Secondary Environmental Liability Regime Subject to Development

Authors: Noora Britschgi and Klaus Metsä-Simola

The Ministry of the Environment is developing the secondary liability regime for environmental damage. This blog post presents some of the main alternatives that form the basis for the legislative drafting.  The Ministry aims at the submission of a Government Bill on proposed legislative changes in May 2022, and we will be following the process, as changes may have an impact on operators within fields that involve environmental risks.

Environmental Liability System in Finland

Environmental liability is normally divided into four categories, namely the public liability for remediation, private liability for environmental damages, agreement-based liability, and criminal liability. The topic of this blog post relates to public liability. The Finnish public environmental liability system is based on the Polluter Pays Principle, according to which the party whose operation has caused contamination of soil or groundwater is primarily responsible for the remediation. However, the Polluter Pays Principle does not cover all situations where environmental contamination is present.

Secondary liability means the liability of another party than the polluter, and it may actualise when the polluter is insolvent or cannot be identified or reached. Under the Finnish Environmental Protection Act (527/2014), the possessor, which means the landowner or the tenant of the property, may be held liable if it has consented to the contamination or has been or should have been aware of such contamination when acquiring the property, and this is not deemed unreasonable. If the possessor cannot be held responsible, the municipality shall investigate and remediate the soil. In addition, the secondary liability regime in Finland is comprised of the Finnish Oil Pollution Compensation Fund, the environmental damage insurance, and the Finnish State budget funding:

• The Finnish Oil Pollution Compensation Fund’s operations are funded through oil protection fees collected for oil that is either imported to Finland or transported through Finland and from an average of EUR 2–3 million transferred to the fund from the State budget. According to the Ministry of the Environment, the compensations paid annually from the Finnish Oil Pollution Compensation Fund amount to about EUR 10 million.
• An environmental damage insurance is compulsory for private corporations whose activities involve an essential risk of environmental damage or whose activities generally cause damage to the environment. The insurance compensates damage caused to an injured party who cannot receive compensation from the party who caused the damage or from any other compensation system. In practice, very few claims have historically met the eligibility criteria of the insurance.
• The State has directly funded, for example, the closing of mines, the treatment of insufficiently stored dangerous waste and chemicals, and other secondary remediation by EUR 5–10 million each year in particular in situations where the municipalities have not been able to take the secondary liability.

In practice, the secondary liability system is often deemed inadequate. In particular, situations of historical contamination and bankruptcy have proven difficult. Furthermore, less severe environmental damage is sometimes not remediated at all, and, on the other hand, the excessive burden on the State budget has been criticised.

Assessment of Alternative Secondary Liability Models

The need to develop the secondary environmental liability regime towards a better enforcement of the Polluter Pays Principle has been recognised in the environmental administration and lately also in the Government Programme. In order to enforce the Government Programme, the Ministry of the Environment introduced a legislative project regarding the development of the secondary liability regime for environmental damage on 3 December 2019. The project aims at the submission of a Government Bill on proposed legislative changes in May 2022. The legislative drafting will be based on the comparison of different models applied in other countries conducted in 2019–2020 by the University of Helsinki and the Finnish Environment Institute, which published their report on the matter on 18 March 2020.

According to the report, none of the compared countries (Sweden, Austria, Denmark, France, Belgium, Netherlands, Canada, United States, and Australia) had a unified and comprehensive model regarding secondary liability situations. Most often, the applied models were based on sector- or substance-specific solutions. The report identifies three main systems suggested to be implemented in Finland: (1) State funding, which is either based on overall fiscal revenue or specifically earmarked taxes collected from operators within fields that involve environmental risks, (2) regulation-based collective liability, and (3) agreement-based collective liability. The latter two systems rely on the extended Polluter Pays Principle, which means that the operators within a specific field would collectively be responsible for environmental damage deriving from all operation within that field. The system would be either regulation-based and thus compulsory or agreement-based and voluntary. In practice, the operators would jointly finance an insurance policy, a fund, or another kind of agreement-based arrangement, out of which the resources for needed investigation and remediation would be taken. The problem with the extended Polluter Pays Principle is its acceptability, as there is a risk that operators who already comply with legislation and good practices would finance environmental damage caused by competing operators who fail to comply due to insolvency, for example. In particular, the voluntary systems may not be comprehensive enough.

In Finland, one option could be to extend the currently applied environmental security models to cover environmental liability situations. Such security models are already applied, for example, to the treatment of waste and the restoration of closed mines to a condition required by general safety. However, obtaining sufficient security could result in disproportionate costs for operators.

Next Steps

At this point, it is still unclear which approach the Ministry of the Environment will take. Taking into account the complexity of the matter and the lack of comprehensive functioning models, the Ministry of the Environment has extensive work ahead of it. The previous attempt to improve environmental liability regulation in connection with bankruptcy situations did not pass the constitutional examination within the Finnish Parliament. Similarly, the reform of the secondary environmental liability regime is likely to generate broad discussion.

Our Environment and Natural Resources team is closely following the aforementioned legislative drafting and will keep you posted as things develop. For any related legal questions or issues, please do not hesitate to contact us.