Determinants and effects on property values of participation in voluntary cleanup programs: the case of Colorado

Contemporary Economic Policy, July, 2007 by Anna Alberini

I. INTRODUCTION

Environmental regulation and enforcement-based environmental programs sometimes result in unintended consequences that defeat the purpose of the programs themselves. Many observers argue that the U.S. Superfund program is one such program. Over the last 25 yr, Superfund has identified contaminated sites needing environmental remediation, tracked down the responsible parties, and forced them to pay for the cleanup (or reimburse the U.S. Environmental Protection Agency [U.S. EPA] for the cleanups it initiated). Liability for the cost of cleanup is retroactive, strict, and joint and several, with potentially responsible parties to be sought among the owners and operators of the site and transporters of the wastes.(1)

In theory, these features should deter firms from handling hazardous waste carelessly. In practice, since liability has in some cases been construed to apply to property owners and lenders who foreclose on contaminated properties (Fogleman, 1992), they have also been blamed for discouraging the purchase and reuse of contaminated or potentially contaminated sites, which have remained idle or underutilized.

Recent state programs and federal legislation have attempted to reverse these disincentives. For example, the federal Small Business Liability Relief and Brownfield Revitalization Act of 2002 provides conditional relief from environmental liability for property owners and purchasers of land. In addition, starting in the 1990s, several states began establishing voluntary cleanup programs (VCPs) offering liability relief, other economic inducements such as tax credits or low-cost loans, oversight and expedited approval of cleanup plans, and simplified cleanup standards in exchange for site cleanup (Bartsch and Dorfman, 2000; Meyer and VanLandingham, 2000).

Despite much interest in policy circles and the attractiveness of relying on economic incentives rather than enforcement-based approaches, the effectiveness of these programs in promoting environmental remediation has not been studied to date in the economics literature. Little is known about the responsiveness of cleanup and redevelopment activity to these inducements, and while several studies have examined the effects of contamination on the value of commercial and industrial properties, none has focused on the appreciation potential (if any) of parcels participating in VCPs. Yet, these are important environmental policy questions, especially if we consider that the emphasis of these VCPs has gradually shifted away from environmental remediation goals toward economic development goals and that participation in the VCP is required in some states--such as Pennsylvania--for transferring contaminated properties (Meyer, 2000).

In this paper, we ask three related questions: First, what are the characteristics of parcels that make them attractive candidates for voluntary cleanup? Second, do other local and federal economic development programs (whether or not specifically targeted for contaminated sites, such as enterprise zone or brownfield zone designations) make voluntary cleanup more or less likely? Third, what are the effects of participation in VCPs on property values?

Given the wide variety in program features across states, and the dearth of data documenting program enrollment and the characteristics of participating and nonparticipating properties (Meyer, 2000), we do not attempt a national-level analysis of VCPs. Instead, we focus on one state, Colorado, which established its VCP in 1994 and use information about individual parcels to estimate (a) a probit model of participation in the Colorado VCP and (b) a hedonic pricing model that relates property value to characteristics of the parcel and the neighborhood, and on whether the parcel was signed up for the program.

Three important lessons emerge from our analysis. First, the program has not "absorbed" the existing supply of sites on EPA registries of contaminated sites but has rather created a new "crop" of sites. Second, because the majority of these properties apply directly for a No Further Action determination, the program does not seem to have encouraged much environmental remediation. Third, the participating properties are probably those with the highest redevelopment potential.

The results of hedonic pricing regressions where participation is allowed to be endogenous with property values show that sites with confirmed--not merely suspected--contamination sell at a 43%-56% discount relative to comparable uncontaminated properties. Participation seems to result in a partial to complete price recovery.

The estimate of the contamination discount is robust to the way we construct our sample of properties--whether we focus on sites on EPA registries of contaminated sites (augmented with the sites that actually participated in the VCP) or form an alternate treatment-control sample where participating sites are pooled with nonparticipating parcels selected at random from the universe of properties in the same areas slated for similar uses. The exact extent of the rebound in property values does vary across these two samples, and price recovery appears to be complete only for the alternate sample.