A flexible assurance bonding system for improved environmental management

Current methods of regulating activities that are known or suspected to be environmentally danaging are not working well. They induce legal confrontation, obfuscation, and government intrusion into the inner workings of firms. They tend to suppress technical and social innovation aimed at long-term solutions. They do not mesh well with the market signals that firms use to make decisions. This paper discusses some of the underlying reasons for this problem, and outlines a flexible environmental assurance bonding system designed to incorporate environmental criteria and uncertainty into the market system, and to induce positive environmental technological innovation. In addition to direct charges for known environmental damages, an assurance bond equal to the current best estimate of the largest potential future environmental damages would be levied and kept in an interest-bearing escrow account. The bond (plus a portion of the interest) would be returned if and only if the firm could prove that the suspected damages had not occured or would not occur. If damages did occur, the bond would be used to rehabilitate or repair the environment, and to compensate injured parties. By requiring the users of environmental resources to post a bond adequate to cover potential future environmental damages (with the possibility for refunds), the burden of proof is shifted from the public to the resource user and a strong economic incentive is provided to research the true costs of environmentally innovative activities and to develop innovative, cost-effective pollution control technologies. © 1990.