EXCERPTS:
"Our national frustration continues to rise with each new drop of BP oil that leaks into the Gulf of Mexico. Everyone knows we can't legislate away environmental risks without consigning ourselves to the Stone Age. What's needed going forward is a comprehensive legal strategy that addresses the risks though a combination of regulation before the fact and tort liability (and criminal sanctions where appropriate) afterwards.
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 the most devout defender of laissez-faire must insist, not just concede, that tough medicine is needed in these cases. The fundamental question here is one of technique: What mix of before and after sanctions will do the job at the lowest cost?
The first element in the mix is a no-nonsense liability system that fastens full responsibility on the parties who run dangerous operations, no excuses allowed. Accordingly, 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 $75,000,000." 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 has waived the cap by expressing its willingness to pay "any legitimate claim." No surprise here, especially as the evidence to date suggests the cap will be blown off precisely because of the two exceptions. But we'd 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 in 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 the Price Anderson Act's $375 million cap on damages for each responsible party to cover incidents at a nuclear power facilities should be rethought.
Tort liability does not preclude direct government safety inspection and regulation, especially in the Gulf of Mexico, where the government itself leases the drilling rights. So by all means work hard to make these better. Just be skeptical that this or any other presidential administration will reform the Department of Interior's hapless Minerals Management Service.
The rash decision of the Obama administration to shut down for six months all drilling in over 500 feet of water highlights the converse risk of regulatory overreaction. Why impose a ban on competitors with better safety records? Why extend it to relatively shallow waters?
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