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Partner Sylvie Gallage-Alwis examines how stricter enforcement of the polluter pays principle will affect corporates operating in the chemical industry, in Chemical Watch.

Sylvie’s article was published in Chemical Watch, 14 September 2021, and can be found here.

On 5 July 2021, the European Court of Auditors (ECA) published a report on the application of the polluter pays principle in the European Union.  This report aims to determine whether the principle was appropriately applied in four EU environmental policy areas, namely industrial pollution, waste, water, and soil.

Two main issues justified this audit:

• Pollution represents a significant cost for society and is a key concern for EU citizens;
• The polluter pays principle has a key role in enabling Europe to reach its environmental objectives in an efficient and fair manner.

The principle

The polluter pays principle was first created in 1972 by the Organisation for Economic Co-operation and Development (OECD).  In 1992, the United Nations Declaration on Environment and Development recognised this principle as one of the twenty-seven guiding principles for future sustainable development.

The scope of the polluter pays principle has significantly increased since its creation.  At first, it only concerned the prevention and control costs against pollution.  It was then extended to the costs of the measures taken by the authorities to address pollutant emissions and was then further extended to cover environmental liability.

Consequently, the European Commission needs to draft legislation based on the polluter pays principle and all Member State need to transpose, apply, and enforce environmental directives and regulations.

In France, the polluter pays principle is covered by Article L. 110-1 of the French Environmental Code according to which “the costs resulting from the prevention, reduction of pollution and fight against such pollution shall be borne by the polluter“.  This principle has a constitutional value given that it is implicitly mentioned in the body of the Environmental Charter, which provides that “any person shall contribute to remedying damage caused to the environment, in the conditions laid down by the law” (Article 4).  Consequently, the polluter pays principle is used as a legal basis for the new rules on the indemnification of environmental damage created by the Biodiversity Law of 2016.

Findings of the European Court of Auditors

In the scope of its audit, the ECA has noted that the polluter pays principle is not applied uniformly.  Indeed, it is not applied to the same extent depending on the environmental policy area:

• With regards to the industrial sector, the polluter pays principle is relatively well applied to the most polluting installations. This is not, however, the case of residual pollution, the cost of which for society is still high.  Indeed, in most Member States, polluters do not bear the cost of the emissions they generate when they are below the authorised thresholds;
• With respect to waste, the ECA recognises that the legislation takes the polluter pays principle into account, but it does not guarantee that the polluters will pay the entire costs of the pollution. Public investments are often necessary to overcome the financing deficit;
• In relation to water pollution, the result is clear: polluters do not bear all the costs of their pollution. For instance, EU households pay most of the cost of water supply and sanitation even though they consume only 10% of this water;
• Lastly, the ECA regrets the absence of EU legislative instruments with regards to soil pollution and the cleaning-up of polluted sites. While some Member States have very comprehensive national legislation in this respect, this is unfortunately not the case of each one of them.  The Court, however, recognises that the application of the polluter pays principle in the soil pollution area is not easy due to the difficulty in identifying the responsible polluters in the event of diffuse soil contamination.

The ECA concludes its report by stating that the coverage and application of the polluter pays principle is still widely incomplete.  The Court further notes that the budget of the European Union is often used to finance decontamination actions, the costs of which should, pursuant to the polluter pays principle, be borne by the polluters themselves.

Recommendations of the European Court of Auditors

As a result, to help better integrate this principle, the ECA has issued three recommendations for the attention of the European Commission:

• It encourages it to assess the scope for strengthening the integration of the polluter pays principle into environmental legislation, by the end of 2024. The ECA suggests that the Commission review downwards the authorised emissions thresholds to reduce residual pollution and focus its actions on the fight against diffuse water pollution, regardless of its source.
• It suggests that the Commission consider reinforcing the application of the Environmental Liability Directive, by improving the criteria used to define the environmental damage to which the Directive should apply and by increasing the use of financial guarantees.
• It suggests protecting EU funds from being used to finance projects that should be funded by the polluter. To do so, the Court invites the Commission to check that the funds of the European Union can only be used for decontamination purposes, provided that the competent authorities have done all they could for the polluter to pay for its pollution.  The Court of Auditors also counts on the use of financial guarantees covering environmental risks that should, in its opinion, be made compulsory.  Today, only seven Member States, namely the Czech Republic, Ireland, Spain, Italy, Poland, Portugal and Slovakia, require a financial guarantee for all or part of the polluters’ environmental liabilities.  Yet, the fact that financial guarantees are not compulsory for all Member States implies that the taxpayers must bear the costs of decontamination when an operator at the origin of environmental damage is deemed insolvent.

Impact on the Chemical industry

The polluter-pays principle is a very well-known principle within the public opinion.  The fact that the ECA highlights that it would be rarely applied will for sure have an impact on all industries, including the chemical industry as history has shown that this type of report is generally followed by two phenomena: (i) more stringent regulation and (ii) multiplication of claims.

The ECA encourages the European Commission to reinforce the Environmental Liability Directive.  This will be done through different ways, including claims filed by the European Commission against Member States.  This type of claim is multiplying when it comes to climate change litigation, such as the fight to reduce emissions/air pollution.  All Member States have been sued by the European Commission in this respect.  There is no reason why this should not expand to any type of pollution and to alleged lack of enforcement of sanctions by the Member States against businesses.

In the same vein, businesses will become targets for Member States’ increased regulation, controls, sanctions and claims.  In parallel, we can count on NGOs to also file claims to put pressure on businesses to finance remediation works, as they are currently doing against many companies to avoid having them being authorized to operate sites or pay damages when pollutions arise.

The chemical industry will be no exception (as for instance, when it comes to general climate change litigation, even banks and the finance sector are being targeted).

What professionals need to do is to first assess their files to ensure that the proper environment/health/safety measures are, and have been, implemented and documented.  If there are some mismatches, the professional should conduct measures as soon as feasible to ensure that current operations comply with applicable regulation.

The professionals should then analyse their contracts to determine whether they have the liabilities (and to which extent) of past operations on a site.  When deciding to conduct works, of whatever nature, the industry should realise that more stringent measures will be required by the authorities in order to remove all past and existing pollution and ensure that future measures comply with environmental rules.  What is written in contracts between successive operators of sites, suppliers and distributors, manufacturers and suppliers of chemical products is key.

The professionals should also ensure that their employees benefit from all protections available and needed.  Indeed, environmental exposure to chemical substances is becoming an increasing ground for claims by employees against the industry on the ground of specific occupational diseases being developed but also on the ground of the anxiety to develop a disease in the future. This so-called anxiety-damage is recognised in France, Italy and Spain, with the European Parliament pushing, in a report dated 15 July 2021, for its global recognition across all Member States.

Finally, professionals of the chemical industry should ensure that the marketing around their products is truthful and provides for the correct information on the chemicals used.  Indeed, claims on the ground of misrepresentation, deceit and also greenwashing are increasing against businesses, such claims being mostly filed by consumers and NGOs.

To summarise, this informative report should be taken into account as it will certainly change the legal landscape in the near future, especially in light of the EU efforts to tackle climate change.