sites met a threshold of "significant threat" and another 192 might meet that criterion.(20) The state data do not resolve any uncertainties.
The overarching conclusion is that the NPL centrism that dominates debate over Superfund is a delusion that obscures the true nature of the hazardous waste problem. For example, to anticipate a conclusion from later in this analysis, a policy of spending billions of dollars to clean up 1,238 haphazardly selected NPL sites to perfection while ignoring the universe of other possible remediation needs is not rational.
The Superfund Sausage Grinder
Other parts of Superfund were drafted in the same com- prehensive spirit as the coverage provisions. One central article of faith was that cleanup should not be paid for by the taxpayer. The assumption was that the large corpora- tions responsible for disposing of wastes had been reckless, had conspired with disposal companies to dump waste care- lessly, or had turned a blind eye. A premise of the program was "the polluter must pay," however legal or responsible its actions under the standards of the time. The spirit of revenge extended to everyone who had anything to do with either the disposal site or the waste, including the present owner or operator; the owner or operator at the time of the waste disposal; the generator of the waste; and anyone who transported, treated, or disposed of it. The EPA's instinct is to sue not only everyone who ever had any direct connec- tion with the waste or the site but also those whose connec- tion is more removed--lenders, shareholders, corporate officers, parent and successor corporations, lessors and lessees, executors and trustees, and bankrupt estates.(21) There is an "innocent landowner" defense, but it is diffi- cult to establish.
Since 1991 mercy has been extended to residential property owners who had nothing to do with the contamination of groundwater under their property. As a matter of enforcement discretion--not because it is compelled by law-- the EPA will not sue them. In 1995 that policy was extended to all nonresponsible landowners. That does not prevent another party who is potentially responsible for the cleanup from dragging landowners into the matter, however; but the EPA will also "consider" entering into settlements with innocent landowners that insulate them from further liability.(22) Of course, that policy covers only NPL sites. An innocent landowner caught up in a private suit cannot settle with the EPA because there is no federal enforcement action.
Superfund liability is "strict," which means that the government need not prove any fault to impose responsibility for cleanup. A generator that gave its waste to a legitimate disposal company that took it to a licensed landfill is still liable for cleaning up the landfill. So is the transporter. The legal or moral quality of the company's actions is irrelevant; a company that made every effort to protect the public weal is treated as a miscreant of the same stripe as the most egregious dumper. Superfund recognizes as defenses neither responsible conduct by the waste disposer nor subsequent recklessness by a third party.(23)
Superfund liability is also "retroactive" and "joint and several." "Retroactive" means that liability extends to cleanup of wastes disposed of at any time in the past. "Joint and several" means that anyone connected with a site can be forced to pay the total cleanup bill, no matter how limited his participation. A Potentially Responsible Party (PRP) that is named by the EPA can sue other PRPs and make them contribute to the pot, and if they cannot be located or are bankrupt, that is the first PRP's tough luck.
If the polluters of a site cannot be identified, government will pay the bill. However, the taxpayers are not asked to pay directly for those orphans. The 1980 law levied a special tax on chemical and petroleum feedstocks to raise a fund of $1.6 billion. In 1986 the fund was increased to $8.5 billion and the source of revenues expanded by a special tax on all corporations. If the fund pays, CERCLA gives it a lien on the property.
How Clean Is Clean?
CERCLA expresses a strong preference for "permanent solutions," which means that simple in-place containment of contaminants is disfavored. CERCLA also provides that groundwater should usually be cleaned up to the level where it can safely be drunk straight from the ground without further treatment, at a rate of two liters per day for 70 years.(24) Simply not drinking the water, which may be all that is necessary to prevent any harm to humans, is not an acceptable option.
In general, cleanup levels must be "protective of human health and the environment," and that is judged by the applicability of any criteria under other environmental laws that are "relevant and appropriate . . . under the circumstances presented by the release." The standard is "applicable or relevant and appropriate regulations" (ARAR)(25) For the most part, state programs gear their cleanup standards to the EPA's goals.(26)
Exactly what standards, in addition to those for water, are ARAR can be a complicated question. The statute does not illuminate the meaning of any of the crucial terms (such as "appropriate" or "circumstances"), and the regulations add little precision.(27) The statute lists several specific statutes as relevant, and a 1988 EPA notice on the National Contingency Plan identified as possibly ARAR 14 RCRA standards, 8 water standards, 5 air standards, 1 standard each involving polychlorinated biphenyls and floodplains, and the requirements of 10 other entire environmental laws that were referred to en bloc. It then added Department of Transportation rules for transportation, all of the rules of the Occupational Safety and Health Administration, and historical preservation considerations. The notice then gave a few examples of state rules that might also be ARAR.(28) Needless to say, hiring lawyers and consultants to argue over what standards are ARAR under what sets of circumstances is not cheap.
"Worst-First" Prioritization
Because the machinery of Superfund is brought to bear only on listed sites, all contaminated property on the NPL receives priority over sites not on the NPL. Furthermore, given the policy of cleaning up to pristine levels, that priority is irreversible. NPL sites are not reassessed in the light of improvement. After a year of remediation, an NPL site might score only 10 on the HRS if it were rescored. Nonetheless, work will continue there until cleanup is complete. Resources will not be shifted to a site that almost made the NPL, such as one with an HRS score of 25.
In choosing among the sites on the NPL, the EPA embraces a policy of "worst first," which means that the worst sites are to receive priority over less contaminated sites, and the worst parts within each site are to be cleaned up first.(29) The worst-first concept is not rigorously applied, though. Often, the EPA does not know which sites are the worst. Once the HRS shows that the site will reach the magic score of 28.5, the responsible regional office of the EPA may stop the analysis because the crucial information that the site is NPL material has been obtained. Regional offices are also subject to many pressures from local residents and have strong incentives to devote cleanup resources to the NPL sites that have been waiting the longest.(30)
Costs of Superfund Sites
Total Superfund spending on NPL sites, including cleanup and transaction costs and the tax bill, runs about $6 billion per year.(31) The estimated cost of an average NPL cleanup is about $29 million, but the true cost varies greatly with the type of site. A mining waste site might cost $170 million, a manufacturing site only $13 million. Remediating some of the big federal facilities will be an even more expensive task.
The cost estimates exclude the transaction costs of determining liabilities when multiple parties are involved. If only four or five PRPs exist, transaction costs might turn a $29 million cleanup into a $30.5 million job. The transaction costs for 50 PRPs might raise the total from $29 million to $41 million.(32)
Polluters are also liable for "natural resource damages," which means they pay for general damage to the environment regardless of any economic harm.(33) "Natural resource damage" is an esoteric topic with a specialized literature of its own, but its flavor is captured by a recommendation for reform that states, "Legislation is needed to limit natural resource damage liability to cases where there is actual damage to natural resources."(34) Only under Superfund would liability for phantom damages come to be the natural order of things and the idea that damages should actually exist before they must be paid for come to be regarded as a proposal for reform.
The nation's total potential cleanup bill cannot be calculated, given the uncertainty surrounding the number of contaminated sites. Two thoughtful analysts puts the range at between $44.4 billion and $135 billion. The low bound assumes 1,350 sites at an average cost of $32.9 million; the high estimate is for 3,000 sites at a cost of $46 million each.(35) Such estimates could be expanded. If 10,000 sites need cleanup at an average cost of $30 million each, the price tag is $300 billion. If 1 million sites require an average investment of, say, $1 million, then the total price is $1 trillion. Neither of those figures would represent an unreasonable guess, and even $5 trillion is not an upper bound under the EPA's present cleanup policies.
Enforcing Superfund
All Superfund provisions are enforced by a set of administrative provisions of unusual severity. Rights of judicial review and appeal are limited, a tactic designed to force parties to clean up first and litigate later. The ostensible reason is that the public health urgency of the crisis does not allow for shilly-shallying. Defenses are limited, and neither the reasonableness of one's own conduct nor the recklessness of another is relevant to liability. As one lawyer said, "I tell my clients there are only two rules under Superfund: You lose and you pay, but if you want to pay me to prove these rules all over again, I'll take the money."(36)
PRPs are not quite as helpless as that suggests. The EPA must enforce the statute in court. Judges do not like to be presented with cases that they consider unreasonable. As a result, PRPs have more leverage over standards and schedules than is given them by the formal terms of the law. Government lawyers are faced with constant pressure "to go out in the hall and settle this thing," with the implicit threat of judicial impatience with anyone who is too recalcitrant.(37)
Superfund in the Dock
Recently, analysts with Resources for the Future noted that the Superfund debate seems to attract disproportionate attention. The cost of $6 billion per year is respectable, but it is just 5 percent of the estimated $135 billion spent each year to comply with all environmental regulations.(38) The program certainly collects more than 5 percent of the grief given the EPA, so what is going on?
The answer is actually simple. Superfund is perceived, accurately, as unjust. It is also perceived, accurately, as expensive and ineffective, pouring out money without creating value. Its potential future costs are in the hundreds of billions, and maybe in the trillions, of dollars. Its requirements are inscrutable, creating substantial uncertainty for the people within its ambit and subjecting them to heavy penalties at the whim of an arbitrary bureaucracy. It transfers mountains of money to litigation lawyers and environmental consultants for work of little or negative social utility. It siphons resources into a limited number of sites on the NPL while ignoring broader cleanup problems, and it contains no system for establishing priorities. It has created a huge problem of "brownfields" because hundreds of thousands of parcels of land are blighted for development while new industries are built on virgin ground. Incentives are perverted, as contractors have little reason to seek efficiency or pursue innovation. Finally, despite years of heavy criticism, Superfund never gets fixed.
Those issues reinforce each other in a steadily intensifying spiral of grievance. A minor PRP who gave trash to the local municipal collection service feels irked if asked to contribute a few dollars toward cleaning up the dump. Up the ante by making him or her pay part of the cost for all the unknown contributors, and for the whole dump, and the sense of grievance grows. Add other factors, such as cleanup standards that have no relationship to real risk and that increase costs dramatically, and irritation soon turns to a raging sense of injustice. Put enforcement in the hands of hard-nosed federal attorneys, and then let Congress dither over the problems for years without correcting them, and the public anger grows accordingly.
That is an extensive bill of particulars for a single program. As one industry lawyer said to the author, "Imagine. They accomplished all this in just 15 years. Usually it takes decades for a government program to become this fouled up."(39) Five dimensions of the case against the Superfund law are examined below: injustice, waste, delay, "brownfields," and priorities.
Making the Polluter Pay?
The most important item is the miasma of injustice that surrounds the program, generated by its core doctrines of polluter pays and liability that is strict, joint and several, and retroactive.
Explaining Superfund to noncombatants is difficult because the terms are technical and do not convey the full impact of the doctrines. The rhetorical challenge has stimulated the metaphorical imagination of the Superfund bar. Two of the better efforts to convey the full weight of Superfund liability rules are those of J. Kent Holland and Alfred R. Light.
Holland asks us to suppose that Congress passed a new statute for cleaning up automobile junkyards. If it were like Superfund, it would say that any person who had ever owned a car found in a junkyard could be required to pay the total costs of cleaning up the whole junkyard. It would not matter when the car was disposed of; or whether that car, or any car, actually caused environmental damage; or whether the owner had disposed of it by abandoning it, trading it in at a dealer, or giving it to a scrap dealer.(40)
Light hypothesizes the following factual situation. In 1863, a servant at Monticello, Thomas Jefferson's historic home in Virginia, hides the family silverware in an iron and copper pot that is kept in an underground storage facility. Yankee cavalry find the pot and seize it on behalf of the U.S. government, in accord with army regulations. The pot then disappears until 1975, when it is found near Fort McNair, sealed in a vault and in excellent condition. After its discovery, the vault is resealed, and the pot never results in any contamination. In 1979 the army finds dioxin contamination in the soil several hundred yards away from the vault and cleans it up. The point of this hypothetical story is that in 1985 the government could use Superfund, passed in 1980, to sue Thomas Jefferson IV for the costs of cleaning up the dioxin back in 1979, even though the dioxin had absolutely no relationship to the pot. Under Superfund precedents, the government would win.(41)
People who discharged contaminants in accord with the standards of the time simply do not feel like the evil polluters of the EPA's cartoonlike depictions, and only 10 percent to 14 percent of Superfund sites exhibit evidence of illegal disposal by anyone.(42) Those people do not feel any moralistic hostility to industrial activity, national defense, or other productive enterprises that accompanied the original contemination, a hostility that fuels many environmentalist assaults on "the polluters." As a result, PRPs do not accept the fairness of retroactive, joint and several strict liability for actions that followed the practices of the times.
The sense of outrage is most pronounced among smalland medium-sized PRPs, who have a hard time paying the legal costs of a Superfund fight. One can protest that problems can be taken care of through sensible administrative discretion and that government lawyers will not act unjustly, but experience belies that. The number of horror stories keeps multiplying. Auto dealers have been billed for the cost of cleaning up a used oil refinery and told to provide tax returns for five years so the EPA can see how much money they have. A formal wear rental company is a PRP because in 1972 it sent trash to what later became a Superfund site. A butcher shop owner is liable because the glue on his discarded boxes contained hazardous material.(43) A $54 million per year plastics company is "bludgeoned" into paying $700,000 to clean up wastes that a prior owner sent to an accredited landfill via a licensed hauler.(44) In 1952 a Vermont State official advised a company to dispose of waste in a landfill so as to avoid water pollution; 30 years later, as an EPA official, he sued the company under Superfund.(45) Despite statutory language urging the pursuit of settlements with de minimis contributors, the EPA has grossly underused its powers to do so.(46)
The horror stories and the resentment are worsened by a lack of records. Before 1980 no statutes required records of the disposal of hazardous waste, and until 1987 the requirements had significant gaps. About 70 percent of Superfund liability at current NPL sites is based on pre-1981 activities, and 95 percent on pre-1987 actions.(47) As a result, developing a list of PRPs for a site is quixotic. Superfund lore is full of stories of companies sued because a landfill operator listed them in his address book, because waste paper went to a codisposal site, or because of 20- year-old memories of scrap yard employees and truck drivers.(48)
Waste generators are not the only ones surprised to find themselves involved in Superfund litigation. People, such as shareholders and lenders, with any connection whatsoever with the generators are brought in, even if they had no decisionmaking power over operations of the generator. Insurers are, to their outrage, held responsible for routine contamination or leakage despite policy clauses excluding liability for anything except sudden occurrences. All those tangential parties view their involvement as based on no principle except the "first rule" of Superfund, which is, "the deepest pockets will be picked."(49)
The Superfund net has caught over 32,000 people as PRPs at the 1,134 nonfederal NPL sites that existed in August 1993.(50) That is probably an understatement, since it does not fully reflect the thousands of PRPs at a few large waste dumps. The record may be the Operating Industries site in Los Angeles, with 4,000 PRPs. The estimate also omits the new parties who may be drawn in by existing PRPs as more NPL sites enter an active cleanup phase. The number of PRPs ensnared in state programs is anyone's guess.
Even if the EPA were willing to pare the list of PRPs, others would not be. Named PRPs have a strong incentive to bring in smaller contributors. They want to cut their own costs. They also want to pressure the EPA to be reasonable in its cleanup standards and to keep the whole Superfund program under continuing political pressure. Since the statute sweeps in all those people, the PRPs will act on it, and, indeed, their lawyers are absolutely ethically bound to act on it. Superfund is not a system that can be saved by enforcement discretion.(51) For example, the EPA might not sue innocent homeowners, but a PRP might well bring them in. A court might decide that their payment should be little or nothing, but the homeowners cannot be sure of that in advance and cannot avoid hefty transaction costs. In Utica, New York, the EPA sued a cosmetics company and a metal components firm as PRPs. Those companies sued 600 businesses, mostly small, and 41 towns and school districts. A local pizzeria settled rather than fight.(52) At another site, a merchant took third-party checks issued by a battery cracking plant in exchange for a bag of dog food in 1977 and a bag of seed in 1984. Sued as a PRP on the basis of the checks, he paid $3,500 to extricate himself.(53)
A group that does keep good records--to its current regret--is school boards. Schools throw out trash, and that trash has traces of hazardous substances. Ergo, schools become jointly and severally liable for the cleanup of any site to which their waste was sent. More than 200 school districts have been named as PRPs in Superfund actions across the country.(54) School executive Timothy Duffy tells of two small Colorado towns that were named as PRPs for sending sewage sludge to a landfill where it was mixed with toxic wastes. After they stopped using the landfill, they began recycling the sludge by selling it for use as a soil supplement and fertilizer on wheat fields, parks, and playgrounds. "In 1989, EPA gave them an award for beneficial reuse of essentially the same sludge that is now alleged to trigger liability under Superfund."(55)
A strong sense of grievance is felt even by companies that are clearly within the intended ambit of the law: those that discarded chemical wastes. Many are philosophical about contributing to the cleanup, but they resent the lack of any recognition of efforts to be responsible. When that is coupled with strict liability imposed on responsible actors for harm caused by companies that act irresponsibly, the bitterness becomes intense. There is also a sense that everyone was slow to recognize the problems surrounding the disposal of hazardous substances, that governments were as slow as anyone, and that the government is now penalizing the private sector for its own dereliction of duty. One site in South Carolina includes among its polluters the U.S. Centers for Disease Control, the state environmental protection agency, the state medical school, and the EPA.(56) The government has even sued contractors for contamination at military bases over which the government had control.
There is also a sense that the federal government still does not know what it is doing. Some towns are fighting EPA efforts to make them into NPL sites on the ground that there is no evidence that the wastes present any cause for concern.(57) The government's flipflop on Times Beach, Missouri, has hurt the EPA's credibility. Times Beach was a cause cÇläbre, evacuated in 1982 because of dioxin contamination at a total buyout and cleanup cost of almost $200 million. In 1991 the principal government official involved described the whole episode as an unnecessary error.(58)
A good case study of the roots of the anger of the PRP community is Love Canal, where discovery of hazardous waste near a residential area triggered an outbreak of company bashing. Love Canal became "Exhibit A" in support of the need for Superfund, but a careful contemporaneous article in Reason documented the company's efforts to act responsibly.(59) The problems were created by actions of state and local governments that disregarded elementary precautions of waste handling. Reason plays no role in Superfund, though, and those facts did not keep the company from paying millions to settle its liabilities. The company also paid lawyers' fees for years of litigation and a very high cost in negative public relations created by the political need of assorted governments to drum up and maintain support for legislation and to avoid blame themselves.(60) Worst of all, Love Canal became the poster child for the whole problem, with the result that "government mismanagement . . . and sensationalist journalism deliver[ed] us the Superfund law of 1980."(61)
The sense of injustice is heightened by the difficulty of finding a fair method of allocating cost shares among the PRPs. The statue specifies no principles, saying only that parties can seek contributions from others who might be responsible. Should shares be based on volume of solid waste, on degree of hazardousness, on volume of that subset of solid waste that is defined as "hazardous" waste, on the responsibility exercised by the company, on the standards applicable at the time, or on some other factors? A case can be made for each of those. All of them, and others to boot, have been used by the courts.(62) No approach would command universal respect as a just solution.
The lawyers' cop-out that "allocations must be made case by case" means only that decisions will be made at the local level, after heavy litigation expense, rather than in one swoop at the national level, and that decisions will vary according to the local mood. If it is not obvious which of the factors should control as a matter of national policy, how does it become any clearer in a single case involving the same menu of choices? The present rage in reform circles is for a policy calling for "a neutral allocator," but it is unclear why standardless decisions made in conference rooms by nonjudges will be better or cheaper than decisions made in courtrooms by judges. The system will remain one in which everything is relevant and nothing determinative and in which PRPs will spend large sums developing peripheral information that just might help tip the balance.
The PRP community was also outraged by an EPA decision in 1990 called "Enforcement First." Under that policy, the EPA makes no attempt to find all the PRPs connected with a site. Instead, it identifies three or four and starts action against them, thus forcing the initial PRPs to try to identify others. In the PRPs' view, that is an effort by the agency to transfer to them investigation costs that should be borne by the government. Lacking the government's powers, those PRPs cannot investigate as efficiently, especially when the EPA is pressuring them to make quick decisions.
Finally, even the bedrock proposition that the polluter ought to pay is questionable from an ethical point of view. Economists point out that money saved on waste disposal did not go to swell profits. U.S. industries have always been subject to competitive pressures, and cost savings were passed on in the form of lower prices to consumers. If the object is to make the beneficiaries of the polluting acts pay, then the old Pogo line applies--"We have met the enemy and they are us." Everyone was a beneficiary.(63) Furthermore, we should be grateful that our forebears were willing to tolerate pollution. Application of today's pollution control standards during the 19th and early 20th centuries would have inhibited and possibly choked industrial development. The United States could now be the industrial equivalent of the Third World instead of the richest nation on earth. Many environmentalists might think that a good thing, at least until they tried it, but most Americans would not.
Another example of the ethically dubious nature of Superfund policy is provided by the sites owned by the Departments of Defense and Energy. During the Cold War national survival was regarded as at stake, and anyone who forgets that should reread John F. Kennedy's 1961 inaugural address. We now wish that greater care had been taken about the disposal of hazardous wastes. It could have been done, and the cost might not have been inordinate. However, waste disposal was not a paramount consideration at the time, and any suggestion that defense activities be curtailed because of a potential contamination problem would have been regarded as loony. Furthermore, they would have been loony, given the context. Singling out those involved in the immediate projects, whether individuals, government agencies, or companies, for opprobrium is blatant scapegoating.
"Polluter pays" is a poor principle in another way. It cannot be achieved. Superfund deals with pollution going back 150 years. Many of the people involved are long dead. When corporations are involved, both management and stock ownership have turned over, sometimes several times. It is not possible to punish corporations, which exist only on paper and have no nerve endings, for acts committed long ago. The government can only punish present managers and shareholders for the sins of their predecessors. Before embarking on that course, the government should note that 32 percent of the stock of U.S. companies is owned by pension funds and another 25 percent is in the hands of other institutions, such as mutual funds, insurance companies, and bank trust funds, that hold stock primarily for the benefit of individuals.(64)
The abstract goal of making polluters pay also punishes present consumers, since much of industry's costs of cleanup must be passed on in the form of higher prices. To a large extent, Superfund is an expensive way of forcing the populace at large to pay for cleanup without raising taxes in any obvious way. Congress was well aware of that at the time of passage but deemed the indirect approach more politically palatable.(65)
Superfund's Superwaste
If a pervasive sense of injustice is the most important ground for criticism of Superfund, second place goes to the economic waste involved. That waste takes four major forms: cleanup standards, transaction costs, inefficient cleanup processes, and the costs of administering the tax that produces the super "fund."
Superfund's "Operation Eden." The most fundamental objection to Superfund's cleanup standards is that once a site moves beyond the emergency removal program into long- term remediation, the health risks posed to people off the site are close to zero, or can be made so at low cost. No human fatalities are attributable to Superfund sites.(66) Despite the hoopla of 1980, abandoned waste is not much of a public health problem.(67)
Even if the low levels of exposure associated with waste sites did present cause for concern, the health risk could be eliminated cheaply. The technology for containing contamination is well established. Sources of continuing releases, such as barrels or unlined ponds, can be removed or drained. Free product waste can be captured. Flows of contaminant-bearing groundwater can be stopped with slurry walls and pumping. Drinking water wells can be tested and alternative delivery systems built if problems are discovered. Airborne contamination from Superfund sites is usually slight; the volatile substances have long since volatilized.
Given those facts, cleanup protects the public health in only two ways. First, it protects against risks that might arise from serious stupidity, such as neighboring landowners' drilling water wells in the middle of a site. Second, it protects against risks that might arise if the site were put to use in the future and if all measures to avoid exposure failed. The exposure scenarios used to justify stringent cleanup levels bear no relationship to present uses of the land and do not consider the possibility of restricting future uses. They are based on what exposures might occur in the future if the land were restored to unrestricted use. In other words, the risks that are to be protected against are all hypothetical and easily avoidable. They are not real risks that exist today. "The underlying assumption driving EPA risk analyses is that there will be new residential areas on existing Superfund sites where there are currently no such residential areas."(68)
For example, one of the horror stories used in the current debate over regulatory reform concerns a site in New Hampshire at which the EPA forced the expenditure of millions of dollars to clean up the soil to the point where children could eat dirt 245 days a year. The criticized standard was set, applying the criterion of one in 1 million lifetime risk and using conservative risk assessment assumptions, at a level that would allow children living in homes built on the site to play in their yards.(69) Supporters of the decision argue that children playing outdoors do get dirty and that the dirt does get ingested. That argument is correct, but it ignores the more fundamental question of why the EPA insists on making that particular tract suitable for residential use. Industrial or commercial use, or nothing, would preclude dirt ingestion by children, and there is no shortage of residential land in New Hampshire.
Another example: according to a review of the EPA's risk assessment for a site in South Carolina, to find any risk from the current use of the site, the assessment had to assume that a hunter would eat deer or fish taken from a barren two-acre site twice a week for 70 years.(70)
The EPA estimates that half of Superfund expenditures go for such protections, nicknamed "dirt-eating rules."(71) A systematic study by Duke University researchers found that fully 91 percent of all the carcinogen risks against which the EPA is protecting would arise only through changes in the use of the land.(72)
The result of those policies is that few Superfund dollars are spent for the protection of public health. Most of whatever value is added by the program stems from making land available for residential use, and residential use requires a substantially higher level of cleanup than do alternative uses. Cleanups are subject to the law of diminishing returns, and the closer one tries to get to perfection, the more expensive it becomes.(73) A recent study sponsored by the Chemical Manufacturers Association found that reorienting EPA cleanup standards to reflect actual land use could cut the cost of remediation by one-third.(74) Adopting the approach of risk-based corrective action, which is being developed in the context of corrective action for releases from underground storage tanks, could cut costs by 90 percent in some instances.(75)
To the people who have to pay, spending millions trying to clean up everything to residential levels is pure economic waste compelled by an imperial Congress. Although the EPA could take some action to make its exposure scenarios more honest, the driving force behind the excessive cleanups is Congress's preference for permanent solutions and ARARs. A wave of malicious joy swept the PRP community when New Jersey governor James Florio, who had been chief architect of Superfund while in the House of Representatives but later became concerned about urban development, whined, "It doesn't make any sense to clean up a rail yard in downtown Newark so it can be a drinking water reservoir."(76)
Despite the waste involved, powerful forces obstruct reform of cleanup standards. Environmentalists oppose change as a matter of ideology. Contractors and hazardous waste treatment companies have a big stake in the present system. The exaggerated publicity about health risks that accompanied Superfund's passage has had a long-term impact. Neighbors are scared about health risks and fear the impact of an unremediated site on the value of their property. Given those concerns, and given that cleanup is a free good to the community, neighbors have strong incentives to be completely risk averse and to press stringent standards on their political representatives and the EPA. Furthermore, the EPA requires heavy community involvement and provides funds for it.
Lawyers in Love. Transaction costs can be high. The endless wrangling among PRPs takes a lot of money, especially at multiparty sites. Some PRP meetings have to be held in the local high school gymnasium, and more than 20,000 lawyers are making at least part of their living by handling Superfund cases.(77) The multifactor analyses used to allocate costs among PRPs may look like "equitable case- by-case decisions" from the height of a judicial bench, but to the clients they look analogous to the classic definition of a sailboat--a hole in the water that you fill with money.
Several studies of transaction costs, focusing on the price of lawyering and negotiating, have been performed. The federal government is spending $250 million to $300 million on Superfund enforcement (15 percent to 18 percent of the Superfund budget), and private parties are spending $900 million annually, which is about 32 percent of their total spending.(78) For small businesses, which have no economies of scale in handling Superfund matters, the percentage of outlays that goes to lawyers is far higher. Trade gossip reports instances of legal bills that are three or four times the cost of a PRP's share of a cleanup.
The studies of transaction costs do not count the amounts spent on site assessments and risk assessments. A substantial, albeit unknown, proportion of those expenditures should be counted as transaction costs rather than real contributions to the public health. Much of the work is performed to support decisions that add little or nothing to protection of public health.
Cleanup Hammers. The third form of waste involves cleanup methods. Although the EPA is supposed to adopt the most cost-effective remedial methodologies, it is often criticized because it and contractors lack adequate incentives for efficiency and cost-effectiveness. The EPA is also criticized for poor management of contractors. The Office of Technology Assessment estimated that between 20 percent and 40 percent of total Superfund spending is inefficient. John Dingell, former chair of the House Energy and Commerce Committee's Oversight Subcommittee, decided that the EPA was "one of the 'worst cesspools' of contract mismanagement in government." Even EPA administrator Carol Browner has expressed dismay at the lack of management accountability and discipline within the agency.(79) Analysts at Resources for the Future estimate that PRP-controlled cleanups entail a savings of 15 percent to 20 percent of the costs of government-controlled cleanups.(80)
The system discourages innovation. The endless approvals required for remedial plans make innovation difficult. Also, PRPs are reluctant to take the risk that a new technique will fall just a little bit short of the goal and they will be forced to go back and redo the whole cleanup.
The requirements of subtitle C of RCRA also increase the price of Superfund cleanups. RCRA covers the storage, transportation, and disposal of newly generated hazardous wastes. Unlike Superfund, it is not retroactive and thus does not apply to wastes generated before 1981. Once a Superfund cleanup begins, though, the wastes fall under the EPA's "active management" doctrine, which holds that when pre-1981 hazardous wastes are disturbed they are once again "generated" and become subject to RCRA rules.(81) Those rules present a formidable combination of permitting requirements and limitations on disposal. Landfills are subject to extensive rules including double liners and careful monitoring, for example, and even then wastes cannot be landfilled without extensive pretreatment. One study of the costs of treating contaminated soil estimated the cost of thermal treatment at $55 per cubic yard, the cost of subtitle C landfilling without treatment at $510 per cubic yard, and the cost of hazardous waste incineration at $1,060 per cubic yard.(82)
In the worldview of RCRA enforcement, generating hazardous waste is a bad thing and should be discouraged. If handling and disposing of waste become expensive, fine. That increases industry incentives to minimize wastes.(83) But the rationale does not apply to Superfund cleanups, where the wastes have already been generated and unnecessary costs are pure economic loss. Nonetheless, the effort to adapt RCRA requirements to improve the efficiency of Superfund cleanups has been a slow, complex struggle among PRPs, different parts of the EPA, and the states.
The Taxman Cometh. The "fund" part of Superfund is supported by three different taxes: a tax on crude oil ($0.097/barrel), one on chemical feedstocks (varied), and a special corporate Environmental Income Tax (0.12 percent on all companies' modified Alternative Minimum Tax Income above $2 million). The petroleum tax collected $550 million in 1991. No estimates of cost of compliance have been made. The chemical tax is levied at different rates on 11 organic chemicals, 31 inorganics, and 73 imported substances. It generates $287.7 million, at an unknown cost of compliance. The Environmental Income Tax produces $479.3 million, at a cost of compliance estimated at close to $2 billion. So the system as a whole loses over $1 billion a year, even without any allowance for the cost of compliance to the oil and chemical industries.(84)
Snail Express
Superfund has been criticized repeatedly for the slowness with which cleanups are completed. In 1983, 406 sites were on the NPL, and the number grew to 1,238 by 1995. Only 75 sites have been eliminated from the NPL. Those include a few sites at which no cleanup was necessary at all. A 1994 Congressional Budget Office study concluded, from agency projections rather than experience, that the average time between listing and construction completion would be 13 to 15 years.(85) Proponents of the program regard that as misleading, arguing that preliminary assessments at many sites are nearing completion and that the program is poised for take off. The NPL contains 217 sites designated "Construction Complete," which means that the necessary physical installations are in place and that cleanup is now a matter of time and institutional controls.(86) Skeptics point to the long history of waste and delay and doubt that the program is poised for anything except more waste and delay.
To some degree, the criticism based on low numbers of completions is unfair. Part of the delay is due to tradeoffs between time and cost. If speed is the sole criterion for a cleanup, the fastest approach is to dig up every cubic yard of contaminated soil and pump every gallon of contaminated water into tankers and haul them away. If the EPA were to adopt such a costly policy, the PRP community would be exceedingly unhappy. The most cost-effective techniques, such as in situ treatment and bioremediation, often take time, and the PRP community would be well advised to stop using the stick of "completed cleanups" to beat the EPA.(87) An old adage says to be careful what you wish for because you might get it.
The serious delays are not in completion but in commencement. Preliminary assessments eat up years, and elaborate bureaucratic processes of review and approval freeze everybody and prevent even sensible voluntary action. It takes 43 months from the time the EPA learns of a site to its listing on the NPL, 20 more to begin a Remedial Investigation, and 38 for decision on a remedy.(88) Those delays can result in worsening contamination and substantial increases in long-term costs.(89) The secretary for natural resources of the Commonwealth of Virginia cites a case in which it took a responsible party years to get permission to do a three-week job to repair a concrete pipe by inserting a plastic lining. The pipe continued to leak for the entire period.(90)
he "Brownfields" Dilemma
The CERCLIS list has become the leper colony of the real estate industry. Once a site is identified as a possible candidate for the NPL, it becomes untouchable. Lenders will not write mortgages and developers do not want anything to do with it. Industries prefer to find virgin sites in the suburbs that do not carry the tar-baby risks of existing contamination. The CEO of a cleanup firm said, "We work on many sites to clean them up only for abandonment. The post- remediation liability threat is so great that no one will touch a site even though it is declared 'clean.'" He cited as an example a site that is "certifiably the cleanest place in Colorado" that the owners cannot even give away.(91)
The effect can extend beyond the property itself to the underlying business. One finance expert noted that Superfund can discourage financial involvement with a credit-worthy company because of fear of ultimate liability for cleanup costs.(92)
No one knows how many sites have been blighted by Superfund. Obviously, the starting point is the 39,000 plus that are on CERCLIS, but to those must be added all the sites on state lists. Also, as the possibilities of private legal action become more obvious to all, every possibly contaminated site becomes a leper, regardless of its presence on any list. Nearby property become tainted as well. Why should someone who wants to start a grocery store buy a site once occupied by a dry cleaner, and thus possibly contaminated by cleaning solvent? Or a site that is close to a dry cleaner? Developers prefer finding virgin sites to running the risks of the Superfund tar baby, and estimates of the number of blacklisted contaminated sites run to 500,000 or more.
Government initiatives to palliate the problem are under way at both state and federal levels. The EPA has moved mildly contaminated sites off the CERCLIS list to make clear that they are not going to be put on the NPL. It is difficult to see why that should change anything, since some CERCLIS sites have always been designated "No Further Response Action Planned" without ending the problem. Those who might get involved know that delisting is not binding on the government if standards change or if contamination is more serious than now thought.
Both state and federal agencies are also trying out such devices as entering covenants not to sue if parties agree to certain levels of voluntary cleanup.(93) That is a productive approach, but it has two major problems: Governments tend to insert so many conditions, such as reopener rights or conditions on benefits received by the government, into such agreements that the promises are worth little. Second, it is a retail solution to a wholesale problem. It will help with a few of the most valuable sites, but the high transaction costs involved will limit its application.
Another development is more interesting. Private companies are responding to the market opportunity. At least one firm, Environmental Liability Acquisitions, has entered the business of buying contaminated sites, remediating them, getting appropriate government closure levels, obtaining insurance on the cleanup, and selling off the properties. Its main customers are chemical companies, which have large potential liabilities; as of 1993 eight companies had set aside $2 billion in reserves for Superfund cleanups. ELA does not yet know if it can make money.(94)
Worst First
The EPA's prioritization of NPL site cleanups is perverse. "Worst first"--giving the worst sites priority-- makes no sense when the level of contamination does not increase the level of risk. For the cost of remediating one seriously contaminated site, society could fix several that are only marginally contaminated, probably producing substantially more value. Suppose that a state has 10 Superfund sites and that 9 exhibit moderate contamination and could be cleaned up for $1 million each. The 10th is severe and will take $9 million to remediate. The EPA's policy is to spend the $9 million on the worst, which leaves society with one clean site and nine moderately contaminated, but still unusable, ones. Rational policy would be the reverse; it would allocate the $9 million to cleaning up all nine moderate sites. That would produce nine pieces of valuable property and one unusable one.
"Worst first" also has perverse environmental effects. In cleanups, a major cost differential often exists between sites at which the groundwater has become contaminated and those at which it has not. In addition, groundwater is quite difficult to treat. For both those reasons, the most effective way to use cleanup dollars is to prevent contaminants from reaching the groundwater rather than to attempt to clean up groundwater that has already been contaminated. "Worst first" does the reverse, thus ensuring that the volume of contaminated groundwater will increase.
The combination of focusing on NPL sites and insisting on perfectionist cleanup standards creates an even more serious skewing of priorities. The assumption that the NPL contains the whole problem means that billions of dollars are to be spent to clean up 1,238 (or 3,000 or 6,000) sites to pristine conditions while the universe of other sites is neglected. Resources are frittered away on low-payoff activities at NPL sites while other contaminated sites lie fallow, and cost/benefit analysis of possible alternative investments in remediation is ignored. That would be silly policy even if the NPL clearly contained the worst sites, but the NPL sites do not necessarily present greater risks to human health or the environment, or provide superior economic returns to investment in cleanup, or result from actions that can be differentiated morally from the actions that caused contamination at other sites. It is impossible to justify--on environmental, economic, or ethical grounds-- any policy that distinguishes sharply between NPL and non- NPL sites.
The Federal Waste Quagmire
The 155 NPL sites belonging to the federal government are overwhelmingly connected with defense. One hundred twenty-six are Department of Defense facilities, and an additional 20 are Department of Energy sites, most of which were used for production of weapons. The National Aeronautics and Space Administration has two sites; Interior has two; and the Army Corps of Engineers, the Department of Agriculture, the Small Business Administration, the Department of Transportation, and a combination of the EPA and the National Oceanic and Aeronautic Administration have one apiece.(95)
The 155 NPL sites are the tip of the government iceberg. A recent report by a specially created task force, the Federal Facilities Policy Group, said that the Department of Defense has 800 installations with 11,785 sites at which cleanup is either under way or under study. Another 9,640 potential sites have been closed out, mainly after a determination that no cleanup is needed. An additional 8,316 Formerly Used Defense Sites are eligible for federal cleanup payments; of those, 4,604 have been closed out. DOE has as large a challenge. It must perform 1,200 distinct cleanup tasks on over 10,000 known potential release sites at 137 facilities. The Department of the Interior estimates that it has 26,000 sites; the Department of Agriculture estimates that it has 3,500 sites; and NASA estimates that it has 750.(96) Total costs for all five agencies are estimated at between $234 billion and $389 billion, a figure that should be regarded as--to put it politely--a rather rough estimate.(97)
Some of the government sites present large problems:
* Jefferson Proving Ground in Indiana is 100 square miles with over 1.5 million unexploded shells and the residue of 6.9 million expended pieces of explosive. Of its 55,000 acres, 53,000 are contaminated. To remove all the ordinance would require that 30 feet of soil be stripped, at a cost of up to $13 billion.(98)
* McClellan Air Force Base has identified 177 contaminated sites, and 81 additional areas are still being checked. Groundwater is heavily polluted, soil is contaminated to a depth of 100 feet, and cleanup could cost $10 billion if current technology is used.(99)
* The Hanford, Washington, nuclear facility is a 560- square-mile facility that has four separate entries on the NPL and 1,500 different waste disposal sites. The Hanford cleanup absorbed $7.5 billion from 1989 to 1995 and will take $1.5 billion a year indefinitely.(100)
A serious problem with federal sites is that no one involved has any incentive to aim for anything except top- of-the-line cleanup standards or to conduct operations efficiently. The agencies' cleanups are funded by special appropriations, so they do not have to trade off cleanup against other desirable missions, and cleanup projects can actually expand the bureaucratic empire. Employment at Hanford is now 18,500, which is 35 percent more than the number of people employed when the cleanup began in 1989.(101) The surrounding community is not paying for the cleanup, so it has no reason to push for economy. Quite the reverse, in fact. The more thorough the cleanup, the better for surrounding property owners. Also, the more expensive the cleanup, the more money flows into the community. For the same reasons, congressional representatives have no reason to inquire into the problem. Pork is pork, and when Congress is in a feeding frenzy, even hazardous waste is not too tainted. The contractors have no incentive for efficiency. Establishing a cleanup operation and milking it forever boosts salaries and stock prices. Given that "iron quadrangle" of agency-community-Congress-contractor incentives, it will be a wonder if cleanup is ever completed at any federal site.
Setting the Goalposts for Reform
The thicket of problems surrounding Superfund is such that one can easily lose sight of the forest for the trees. Although the program's problems are legion, reform efforts must focus on four central objectives.
Objective 1: Reorder Superfund Priorities
The first requisite for reform is better delineation of the purposes of Superfund. Superfund was sold as a program to deal with a public health emergency but drafted as a grandiose effort to scrub the world free of contamination. Its decision criteria are ostensibly based on public health, but, because those criteria exclude the low-cost options of containment and prevention of exposure, Superfund is actually a land development scheme to return contaminated real estate to productive use and express an aesthetic distaste for contamination.
Distinguishing those issues does not imply that either economic or aesthetic concerns are unimportant. They are very important and well worth substantial investment. Most of the nation's spending goes to improve the quality of people's lives. Great paintings sell for millions of dollars, and people value the stars of entertaining movies enough to turn them into the nation's new aristocracy. But health issues have a greater urgency.
Keeping children from playing in a New Hampshire dump and eating the dirt is a public health issue. Removing leaking drums, testing the soil, replacing contaminated drinking water, and building a fence are high-priority actions. Cleaning the site to the point where it can be a playground might be a worthy long-term ideal, but it is not a health issue and not an urgent priority. There are other possible playground sites. That option should be evaluated against alternative expenditures that would improve land use or, in a broader view, enhance the quality of life of the state's residents and visitors. Perhaps the people of New Hampshire would prefer to spend the money to build mountain trails or bike paths or preserve old buildings. For a health problem, one might defend a federal law that says that money must be shifted from the mountain trail to the dump site. To impose such a mandate for an issue of land use or aesthetics is arrogant and unjustifiable.
A program to prevent imminent harm and deal with emer- gencies is readily defensible, but that has little to do with the Superfund of CERCLIS and the NPL. That Superfund, the Superfund that actually exists, deals with land reclama- tion and aesthetics.
Objective 2: Tackle Retroactivity and Cleanup Standards
A second requisite for sound Superfund policy is to come to terms with the concept of retroactivity and to recognize that retroactivity and cleanup standards are two inseparable parts of a single problem.
Most reform proposals state that retroactive liability for wastes disposed of before either 1980 or 1987 (one can argue for either date) should be eliminated. But it is not possible to eliminate all retroactive impact. Public attitudes toward contamination have changed, and contaminated property has declined in desirability and thus market value. Concepts of nuisance have changed. Emissions that would once have been regarded as the result of reasonable uses of property are now regarded as intolerable impingements on neighboring owners. If the nuisance is abated, the offending owner loses. If it is not, the value of the adjacent properties declines. Because of those changes in attitudes, real economic losses have occurred, and even without Superfund they would fall somewhere, depending on the provisions of local law. There is no way to avoid the pain of retroactivity. The only question is who will bear its impact.
The problem is illustrated by the facts of a recent lawsuit. In 1917 Weyerhaeuser Corporation bought 72 acres in Baltimore, where it operated a lumber yard and port. In 1944 American Lumber leased five acres to operate a wood treatment facility, promising to return the property in "as good a state as reasonable wear and use will permit." Weyerhaeuser's lumber yard would benefit from the proximity of that facility, of course. All of American's assets were acquired by Koppers in 1954, and the treatment operation continued until 1977. The facility was well run, in accord with the most progressive practices of the time, but wood treatment is a messy business and contamination occurred. In 1977 Koppers gave up the lease. Environmental analyses were not usually performed then, and none was done. Weyerhaeuser accepted the property back and leased it to an auto dealer. In 1986 the auto dealer wanted to buy it and insisted on an environmental assessment. Contamination was found, and it also become clear that the groundwater plume was threatening to move beneath adjoining property. Negotiations over responsibility broke down, and a Superfund lawsuit resulted.(102)
That is a useful case to examine, because, as is generally the case at hazardous waste sites, no one has acted badly or irresponsibly. There are no "evil polluters," just respectable companies acting in accordance with the standards of the time. Given those facts, what does it mean to "eliminate retroactive liability"? Clearly, the contamination is going to cost someone some money. The only questions are how much and who--Weyerhaeuser, Koppers, the neighbors, or the taxpayers? And who gets the land after the cleanup? Does it stay with the owner (Weyerhaeuser), or does it go to whoever paid for the cleanup?(103) It is possible to come to varying conclusions on those issues, but one thing is not possible. Retroactive impacts cannot be eliminated, given the sea change in social attitudes toward contamination.
On the other hand, the cost of retroactivity can be eased substantially. Many, perhaps most, of the losses caused by contamination are now due to Superfund's cleanup standards rather to any harm actually caused by the contamination itself. For example, if most of the value of a particular site is due to its advantageous location for a factory, then the existence of contamination has little effect on that value. To require cleanup beyond realistic health-based levels does not add any real economic value; it simply imposes a deadweight loss for the sake of an abstract aesthetic that regards clean factory sites as superior to dirty ones.
A prime goal of Superfund reform should be to reverse current cleanup policies that have the effect of maximizing economic losses. The goal should be to minimize them. That is not only a good idea in its own right, it would considerably ease the difficulties of allocating the pain. Lesser losses are, by definition, easier to parcel out, and people are more willing to contribute to a system that is perceived as efficient and sensible than to one that is wasteful and punitive. It is highly likely that Weyerhaeuser and Koppers, faced with better cleanup standards, would have spent more money cleaning up and less litigating. Retroactivity and cleanup standards are not separable problems.
Nonetheless, some losses have to fall on someone. The choices are the property owner, the generator of the waste, the disposer, neighbors, and the public. There is no one else. Present policy puts it initially on everyone and then reallocates it through the Superfund process according to a host of vague "equitable" factors. In general, generators are regarded by both the EPA and the courts as the primary PRPs, with landowners a strong second.
There would be considerable logic in changing that order and letting the burden of retroactivity fall initially on the property owner. The idea that putting hazardous materials on one's property is a risky undertaking has deep roots in common law. It does not offend the sense of justice to say that owners who allowed contamination assumed the risk of a change in public attitudes that would decrease the future value of their property.
However, some owners never agreed to the disposal of contaminants on their property. The most obvious examples are the recipients of illegal dumping. Also, there are the neighbors, who certainly never agreed to have plumes of contamination move under their land in groundwater. Some transferees might also be regarded as innocent landowners in the same sense, but for transferees the situations will vary greatly.
In deciding who should bear the burdens of retroactivity, if the choice is between the generators of the waste and groups of innocent landowners, in most cases the generators should probably be chosen. It is hard to feel too sorry for generators that were engaged in the systematic disposal of large volumes of hazardous substances. They knew that the stuff should not be released and were in a good position to guard against that eventuality. However, a sharp caveat is important here. It is much more reasonable to hold generators retroactively responsible for containing threats to public health than to require them to clean up property to residential standards. No one, 20 or 30 or 100 years ago, would have imagined that waste disposal sites should do double duty as drinking water reservoirs, and it is difficult to regard failure to foresee such a bizarre development as a moral failure. In contrast, even 20 or 30 years ago the generator could have foreseen the need for long-term containment.
Two restrictions should, however, be placed on any impositions on generators:
* Generators should be responsible only for their own substances. They should not be held responsible for the actions of others. That is the industry-advocated idea of "fair shares."
* Generators that were not in the business of handling or using large volumes of hazardous substances should have been entitled to rely on the waste disposal mechanisms developed by society as a whole. There is no justification for holding them responsible as long as they disposed of waste legally. One might, reluctantly, be willing to impose some special duty on the chemical industry or other large industries on grounds analogous to the common law duty of experts possessing superior knowledge, but that does not apply to the casual disposer, such as a local school or a small machine shop.
Of course, for many sites the distinction between the landowner and the generator is irrelevant because the two are the same. Captive waste dumps and industrial sites are the most prominent examples.
Objective 3: Reexamine CERCLIS
The next crucial factor in formulating Superfund policy is resolving the uncertainty about the size and seriousness of the overall cleanup problem and about the significance of CERCLIS and the NPL.
A better delineation of the problem would make it obvious that Superfund policy must develop a realistic set of priorities--which sites will be cleaned up, to what level, and when. It is not possible to clean them all at once. The current system is to focus on a limited number of sites, ignore the rest, and then prioritize according to an elaborate assessment of risks that do not really exist.
The goal of cleanup policy should be to clean up sites only to the extent that the value added to the property outweighs the cleanup costs--once real, as opposed to hypothetical, health concerns are alleviated. Furthermore, money should be allocated to those sites where cleanup generates the most added value, and cleanup should stop when additional increments cease to add value.
Decisions of that type cannot be made effectively through bureaucratic processes. Society must rely on the market to assign value to the sites in the same way that it assigns value to land generally. For example, no market would ever produce the wasteful "worst-first" policy; only a bureaucracy can do that.
Objective 4: Fostering Efficiency
Finally, good Superfund policy must promote cost-effective cleanup. Firms should have incentives to conduct only those site and remediation assessments that are necessary for technical purposes and avoid those conducted for purposes of litigation and cost allocation. Firms should also be encouraged to conduct operations as efficiently as possible and to develop innovative techniques that will make remediation more cost-effective in the future.
More broadly, Superfund policy should foster the development of a class of firms with expertise in containment and cleanup and provide incentives to reduce rather than inflate the costs. Such incentives would maximize the amount of cleanup undertaken in the future.
The Privatization Option
The only way to achieve the policy goals laid out above is to privatize Superfund. The virtues of privatization are the virtues of the free market. Markets allocate resources to their most productive uses, enlist the talents and energies of millions of people, establish values in situations of uncertainty, and provide efficient administration of complicated systems.
Privatization can best be accomplished by auctioning off the sites. Auctions are a mechanism for privatizing decisions, and they are, increasingly, used for decisions that have traditionally been made through bureaucratic processes.
For example, auctions are used to allocate the electromagnetic spectrum. That not only makes money for the government, it also substitutes for years of hearings designed to answer the impossible question of who is in some way most worthy of receiving a Federal Communications Commission license.
The electromagnetic spectrum is a "good" in that it is something that people want to have and for which they will pay money. Auctions can also be used for "bads," for things that people do not want. For bads, the flow of cash is reversed. The auctioneer pays money to the bidder.
A leading example of a bad is airline overbooking. In the past, airlines that overbooked would select the passengers to be bumped by some arbitrary process. One way was to bump elderly people because they were less likely to complain. In 1978 the Civil Aeronautics Board, acting at the prodding of economist Julian Simon, required airlines to institute a "voluntary bumping" system, which meant that they had to offer to pay bumpees. The procedure is simple. The airline offers a set amount to anyone who will give up his or her seat. If not enough takers appear, the offer is raised until a sufficient number of passengers volunteer. In short, the airline gives each ticketed passenger a property right in her seat and then, if it overbooks, buys that right back at a price satisfactory to the passenger. The auction is a mechanism for offering the deal to a large number of passengers at the same time and for minimizing the costs to the airline by getting passengers to compete with each other.(104)
The result has pleased everyone. The number of passengers who profited from a buy-back payment reached 599,205 in 1991. By definition, they are happy because they wanted the money more than they wanted the seat. The rate of involuntary bumping fell from 6.4/100,000 in 1978 to 1.1/100,000 in 1991. All the people who were not bumped are happy, or would be if they knew of their escape. The airlines have been able to increase overbooking, which raises their load factors and makes them ecstatic. Fares have decreased, to the joy of the traveling public. Ticket agents do not get grief from bumpees, which improves their quality of life. No one has claimed damage from the system.
Auctions hold great promise as a device for dealing with another kind of bad, the siting of Locally Undesired Land Uses (LULUs), such as prisons and waste dumps, that are subject to ferocious not-in-my-back-yard problems.(105) A community would bid by specifying how much money it would take to accept the facility voluntarily. The low bidder would get the facility. By allowing a community to put a price on its reluctance, the process ensures that the town that ultimately gets the facility will regard itself as better, not worse, off. The community is like the airline passenger who prefers the money to the seat.
As does auction of the electromagnetic spectrum, LULU auctions would substitute for lengthy administrative processes that try to answer insoluble riddles. What possible criteria determine which city "should" have an undesired facility? Dozens of factors can be brought into play and the point debated for years without any agreement on a "just" solution. (The analogy with the method for allocating responsibility under Superfund is obvious.)
People tend to think of auctions of bads as a radical, untried idea. Actually, they are exceedingly common. When the EPA puts out bids for a cleanup, it is conducting an auction. It is selling the bad of the obligation to perform the work to whichever company demands the least amount of money. Viewed in that light, every process in society in which someone solicits offers from suppliers of products or services is an auction of a bad--the assumption of the legal obligation to perform. Far from being untried, the idea of auctioning bads presents an immense body of experience on which to draw.
In the environmental field, private waste disposal firms are using market approaches. The realities of environmental permitting are that a determined opposition can hold up approval of a new site indefinitely. Such opposition emerges especially if a dump would impose significant costs on a community in the form of noise, traffic, smells, or other displeasing externalities. The best way for a firm to speed up the permitting process is to compensate the community for those externalities in addition to paying the owner of the land itself. In the private world, formal auctions are rare, but the price demanded by different communities is a factor in a company's site-selection decision, and potential sites can be pitted against each other informally.
Auctions take five basic forms: English, Dutch, reverse Dutch, Herodian, and sealed bid. The most familiar is the English auction, in which an auctioneer starts with a low price and buyers bid openly at successively higher levels until no one is willing to go further. Art, furniture, livestock, and many other goods are sold that way. Every weekend local newspapers carry numerous announcements of English auctions.
In a Dutch auction the seller starts by offering the good at a set price, one calculated to exceed the level that anyone will be willing to pay. If no one buys, the price is lowered and bids are again solicited. If there are still no buyers, the price is lowered further, and so on, until someone accepts it. Department stores selling off excess merchandise often use a Dutch auction. The first week, prices are slashed 20 percent, the next week 40 percent, and so on. A customer who likes an item well enough to buy it at 20 percent off must calculate the probability that it will still be there next week, only cheaper.
A reverse Dutch auction is used to sell bads. The question is, how much must the holder of the bad pay to persuade someone else to take it off his hands? The auctioneer starts by offering to pay $X. If there are no takers, he offers $X+, and so on, until a party accepts. For example, in auctioning off a contaminated property, the seller might start by offering to give $1,000 to anyone who would take the property off his hands. If no one accepted, the offer would be raised to $2,000, and so on. It is simply a Dutch auction with a negative price.
Putting a construction project out for bids is another type of reverse Dutch auction. As noted above, the purchaser is determining which bidder will accept the least amount of money for accepting the bad of a duty to perform the construction.
In a Herodian auction (the name comes from an incident in the works of the ancient Greek historian Herodotus) a bad is auctioned off in reverse English style. The auctioneer starts by offering to pay a high sum, and the bidders respond by lowering their demands until no one offers a lower bid. For example, the owner might offer $1 million to whoever would take a contaminated property. Several bidders might accept, so the owner would then say, "Well, who will take it for $500,000?" If more than one bidder still accepted, the offer would be lowered further until only one contender remained.
In a sealed bid auction no bidder knows what others offer. The theory is that each bidder will be pushed to bid near the maximum price that he would be willing to pay in an open auction, thus making more money for the seller. At an open auction, a bidder who would be willing to pay $10,000 for that antique ormolu clock may be lucky and get it for only $5,000. If bids are sealed, and the buyer really wants the clock a lot, he might offer $9,000 or even the full $10,000. Sealed bids are used for construction projects as a way of pressuring bidders to cut their offers to the bone.
The lack of any interaction among the bidders distin- guishes the sealed bid auction and makes it difficult to classify as Dutch or English. If the seller of the ormolu clock solicits sealed bids, for example, is it an English auction or a Dutch auction? Or, when the government solic- its sealed bids for a construction project, is it a reverse Dutch or a Herodian auction?
Variants and hybrids also exist. An auction can be sealed bid, with the top few bidders then given an opportu- nity to revise their bids upwards. That is an attempt by sellers to capture the best of both worlds--to put pressure on bidders to come in high and then to enlist the forces of competitiveness to make them go higher still. The same tactic is often used for construction projects, where the lowest bidders are given an opportunity to cut their bids still further.
Mechanics of a Superfund Auction
A Superfund auction would combine features of several of those types. A contaminated site presents an unusual problem because it is not necessarily either a good or a bad. It can be either, depending on whether the cost of remediation will exceed the value of the property, and the outcome will not be known until after the auction.
That contrasts with the electromagnetic spectrum, which is a good because it has positive economic value. It also contrasts with an auction used to site a waste dump. A waste dump is clearly a bad, and a community has a choice about whether to take it or not. A Superfund site presents no such choice. It is where it is.
Despite those differences, the basic virtues of an auction process still apply. That is, it increases efficiency, harnesses individual knowledge and initiative, ensures competition, and allocates resources efficiently.
The auction mechanism could be used initially for sites owned by the government, either because they were contaminated by a federal agency or because they have been abandoned and the government has taken them over. Two other substantive reforms, however, would have to be made in Superfund, or the mechanism would be of little value.
* The government would have to abandon the idea that all sites must be cleaned up regardless of cost of remediation or ultimate value of the site. The buyer would agree to prevent human exposure but would not be required to clean up the site.
* The government would establish standards for cleanup appropriate for different types of uses, such as manufacturing, transportation terminal, residence, park, school, playground, and nature preserve. Those standards would be based on realistic risk assessments, not on worst-case phobias. An owner wanting to develop the property would have to meet the standard for the desired use. (As a matter of theory, that function could be performed by the private liability system, which would make the owner liable for any harm caused by contamination. However, the liability system for "toxic torts" is in considerable disarray at present, and Superfund reform cannot be suspended pending liability reform. The adoption of cleanup standards based on realistic risk assessment is a reasonable compromise solution.)
At the auction the price could be positive or negative. That is, the buyer of the property might pay money to the government in exchange for the land, or it might take the land only on the condition that the government pay money to the buyer.
The form of the auction should be Dutch or, if the price is negative, reverse Dutch. In the context of Superfund, whether a given property is a good, for which the seller should be paid, or a bad, which the seller must pay to get rid of, will often be uncertain. The Dutch auction allows a smooth transition between those states. The price is simply lowered steadily, and if there are still no takers when it falls to zero, then it is lowered still further, into the negative zone, and the process transmutes into a reverse Dutch auction. (Actually, the term "reverse Dutch" seems a bit misleading because such an auction is not really in reverse; it is simply a Dutch auction in which the price is negative.)
The Invisible Dutch Hand
Privatization by auction, combined with abandonment of the policy of valueless cleanup, addresses most of the current problems with Superfund. It creates a mechanism for allocating cleanup resources to their most productive uses. They will be devoted to those sites that can be brought back into productive use most cost-effectively. "Worst-first" prioritization disappears automatically. The impossible problems created by using a bureaucratic process to allocate resources among competing sites according to some elaborate checklist are eliminated. That is a key benefit of the scheme. The government is not just privatizing the responsibility for conducting a cleanup. It is privatizing the decision about whether cleanup should be undertaken at all and, if it should, to what level of use.
Privatizing the decision about which sites should be cleaned up is extremely important. In that respect, the Superfund auction is closely akin to using an auction to determine where to site a hazardous waste dump. A primary point made by advocates of the waste dump auction is that siting of a dump is not a decision that can be made "fairly" through the application of some set of objective criteria. Every community that is considered as the location of a bad can and will raise strong objections and cite numerous reasons why it should not have to bear the burden. Those arguments will not be spurious, and, like many decisions about fairness, they have no definite answers. An auction system allows every community to avoid the burden if that is its preference. The system also allows any community that values the money more than the avoidance to get its wish. Neither of those results is attainable through bureaucratic weighing of questions about which community "deserves" to have the site.
Deciding on priorities for Superfund cleanup presents analogous problems. Once immediate threats to public health are eliminated, what criteria can be applied to determine which sites should be cleaned up first? Is an old factory in Newark somehow more deserving than a waste dump in Pittsburgh? How can anyone believe that the government can invent an allocation system that will answer that question in an objective way that will be accepted as fair by all? Furthermore, in a system of bureaucratic allocation, Newark and Pittsburgh must invest resources in investigating each other and every other competitor for funding and knocking down each other's claims, an investment that is inherently wasteful.
Introducing a market mechanism into the choice changes the decision for each city. Newark and Pittsburgh are no longer in competition with each other. Instead, either site, or both, or neither, will be cleaned up to the extent that makes economic sense in the context of Newark or Pittsburgh, regardless of what happens elsewhere. Any possible competition between the cities will be only for the same supply of cleanup resources. That form of competition is highly attenuated because, if economic value can be produced, more resources will be brought into the cleanup field. The introduction of a market also eliminates any incentive for either city to spend money knocking down the claims of the other. The price of cleanup provides all the information needed about how high a value other cities place on cleanup.
An auction would also allow for the possibility that not all benefits from cleanup are captured by the owner of the contaminated site. If a community as a whole or a group of neighboring landowners would benefit, they could participate in bidding for the site. The property would be worth more to them than to anyone else, since they would get the benefits not only of the increase of value in the contaminated site but also of the increase in the value of their property. That, too, would help to establish a better system of setting priorities among competing sites and ensuring that resources are devoted to the most advantageous uses.
The site auction approach has another major benefit. The more efficient a cleanup firm becomes at conducting remediation, the more money it can make. Because large numbers of sites will become available, private firms will find it worthwhile to invest in developing their expertise and taking advantage of economies of scale. They will also find innovation profitable.
The "Winner's Curse"
Auctions become more complicated when the facts that determine the value of the property sold are uncertain. The quality of the goods offered may not be completely determinable by casual inspection. When the government sells oildrilling rights to an undersea parcel of land, each bidder must assess how much oil exists. A construction company bidding on a project must reach a conclusion about the state of the ground under the site, because agreeing to build a skyscraper on a bottomless swamp is a prescription for bankruptcy. Before setting a price for cleaning up a hazardous waste site, a company must assess the nature and extent of the contamination.
Numerous devices have evolved to handle such uncertainties. Goods can be sold "as is," to make clear that it is the buyer's risk, or, in the alternative, warranties may be attached. A solicitor of bids may specify the conditions that bidders can assume to exist, and, if the reality differs, the price is adjusted. For example, the owner of a building site can say that the foundation is bedrock. The owner of a waste site may investigate the types and amount of contamination involved, decide that the groundwater is uncontaminated, and make that representation in soliciting bids for remediation. If the representation is in error, the costs will go up and the contractor can demand more.
An alternative approach is for the auctioneer to make no representations, requiring each prospective bidder to assess the site as part of its bid preparation. That approach may run into problems if site assessment is expensive, because it requires that each bidder pay for an independent assessment. Those costs will be wasted for the unsuccessful bidders, and in the end those procuring the services must pay, as a class, because the unsuccessful bidders must include the assessment costs in their overhead and recapture them on other projects.
Another dimension of uncertainty is the phenomenon known as "winner's curse," which first appeared in the economics literature in 1951.(106) The term developed from the empirical observation that many companies that bid on assets of uncertain value found that they lost money every time they made a successful bid. The problem was first noted in analyzing the results of bidding for mineral rights, where the tendency toward disastrous victories became obvious. Winner's curse has been analyzed extensively, since it is of considerable interest to oil and mining companies.
Stated generally, the winner's curse is based on the fact that estimates of mineral reserves can never be precise. Every company makes errors, sometimes estimating too low and sometimes too high. As a group of companies bids repeatedly on mineral tracts, each finds that it is the successful bidder only on those tracts for which it estimated too high, and for which the error in its estimate was greater than any other company's error. It does not make up for those errors by getting the tracts on which its estimates were too low because those go to the company that bid too much for them.
The result is that every company always loses money on its bids. That might seem like heaven for the sellers of mineral rights. However, buyers tire of no-win games, so the ultimate result is that sellers hold auctions and no one comes. Or government agencies find that no one is willing to bid on cleanups of uncertain dimensions. Winner's curse is one reason why government agencies are often forced into cost-plus contracts despite their long-known tendency to promote inefficiency and featherbedding.
Winner's curse is a real problem, and it will affect cleanup bids. For example, suppose 10 firms assess a site and bid. One of them thinks groundwater is not affected, and nine think it is. Obviously, the low bidder will be the optimist. If the winner is wrong, it will lose its shirt. If the winner is right, of course, then the bid was right on target. If the companies are equally competent, though, each will make about the same number of errors, and in fact the optimist will almost always be wrong. Each company will win just those bids on which it errs, and all the companies will go broke at the same rate.
Because the problem of winner's curse is important to many companies, because the cost-plus alternative is so unsatisfactory, and because of the importance of the issue to such enterprises as the federal government's efforts to auction off assets such as the electromagnetic spectrum, it has been subjected to extensive analysis. There are two basic approaches to avoiding the problem.
* Special mechanisms can protect bidders against aberrant assessments. For example, the high bidder can be given the site at the price offered by the next highest bidder.
* The auctioning authority can assemble portfolios of sites for sale as packages. If site assessment errors are made, they are likely to cancel out and produce more accurate results.
A major task to be performed by any agency implementing the Superfund auction will be to analyze the winner's curse issues and develop practical approaches to minimizing their impact.
Issues and Answers
In addition to the problems posed by the uncertainty of the cost of cleanup, a program to auction Superfund sites must deal with a number of other knotty issues.
The first is whether the auction system will satisfy the residents of affected communities. In particular, will they perceive the advantages of being able to bid on sites and take immediate cleanup action? Given the fact that the existing regime has become deeply unpopular at the local level due to long cleanup lead times and the impact of NPL designation on property values, one could certainly envision an auction system proving far more popular than the status quo.(107)
The second question revolves around "environmental justice," shorthand for the allegation that poor neighborhoods and people are subject to disproportionate environmental risk and "dis-amenity." The argument is that undesirable land uses, such as industrial facilities or waste dumps, tend to be located in poor areas, and that that is inherently unfair. An objection to the Superfund auction that is likely to be raised is that rich communities will outbid poor ones for cleanup resources.
There are three responses. First, available data suggest that hazardous waste sites--at least those that have been placed on the NPL--are actually concentrated in wealthy white, not poor black, communities.(108) Second, even assuming that environmental justice is a genuine issue, cleanups will be conducted at sites where they will produce the greatest additions to property values. There is no reason why those sites should be located in rich areas. In fact, a blighted area seems to offer more scope for large gains. Third, even if the premise were true, it would provide little justification for retaining the present system, with all its inefficiency and waste. A better approach would be to develop ways to increase the incentives for firms to clean up properties in blighted areas.
The third set of issues surrounds the question of "how clean is clean?" and who decides. Among the matters at stake are whether the owner's obligation to contain contaminants should be a zero release standard or a de minimis standard, the appropriate set of penalties and damages for failure to contain, whether the obligation to contain harm is defined and enforced by political officials or by the courts where other issues of trespass and nuisance are traditionally addressed, and at what level of government-- local, state, or federal--those matters should be resolved.
Most of those questions, of course, were implicitly answered in the earlier analysis. A "release" is inconsequential in and of itself; only when a nontrivial health or environmental risk is presented should policymakers or courts intervene in some manner. Thus, owners of facilities that "release" hazardous constituents into the environment should be required to meet a de minimis standard, and penalties and damages should roughly reflect the degree of threat presented by the release. Since the release of hazardous materials is obviously a matter of trespass as understood in both English common law and established jurisprudence in this country, it is difficult to imagine why regulatory bodies should intervene when judicial bodies are more than capable of adjudicating such disputes.(109) Finally, a hazardous waste "release" is by definition a local--not a national--problem, and the concept of subsidiarity (the belief that local problems should be dealt with by local officials) suggests that local, not state or federal, officials should ultimately be responsible for controlling hazardous waste sites. Indeed, state and local hazardous waste cleanup programs have proven more environmentally friendly, less costly, and far speedier than federal cleanup programs.(110)
Fourth, the line between containment and cleanup is not always bright. Often, cleaning up a spill is a trivial chore as long as only the soil is contaminated. Once the substance reaches the groundwater, difficulties, costs, and time all multiply. From the standpoint of economics, a property owner might decide that the costs of cleaning up the soil alone exceeds the value of the property for prospective uses and that the optimal course of action is to do nothing and let contamination spread into the groundwater, controlling it only when it threatens to go off-site. From an economic point of view, that may be the optimal solution, but it is difficult to imagine the environmental community accepting such a spread of pollutants.
The fifth matter for resolution is that of financial responsibility for Superfund properties. How does the government keep a buyer from distributing the public money to its shareholders and then disappearing? Well, the legal system is one weapon commonly employed against fraud and endangerment, and it certainly would not be difficult to track down corporate board members or stockholders of flyby-night companies that receive Superfund properties if parties entering into Dutch auctions were required to disclose extensive information before bidding. Another option would be to require that parties procure environmental liability insurance within a few months of the assumption of property as a final condition before transfer of title.
The sixth question pertains to innocent neighboring landowners. What about the owner who did not consent to have contaminants placed on its land and whose property is contaminated by releases from some other parcel of land? In some cases an additional requirement might be imposed on the bidders. If contamination has spread off the property to nearby land, the buyer of the main site could be required either to clean up the off-site contamination or to buy the property at its fair market value (assuming no contamination) and incorporate it into the main site.
The seventh issue involves transferees. Will it be regarded as fair to put the obligation to contain contaminants on a transferee who took the property without knowledge of the contaminants? The existence of hazardous materials may not have been obvious, or the issue may not have been regarded as important at the time and no inquiry made. Simple fairness would imply that, if the original parties at fault cannot be located or held responsible, the burden of dealing with the hazardous waste should be shouldered by the public and any auction should be undertaken by the government.
Finally, there is the issue of appropriate tax treatment. For federal income tax purposes, is the cost of cleanup an expense, deductible from gross income, or is it a capital investment? If it is the latter, it would not be depreciable if it were regarded as an investment in land, because land is not depreciable. Also, how should contaminated property be assessed for real estate tax purposes, especially if its value is negative?
All of those questions must be answered in the course of developing a complete program to auction off Superfund sites. They are not core issues, though, because the answers do not determine the basic workability of the concept. The definition of containment and the method of assessing damages for failure to contain will affect the price of a site, as will tax treatment. Criteria for financial responsibility are necessary, but that is a problem that arises in many contexts, and devices such as bonds, escrow accounts, and installment payments are familiar. Legal liabilities of transferees and neighboring landowners are important, but the auction approach will remain valid no matter how those questions are decided.
Going Dutch
The first ste