Valuing environmental damages: Fundamental issues and methods

Abstract

Ecological destruction is one of the greatest challenges of our times. When it is human-based and directly caused by risky activities, liability can play a role in addition to all other regulatory and market-based tools. From a legal perspective, liability primarily aims for victim compensation, whereas, from an economic perspective, its main goal is deterrence. This can be achieved by inducing potential polluters to invest in care (ex ante) in order to minimise expected losses (ex post). Yet, several issues might undermine the possibility to achieve either compensation or deterrence. The aim of this article is to examine how different methods of damage assessment in litigation can enhance or undermine the goal of environmental liability from an economic perspective. More precisely, the overarching research question is whether the available methods of damage assessment are likely to pursue deterrence in an efficient manner. The article is thus structured in the following way. First, the theory of tort law and economics is reviewed to explain how damages should be theoretically assessed to achieve deterrence. Secondly, drawing on the scholarship of environmental economics, advantages, drawbacks and practical use of traditional methods of environmental damage assessment are illustrated. Lastly, conclusions will be drawn based on the comparison of these methodologies in view of providing judges with a cost-effective and ‘on average’ accurate valuation technique, taking also into account the recent ecosystem service approach to damage assessment.