The Scottish Government

« Previous | Contents | Next »

Listen

ANNEX 1: COSTS AND BENEFITS : DETAILS

Remedial measures

Biodiversity damage

37. We note that:

- The threshold for biodiversity damage would be that a significant adverse effect on reaching or maintaining the favourable conservation status of relevant species and habitats has occurred (hereafter this threshold is referred to as ' FCS')

- Relevant habitats and species are those in the Annexes of the Habitats Directive and the Birds Directive as referred to in Article 2.3 a) and b) of the ELD.

Sources

38. There is no single or centralised recording system for damage to species and habitats in Scotland. We have therefore drawn on a number of sources to estimate the number of cases under the directive. For land-based biodiversity these include records held by Scottish Natural Heritage and by UKNGOs and reports on habitats and species under the European directives. The assessment for marine biodiversity was undertaken with marine conservation experts including in the Joint Nature Conservation Committee in Aberdeen, the Centre for Environment, Fisheries and Aquaculture Science, Natural England and Defra.

Estimated number of cases

39. For land-based biodiversity damage it is estimated that on average there might be a case that exceeds this threshold ( FCS) every two years. This is on the basis that the majority of these will fall within EU sites but that there might be the occasional case outside sites that come to attention.

40. Cases of marine damage are likely to be rarer with a case coming to attention every ten years on average although this depends to a large extent on the nature of enforcement in the marine environment compared with that on land. The consensus was that there were few activities which could cause significant damage at a species or habitat level in the marine environment and where the cause can be traced to identifiable operators. Fishing with bottom gear is most likely to attract action under the directive with a few other activities such as engineering operations, dredging and dumping and mariculture causing damage rarely.

41. In addition to the cases that might be expected to occur year on year, there would very occasionally be more severe cases. An example might be if a business introduced an non-native species which significantly reduces the populations of protected species across Scotland. It is suggested that such severe cases might occur once in a generation (or, once in twenty-five years) in Scotland.

42. No cases of imminent threats were identified where more would have been required under the ELD than at present. Where there are imminent threats of damage to species and habitats covered by the ELD there are generally the arrangements in place to prevent it. It is therefore unlikely that additional preventive measures would be required because of the ELD.

Costs

43. Twelve cases of land-based biodiversity damage from across the UK were examined, and the costs of potential additional measures assessed. This suggested that on average the costs of these cases were unlikely to fall outside the range £25,000 to £400,000 with a best estimate of £100,000. Review of the types of damage that might occur in the marine environment and the potential costs provides a range of £100,000 to £2m on average per case.

44. As well as the remedial work itself operators will also face costs of assessing the damage in line with Annex II of the directive and costs of administering work as well as costs that the enforcement authority recovers.

Benefits

45. The assessment of the benefits to society that accrue from additional remedial measures taken ⁵ is made on the basis of the expected outcomes of the remedial measures identified for the assessment of costs. The improvements associated with measures were identified and the value to society of improvements was estimated by transferring values from studies that value similar ecological resources. The assessment of benefits is made on the basis of twelve land-based cases and one case of marine biodiversity.

Table 2: Remediation of biodiversity damage

46. There is some uncertainty in these estimates of future damage as they are based on past experience.

Water damage

47. The definition of water damage refers to the 'status' of waters under the Water Framework Directive ( WFD). The 'status' of waters will be determined by standards that are being developed in the WFD context. Criteria will need to be developed to determine what is meant by 'significantly adversely affects'. For the purposes of this assessment assumptions have been made on what these standards and criteria will be. In essence, the threshold based upon the changes in status class of water bodies under the Water Framework Directive will capture the most significant cases of water damage.

Sources

48. The assessment is based on data from SEPA including incident reporting databases and information on failures of standards under EU directives. It is also informed by advice from SEPA and from the Environment Agency of England and Wales.

Estimated number of cases and costs

49. It is estimated that there might on average be three cases of water damage each year. Seven case studies ⁷ were examined and the costs of potential additional measures required under ELD assessed. The average additional cost from these cases of £105k is used. There is also likely much less often to be a case that leads to significantly higher costs, normally because a major aquifer is severely polluted. By comparison with the assessment in England and Wales, it is suggested that these are unlikely to occur more than once every forty to fifty years on average and that additional costs of £5m would not be atypical. It is considered unlikely that there will be cases where preventive action is required over and above what is already required.

Benefits

50. Benefits were assessed for the seven case studies using a per km benefits estimate ⁸ and is used for the estimated three cases in Scotland.

Table 3: Remediation of water damage

Land damage

51. Generally the remedial standards for land damage in the ELD are not more rigorous than corresponding provisions in existing legislation, for example those contained in Part IIA of the Environmental Protection Act 1990. The ELD may lead to more remedial work being undertaken in response to land damage for two reasons:

1) The ELD imposes a requirement for operators to notify the competent authority of damage and undertake the necessary measures whereas there is no such automatic requirement in Part IIA
2) Damage from organisms and micro-organisms is explicitly covered in the ELD.

Estimated number of cases

52. The ELD only applies to land damage that occurs (or caused by events that happen) after April 2007. It is suggested that there might be around 50 incidents of 'new' land damage in Scotland that are already addressed under existing regimes each year ⁹. It is expected that in the majority of cases where people are aware of significant risks to their health arising from contaminated land action will already be taken and people would request the relevant authority to pursue it. It is suggested that the ELD may lead to an additional 10% of cases (5 per annum) being addressed.

Costs

53. The costs of six sample cases of 'new' land damage were assessed ¹⁰ which suggest and average cost of £52,000 which is applied to the estimated 5 cases of damage per annum.

Benefits

54. The benefits of the six cases were also assessed. It is difficult to predict the nature of any cases that may additionally be addressed once the ELD comes into effect; it is, however, possible that it will be those cases with less defined benefits as existing arrangements may already pick up those cases where action is most 'needed'. The benefits estimates are deflated by 50% to reflect this.

Table 4: Remediation of land damage

Operator anticipatory response to ELD

Nature and cost of anticipatory measures

55. The ELD only applies where there is damage or an imminent threat of damage. Remediation will lead to costs for businesses. In addition to these, some operators will incur some costs, as a matter of choice, in taking anticipatory measures in response to changes in the liability rules.

Risk assessment

56. Some businesses will undertake additional risk assessment to work out their exposure to increased costs. This could take a variety of forms. For smaller businesses it might involve a visual inspection of aspects of their activities that may give rise to risks, or research into the location of sensitive environmental features. Some businesses may seek external advice.

Precautionary measures

57. Some businesses may act to reduce their risks, taking precautionary measures rather than risking increased costs associated with causing ELD damage. Businesses will have different attitudes to risk which will affect the way they respond. For some companies the risk of reputational damage may be more important than the immediate costs of remedial works.

58. Many companies thought that the ELD would not be the single factor determining whether or not to make operational changes but that it would be a consideration and in some cases make the difference between making an investment or not.

Baseline assessment

59. Remediation of water and biodiversity damage requires return to baseline condition (the condition before the damage took place) which is to be estimated on the best information available and the directive only applies to damage that takes place after 30 April 2007. For these reasons some companies may decide to record the 'baseline condition' of the environment surrounding their operations. This might involve for example taking photographs, taking chemical samples and monitoring species.

Insurance

60. General insurance policies only cover environmental risk to a very limited extent. A separate 'Environmental Impairment Liability' market developed in the US in the early 1990s and US insurers have since opened markets in the UK and Europe. Cover in the UK is generally restricted to liability for historic contamination during property transactions. The purchase of policies for operational risk is not widespread.

Generally, companies do not purchase cover for operational risks and we do not expect that the ELD will trigger significant change. Although there is existing cover available for some of the requirements of the ELD, there is none for the aspects of the directive that are expected to be responsible for most of the additional costs - particularly complementary and compensatory remediation. If there is limited demand for insurance it may take time for good value products to develop.

61. A best estimate of £0.7m is made for the costs of anticipatory measures. These have been derived from Defra focus groups and interviews with individual businesses and estimates were cross-checked with trade associations. More detail on the methodology for these estimates can be found in annex 2.

Benefits

62. There may be benefits associated with anticipatory measures particularly those that seek to reduce exposure to risk: by reducing the probability of causing damage or mitigating the consequences in the event of damage. In general, businesses are likely to take anticipatory measures where it is cheaper to do so than to bear risks. Annex 2 explains the methodology behind the assumption that the benefits will tend to exceed the costs of actions taken.

Familiarisation

63. Many businesses will take time to familiarise themselves with the new rules so that they know what the requirements are in the event of damage and whether they are likely to cause relevant damage. This time which is likely to be invested largely in the first year of operation, has a cost associated with it. An estimate is made of £0.3m based on assumptions about the resource input of businesses in different sectors. It is assumed, for example, that a proportion of smaller businesses may spend about an hour of someone's time whereas some larger businesses may take a month, including communicating to other staff. Trade associations and other representative organisations are likely to provide information to their members and stakeholders. It is assumed that some time will also be spent in subsequent years, for example, if new staff or businesses familiarise themselves with the rules or if more businesses decide to find out about the ELD following a high profile case.

Potential exposure of sectors to additional costs

Table 5 demonstrates how costs would be allocated by sector if on the basis of past patterns of environmental damage ¹¹.

Table 5 Potential exposure to additional costs of ELD by sector

64. Agriculture is likely to be exposed to the highest risk of additional costs (35%), borne largely by those who manage land with important habitats and species and those whose operations cause contamination of surface waters and groundwater.

65. Farmers affected may spend time familiarising themselves with the new rules. It is not likely that the ELD by itself will cause major operational changes but it may be one driver amongst others (such as measures required under the WFD and the Common Agricultural Policy's 'cross-compliance') for farmers to take measures to reduce their impact on the environment. Farmers may be subject to more uncertainty than other types of business as their operations are subject to the vagaries of the weather and animal behaviour. Overall the farming sector would be exposed to a potential increase in production costs of around 0.01%, but the costs to those who actually cause ELD damage are likely to be high in relation to their annual turnover.

66. On the basis of past damage the water sector would be exposed to 12% of the costs to operators. Failure of sewage treatment infrastructure causing water damage is also responsible for a large proportion of the estimate. To eliminate the risks of causing these types of damage would require investment of significant investment but it is considered that the additional costs of ELD remediation would not justify this level of investment.

67. On the same basis the waste sector would be exposed to 15% of costs. Additional costs of remediation may largely fall on operators who do not fully comply with existing requirements rather than those who are compliant. It is thought unlikely that the waste sector will take significant measures in response to the new rules. This is because the majority of waste businesses already control their risks to the environment adequately and those that do not are considered unlikely to do so as a result of this directive.

68. Manufacturing businesses would be exposed to 11% of costs. Environmental damage covered by ELD could occur through slow leaks from infrastructure, systems failures and major accidents. Generally operators and their representatives stated that they would not take action as a direct result of the new rules but ELD may act with other drivers to encourage changes.

69. Land transport operators (largely road) would be exposed to around 3% of costs e.g. from land and water damage caused by road traffic accidents and leakages associated with transport depots and other facilities. In view of the large number of operators and low probability that any one will caused the type of damage covered by the Directive, it is unlikely to lead to significant operational changes in this sector.

70. In the marine sector, damage from shipping of oil, hazardous substances and radioactive substances will be covered by separate, existing arrangements (see annex IV and V of the Directive). On the basis of the assessment of marine damage, fisheries would be exposed to an estimated 4% of ELD costs. These relate largely to damage and imminent threats of damage caused potentially by bottom trawling over sensitive marine habitats. The principal precautionary measure that fisherman can take is not to fish in relevant areas and it is difficult to predict whether they would do this. There are some alternative measures that fishermen might adopt to reduce impacts, for example fitting 'pingers', which are alarms to deter cetaceans, on fishing nets. Enforcement in this area is complicated both on evidential grounds and by the nature of 'operators' who fall under the jurisdiction of the Common Fisheries Policy and many of whom are likely to be foreign registered vessels. Arrangements for enforcement beyond 12 nautical miles are subject of discussion with DEFRA.

71. The construction sector would be exposed to a small proportion of costs relating, for example, to release of substances into watercourses, movement of contaminated soils and major damage to bat roosts. The Energy sector is also likely to face a low level of costs from accidents at sites and damage to estuarine biodiversity from water abstraction.

72. The retail fuel sector is also likely to be affected as a result of more cases coming to attention.

Enforcement costs

73. There may be several public authorities in Scotland responsible for enforcing and administering the new provisions. Estimates of additional costs have been made with information from the authorities that are currently responsible for parallel existing regimes where they exist and on the basis of the estimated average levels of damage.

74. There will be costs in setting up the systems and procedures and training staff. There will also be ongoing annual costs. Some of these are recoverable from the liable party. They may include costs associated with investigating damage, assessing damage and remedial measures and enforcing works. Non-recoverable costs may include costs of investigating incidents that do not require any action, policy advice, and internal liaison, liaison with other authorities, legal and economic advice and reporting. There is discretion in the ELD to allow authorities to recover some general costs from operators which may reduce the costs outlined above and increase the costs to operators. Initial costs in table 6 below represent the costs before cost recovery, and final is after recovery. Those estimates are sensitive to a number of factors such as the level of damage, the extent to which cost recovery is possible and will depend on year to year fluctuations in the level of damage.

Table 6 Additional costs of enforcing and administering the ELD

Costs and benefits through time

75. We now turn to costs and benefits beyond this first year of implementation. We also considered the costs and benefits of incidents in the ELD's first ten years. As in consideration of the first year this takes account of the costs and benefits of voluntary action and of measures associated with incidents irrespective of when the benefits actually accrue.

76. Set-up costs for enforcement authorities and operators are one-off costs in the first year. Other costs and benefits recur each year. However, there are reasons to suggest that annual costs and benefits will decrease over time.

77. It is assumed that the average annual numbers of ELD incidents remain constant for the first ten years. Environmental protection legislation, voluntary actions taken as a result of the ELD and technological improvements are all likely to have a downward effect on the numbers of incidents. Some changes may increase the number of cases coming to attention e.g. increased rights to roam may mean that sensitive environmental areas are more accessible, mobile phones make it easier to report incidents and initiatives such as the Aarhus Convention ¹² encourage increased public participation in environmental matters. The assumption that damage is constant is a cautious assumption as the identifiable factors that are likely to influence the level of damage appear likely to reduce damage overall.

78. It is thought that a large proportion of measures taken to reduce exposure to liability will be taken at implementation of the ELD but that there will also be some ongoing investments. Large incidents subject to ELD requirements that attract media attention may happen at any time and may encourage other businesses to take measures. It is assumed that these costs will reduce by 80% after the first two years of the directive.

79. Taking account of these assumptions the additional costs of ELD over 10 years are estimated to be £16.4m and the benefits are estimated to be in excess of £22m ¹³. This is set out in more detail in table 7.

Total costs and benefits

Table 7 Costs and benefits of ELD

Costs in context

80. Table 8 places the estimated additional costs of the ELD in the context of annual turnover of sectors and of individual companies. Total estimated costs to operators associated with transposing the Directive might increase the current expenditure by industry on environmental protection ¹⁴ by 0.5%

Table 8 Costs to business in context

Wider costs and benefits

Economic

Social

Environmental

Risks

Risks associated with the new provisions are identified, in particular that

i) The thresholds are interpreted more widely than anticipated leading to more cases of qualifying damage being caught
ii) The directive leads to litigation
iii) Damage assessment leads to high costs if not used proportionately
iv) ELD is misrepresented and businesses respond inappropriately
v) Requests for action divert authorities and businesses from central activities
vi) It is difficult to find appropriate remediation projects
vii) The directive is transposed late leading to uncertainty

« Previous | Contents | Next »