The Winding Road to Industrial Safety: Evidence on the Effects of Environmental Liability on Accident Prevention in Germany

The German Environmental Liability Law (ELL) of 1991 has introduced far-reaching civil liability for environmental damages with the aim of increasing firms' efforts to prevent accidents. Previous studies find poor evidence that this goal has actually been achieved. One and a half decades after the introduction of that law, we undertake a new attempt to investigate the impact of the ELL on accident prevention. Our analysis is based on annual data on the number of environmental accidents per year, reported to the monitoring agency ZEMA, and the risk premium imposed by a large German insurer on environmental liability insurance (ELI). Examining the relationship between the ELI premium and accident prevention, we are able to model the dynamics of the adjustment process induced by the ELL. According to our results, the average number of environmental accidents per year has decreased from 35 before to 22 after the reform.