The Other Toxic Gunk

Wednesday, September 29, 2010

The recent oil spill in the Gulf of Mexico offers a somber occasion for rethinking the proper response to man-made disasters. First, the spill should put into perspective the many modest social inconveniences that all too often are the focal point for major environmental smack-downs. “Visual pollution,” for instance, is often trumpeted as a reason to block private landowners from building beachfront homes. Habitat preservation is urged to justify saving wetlands or setting aside extensive space for endangered species.

All that fancy footwork should be set aside. If the government wants to order people to use their private property for public benefit, it should condemn that property with public dollars—which may not be easy to raise for these partisan and often-quixotic requests.

But any sensible impatience with a misguided environmental imperialism is beside the point in the current case. From the earliest times, every legal system has treated the discharge of deadly substances into the environment as a legal wrong to public and private property alike. Tort remedies are essential to protect people (and their property) who do not have contractual relations with defendants from harms such as air and water pollution. The legal system should never allow self-interested parties to keep for themselves all the gains from dangerous activities that unilaterally impose losses on others—which is why even the most devout defender of laissez-faire must insist, not just concede, that tough medicine is needed in these cases. The only real dispute is over the choice of the remedies used to compensate for past losses and to prevent future similar harm to public and private lands and to the people and wildlife that use them.

Yet designing a workable remedial system for these laudable ends raises its fair share of pitfalls. What follows is a primer on some key issues that shows no partiality to either BP or its many adversaries.

First, the courts should not waffle on the question of legal responsibility. BP (and its co-venturers) should, as the legal jargon has it, be strictly liable for the harm that follows from the blow-up of its well. The same is true for Transocean, the owner and operator of the drilling rig, and perhaps even Halliburton, which had done some work on the rig just before it exploded. Lawyers often find it tempting to dilute responsibility if, for instance, natural forces contributed to destruction, but such defenses only muddy the legal waters. BP changed the shape of the underwater landscape. The injured parties did absolutely nothing. Put all the blame on BP and rest assured that it will hustle, as it has hustled, to minimize the harm.

Other Toxic Gunk
Legal systems have always treated the discharge of deadly substances into the environment as a legal wrong to public and private property alike.

We have to be especially wary of statutory caps on tort damages, including the current law, under which, in the case of the oil industry, the “total of liability . . . with respect to each incident shall not exceed for an offshore facility except a deepwater port, the total of all removal costs plus $75 million.” That $75 million is chicken feed. Fortunately, the law removes that cap if the incident was caused by “the gross negligence or willful misconduct” of any party, or its failure to comply with any “applicable federal safety, construction, or operating regulation.”

BP waived the cap by expressing its willingness to pay “any legitimate claim.” The evidence to date suggests the cap will be blown off anyway, precisely because of the two exceptions. But we would all be much better off if there were no statutory liability cap and if operators both big and small were required to purchase insurance—amounting to the tens of billions if necessary—when they operate in dangerous waters or terrains.

A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff—so that in this case companies with weak safety profiles don’t get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job of pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate. (This logic also suggests that we should rethink the Price-Anderson Act’s $375 million cap on damages for each party responsible for an incident at a nuclear power plant.)

Second, and paradoxically, not every party that has been hurt can recover for its losses. The proper plaintiffs include the private individuals whose beaches and wharves have been blackened by the oil spill. In addition, someone has to be able to sue for losses to the fish and marine life that have no private owner, for these resources have great value in their wild state whether or not they would have been captured in the ordinary course of events.

At one level, therefore, Louisiana or the United States should be entitled to press claims for the damage to public waters. In addition, some aggrieved private individuals hurt by the disaster should sue as well for these environmental harms. But who? In most disaster cases, courts rightly allow suits by the parties who would catch the fish or swim in the waters. Yet at the same time they uneasily deny any remedy to the squadrons of other firms that service these front-line activities.

BP changed the shape of the underwater landscape. The injured parties did absolutely nothing.

This inelegant compromise tries to meet the twin demands of optimal deterrence and administrative convenience. Both classes of claimants have suffered real economic losses from the spills, but the second-tier firms are far more diffuse than the direct victims. On average, these remote plaintiffs have far greater opportunities to mitigate losses by doing business elsewhere. The direct claimants have losses that run into the billions, so that deterrence remains strong even if compensation is incomplete. Valuation of these direct claims is no joyride; nor is the control of fraudulent claims. But both difficulties become far more pronounced with indirect claimants. So it is best to leave well enough alone.

Now what, if anything, should be done to prevent the occurrence of these gigantic spills? Again, the key point is to keep matters in perspective. We have had only one major spill since the terrible Santa Barbara oil spill in January 1969, when the technology was far more primitive than it is today. The issue here is not about the legitimacy of government regulation. Those efforts seem perfectly appropriate as a complement to private-damage actions by working to stop blowouts before they occur. So by all means work hard to improve safety inspections and techniques, but beware of any near-reflexive call for tougher regulation on this or other projects absent a clear demonstration of regulatory failure (and be skeptical that this or any other presidential administration will reform the Department of the Interior’s hapless Minerals Management Service). The oil companies have the financial resources to answer for their mistakes.

If, as has been argued, BP has the worst record on this count, the heavy burden of the tort system will lead more reliable firms to take a larger role. I doubt that the federal or state governments have the expertise to design a detailed code for safety regulation in the many locales where drilling takes place.

A tough liability system does more than provide compensation. It also sorts out the wheat from the chaff. Companies with weak safety profiles shouldn’t get within a mile of an oil derrick.

What the government should do is rethink where it issues drilling permits in the first place. Minimize underwater drilling by opening up stable land sites, such as those on Alaska’s North Slope, where any leakage from blowouts could be more easily confined. Moreover, environmental priorities need to be straightened out and placed within the framework of a leaner and more responsive legal system. Oil is a fixed star in a national future that will never be risk-free. Dogmatism remains a real danger no matter where one sits on the political spectrum.