Sources of Harm and Causes of Action
When someone buys a home, they are buying a bundle of amenities beyond physical shelter, ranging from granite countertops to desirable local schools and other public services. The purchase price represents the total value of this bundle, although buyers do not receive a disaggregated bill laying out the contribution of each to the final price. Though statistical analysis may be able to disentangle the values of measurable features (such as square footage or the number of bedrooms), economists rarely attempt to determine why particular attributes have value. But these reasons may be particularly relevant for determining damages from environmental harms.
A variety of mechanisms determine or classify how environmental harms impact property owners and values. An environmental harm may cause one-time physical damage to a property. For example, a flood may damage or destroy structures or personal items. Another mechanism is ongoing avoidance costs, which involve a homeowner taking mitigating measures on an ongoing basis, such as installing a filtration system that generates ongoing operation and maintenance costs following groundwater contamination. A resident’s use and enjoyment of their property, however, may be hampered in a way that is not avoidable or is only avoidable at great cost; an example may be odors from paper mills that cannot be controlled or eliminated and that are unpleasant for nearby residents. Lastly, economic theory has long understood that risk and uncertainty impose costs. In this context, uncertainty costs reflect concerns that conditions may worsen or residents may experience health issues in the future. These stigma damages, discussed further below, are a potential legal remedy for environmental harms that cannot be fully addressed through remediation.
A single environmental harm often encompasses several of these mechanisms together. Consider a relatively simple harm: noise pollution from a nearby airport. While it might seem that this harm leads only to loss of use and enjoyment, homeowners also may undertake measures to reduce the harm by replacing windows or increasing insulation. Or consider another simple harm: contamination of a drinking water source beneath one’s property. This may lead to the installation of a filtration system (a one-time capital cost), ongoing maintenance of that system, and uncertainty about the future course of the contamination.
Risk and uncertainty are real costs borne by buyers and sellers: Stock returns are higher than corporate bond prices because equities are riskier than debt, and corporate bond prices are higher than U.S. government bond prices because companies are more likely to default than the federal government. Economists recognize these costs in the context of environmental harm, often labeling them “stigma” costs.
In the legal context, stigma can be considered “the subjective potential by a purchaser of a property to either reduce his willingness to purchase the property or to diminish the value of the property due to negative perception rather than environmental contamination.” John C. McMeekin II et al., Stigma Damages and Diminution of Property Claims in Environmental Class Actions, 24 Env’t Claims J. 260, 261–62 (2012). However, state law may limit the ability for plaintiffs to claim these damages; notably, this ability may depend upon whether the harm is temporary or permanent and whether the property experienced direct harm in addition to any alleged stigma damages. Alex Geisinger, Nothing but Fear Itself: A Social-Psychological Model of Stigma Harm and Its Legal Implications, 76 Neb. L. Rev. 452, 455–56 (1997).
Some courts have been reluctant to consider stigma damages because they are too speculative to determine. Houston Unlimited, Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820 (Tex. 2014). However, housing price declines provide a tangible measure of any stigma value experienced by residents. Though the qualitative experience generating stigma may be difficult to characterize, its quantification is not.
While the impact of stigma can be captured as part of property value diminution, it may be that this impact is too remote from the harm to be legally actionable. For example, some academic research has found that a nuclear plant failure may temporarily depress property values near unrelated nuclear power plants on the other side of the world. These negative price shocks tend to recover within a year. Shinsuke Tanaka & Jeffrey Zabel, Valuing Nuclear Energy Risk: Evidence from the Impact of the Fukushima Crisis on U.S. House Prices, 88 J. Env’t Econ. & Mgmt. 411 (2018). Though there may have been a tangible impact on property values from a nuclear incident thousands of miles away, there is likely no legal cause of action that considers such impacts to be damages. This counterexample helps to frame the circumstances under which stigma constitutes an actionable mechanism supporting damages.
Conditions for Property Values to Serve as a Measure of Harm
While there can be several reasons why environmental harm can affect housing values, harm- and market-specific factors influence whether prices are actually affected. First, buyers must be aware of the harm. If evidence of contamination can be found in public records but is not widely known, for example, buyers may not be sufficiently aware of the contamination when making purchasing decisions. If, however, state laws or regulations require disclosures or public announcements that enable more buyers to become aware of environmental harm associated with a particular property, the date of such disclosure or announcement can be used by economists. A clear date of revelation or announcement of harm can provide a useful “natural experiment” that economists can use to establish the impact of the harm on property values.
In this scenario, property transaction prices from before and after the announcement can be compared to evaluate the impact of the contamination. This is called an “event study.” The reliability of this approach can be enhanced by comparing the change within the impacted area to the analogous change in prices for a similar but unaffected benchmark region. This latter calculation establishes the change that would have been expected in the absence of the harm. Taking the difference between the change in the impacted area and that for the unaffected area constitutes a “difference-in-differences” statistical approach, a method that has become a prominent methodology in economic research and in litigation.
Not all buyers are required to be aware of the harm or to have considered the harm, however. In markets, the price is determined not by all buyers (and all sellers), but rather by the marginal buyer (and marginal seller). The marginal buyer is a buyer who is on the fence about their decision and could be persuaded one way or the other—by learning about environmental concerns, for example. For unrelated reasons, some buyers may be especially eager to live in the affected area (to be close to family, for example) and other buyers may prefer to avoid the area (perhaps because the neighborhood has a negative perception unrelated to the environmental harm). Though these buyers may not be swayed by harm, their existence does not negate the harm’s potential to affect prices.
Second, the harmful conditions need to persist for a sufficient duration for prices to have an opportunity to change, and for the impact to be expected to linger long enough to influence people’s perceptions. If the harm occurs and is remediated so quickly that few transactions occur, then there is no opportunity to observe a change in prices. The latter point, duration of impact experienced, arises because the purchase of a home embeds expectations about the future. Because people often live in a home for several years, an impact that only lasts for a few months may not weigh heavily on their purchase decisions. For example, if a factory is emitting excessive smog due to a mechanical failure that is expected to be repaired within a few months, buyers may not change their offers very much. This does not mean that short-lived contamination fails to impact residents, only that those impacts may not be reflected in property transaction prices.
The duration and timing of the harm may vary across the different mechanisms underlying it. For example, consider a filtration system installed to treat water contamination. While the maintenance of such a system may be ongoing, the installation of the system occurs once (or, at least, infrequently). Sellers may decide to install such a system before listing their home to reduce concerns that buyers have about the contamination. In this case, home sellers bear the capital cost of the system, and buyers experience only the burden of ongoing maintenance. Hence, housing prices capture only the latter and not the former; in this instance, property value diminution by itself may not reflect the totality of the harm.
While markets are relatively quick to incorporate new information, the judgments of tax assessors are unlikely to be so responsive. Because assessed values are used to calculate property taxes—a prime source of revenue for many localities—local governments may have incentives to deemphasize the impact of environmental harm on property values. Furthermore, assessed values are often updated in an algorithmic way. One common approach applies a regional growth rate to the previous year’s assessed value for each property. These algorithms may mask regional differences in property values, especially when areas are differentially exposed to market pressures (such as an environmental harm). Even if assessed values are updated rigorously, a key input to such an assessment is transaction prices for comparable properties, which may not have experienced the same sources of harm. In this way, assessed values lag market transactions and may not account for devaluation from environmental harms.
Recent research on property tax fairness from the Center for Municipal Finance at the Harris School of Public Policy has found that, in general, assessed values are lower than market values. See, e.g., Christopher Berry, Reassessing the Property Tax (2021). Furthermore, the difference between assessed value and market value can depend upon the value of the property itself: the research indicates that lower-valued properties generally have assessed values that are closer to market values than higher-valued properties. Additionally, the growth rate of assessed values is typically faster for lower-valued properties than high-value properties. Because of these differences, use of assessed values (as opposed to market values) for estimating property diminution impacts or damages not only has the potential to bias those estimates, but also may do so differentially for low- and high-value properties, raising environmental justice concerns.
Though the focus of this article has been on property values, some of the mechanisms presented above can also impact rents. Property values can be thought of as representing the value of a stream of potential rent payments less the costs of providing the rental property and a return on investment. If landlords are expected to pay the costs associated with remediation and ongoing maintenance, then the value of the property to renters has not changed and thus rent levels should be maintained. If, instead, renters are required to pay any such costs, the characteristics of the property to the renter have worsened and therefore rents will fall to reflect the reduced value. Separately, renters and owners also may experience stigma to differing degrees.
It may be possible to use rent prices to measure the impact of environmental harms on property values. Because renters often occupy their homes for shorter periods than homeowners, the rental market may more quickly reflect environmental harm impacts. However, renters may be less informed about harms than buyers, dampening the signal. See Kelly C. Bishop et al., Best Practices for Using Hedonic Property Value Models to Measure Willingness to Pay for Environmental Quality, 14 Rev. Env’t Econ. & Pol’y 260 (2020).
Avoiding Double Recovery
To the extent that the impacts attributable to specific mechanisms can be determined using other methodologies, such as engineering studies of remediation costs, these identified costs should generally be viewed as confirmatory of the loss of value rather than additive to that loss. In the drinking water filtration example used above, for instance, an engineer can calculate the costs associated with ongoing maintenance of the system. According to economic theory, these costs should be incorporated (or capitalized) into the price of the home because they will be borne in the future, that is, after the property is purchased. This result implies that adding these maintenance costs to property diminution would result in double recovery of damages. To avoid double recovery, courts typically reward damages for the cost of remediation or the amount of the diminution of property value, but not both. E. Jean Johnson, Environmental Stigma Damages: Speculative Damages in Environmental Tort Cases, 15 J. Env’t L. 185, 197–98 (1997). If these ongoing expenses are the primary mechanism of harm, a party may want to calculate both direct operating costs and property diminution; both ought to provide similar results and, therefore, one can serve to support the credibility of the other.
However, some environmental harms also can cause damages that are remediated prior to the sale of a property. Because subsequent buyers do not experience these costs, they will not be reflected in property values and can serve as a distinct set of damages that is additive to the impact on housing prices. Continuing with the example above, while the future cost of operation of a groundwater filtration system is likely captured by a measured decline in property value, the diminished value may not capture the initial installation cost of that system. Hence, part of the remediation cost (the capital cost of the system) may be additive to the diminution in property values. In class action cases involving multiple plaintiffs or multiple properties, some properties may have systems installed prior to sale and others may not. In this situation, housing price impacts on their own may be a lower bound on damages (in the extreme, assuming that none of the affected properties had systems installed prior to sale), while the sum of the price decline and the installation cost of a filtration system may serve as an upper bound (to the other extreme, assuming that all properties included these systems prior to sale).
A less tangible but potentially ongoing impact of an environmental harm is loss of use and enjoyment. On its own, this claim is difficult to quantify; however, its value would be reflected in housing price changes. Thus, assessment of property diminution should capture these losses, and it would be inappropriate to claim damages for both property diminution and an independently calculated value of lost use and enjoyment. See, e.g., Exxon Mobil Corp. v. Albright, 433 Md. 303, 397–406 (Ct. App. 2013) (plaintiffs were entitled to diminution of value damages awarded by a jury, but not damages for loss of use and enjoyment).
The distinctions drawn above between costs that arise before a property is sold and those that arise after highlight the need to consider the mechanisms that underlie diminution in property values. These examples illustrate the potential for double recovery when other costs are considered, but they also highlight limitations of the “either-or” approach that some courts have taken when selecting a damages methodology.See, e.g., U.S. Steel Corp. v. Benefield, 352 So. 2d 892, 894 (Fla. Dist. Ct. App. 1977) (“Generally, with respect to wrongful injury to real property, there are two rules of damages:(1) the so-called ‘diminution in value’ rule, which is the difference between the value of real property before and after the injury; and (2) the cost of repairing or restoring the property to its condition prior to the injury, usually referred to as the ‘restoration’ rule.”).
Evaluating Property Diminution Damages to Make Parties Whole
Property values are a widely accepted tool for assessing damages from an environmental harm. Property transaction prices capture the full suite of amenities offered by a home and surrounding community. To the extent that the experiences of residents are impacted by an environmental harm, those impacts will be reflected in sale prices. The underlying mechanisms that lead to housing price impacts can be tied to theories of harm under American common law.
This article has focused on property diminution damages arising under common law by residents whose properties have been affected by environmental issues from nearby facilities. These residents also may experience personal injury, leading to separate claims and separate damages calculations. The impacts of the harm also may extend to others; for example, people may visit the region for recreational opportunities, which also could be affected, leading to another potential category of harm to be included in the damages calculation.
The general precept that damages ought to make a plaintiff whole prevails. If the impacts of an environmental harm are sufficiently short-lived or residents were not informed of the harm for an extended period, housing prices may not completely reflect harm. Ultimately, the mechanisms that cause the harm and the specific facts of each case will determine whether property value declines capture the full value of the environmental harm or whether other analyses may be necessary to make the plaintiff whole.
