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The Special Case of "Superfund"

Environmental regulation can produce unpredicted side effects. Superfund (more formally, CERCLA, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980) is a case in point. The act provided authority to the Environmental Protection Agency to designate contaminated sites. Owners of these sites are required to bring them up to EPA standards. The law requires this "remediation" even if the actions that polluted the site were legal at the time they were taken. For example, a site may have been contaminated by the dumping of paint solvents when such dumping was not prohibited. Beyond that, present owners of the site may be held responsible for contamination caused by previous owners of the site. Thus by buying a site that subsequently turns out to have been contaminated by a previous owner, a firm or individual may be inadvertently "buying" a liability that is much greater than the value of the site. That possibility will make potential buyers of used industrial or commercial sites very hesitant. But it goes still further than that. Suppose XYZ Corp. goes bankrupt while still owing $1 million to the bank that holds its mortgage.

Normally, the bank would foreclose the property, sell it, and thus recover some of its loss. But if the site has been in industrial use for, say, the last century, Superfund's liability provisions will make the bank hesitate. If the site subsequently turns out to be contaminated, the bank may now become the unhappy owner of a site that costs $10 million to bring it up to standard. Maybe it would be wiser just to accept the loss and not foreclose. But the next time the bank is asked to make a loan to a firm on an old, possibly contaminated site, it will remember what happened when the XYZ Corp. went under and say no.

The liability provisions of Superfund have brought into being the terms greenfields and brownfields. A greenfield is a site, usually suburban or rural, that has never been used for industrial or commercial purposes. A brownfield is a site, usually urban, that has been or is in commercial or industrial use. Greenfields pose no threat of unforeseen liability under Superfund, but brownfields do. This will bias the market for industrial and commercial sites against urban areas in favor of suburban and rural sites.11 For cities struggling with problems of structural unemployment (see Chapter 13) and inadequate tax bases, that bias is very unfortunate. It was also completely unintended.

After perhaps a decade, these anti urban side effects became widely recognized, and some steps were taken to nullify them. For example, some state environmental agencies devised arrangements that, in effect, immunize firms against Superfund liability for contamination that comes to light in the future, if firms will agree to appropriate remediation of presently known contamination. Banks can sometimes protect themselves against the sort of risk described earlier by making mortgage arrangements such that, in the event of default, they can foreclose on property other than the potentially risky brownfield property. In the previous example, this would mean that the bank could foreclose on some nonbrownfield property owned by the XYZ Corp. Of course, doing that presumes that XYZ Corp. has such a property and that said property is not encumbered by other liens. Insurance arrangements against Superfund liability risk have also emerged. Thus the side effects of the law have been dealt with, at least to some extent. The point of the digression, though, is that environmental legislation and regulation can create powerful and unintended side effects.

 
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