Nber Working Paper Series Environmental Liability and Redevelopment of Old Industrial Land

Many communities are concerned about the reuse of potentially contaminated land ("brownfields") and believe that environmental liability is a hindrance to redevelopment. However, with land price adjustments, liability might not impede the reuse of this land. Existing literature has found price reductions in response to liability, but few studies have looked for an effect on vacancies. This paper studies variations in state liability rules — specifically, strict liability and joint and several liability — that affect the level and distribution of expected private cleanup costs. It explores the effects of this variation on industrial land prices and vacancy rates and on reported brownfields in a panel of cities across the United States. In the estimated equations, joint and several liability reduces land prices and increases vacancy rates in central cities. Neither a price nor quantity effect is estimated from strict liability. The results suggest that liability is at least partly capitalized, but does still deter redevelopment. Hilary Sigman Department of Economics Rutgers University 75 Hamilton Street New Brunswick, NJ 08901-1248 and NBER [email protected] Many communities seek to encourage the redevelopment of sites that are idle or under-used because of potential contamination (known as “brownfields”). Redevelopment of these sites is desirable because they are a disamenity and seen as a substitute for use of relatively pristine land (sometimes known as “greenfields”), which reduces open space and requires construction of new infrastructure. A survey by the U.S. Conference of Mayors (USCM) found about 25,000 brownfield sites in the 205 cities that responded (USCM, 2002). Environmental liability — in particular, the threat of being compelled to pay for cleanup of contamination — is perceived as a significant barrier to redevelopment. The respondents to the USCM survey cited liability as second only to lack of cleanup funding as the major obstacle to redevelopment. In 2001, Congress passed the Small Business Liability Relief and Brownfields Revitalization Act, which funded and codified an existing EPA grant and loan program for cleanup of brownfields and included several provisions to reduce the presumed liability deterrent. Reuse of contaminated land remains an active issue for state and federal policy in the U.S. and abroad. Despite the perception of a problem, the economics literature raises theoretical questions about the impact of liability on redevelopment (Boyd et al., 1996; Segerson, 1993, 1994). Much of the policy discussion fails to consider real estate price adjustments in face of expected liability and thus may overstate the deterrent to redevelopment. Empirical questions about the role of liability also remain. Urban and industrial decline long predates modern environmental laws, so liability is at most a partial explanation for under-used industrial land. Previous literature has explored the effect of liability on prices (e.g., Jackson, 2002; Alberini et al., 2006). However, only a few studies focus on “mothballing” of land (Schoenbaum, 2002; Howland, 2000, 2004) or the deterrent to redevelopment (McGrath, 2000). This earlier research uses the level of contamination at a site to measure the extent of liability. This approach potentially confounds the variation in liability with other spatial heterogeneity.1 In this paper, I use panel data on cities across the US to estimate the effects of variation in environmental liability on prices and vacancy rates of industrial land. Most industrial land is 1For example, Schoenbaum (2002) finds a positive association between land values and brownfield status in Baltimore.