To Sue BP, or Not to Sue BP

The media has been in quite a fucking frenzy over the BP oil spill, and it’s sparked considerable debate over whether regulation or tort is the best way to prevent future oil spills and environmental disasters in general. Neither of these, I think, would be completely sufficient.

Government regulation would dissuade oil companies from drilling domestically in the first place, which would make oil prices more expensive and drive the business overseas, where there are fewer regulations. This is a problem with nearly all heavily-regulated industries.

Then there’s the nightmare of figuring out which pointless regulations to pass, who’ll enforce them, and how. All of that will take time (and tax dollars), and will most likely result in some kind of impotent compromise that benefits no one, and places the economic burden on everyone. These regulations also need to constantly be updated, to avoid companies trying to weasel out of paying large-scale damages.

To even persuade U.S. oil companies to deal with heavy regulation and drill here anyway, the government would have to add some sort of provision that would exempt these companies from some or all liability for any accidents that occur so long as they follow regulations (this is common in heavily-regulated industries), which then means it is up to the government to repay the damages. More tax dollars.

On the other hand, relying on pure tort liability won’t do much to dissuade companies from being careful and not cutting corners when drilling. And if a spill does occur, the damages won’t be paid if the company has already gone bankrupt from the aftermath of cleaning it up and losing market share. Tort liability is also difficult to enforce for a large-scale disaster.

Jeffrey Miron posted an interesting solution on his blog, which I must say makes a lot of sense.

Here is one possibility: if the government grants a company like BP the right to drill in an area like the Gulf, where enormous damage to both private and public property is possible, it should also require BP to post a bond equal to something like the expected environmental damage.

In short, under this plan, if an oil conglomerate successfully drills without any accidents or spills, it gets the money back from the bond after it closes its wells (presumably with interest). This gives the company incentive to be careful when drilling.

However, if property damage does occur as a result of the drilling, the oil company will lose some or all of the bond money. And those parties collecting damages would not have to worry about trying to collect money from a company that may already be bankrupt, since the money has already been put aside.

This approach has a few minor problems, of course. It would be a challenge to calculate an appropriate figure for the potential damages, and oil companies would try to litigate their way out of paying damages in the event of a spill.

But it seems much more likely to work than regulations or pure tort, if the ultimate goal is to prevent future environmental damages.

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