Africa and environmental disasters: Can environmental insurance help?

Introduction

Globally, many developed countries are now confronted with environmental disasters that are destructive and sometimes life-threatening. Recent such disasters include the oil spills in the Gulf of Mexico off the coast of Louisiana in the United States of America, the oil spills of the Niger Delta of Nigeria, the red mud disaster in Hungary, and the environmental damage resulting from Hurricane Katrina. To address the effects of these disasters the victims look to their governments for compensation and subsidies, especially in the developed countries. In addition, many countries have adopted the so-called “polluter pays principle”. Thus, in the case of the British Petroleum oil spill in the Gulf of Mexico, the US government forced the company to pay billions of dollars for the clean-up. In addition to applying the polluter pays principle, a number of countries (both developed and developing) have also adopted environmental insurance schemes to cover environmental disasters. In fact, all these schemes and methods have been faced with some implementation challenges in developing countries. This brief article therefore looks at the polluter pays principle and other forms of environmental pollution liability insurance schemes to see how they can be strengthened to complement one another, particularly in Africa.

Polluter pays principle

The polluter pays principle (PPP) originated in developed countries.  Luppi et al. (2012) define the principle, quite simply, as “the person who damages the environment must bear the cost of such damage”. Other scholars, such as Beder (2006), see the principle as an environmental policy that allocates the costs of the prevention of pollution and controlling measures that encourage sustainable use of scarce environmental resources. In other words, application of the PPP is necessary for ensuring that social, economic and environmental goals are properly integrated throughout the process, starting with the decision-making stage. This is of critical importance when environmental impact assessments are carried out for major projects with potentially negative impacts on the environment.

Implementation of the PPP has been far from effective, however. For example, according to Beder (2006), governments offer incentives to reduce pollution, but the potential victims continue to be exposed to serious risks. Moreover, many European countries have adopted liability laws to deal with damage to property and human health (Beder, 2006).  In addition, to ensure that the polluter pays, the European Union member states have to monitor exactly what the polluter discharges into the environment and, to do so, they have to install their own pollution control equipment, and charge the polluter taxes and levies to cover government environmental protection costs (Beder, 2006). Luppi et al. (2012) acknowledge that, while it is true that many EU member states embrace the polluter pays principle, they have not shifted the entire costs of environmental degradation to polluting firms. In view of this somewhat flexible approach, therefore, they argue that the EU practice falls well short of what full implementation of the PPP requires.

On the other hand, the case of the BP oil spill in the Gulf of Mexico is unusual, because the United States is such a powerful country and, as Khor (2010) notes, BP – as a polluter – had no choice but to yield to its demands, because of political pressure and public anger. President Obama forced BP to set up a 20 billion-dollar fund to cover environmental costs and economic losses in affected areas and this amount may yet be further increased. This, regrettably, was not the case with the Niger Delta in Nigeria, where oil spills by Shell Company have had devastating effects on farmland areas and fisheries on which the people of the region depend for food and livelihoods.

Both these examples, especially that of the Niger Delta, raise questions about the value and credibility of the original EIAs that were carried out: had the reports been credible they would have indicated in their follow-up mitigation management plans the action that should be taken. This would have reduced the effects of the disasters and the polluter costs would have been much less, especially in the case of the BP oil spill. With regards to the Niger Delta, there have been several reports questioning whether Royal Dutch Shell did in fact carry out an EIA to begin with, including a mitigation plan. If they did, the studies done by other organizations, including that by the United Nations Environment Programme in 2011, seem to suggest that Shell has not been transparent about the oil spill clean-up activities they have carried out in the Niger Delta.

Looking beyond the PPP, and realizing how long the polluter takes to pay for damages, the government of India has adopted a transformative approach known as the “government pays approach”. Simply put, the government steps in for the polluter and pays for the damage and thereafter requests the polluter to refund the incurred costs (Luppi et al, 2012). This approach is being lauded by many developing countries, including Chile, Costa Rica, Kenya, Malaysia, and South Africa. Although the government pays principle has its own limitations, for now it is a preferred mechanism, in particular in Africa and other developing countries suffering from widespread poverty, unemployment, illiteracy, inequality, corruption and political instabilities.

Mandatory environmental insurance

Other countries, such as China, have introduced a different approach to environmental insurance. According to Combeau (2013), the government of China has mandated the compulsory purchase of pollution liability insurance for companies that have high environmental risks. This measure was prompted by the country’s recent national pollution crisis, which includes the widely publicized hazardous smog levels in Beijing, along with the doubtful safety of the drinking water in Shanghai, the degradation of the quality of groundwater resources across the country and the levels of soil pollution, which remain a state secret  (Combeau, 2013). Other countries that have joined China in introducing such a scheme include the Czech Republic, Greece, Hungary, Kazakhstan, the Philippines, Slovakia, Turkey and Spain (Combeau, 2013).

Mandatory environmental insurance has some positive aspects. For example, according to Combeau (2013), the governments concerned expect that underwriters will assess the risks and apply pressure on operators to improve pollution risk prevention and protection of manufacturing sites. In addition, it is much easier and cheaper to ensure control of the operation of the environmental insurance system by the enforcement authorities than to carry out full compliance gap analyses against operating permits. Reviews can be conducted regularly and this will improve the scale of the supervision. Moreover, following a pollution accident the responsible party will remain solvent and the taxpayers’ money will not have to be used to cover pollution liability.

There are limitations to this approach, however, including the need for the participating insurers to be in a position to provide the required coverage at a sustainable price. In addition, they must have sufficient human resources to carry out risk assessments and to enforce the follow-up recommendations. Furthermore, the fact that environmental insurance is required only for a business’s most hazardous activities renders it a less attractive proposition for the insurance market.

Whatever the problems, Combeau (2013) states that the government of China feels that it will generate sufficient funding for clean-up, repair and immunity without companies filing for bankruptcy. She warns that, to achieve this, however, committed governments should provide incentives to enhance pollution prevention and control, accompanied by enforcement of laws and sanctions. Otherwise there is a likelihood that insurers may be discouraged and decide to pull out of providing coverage in selected geographical areas or walk away from potential markets. Consequently, environmental insurance might be a counterproductive means of addressing pollution problems.

Status quo and recommended future steps

First, it is clear that, by and large, if a project is required by law to be subjected to an environmental impact assessment (EIA), its developers and sponsors should also be required to take out environmental insurance in the event that their activities damage the environment and they are deemed to be liable for and have to bear the total cost of the pollution. Ironically, the implementation of projects that are subject to an EIA, especially in Africa, faces serious challenges such as mismanagement and corruption, and in some cases the EIA reports have been substandard and not useful. In many cases the developers or investors have not built insurance policies into their projects and, if an accident happens, such as the collapse of a building, the blame is put on the government.

Accordingly, African countries should consider making insurance a mandatory requirement for certain categories of environmentally sensitive projects. This requirement should be applied pragmatically, in order not to drive away the few investors who might be interested in the region. That said, willing investors, especially from developed countries, should not apply double standards when they are outside their countries of origin where PPP or environmental pollution insurance is required. The example of BP and the response by the US government on the oil spill in the Gulf of Mexico is instructive.

Second, it is clear that the concept of environmental insurance is not fully understood in many sectors. African governments, environmental insurance companies and organizations such as the United Nations Environment Programme should therefore organize tailor-made workshops or seminars to demystify the subject. In this connection, Hawryluk (2014) urges the environmental impact assessment community to work closely with environmental insurance providers to understand and address the mitigation measures associated with decommissioning and rehabilitation after the completion of a project. According to available literature, the decommissioning activities present the biggest financial risk to the insurance industry in developed countries. Besides, as observed by Hawryluk (2014), including environmental insurers in the EIA process would not only improve understanding of the EIA process but also enhance its quality, by providing insight relating to potential impacts. In addition, given that environmental liability involves a large number of people and organizations, the effectiveness of environmental insurance calls for not only a solid working partnership with key stakeholders but also a very strong degree of knowledge and understanding of the industry.

Third, all things considered, the effectiveness of environmental insurance schemes continues to be impeded by problems of enforcement, in particular of the polluter pays principle. Enforcement cuts across many sectors or areas, essentially because of corruption and lack of capacity. Moreover, in Africa, this problem is compounded by the lack of strong political will: African leaders have been reactive and defensive, especially when it comes to disasters.

No matter what, unless enforcement of the requirement for environmental insurance of projects that have a potential negative impact on the environment is taken seriously we will continue to regularly see disasters with unmanageable liabilities. Consequently, projects or programmes with high environmental risks, whether insured or not, call for effective and proper pollution preventive measures.

Fourth, one of the lessons learned from the BP experience in the Gulf of Mexico is that if the PPP has to be implemented to the letter in Africa, it will force many medium-sized companies, firms and manufacturing plants to file for bankruptcy after an accident. Clearly, given the huge sums of money involved in some cases, the polluter should have been obliged to take out pollution liability insurance to offset any possible damage costs. In addition, large and powerful companies such as those in the oil and gas sector may use certain stratagems to circumvent paying the actual costs of the accident.

This arises because, in practice, environmental issues are often not taken seriously by African governments, which cite pretexts such as the danger that they will hinder development, especially job creation and poverty alleviation. As a cautionary aside, we might note here that a comparable view is also held by US president-elect Trump. His campaign promise that he will cancel the Paris Agreement and get the coal mines up and working again is evidence enough of his total lack of regard for environmental issues. In some African countries, such as in Kenya (the housing sector), Nigeria (the Niger Delta), Lesotho (the Highlands Water Project), and others, government officials are known to have accepted bribes and overlooked environmental damage. Whatever the case, the application of PPP should be pragmatic, like the approach taken by some EU countries, and accompanied by an environmental liability insurance to cover any eventualities.

Conclusion

In tackling pollution or environmental risks, African countries should ensure that companies or individual developers subscribe to either PPP or environmental pollution liability insurance. This should be done in every instance where an environmental impact assessment is prepared for large-scale environmentally sensitive projects. As noted by Susavidge and Barry (2002), in the past, environmental pollution liability insurance coverage was prohibitively expensive, but the perceptions and uses of environmental insurance have changed substantially. With this in mind, the various approaches currently available, namely, the polluter pays principle, the government pays principle and mandatory environmental insurance, would appear to offer dynamic mechanisms that are mutually complementary.

According to Susavidge and Barry, by embracing environmental insurance, many businesses find themselves sitting comfortably in lucrative business deals, as opposed to the skepticism that dominated the industry in the past. No matter what, Africa should take advantage of the changing circumstances in today’s environmental insurance industry and ensure that certain activities which have serious negative impacts on the environment include the obligation to take out insurance. This is the policy followed, for instance, by the auto industry: in most African countries, as elsewhere in the world, given the heavy traffic and poor roads one cannot drive a vehicle without insurance – whether comprehensive or third party.

* Ambassador Dr. John O. Kakonge is a sustainable development consultant.

References 

Beder, S. (2006). “The Polluter Pays Principle”, in Environmental Principles and Policies. University of New South Wales Press Ltd., Sydney, Australia.

ombeau, J. (2013). “Can mandatory environmental insurance resolve pollution problems in China and the rest of the world?” Willis Towers Watson Wire. Available from http://blog.willis.com/2013/12/can-mandatory-environmental-insurance-resolve-pollution-problems-in-china-and-the-rest-of-the-world/.  Accessed 10 October 2016.

Hawryluk, R. (2014). “Should the insurance industry take a more active role in EIA?”Available from https://mastereia.wordpress.com/2014/02/26/should-the-insurance-industry-take-a-more-active-role-in-eia/.  Accessed 31 October 2016.

Khor, M. (2010). “The double standards of multinationals”.The Guardian, U.K. Available from https://www.theguardian.com/commentisfree/cif-green/2010/jun/25/double-standards-multinationals-ecological-disasters. Accessed 15 October 2016.

Luppi, B., Pansi, F. and Rajagopalan, S. (2012). ”The rise and fall of the polluter-pays principle in developing countries,” In International Review of Law and Economics, vol. 32 (1), pp. 135–144.

Susavidge, M. A. and Barry, S. (2002). “Environmental Insurance Insuring the Deal”. Canadian Underwriter. Available from www.canadianunderwriter.ca/features/environmental-insurance-insuring-the-deal.  Accessed 24 October 2016.

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