Chapter 4. What to do about monetary damages for industrial air pollutants?

Over the past few decades, Kazakhstan has been imposing compensation (monetary damages) for environmental damage (or damages to the environment) via the judicial system. These damages are allegedly caused by emissions into the air from stationary sources above the emission limit value.

The chapter compares Kazakhstan’s underlying concepts and practices for liability provisions in case of environmental damage with the experience of OECD member countries. It reviews the legal framework, the assessment of environmental damage and the links between environmental liability and financial security. It then provides recommendations to streamline the system of environmental liability, thereby implementing more amply and effectively the Polluter-Pays Principle.

    

4.1. Introduction

The economic implications of weak environmental liability regimes are multiple and substantial. These include the need for public financing of environmental remediation, increased spending on public health, loss of competitiveness because of work force migration out of polluted areas and loss of ecosystem functions. Liability for environmental damage in most OECD member countries is understood as an obligation for the responsible party to bear the costs of restoring the environment to its pre-damaged state. Where such restoration is not possible, the value of the pecuniary compensation should be directed towards complementary or compensatory remedial measures. This obligation, under the strict liability regime primarily applied by OECD members, does not require proof of negligence or regulatory non-compliance. The party responsible for the damage under an administrative or court order usually conducts the remediation, in accordance with a specific clean-up project (OECD, 2012[1]).

4.2. Comparative analysis

4.2.1. Legal framework for environmental liability

In Kazakhstan

The system of environmental liability in Kazakhstan diverges substantially from OECD experience and practices. Environmental liability remains focused on estimating and obtaining monetary compensation for the state (essentially serving as a penalty), rather than on avoiding and rectifying the damage. Environmental damages do not arise upon a claimant bringing physical evidence of actual harm to a natural resource. The regulatory framework thus neither encourages nor facilitates the application of an environmental liability regime (UNECE, 2019[2]), as defined and applied by OECD members.

In theory, the framework foresees that competent authorities first assess the possibility of restoration after damage. It also envisions that the polluter will implement remediation measures (see Chapter 46 on Liability for Environmental Offences and Settlement of Ecological Disputes of the Environmental Code [as amended]).1

In practice, establishing actual harm to the environment is irrelevant to setting out environmental liability. Liability is related instead to the emission limit values (ELV) set in project documents and environmental permits. Exceeding the ELV becomes the basis for environmental liability (the fault-standard).

Direct or indirect methods are used to calculate monetary damages payable to the state. See Section 4.2.2 for more details.

The specific violations that trigger damages liability are set forth in Article 321(2) of the Environmental Code. It states that “Damage, inflicted to the environment, and to the civil health and property of individual and legal persons, is subject to compensation, as a result of:

  1. 1. destruction and damage of natural resources

  2. 2. unlawful and irrational use of natural resources

  3. 3. unauthorised emissions

  4. 4. over-standard emissions.”

As a result, unauthorised emissions and above-limit emissions have historically constituted the grounds for most of the damages payments assessed each year against alleged polluters. This has been confirmed by interviews with professional associations (American Chamber of Commerce in Kazakhstan, 2018[3]).

In most cases, environmental damage is not remedied, despite the polluter being identified and paying for the damage done (UNECE, 2019[2]).

OECD member countries

Compensation for environmental damage is quite unusual among OECD members. It typically arises from lawsuits following unanticipated, severe and exceptional pollution events. Liability is understood as an obligation for the responsible party to bear the costs of restoring the environment. The policy objective is to restore the environment, which is reflected in specific requirements imposed by the law on liable parties. The objective is not to punish the operator that caused the damage (OECD, 2012[1]).

In other words, within the OECD, monetary pollution damages are not meant to punish an operator for breaching an emission limit or causing emissions not expressly authorised in a permit (OECD, 2012[1]). Rather, monetary pollution damages are intended to be restorative. Violation of laws (such as emission limit rules) is the domain of administrative penalties and criminal law.

In determining the features of a liability regime underpinning monetary damages, legislators must choose between a strict liability and a fault-based standard.

A strict liability standard forces the operator to consider both the level of care and the nature and level of activity. It creates additional incentives for good corporate environmental management, at least with respect to hazardous activities (OECD, 2012[1]).

A fault-based standard provides appropriate incentives to potential responsible parties. However, these incentives relate only to the level of care (the diligence in performing a given activity) and not to the nature and level of polluting activity (OECD, 2012[1]). Some European countries (e.g. Italy and Poland) historically used fault-based liability. However, they changed their systems to comply with the Environmental Liability Directive (ELD) (OECD, 2012[1]).

Strict environmental liability was first applied in the United States and gained ground in other OECD member countries. The EU ELD imposes the policy on operators engaged in dangerous activities listed in Annex III of the directive. ELD Annex III defines dangerous activities as those subject to an integrated permit, a water abstraction, wastewater discharge or a waste management permit, or a licence for handling dangerous substances and waste. However, a strict liability regime can be weakened by different mitigating factors. The ELD states that operators can, subject to national legislation, invoke two defences. The “permit defence” argues the harmful activity was legally permitted or licensed, and that the operator can prove compliance with all permit/licence conditions. The “state of the art defence” can be used to avoid liability. It aims to prove the harmful activity was not considered likely to cause the damage according to the state of contemporary scientific and technical knowledge.

The party responsible for the damage usually conducts remediation. This is done under an administrative or court order, in accordance with a specific clean-up project. In a public health or environmental emergency, public authorities can proceed directly with remediation. Afterwards, they can recover remediation costs from the liable parties (OECD, 2012[1]).

Importantly, air pollution is not typically a basis for environmental damage in the OECD. Cases for damages to land and water for air emissions are rare. The environmental damages laws of OECD member countries thus tend not to be used for air pollution. The air cannot be remediated, and it is difficult to relate industrial air emissions to the harm of land, water or human health. As noted earlier, OECD jurisdictions impose a penalty, not monetary damages, on a resource user for exceeding a limit in a permit due to its own fault.

In Canada or Norway, cases in which a company was subjected to damages to land or water caused by emissions into the air could not be identified.

In the United States, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) includes air in its definition of natural resources damages. However, interviews with senior officials at the enforcing authority indicate that air pollution, while not expressly excluded, is clearly “outside the ambit” of natural resources damages under CERCLA and the Oil Production Act (OPA).2

In the European Union, air pollution is not, strictly speaking, a subject of damages liability as defined by the ELD. However, emissions to air that cause “environmental damage” can still have legal consequences. For example, if air emissions damage “land”, then the operator will be liable for the costs of remediation/restoration of the land. However, a causal link has to be established in court.

  • The ELD establishes an EU-wide common framework of environmental liability to prevent and remedy specific types of environmental damages (see Figure 4.1). The ELD covers three areas: i) “damage to protected species and natural habitats”; ii) “water damage”; and iii) “land damage.” The term damage pervades all three categories. It is defined as a measurable adverse change in a natural resource or measurable impairment of a natural resource, which may occur directly or indirectly. Measurability is, therefore, a central determinant as to whether damage (as a matter of strict legal definition) has been caused. Scientific assessment will be required to determine if the relevant threshold has been met (Fogleman, 2006[4]).

  • Air is absent from the definition of “environmental damage” under art 2(1) of the ELD. The European Commission has been asked to reconsider this absence in light of the harm caused by air pollution to human health and the environment (European Parliament, 2017[5]). The case of Túrkevei Tejtermelő Kft. v Országos Környezetvédelmi és Természetvédelmi Főfelügyelőség confirmed that “air pollution does not in itself constitute environmental damage covered by Directive 2004/35” (European Court of Justice, 2017[6]). Through analogy, flaring in excess of the limits of a permit, in itself, would not fall with the ELD’s definition of environmental damage.

However, recital four of the ELD is particularly pertinent. It asserts that environmental damage, “also includes damage caused by airborne elements as far as they cause damage to water, land or protected species or natural habitats.” Thus, the framework of environmental liability to be implemented by member states is relevant where water, land, protected species or natural habitats are damaged by emissions to air from, for instance, a flaring stack.

The competent authority has to present evidence that air pollution had caused such damage before it can consider making the relevant operator take remedial measures. Where this can be done, the pollution would come within the scope of the ELD. If not, relevant national law rather than the ELD would apply.

It may be more difficult to invoke the ELD in circumstances where the pollution is of a widespread, diffuse character. Diffuse pollution is generally understood to encompass, “[p]ollution from widespread activities with no one discrete source, e.g. acid rain”.

Diffuse emissions to air can occur from various scattered sources such as road transport, shipping, aviation, domestic heating, agriculture and small business. While pollution from individual diffuse sources may not be of particular concern, the combination of diffuse sources of pollution can have an environmental impact.

The ELD only applies to damage caused by pollution of a diffuse kind where it is possible to establish a causal link between the damage and the activities of individual operators. There is important case law from the Court of Justice of the European Union, which helps competent authorities to establish that link.

Figure 4.1. Examples of environmental liabilities and changes
Figure 4.1. Examples of environmental liabilities and changes

Note: IPP/IED = International Plan Protection Convention / Industrial Emission Directive; WFD: Water Framework Directive

Source: (European Commission, 2013[7]).

Environmental damage can be identified through a variety of means. In addition to regular site inspections by an environmental enforcement authority, information may be obtained from accident notifications from operators, routine self-monitoring reports, environmental quality monitoring data or citizens’ complaints. The identification of contaminated sites with historic damage can take place during an application for a building or operation permit or a transfer of ownership of the site (OECD, 2012[1]).

An initial investigation evaluates the extent of damage. For example, Lithuania uses a two-step approach divided into a preliminary investigation (impact assessment) and a detailed investigation to determine the significance of the environmental damage.

Most EU countries have no general criteria of the severity threshold. Competent authorities use professional judgement to determine the significance of the damage on a case-by-case basis.

In the United States, formal site scoring uses the country’s criteria and scoring procedures set forth in the hazardous ranking system. Among the criteria applied are toxicity of substances, location of potential receptors, exposure pathways, threats to human food chain and the environment. Sites with a score above a certain threshold are put on the National Priorities List.

4.2.2. Assessment of environmental damage

In Kazakhstan

What and when

Article 108(1) of the Environmental Code states that the economic assessment of damage caused to the environment meansmonetary value of the expenditure, required to restore the environment and consumer properties of natural resources”.

As mentioned previously, environmental damages are triggered by exceeding a limit set in the permit, not a proven actual harm to the environment contrary to the case in OECD member countries.

The level of compensation for the damage is estimated and charged to the polluter. Article 322(6) of the Environmental Code (as amended) states that, “(t)he recovered amount of compensation of harm shall be transferred to the state budget, and in the established cases by the legislation of the Republic of Kazakhstan – to injured person.3

The competent authority (CERC officials), within one month from the date of establishing the fact of a damage to the environment, collect and analyse necessary materials and assess the economic damage.

The direct/indirect method

An economic assessment of environmental damage can be carried out directly or indirectly. The choice depends on whether the complete elimination of the damage is possible through environmental remediation.

The direct method of economic assessment of damage consists in determining the actual costs necessary for restoring the environment; replenishing degraded natural resources; and healing living organisms. In each case, the work would use the most efficient engineering, organisational, technical and technological measures.

Competent authorities primarily consider how the party that has caused damage can restore the environment. The letter of guarantee of the party that has caused damage to the environment sets out relevant obligations for these restorative actions. It indicates specific measures and dates for implementation.

The cost of mitigation measures is supposed to be determined by their market value. In the economic assessment of damage by a direct method, officials of the competent authorities may involve independent experts. Environmental auditors, as well as specialists from design, engineering and scientific organisations can act as experts. The person who has damaged the environment pays for the work of independent experts.

The Environmental Code establishes the priority of the direct over the indirect method. In principle, the indirect method is used when the direct method cannot be applied. However, in practice, the use and the priority given the direct method are purely declarative. In the overwhelming majority of cases, the competent authority is “forced” to use the indirect method. In fact, the direct method cannot be used, since there is often no physical evidence of harm linked to an industrial air emission. Unlike the practice in OECD member countries, an indirect method is easier to apply and usually results in much higher monetary damages. Indirect damages were thus the largest component of the 2013 flaring fines (USD 740 million) according to interviews with operators.

Kazakhstan triggers the calculation of monetary compensation for damages to the environment. This occurs when a limit in a permit is exceeded or a pollutant is emitted into the environment on a day or in a circumstance that is unauthorised. This is the case even if the same facility emits far greater amounts of the same pollutant but under authorised circumstances. An example of such unauthorised emission is a malfunction that leads to a need for a gas flaring for less than a day. Although there is no evidence of harm, the state assesses damages; it must, since emissions exceeded the permit limit or the flare was unauthorised.

The indirect calculation formula is theoretical. It has even been negotiated over the years, while it was supposed to ensure a ‘scientific’ determination of damage, and the related monetary compensation. The actual formula is in the Government Resolution №2 535. 4

  • The damage is a function of the pollution charge rates. By design, the formula is thus discriminatory, since pollution charge rates differ for the flaring of gas from other emissions from stationary sources. It is directly proportionate to the mass of pollutants emitted in excess of the permitted limit and the charge rate for that pollutant.

  • The rationale behind the formula, as communicated by the Ministry of Energy, is that “(t)he excess of actual volumes of emissions over the established standards is determined by instrumental measurement or by calculation in accordance with the methodology for determining emission standards to the environment […]. Conversion of the actual mass of the pollutant into conventional tonnes is carried out by multiplying its mass in tonnes by the hazard coefficient ‘(Ai)’ equal to 1/MPC (‘maximum permitted concentration’) of the substance.”

  • The competent authorities determine the level of environmental hazard caused by the violation of environmental legislation, as well as environmental risk, based on criteria specified in the rules for the economic assessment of damage from environmental pollution.5

The indirect method is thus controversial for a variety of reasons. First, the damages paid by resource users need not be used for environmental purposes. Typically, they are not aimed at correcting the environmental damage caused, limiting its impacts or preventing further damage. Payments received from resource users raise revenue for regional or local budgets. Second, they result in the discriminatory treatment of foreign investors. As payments are established based on the tax rates, payments for gas flaring are higher than those from other stationary sources; major oil and gas companies pay hundreds of millions of dollars in compensation under the indirect method (OECD, 2017[8]). Third, the formula increases the costs of investing and doing business in Kazakhstan in an arbitrary and unpredictable way; resource users may pay substantial sums. The oil and gas sector perceives the payments required by the Kazakh authorities as significantly higher than gas flaring payments in OECD member countries (OECD, 2017[8]).

The missing reference to equivalency analysis

The Code itself has omissions compared to legislative acts in OECD member countries. It provides for two means of assessing economic damage: the direct and indirect methods, which are detailed in articles 109 and 110. Neither of these methods necessitate an equivalency analysis to be undertaken, as it is for instance refer in the EU ELD.

Indeed, the Environmental Code does not specify complementary and compensatory remediation. This means that equivalency analysis can play no role in determining the appropriate remediation measures for resource users.

These are important omissions from a framework of environmental liability. They mean that liability imposed upon a resource user, as determined by the direct and indirect methods, will not reflect the true level of loss to the environment and society caused by the environmental damage. For instance, the framework cannot address interim losses.

Article 109, which deals with the direct method, is focused solely upon determination of the financial cost associated with primary remediation.

  • More specifically, articles 109(1) and (3) provide that the direct method of economic damage assessment is to determine the market value of the “actual costs” associated with restoring the environment, “through the most effective engineering, organisational, technical and technological measures.”

  • Formulated as such, the direct method does closely resemble the idea of payment for damage by the person damaging the environment (i.e. the polluter) under common conceptions of the Polluter-Pays Principle in OECD countries, particularly within the European Union.

  • Article 109(1), however, does not sit comfortably with Article 108(3), which asserts that the direct and indirect methods are used for the economic assessment of damage to the environment. Reading those provisions together, it appears only the costs of primary remediation are to be equated with the economic value of the damage under the direct method. The associated benefits are not relevant (i.e. the wider benefits associated with the natural resources that were lost – the services provided by those resources).

Article 110(1) deals with the indirect method of economic damage assessment. This is where the approaches of Kazakhstan and OECD member countries vastly diverge.

  • Article 110(1) asserts that the indirect method is to be used in cases, “when the direct method of economic damage assessment cannot be applied”.

  • Article 110(2) outlines that “(e)conomic damage assessment shall be determined by the types of impact on the environment by adding the damage assessment for each ingredient by an indirect method”.

  • The indirect method determines the value of the “pollution damage” as a function of the pollution tax rates. It further determines the “pollution damage” from each pollutant using a mathematical formula. It then combines the resulting assessments of damage caused by each pollutant. However, it does not require measurements (or proof) of actual damage to the environment in determining the amount of required compensation. Nor does the lack of such evidence provide a defence for the resource user.

The very notion of environmental damage

There is also imprecision and inconsistency over how environmental damage or “damage caused to the environment” are defined under the Environmental Code (as amended).

There is reference to damage caused to natural resources. Article 5 sets out the basic principles of the environmental legislation of Kazakhstan, including “mandatory compensation for damage caused to the environment”. Article 321(4) provides that, “[t]he compensation for damage, inflicted to environment by the virtue of breach of environmental legislation [… ] shall be carried out voluntarily or by the court decision on the basis of economic assessment of the damage, the procedure of conduct of which shall be determined in accordance with this Code”.6

However, there is no substantive reference to damage to the services performed by a natural resource for the benefit of another natural resource (or natural resources) or the public.

Clear definitions of damage “inflicted to the environment” and “damage caused to the environment” are needed under the Code for the effective operation of Articles 5(7) and 321(4).

Under Article 1(42), the term “environmental damage” is defined as “pollution of the environment or the harvesting of natural resources over the established limits, causing or inducing the degradation and depletion of natural resources, or the death of living organisms”.

However, that term is not used in the Code, which deals with economic damage assessment, specifically Articles 108-110. Rather, the phrase “damage to the environment” is used. Article 1(41) defines the term “environment” as “a set of natural and cultural objects, including open air, the ozone layer of the Earth, surface and underground water, land, minerals, flora and fauna, as well as the climate in their interaction”. And Article 1(48) defines “pollution of environment” as “entry of polluting substances, radioactive materials, waste production and consumption into the environment”.

OECD member countries

In OECD member countries, where a polluter’s activities have caused damage to the environment, the polluter may be required to: i) remediate the environment; and ii) compensate the public for the natural resources/services which were lost during the period in which the environment was impaired (Lipton et al., 2018[9]).

This compensation is resource- or service-based, not monetary per se. Competent authorities use a process termed “equivalency analysis” to determine: i) the type and amount of natural resources and services lost over time as a result of the damage and; ii) the type and amount of complementary and compensatory remediation actions needed to offset that loss.

It seeks to ensure that polluters neither under-compensate nor over-compensate for losses. In this way, it facilitates respect for the Polluter-Pays Principle as understood and applied in frameworks of environmental liability in OECD member countries.

The focus is upon complementary and/or compensatory remediation; equivalency analysis does not seek to determine what primary remediation should be undertaken (Lipton et al., 2018[9]). That said, quantifying the benefits of primary remediation with a view to determining any residual damage ripe for complementary and/or compensatory remediation is a key input into an equivalency analysis.

According to the ELD, for example, environmental damage to water or protected species or natural habitats can be assessed with regard to primary, complementary and compensatory remediation in the European Union.

  • Primary remediation entails actions to reduce or remediate site-specific damage, usually through removal of released polluting substances or actions to reduce their ongoing discharge. It aims at returning the damaged natural resources or services to their pre-incident, or baseline, condition. However, this may not always be possible.

  • Complementary remediation may be needed. This can occur at the site of the incident by improving or creating alternative resources or services (to the damaged ones). It could also take place at an alternative site by improving natural resources/services of the same or comparable kind, if full on-site remediation is impossible.

  • It takes time to remediate the impacted natural resources and services to the baseline condition. Therefore, compensatory remediation is needed from the time the damage occurred until recovery to baseline conditions (“interim losses of services provided by the natural resource”). However, the practical implementation of compensatory remediation is still rare. In Germany, procedures for measuring interim losses with economic methods exist, but have not yet been applied in practice. Nevertheless, this is often done implicitly by the experts when defining adequate compensation measures.

Any significant risk of human health being adversely affected is to be removed. The competent authority can decide that no further remedial measures are needed if the cost of these remedial measures to reach baseline condition (or similar level) would be disproportionate to the expected environmental benefits. The reasonable remedial options should reflect the best available techniques.

However, in the case of land damage in the European Union, the framework of primary, complementary and compensatory remediation measures does not apply. Remediation of damage to land is to comprise measures necessary to ensure, as a minimum, that the relevant contaminants are removed, controlled, contained or diminished. In this way, the contaminated land, taking account of its current use or approved future use at the time of the damage, would no longer pose any significant risk of adversely affecting human health (Fogleman, 2015[10]). The presence of such risks shall be assessed through risk-assessment procedures. These should consider the characteristic and function of the soil, the type and concentration of the harmful substances, preparations, organisms or micro-organisms, their risk and the possibility of their dispersion. A natural recovery option (i.e. where there is no direct human intervention) could be deemed acceptable. The framework of primary, complementary and compensatory measures does not apply to land damage cases. Therefore, interim losses are not to be considered when selecting the most appropriate measure(s) to remediate land damage (Brans, 2006[11]). Thus, whether natural resources and services have been impaired during restoration is irrelevant. The operator is, therefore, relieved of liability for interim losses where their activities have only damaged land (that is not a protected habitat and is governed by the ELD).

Importantly, compensation for environmental damages has no links with “the state budget funds”. Such compensation are not funds to be collected. In OECD jurisdictions, polluters do not pay cash compensations to the state for loss of a natural resource. These compensations are irrelevant to the state revenues and as such should not appear in the reporting of ERT.7

The party responsible for the damage conducts remediation under an administrative or court order, in accordance with specific clean-up and restoration project conditions. In cases of public health or environmental emergency, non-compliance with remediation orders or uncertainty about responsible parties, public authorities in most OECD member countries can proceed directly with remediation. Afterwards, they can use civil liability provisions to recover remediation costs from liable parties. The competent government authority always evaluates results of remediation projects (OECD, 2012[1]).

The obligation of polluters to pay for their damage to the environment forces them to fully internalise the negative externalities of their activity. However, the biggest challenge of the resource equivalency analysis is estimation of the degree of loss associated with the environmental harm (and, similarly, of the benefit from remediation) (OECD, 2012[1]). This is even more difficult in the case of damage caused by industrial air pollution.

Many OECD members struggle with this challenge. A consensus has emerged on two general approaches to calculate the amount of required damage compensation. The first determines the monetary value of the damage. The second assesses the adequate scale of environmental remediation needed to compensate (in real rather than monetary terms) for the harm, with the subsequent determination of the respective costs (OECD, 2012[1]). The remediation scope may be mandated by law or left to the discretion of the competent authority. This authority determines specific measures using criteria such as technical feasibility, effectiveness and efficiency. The significance of the damage has to be assessed with reference to the baseline condition of the environmental media or ecosystems concerned. The ELD defines this baseline as “the condition that would have existed had the environmental damage not occurred, estimated on the basis of the best information available” (OECD, 2012[1]).

The key to equivalency analysis is determining a unit of measure of damage that can describe losses over time and can be matched to the benefits of remediation over time. The quantification of damage (or benefit) can be expressed in several ways. These include monetary units, area of required remediation, number of individual organisms that must be replaced (such as fish or birds) or units of recreational use, such as user days that must be replaced to compensate for the loss of recreational use. Common practice includes using a single attribute of the natural resource or environmental service. Examples of single-attribute metrics include measures of vegetation or organism density, biomass and counts of individuals lost. The metric used should be the same attribute on the loss and gain sides of the equation (OECD, 2012[1])

There is no single objective standard for determining the metric. Considerations include type of damage (e.g. physical or chemical) and scale of damage (e.g. area, timing, anticipated duration). The most important consideration is the nature of the remediation available for compensation, since the same metric must be used to estimate the scope of the remediation. An appropriate metric is usually selected in close consultation with biologists, ecologists or other relevant environmental scientists (OECD, 2012[1]).

Annex D provides a more comprehensive analysis of the three main equivalency analysis methods: service-to-service, resource-to-resource and value equivalency.

The equivalency analysis is merely one step in deciding how remediation ought to proceed after damage has occurred. Relevant stakeholders may wish to consider site and incident-specific factors to help determine the level of remediation required to offset the damage (Lipton et al., 2018[9]).

4.2.3. Environmental liability and financial security

In Kazakhstan

When a polluter is unable to bear the financial costs associated with its environmental obligations (for example, as determined by the “direct” method of damage assessment under the Environmental Code), there are two possible outcomes. First, the environment may remain un-remediated following a decision by the relevant regulator that the works will not be carried out at public cost; society pays metaphorically, through the need for it to inhabit a lower quality environment. Second, the state will be required to pay from its own resources; society pays financially, through reduced levels of state funds available to fund public services. Neither accords with the policy objectives of the Polluter-Pays Principle.

The introduction of a system of mandatory financial security in Kazakhstan started with the 2005 Law on Mandatory Environmental Insurance (UNECE, 2019[2]). Article 107 of the Kazakh Environmental Code (as amended)8 does refer to mandatory insurance. Entities carrying out environmentally hazardous economic and other activities are required to have environmental insurance. The law foresees the government determining the list of environmentally hazardous types of economic and other activities. According to the information collected during the most recent Environment Performance Review, this specific list for the purpose of environmental insurance was not approved (UNECE, 2019[2]). Operators of category I activities are considered to fall within the scope of the mandatory environmental insurance. However, there are insufficient data to draw reliable conclusions on the effectiveness of this insurance in terms of the actual remediation of environmental damage (UNECE, 2019[2]).

Further to this, businesses comply with the obligation to purchase environmental insurance. However, they do not ask for insurance benefits in cases when insurance events occur. According to EnergyProm, environmental insurance business is the most profitable of all mandatory insurance types in Kazakhstan. In 2017, environmental insurance benefit payments were 0.04% of total benefit payments for mandatory insurance, while insurance premiums exceeded benefit payments by 106 times (UNECE, 2019[2]). And insurance may not provide a solution where breaches of environmental law have been intentional. The insurer may refuse the coverage.

Other means of financial provision (e.g. bonds, trust funds) are not covered by the Environmental Code (as amended) and some legislative acts on environmental issues.

OECD member countries

Financial provision has long been a requirement in international conventions concerning marine oil pollution and nuclear facilities. It is common in the EU environmental law in relation to coverage of costs associated with environmental obligations under a permit. These are, of course, known foreseen obligations as contrasted with those arising by chance following a pollution incident. There is thus greater political will to impose mandatory regimes where obligations are certain to arise. In many OECD member countries, this political will dissipates when the obligations are a fortuity.

Despite its remedial and preventive potential, financial provision is not a requirement for operators in the main frameworks in OECD members. In the ELD, the principal environmental liability framework under EU law, there is no requirement for mandatory financial provision for liabilities arising under that regime. Only a handful of member states (Bulgaria, the Czech Republic, Portugal, Slovakia and Spain) have introduced mandatory financial provision regimes in their national laws.

The primary benefit of financial provision is its capacity to facilitate remediation/clean-up at the private cost of the resource user(s). Financial provision also exhibits significant regulatory potential to motivate operators to reduce their environmental risk, this being defined as the probability that their activities will cause environmental damage (Mackie, 2014[12]).

This potential may arise in a variety of forms. Broadly, it presents itself through the contractual governance of the resource user’s behaviour (e.g. under the terms and conditions of an insurance policy) and the provision of economic incentives to improve safety levels and/or its financial strength.

There are five main ways in which financial provision may be made. First, monies or assets may be set aside with a third-party, such as a bank or a trustee, in favour of the competent authority (e.g. escrow accounts and trust funds). Second, a resource user (or, in theory, a company associated with it) may grant the competent authority a charge of a valuable asset, such as real estate, in their ownership. Third, risk may be transferred to a third party, such as an insurer or bank, in return for a premium, fee or charge (e.g. insurance, bank guarantees and surety bonds). Fourth, the financial strength of the resource user or a company associated with it (i.e. its parent company or another group company) may be tested and accepted as evidence of financial provision in and of itself (e.g. self-insurance and parent company guarantees). Finally, the resource user, alongside other resource users, could be required to contribute to a compensation fund or other industry fund. All these options are further examined in Annex E).

The competent authority may enable these five categories of measures to be used individually or in combination. Thus, the resource user (or a company or companies affiliated to them) could use more than one measure to evidence capacity to meet their environmental obligations. This would reduce the risks associated with any single category. Insurance has proven to be the most popular instrument to cover environmental liability under the ELD, followed by bank guarantees, funds and bonds (see paragraph 4.1.1. of the report to the Council) (European Commission, 2010[13]).

4.3. Proposed recommendations

4.3.1. Eliminate any form of fault-based damages (e.g. liability arising from unauthorised emissions or exceeding a limit in an IEP) and discrimination

As previously set out, the application of financial “damages” as payments for non-compliant activity, regardless of environmental damage, is not consistent with an OECD/EU framework. This is true both in terms of applying sanctions for non-compliance, and in terms of liability for and remediation of environmental damages. The 2012 EECCA Damages Report describes this approach as “fault-based damages” (OECD, 2012[1]).

A system closer to OECD acquis should thus have three qualities. First, it should ensure physical evidence of actual harm to the environment. Second, it should ensure the assessment, and hence any calculations employed in that assessment, intends to determine replacement or remediation costs. Third, damages must be used only for restoration/remediation of the damaged resource or its replacement in an adjacent site, or reimbursement for the costs of the assessment or funding of a lost public service during restoration.

As in OECD member countries, monetary damages should be assessed. They should be used to restore the specific natural resource that the polluter was proven to have damaged to its condition before the pollution, or to restore the resource at an alternative site to an equivalent level.

A system closer to the experience of OECD members would consider pure monetary compensation for environmental damage as inconsistent with OECD standards. As mentioned previously, monetary pollution damages are meant to be restorative rather than to act as a form of punishment. Violation of laws (such as emission limit rules) is the domain of administrative penalties and criminal law.

A new system of damages would thus do the following:

  • Eliminate the indirect method of calculating damages.

  • Revoke the use of a direct method that is applied to fault-based damages. It should transition to the use of equivalency analysis to assess damages (see section 4.3.3).

  • Reject the idea that liability for damages arise from exceeding maximum permissible concentrations (EQS) of pollutants in the environment and maximum permissible limits (ELV) in emissions permits. As in OECD member countries, EQS and ELV should play no role in liability for environmental damages.

  • Ensure a joint order of the Prosecutor General and the Minister of Energy sets forth detailed criteria. These should identify types of evidence that suggest the presence of criminal intent and types of events that clearly exclude the element of intent. This is outlined in section 3.3.3.

The system of depositing monetary damages compensation into the state budget should be eliminated. Similarly, damages should not be put in an environmental remediation fund, as outlined in section 2.3.5.

Several recommendations revolve around the highly punitive and contested approach the government has adopted for damages (and penalties) for gas flaring. As mentioned in OECD (2017[8]), “the use of multiplied taxes and the indirect method for calculating monetary damages, with their focus on revenue raising, makes it impossible to gauge reliably the relation between pollution payments and marginal pollution reduction costs. A particularly acute illustration […] relates to [...] damages from gas flaring at upstream oil and gas facilities”. More should be done to adjust the system of damages (and penalties) with regulatory approaches used in OECD jurisdictions. All technical issues and guidance on gas flaring should be part of wider guidance on best available techniques for oil and gas production. These would serve as a basis for clear principles and regulations on flaring and permit conditions. Box 4.1 provides guidelines gained from the experience of OECD member countries.

Box 4.1. Specific guidance on damages for gas flaring

1. Most countries surveyed by the World Bank and its Global Gas Flaring Reduction Partnership opted for a more performance-based approach to flaring and venting reductions. While this approach still requires strict enforcement, it emphasises consensus and co-operation between the industry and the regulator in setting objectives and targets. Most countries have thus moved away from a highly prescriptive regulatory system. Such systems use specific and detailed regulations to give clear direction on regulatory processes and procedures, set expectations of operators, and provide incentives for compliance through strict enforcement (BSEE, 2017[14]).

2. The 2017 Law on Subsoil and Subsoil Use allowed for technologically unpreventable flaring under specified conditions and authorised by the Ministry of Energy. However, to converge further towards an OECD benchmark, Kazakhstan cannot use a fault-based approach to establish environmental damage. This is particularly true in the case of unplanned flaring or flaring that technology cannot prevent. In these cases, a fault-based approach automatically imposes a penalty in the scenario of breach of limits on duration, volume or ELV. Nor should Kazakhstan impose limits on the duration of unplanned sour and acid gas flaring that are more stringent than the OECD benchmark. In most OECD members, regulatory programmes define the duration of unplanned flaring, not as an absolute limit, but rather as a threshold for requiring a permit. No permit is required for unplanned flaring for durations less than the specified time periods. For longer periods, flaring may be allowed subject to a permit or other authorisation. In Kazakhstan, breaching those limits or flaring within the limits in an unplanned and technologically unavoidable flaring scenario, results automatically in damages (and penalties). And these damages are established using the indirect formula, not based on evidence of actual damage to the environment. However, even a direct method of calculating damages would be inconsistent with OECD standards if damages liability was connected to unauthorised or above-limit emissions.

3. Finally, flaring regulations also incorporate the concept of “assimilative capacity” in OECD jurisdictions. In this concept, air can receive and assimilate a certain mass of emissions with no environmental damage. Again, environmental damages and compensations can thus only be claimed if an act of pollution has caused harm or injury to others or to a natural resource. Flaring regulations establish limits on the duration and volume of flaring. These aim to prevent exceedances of air quality criteria at prescribed locations. Air dispersion modelling can be used to analyse whether gas flaring has exceeded air quality criteria. However, exceeding emissions limits is a question of administrative liability. In this case, the consequence – without clear evidence that the air pollution has directly caused harm to land or water and subject to the pyramid approach – would be penalties, not damages. This is extremely rare in OECD countries and non-existent in OECD countries in relation to non-continuous gas flaring at upstream oil and gas production facilities.

Source: Author’s elaboration based on interviews and desk research.

4.3.2. Define further environmental damage

An essential component of the effective functioning of any framework of environmental liability is a clear and legally robust definition of “environmental damage” (or analogous variants, such as “damage to the environment” or “harm to the environment”). There is imprecision and inconsistency over how environmental damage is defined under the Environmental Code (as amended).

Kazakhstan should thus:

  • Define environmental damage more fully, referring to that definition more consistently throughout the relevant provisions of the Environmental Code, and using the EU ELD as a basis.

  • Provide guidance on the threshold of damage necessary to render the relevant resource user liable for remediation costs (e.g. specific determinants of the significance of the damage).

  • Incorporate damage to the services provided by natural resources for other natural resources and the public in the definition of environment damage. This prevents problems when assessing the level of damage to the environment caused by a resource user and, ultimately, determining the appropriate level of compensation due from them. The polluter will not pay to remedy the full extent of the damage caused.

Relatedly, Kazakhstan could also follow the approach adopted under the ELD that presumes a causal link between operators and pollution based on proximity of installations to the polluted area. The competent authority must have plausible evidence to justify its presumption. This could include, for example, the close proximity of the operator’s installation to the pollution, and a correlation between the pollutants identified and the substances used by the operator in connection with its activities. Where the competent authority has such evidence then it could, and should, establish the requisite causal link between the operators’ activities and the (diffuse) pollution.

Operators, of course, should be able to attempt to rebut the presumption that their activities have caused any damage through adducing relevant evidence.

4.3.3. Move towards equivalency analysis to assess damages instead of the indirect method

While the Environmental Code deals with primary remediation, it has no explicit reference to either complementary or compensatory remediation. This is an important omission as it substantially weakens the ability of the government to implement the Polluter-Pays Principle fully and effectively. Kazakhstan should thus consider the introduction of such a reference. This would create an opportunity for equivalency analysis to become part of Natural Resource Damage Assessment in Kazakhstan, building on the experience of OECD members.

Three types of remediation should be considered in the case of environmental damage, where possible (Bullock and O’Shea, 2016[15]). First, primary remediation should restore a damaged resource or impaired service to its baseline condition. Second, complementary remediation should be used when a site cannot be fully restored through primary remediation. It should also be considered when remediation involves intervention or improvements to habitat at another site that is physically or geographically linked in terms of species/habitats or human interactions. Third, compensatory remediation should be considered in cases of interim losses before ecological functions can be fully restored or replaced (i.e. compensation/reimbursement for the service that the natural resource provided).

4.3.4. Reserve power to bring lawsuits in the public interest to state authorities

Kazakhstani citizens should retain the right to bring individual or collective damages lawsuits for harm to their health or property under the Civil Code. However, citizens should not substitute for the state and bring damages lawsuits in the public interest. Hence, as in the European Union’s ELD and in the United States’ CERCLA and OPA, citizens should not have the right to bring environmental damages claims for harm to public natural resources. Citizens should ensure that competent authorities take all necessary enforcement actions.

4.3.5. Strengthen the requirements for operators to make financial provisions

Requirements for high-risk resource users to make financial provision for their environmental liabilities should be introduced. These should ensure that an ecosystem does not remain un-remediated and that the state does not have to pay from its own budget, in line with the important policy objectives driving the Polluter-Pays Principle.

An operator (or a party related to them, such as a parent company or other group company) should indeed make financial provision in certain cases. Specifically, it should occur where operators or parties provide and maintain evidence that they have made provision for environmental obligations to which the resource may (i.e. following an industrial accident) or will (i.e. under the terms of their permit) become subject. This would take the form of a certificate or other documentation. This could, depending upon the particular obligation under consideration, comprise measures such as insurance, a bank guarantee, a bond or a cash deposit with the competent authorities. It should also include contributions to an industry fund in a non-discriminatory way, in particular with foreign-owned operators.

Competent authorities may assess the provision offered by a resource user by whether it is secure, sufficient and available. The funds represented by the measure(s) should be secure in the event of the resource user’s bankruptcy. This means that funds or assets used for the provision are ring-fenced and not rendered available to the general body of creditors. The funds should be sufficient to cover the costs of a third-party undertaking the requisite (but outstanding) works. Finally, the funds should be available when required. This means that there is a ready source of funds for the requisite works when needed (EPA, 2015[16]).

References

[3] American Chamber of Commerce in Kazakhstan (2018), Analysis of Deviations of Kazakhstan’s Environmental Payments Systems from OECD-Country Standards, and Recommendations for Reforms, 9 April 2018, American Chamber of Commerce in Kazakhstan.

[11] Brans, E. (2006), REMEDE: Resource Equivalency Methods for Assessing Environmental Damage in the EU, Deliverable No.5: Legal Analysis, REMEDE, http://www.envliability.eu/docs/LegalAnalysis_D5_PRDF_071206_FINAL.pdf.

[14] BSEE (2017), Venting and Flaring Study Report: Analysis of Potential Opportunities to Reduce Venting and Flaring on the Outer Continental Shelf, Bureau of Safety and Environmental Enforcement, Washington, DC, https://www.bsee.gov/sites/bsee.gov/files/5007aa.pdf.

[15] Bullock, D. and R. O’Shea (2016), “Valuing environmental damage remediation and liability using value estimates for ecosystem services”, Journal of Environmental Planning and Management, Vol. 59/9, pp. 1711-1727, http://dx.doi.org/10.1080/09640568.2015.1085842.

[16] EPA (2015), Guidance on Financial Provision for Environmental Liabilities by the Office of Environmental Enforcement, Environmental Protection Agency, County Wexford, Ireland, https://www.epa.ie/pubs/advice/licensee/financiaprovisionsreport.pdf.

[7] European Commission (2013), Environmental Liability Directive: Training Handbook and Accompanying Slides, European Commission, Brussels, http://ec.europa.eu/environment/legal/liability/pdf/eld_handbook/ELD%20Training%20Handbook%20-%202%20days_en.pdf.

[13] European Commission (2010), Report under Article 14(2) of Directive 2004/35/EC on the environmental liability with regard to the prevention and remedying of environmental damage, European Commission, Brussels, http://ec.europa.eu/environment/legal/liability/pdf/com_2010_0581.pdf.

[6] European Court of Justice (2017), Opinion of Advocate General Kokott delivered on 16 February 2017, European Court of Justice, Luxembourg, https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A62016CC0129.

[5] European Parliament (2017), Resolution of 26 October 2017 on the application of the ELD 2004/35/EC,, https://eur-lex.europa.eu/legal-content/GA/TXT/?uri=CELEX:52017IP0414.

[10] Fogleman, V. (2015), “Landowners’ liability for remediating contaminated land in the EU: EU or national law? Part 1: EU law”, Environmental Liability, Vol. 23/1, pp. 6-22, http://www.lawtext.co.uk/pdfs/sampleArticles/EL23-2FOGLEMANpt1.pdf.

[4] Fogleman, V. (2006), “Enforcing the Environmental Liability Directive: Duties, powers and self-executing provisions”, Environmental Liability, Vol. 14/4, pp. 227-146, http://www.lawtext.com/pdfs/sampleArticles/EL-14-4-Fogleman_18_09_06.pdf.

[9] Lipton, J. et al. (2018), Equivalency Methods for Environmental Liability, Lipton, J, E. Özdemiroğlu, D. Chapman and J. Peers (eds.), Springer Netherlands, Dordrecht, http://dx.doi.org/10.1007/978-90-481-9812-2.

[12] Mackie, C. (2014), “The regulatory potential of financial security to reduce environmental risk”, Journal of Environmental Law, Vol. 26/2, pp. 189-214, https://doi.org/10.1093/jel/equ014.

[17] OECD (2017), Environmental Fiscal Reform: Progress, Prospects and Pitfalls, OECD Report for the G7 Environment Ministers, OECD Publishing, Paris, https://www.oecd.org/tax/tax-policy/environmental-fiscal-reform-G7-environment-ministerial-meeting-june-2017.pdf.

[8] OECD (2017), Multi-dimensional Review of Kazakhstan: Volume 2: In-depth Analysis and Recommendations, OECD Development Pathways, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264269200-en.

[1] OECD (2012), Liability for Environmental Damage in Eastern Europe, Caucasus and Central Asia (EECCA): Implementation of Good International Practices, OECD Publishing, Paris, http://www.oecd.org/env/outreach/50244626.pdf.

[2] UNECE (2019), Environmental Performance Reviews: Kazakhstan, Third Review, Environmental Performance Reviews Series, United Nations Economic Commission for Europe, Geneva.

Notes

← 1. See http://adilet.zan.kz/eng/docs/K070000212_.

← 2. Interview with the Senior Solicitor of the Office of the Solicitor, Environmental Restoration Branch, of the US Department of the Interior, responsible for enforcing CERCLA (American Chamber of Commerce in Kazakhstan, 2018[3]).

← 3. See http://adilet.zan.kz/eng/docs/K070000212_.

← 4. “Rules for the economic assessment of damage from environmental pollution” approved by the government of the Republic of Kazakhstan dated 27 June 2007 N 535 (with amendments and additions as of 21 June 2016): http://adilet.zan.kz/rus/docs/P070000535_.

← 5. Ibid.

← 6. This is confirmed by Article 16(7), which asserts that the government of Kazakhstan, in the scope of environment protection and natural management, is to approve “rules for economic evaluation of damage from environmental pollution”. Under Article 95(7), “economic assessment of the damage caused to the environment” is recognised by the Code as a type of “economic regulation mechanism for environment protection and natural management”. See http://adilet.zan.kz/eng/docs/K070000212_.

← 7. See Figure 6 (OECD, 2017[17]).

← 8. See http://adilet.zan.kz/eng/docs/K070000212_.

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