Cap and bait

Michael Greenstone a professor of environmental economics at MIT, argues that oil companies have a “built-in incentive” to spill oil because their liability for the economic damage caused by spills is capped at $75 million. Economic damages beyond that amount are covered by a government-funded Oil Spill Liability Trust Fund, which has a per-incident spending cap of $1 billion for expeditious oil removal and uncompensated damages. Greenstone urges that there be no limit on the liability a company spilling oil for economic damages.
As to his descriptive point, Greenstone exaggerates. If the cap distorted the incentives as much as he claims, it’s unlikely that there would have been so few major spills over such a long period of time. Oil companies have other reasons besides liability for economic damages to avoid major oil spills. One of them is the removal costs which, as Greenstone notes, aren’t covered by the cap.
As to Greenstone’s prescription, placing no limit on liability would probably end off-shore drilling. If Congress desires this result, it should simply ban the activity. A proposed ban would promote rational debate on the pros and cons of off-shore drilling, which would likely lead to a better decision than the kind of back door ban Greenstone effectively is advocating.
There is no doubt, though, that the cap should be raised. The $75 million limit was adopted in 1990, in the wake of the Exxon Valdez spill. Even a simple adjustment for inflation would cause the cap to rise significantly.
The question becomes, how high should the cap be raised. Last month, Congressional Democrats, led by Sen. Robert Menendez, proposed raising it to $10 billion. But Sen. Lisa Murkowski blocked this proposal, which requires unanimous consent. She pointed out that a hike of this magnitude would preclude oil companies from obtaining insurance. Without insurance, only a few giant companies might be willing to drill offshore. And, unfortunately, it is likely that nearly all of them would be foreign, state-run entities.
The trick, then, is to find a number that takes into account changes in circumstances since 1990 but does not end off-shore drilling or limit drilling off of U.S. shores largely to non-U.S. companies. I don’t know where the magic number is, but surely it is well south of the $10 billion the Democrats are talking about.
Indeed, it’s not clear that the Dems were serious about a $10 billion cap. Quite possibly, they just want to grandstand on the issue, wait for Sen. Murkowski or some other adult, to block their proposal, and then grandstand some more.
Sen. Menendez’s lack of seriousness became apparent when he eventually proposed no cap on liability. He defended his abandonment of the $10 billion cap by noting that Murkowski had called that number “arbitrary.” (But Democrats used the same word in rejecting the Republican proposal to raise the cap to $150 million or the oil company’s profits in the last four quarters, whichever is larger). Menendez’s infantile “that will teach her” style of legislating resulted in another Republican block, this time by Sen. James Inhofe.
Where is the White House in all of this? Somewhere between infantile and adult, I’d say. Last I heard, it supported raising, rather than eliminating, the limit, but wouldn’t propose a number. Let’s call this adolescent.


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