Question

The U.S. government actively seeks the identification and cleanup of sites that contain hazardous materials. The Environmental Protection Agency (EPA) identifies contaminated sites under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The government will force parties responsible for contaminating the site to pay for cleanup whenever possible. Also, companies face lawsuits for persons injured by environmental pollution. Potentially responsible parties include current and previous owners and operators of hazardous waste disposal sites, parties who arranged for disposal of hazardous materials at the site, and parties who transported the hazardous materials to the site. Potentially responsible parties should accrue a contingent environmental liability if the outcome of pending or potential action is probable to be unfavorable and a reasonable estimate of costs can be made. Amounts for environmental liabilities can be large. For example, Exxon paid damages totaling $5 billion for the highly publicized Exxon Valdez tanker accident. Estimates to clean up sites identified by the EPA range as high as $500 billion to $750 billion. The "superfund" sites are sites with the highest priority for cleanup under CERCLA. Estimates to clean up these sites alone total $150 billion. The responsible parties face additional lawsuits as well and these potential losses are not included in these totals.

Required:
a. Discuss why environmental liabilities are especially difficult to measure.
b. Discuss how you would adjust the financial analysis of companies that are predisposed to environmental legal action but have not accrued any contingent loss amounts. For example, how might you adjust your beliefs about the financial position of Union Carbide and its competitors following the Bhopal tragedy?
c. Identify three industries that you consider as likely to face significant environmental risk. Explain.



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  • CreatedJanuary 22, 2015
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