The Environmental Liability Directive (ELD) reflects some of the core principles of biodiversity protection. It is designed to encourage prevention of environmental damage, and put the ‘polluter pays principle’ into action by making the party responsible for environmental damage pay for its compensation — not only the compensation of the environment (by returning its quality and quantity back to the no-damage baseline), but also compensation of the human population. This latter aspect requires an understanding of how people may be affected by environmental damage and, in return, how they value the current environmental quality and quantity they enjoy.

The ELD has prompted new thinking about environmental compensation in relation to unplanned damage (e.g. accidents or imminent threat of damage). Similar thinking is also developed for the implementation of the Habitats and Wild Birds Directive in the context of planned environmental damage (from development). This thinking interacts with, and has implications for, current approaches to offsetting biodiversity loss.

Unplanned damage
The liability of those responsible for unplanned environmental damage has until now been limited to what is known as ‘traditional damage’ — damage to commercial assets (e.g. fish in a fish farm, tourism revenue) or human health. The ELD, which came into force on 30th April 2007, changes this by widening the definition of environmental damage to include damage to protected species and natural habitats, water and land (when a significant risk to human health).

As with other complex European Directives, there are several issues that still need to be ironed out for transposition and implementation. One of the issues that will require scrutiny is the institutional setting. Almost a year on, the majority of Member States have still not transposed the Directive. The main reason for this delay is what we may call ‘a culture change’ that the Directive requires of both the Competent Authorities and the operators. Indeed, the ELD is a framework directive that cuts across all environmental media and most economic sectors. As such, some Member States are finding it difficult to appoint Competent Authorities that have sufficiently wide remits and institutional capacities.

For the operators, on the other hand, the difficulty with ELD is understanding the potential cost of the Directive which, in turn, requires understanding the risk of environmental damage from their operations, the magnitude of this damage, the cost of the damage and the cost of its compensation (or remediation in the language of the ELD). These issues are also of great interest for the insurance industry which has been very active in the transposition discussions surrounding the ELD.

Developments
In the cases of planned environmental damage (e.g. construction of infrastructure), Habitats and Wild Birds and EIA Directives have been used to assess the potential future damage and the amount of sufficient mitigation and compensation for residual damages. None of these Directives mentions biodiversity offsets explicitly. However, several factors related to their implementation make such offsets an interesting implementation tool.

The procedures for compensating for damage allowed due to ‘overriding public interest’ under the Bird and Habitats Directives are now established in European Law. Therefore, the compensation needed due to major new developments, and large-scale environmental changes (such as those happening and predicted due to climate change), can be anticipated and thought about in a strategic manner. In this context, offsetting can be regarded as a strategic approach to delivering compensation.

Resource equivalency methods
The ELD recommends the use of ‘resource equivalency methods’; a collection of methods and approaches that are used to determine the type and amount of resources and services that are lost over time as a result of an environmental damage, and the type and amount of remediation or compensation actions that are needed to offset this loss. They assist experts in answering some crucial questions which are also relevant in assessing the appropriateness of biodiversity offsets such as: How much compensation is needed to ‘offset’ accurately?; How do you account for differing ecological quality or site-specific characteristics?; Should you replace habitats, ecosystem functions, or species?; How do you allow for impacts occurring at different points in time, like delays in starting offset projects, or losses while they achieve their full biodiversity value?; and How do you account for natural or existing environmental trends over time?

eftec is leading an international research project called REMEDE — Resource Equivalency Methods for Assessing Environmental Damage in the EU — that address these questions (1). The project is preparing a resource equivalency Toolkit to assist the implementation of Environmental Liability, Habitats, Wild Birds and EIA Directives, and includes a detailed legal analysis of the relationships between these Directives.

The project brings together economic and ecological approaches to assess environmental damage. Once the damage is deemed significant and primary remediation (e.g. clean up and remediation on site) takes place, the REMEDE Toolkit can also be used to select the appropriate level of remediation to help resource reach no-damage baseline (if primary remediation is not sufficient) and compensatory remediation for the interim losses. The latter is defined as the damage that persists between the initial damage and when the resource recovers back to no-damage baseline (or into perpetuity if baseline is never reached).

The project draws from both US experience with Natural Resource Damage Assessment, in terms of methodological developments and implementation issues encountered, and experience of the EU Member States with the Habitats Directive. It describes case studies from across the EU, covering a variety of habitats; including wetland, forest and coastal ecosystems.

The REMEDE Toolkit is designed to be used by all parties interested in damage assessment and remediation selection, including businesses. In fact, it advocates collaboration between the operators and Competent Authorities from the start of an ELD or Habitats Directive case. In addition, the resource equivalency methods can be used in scenario analysis to help businesses estimate their potential liability under different risk and type of incident assumptions.

Beyond ELD
REMEDE has implications beyond the implementation of the ELD. It defines current best practice on remediation, helps formulate responses that are proportionate to environmental damage and establishes criteria that can guide the scale of environmental offsets. Therefore, the current lack of such rules should not prevent offsets discussions moving forward at COP-9. The rules need to work, not as substitutes for, but in addition to legal minima, which define the property rights and responsibilities in any damage case.

Even with careful analysis, there are always risks and uncertainties in remediation. However, offsetting systems and trading schemes can help business manage these risks. For example, the presence of trading possibilities removes the risk of over-compensating for a damage incident, as any surplus should have a value through trade. This should encourage commitments to more ambitious remediation and compensation obligations. For governments, risks and uncertainties mean that there is still a need to consider the precautionary approach to the environment. Offset schemes should have careful monitoring and benefit from certification, preferably by an independent body. Finally, there is room for a period of ‘learning by doing’ on remediation methods in many regions and under different legislative regimes.

Ece Ozdemiroglu is founding director and Ian Dickie is Senior consultant, Economics For The Environment Consultancy Ltd (eftec).

---

eftec provides economic analysis for environmental policy and management, for both the public and private sectors.
(1) REMEDE is sponsored by DG Research in the European Commission. Partners in the research bring together expertise from ecology, economics and law (www.envliability.eu)