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Free Liberal: Coordinating towards higher values

Free Liberal

Coordinating towards higher values

Oil Spill: Who is Liable?

A license to kill ecosystems, globule by globule

by Fred E. Foldvary

The "polluter pays" principle is ethical, efficient, and sustainable. When there is an oil spill such as the disaster in the Gulf of Mexico, the involved oil companies are morally responsible to compensate society for the damage.

But such is not legally required today. In 1990 the U.S. federal government enacted the Oil Pollution Act that set a $75 million liability cap for financial damage and a $500 million cap for environmental damage. The current oil spill in the Gulf of Mexico, reportedly caused by a methane gas explosion, will impose damages of over $10 billion.

The company that is doing the drilling, BP, is paying for the costs of stopping the oil spill and cleaning up. There are also two other companies involved; Transocean owns the oil rigs leased to BP, and Halliburton did the cementing for the casing.

After the 1989 Exxon Valdez oil spill in Alaska, Congress made the oil companies responsible for paying for the cleaning, but put in these liability caps. Since the damage in this case far exceeds the caps, this becomes in effect a subsidy to the oil companies.

A bill has been introduced in Congress to raise the liability cap to $10 billion, but why should there be any cap at all? The companies should be fully liable for all damage caused. That would incentivize them to avoid such a potential cost by putting in stronger safety measures. Unlimited liability for environmental damage would induce them to obtain more insurance, and the insurance firms would insist on the strongest possible preventive measures. The shareholders would also not pay so much for shares of stock if the share prices were vulnerable to a plunge when the operations result in massive environmental damage.

There are now calls to suspend and stop drilling in the ocean. The fact is that there are already thousands of oil rigs in the oceans. As oil has gotten depleted on solid lands, the new finds are in the oceans, and the global economy still depends on oil. There needs to be a global environmental standard making all oil companies, including governmental firms, fully liable for all the damage they cause.

In 1990 Congress also enacted the Oil Spill Liability Trust Fund that compensates the victims of a spill for claims beyond the $75 million cap. That too has a cap, $1 billion per oil spill case. That cap should be eliminated, and the liability should be shifted to the oil companies. The Trust Fund could supplement what the oil companies pay, but it should not be a substitute.

An article in The Progress Report in 2009 stated that the federal and state governments had yet to collect all the funds that Exxon had agreed to pay for Valdez. More broadly, users of oil have not had to pay compensation for the environmental damage caused by burning oil. In effect, there are massive subsidies to oil producers and consumers, in their legal ability to impose the costs to society in general, including future generations.

More fundamentally, we can ask who is the proper owner of the oil in the ground, which nature provided? There are only two possibilities. One is the geo-egalitarianism, an equal sharing of the benefits of natural resources. The other is allodial homesteading, the full ownership of natural resources and their rents by those who discover them or by the heirs of conquest. The practice today is the latter. But the moral justification for that is incoherent.

If one accepts the moral equality of human beings, then geo-egalitarianism is the inescapable moral imperative. Thus is oil doubly subsidized. The profits of the oil companies include economic rent from the oil, gains not from labor and capital goods but from the value of the oil itself, a rent that properly belongs to humanity. Secondly, the oil companies profit from not having to pay the full social costs of the damage they cause.

It is not a puzzle why the planet is being plundered and ruined. The plunder is being subsidized by governments worldwide. These giant corporations have the political clout to obtain tremendous subsidies, and democracy is not stopping it. Something is terribly wrong as the world is falling apart, and governments are causing this by their failure to protect the property rights of the people. We are all riding down the river of doom to a coming global environmental collapse that will be far worse than the economic depressions we willingly impose on ourselves.

This article first appeared in the Progress Report, Reprinted with permission.

Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.

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There is the problem of incentives. If the oil (or location) is entirely community property, the incentive to extract goes away. There are royalty fees which utilities do pay, however they are low because the companies use their free speech rights (money is speech in politics - although most of us consider it bribery) to keep them that way.

The question is not if, but how much - and the question of incentives rather than absolutes if valid.

I agree that the caps should be lifted, but I would be shocked if BP's General Counsel does not sue for an exception under the ex post facto law provisions in the Constitution.

Additionally, the oil companies don't really have any money. If they pay for the oil or pay for the cleanup, their customers will foot the bill through higher prices (either because the firms pass along the fees or because marginal or polluting firms fold and the price goes up). That is probably a just result, either way, since we use oil because we want to.

We have met the enemy, and he is us.

# posted at by Michael Bindner

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