Charlie Riedel/Associated Press Oil from the Deepwater Horizon spill pools against the Louisiana coast along Barataria Bay in early June. Updated, June 16, 9:00 p.m. | Patience Andersen Faulkner of the Prince William Sound Regional Citizens Advisory Council joins the discussion.
As much as 60,000 barrels of oil a day could be gushing into the Gulf of Mexico from the damaged BP well, a flow rate equal to an Exxon Valdez being spilled
every four days. BP, which says it has spent $1.5 billion in response to the spill, has tentatively agreed to place $20 billion into an escrow account to pay victims.
The economic and environmental damage can linger for decades, as was the case with the Exxon Valdez, and even much smaller spills, like the one off Cape Cod in 1969.
How do we calculate the full costs of the BP blowout, which may not be understood for 20 or 30 years? How might we ensure that the public doesn’t end up paying for future damages and recovery, as it has with
Superfund sites?
- Zygmunt Plater, environmental law professor
- Alice Schroeder, former regulator, Financial Accounting Standards Board
- Kate Gordon, Center for American Progress
- Richard Nagareda, law professor
- Alex Tabarrok, economics professor
- Noah Hall, environmental law professor
- Samuel Thernstrom, American Enterprise Institute
- Michael Greenstone, environmental economist
- Patience Andersen Faulkner, Prince William Sound Regional Citizens Advisory Council
The Public Tab
Zygmunt Plater, a professor at Boston College Law School, was chairman of the State of Alaska Oil Spill Commission’s Legal Task Force over a two-year period after the wreck of the Exxon-Valdez.
The frustration for those of us who worked on the Exxon Valdez oil spill 20 years ago is that it did not need to be this way. The Alaska spill revealed the extreme problems of a complex mega-system for extraction and
transport of oil. The risks are great, hence great vigilance is necessary in every sector of the sprawling enterprise.
The payout in the Exxon Valdez spill missed perhaps 90 percent of the hard-to-monetize injuries to the human and ecological communities.
Instead, then, and still now, we have seen “complacency, collusion, and neglect” from the agencies that were supposed to regulate the industry, and the corporations that promised safety along with profit.
Twenty years later, we still don’t have the liability and accountability structures needed to rectify and deter the harms that are imposed upon the public by risky private actions.
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As more facts come out, the bases for BP’s liability will probably mushroom; I predict that total liability will readily exceed $25 billion. The affected coastal population of Alaska is somewhat less
than 40,000; Exxon paid out a total of about $4.5 billion to individuals and governments. An oft-quoted statement in Alaska is that the payout missed 90 percent of the real but hard-to-monetize injuries
to the human and ecological communities hit by oil. The population of potentially impacted communities along the Gulf of Mexico is between 4 and 6 million people. You do the math.
Claimants will have a wide range of choices of statutory and nonstatutory civil liability processes (in addition to major corporate criminal liability as in the Exxon Valdez precedent).
Whatever the settlements reached with BP and other actors at fault, one precedent from the Exxon Valdez case is likely to be expansively applied: “re-opener” provisions. Such provisions subject
the responsible companies to a new round of liability if new types of residual harm and damage are discovered over time.
To a sad extent, most of the harm produced by the BP Deepwater blowout is essentially non-remediable, only slowly to be dispersed and detoxified by natural processes.
Beyond money compensation for the victims, what Congress and the president need to look at is how to manage the mega-system of oil extraction while avoiding or mitigating such incidents. This probably means
that all deepwater oil wells will have their permits and operations intensively scrutinized, with increased surety bonds to cover environmental and economic hazards.
The days of laxity and collusion between the companies and the regulators are probably over. The price of gas will increase, along with safety. And painful though it may be, the need to rethink energy and climate
policy inevitably becomes one big step harder to deny.
File for Bankruptcy
Alice Schroeder, a former regulator at the Financial Accounting Standards Board, is the author of “The Snowball: Warren Buffett and the Business of Life.”
Right now nobody knows what BP owes. Claims will arise for years in amounts to be determined later. BP says it will place $20 billion into an escrow account, but that may not be enough.
The best way to balance today’s obligations against tomorrow’s is through a prepackaged bankruptcy.
We must find a way to treat claimants fairly without putting U.S. taxpayers at risk if an escrow fund is insufficient. That requires putting a price on the unquantifiable, never an easy task.
Just ask the insurance industry. When insurers faced unquantifiable risks from asbestos and terrorism, they asked Congress to create similar escrow funds. Implicitly, taxpayers pay if these funds are exhausted. The
proposals died amid arguments over the funds’ size and objections to bailing out the industry.
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An escrow fund for BP could easily be depleted and turn into a bailout. To prevent that we will need a permanent uncapped fund to ensure claimants are treated fairly and American taxpayers are protected. It’s
unlikely that a BP besieged with competing claims on its earnings and assets will agree to that.
The damaged well is not contained. Hundreds of lawsuits against the company have been filed by everyone from souvenir vendors to condominium operators. The National Guard and workers from more than half a dozen
government agencies are laboring to contain the damage; taxpayers should be reimbursed for this. BP also has obligations to its creditors. And the company, remarkably, is still considering a dividend to
its shareholders.
The best way to sort out these competing claims is through a prepackaged bankruptcy. Bankruptcy has lost much of its stigma. It is a proven way of sorting out claims with fairness and certainty while balancing
today’s obligations against tomorrow’s.
In a bankruptcy, BP’s earnings — $16 billion last year alone — would first go to pay Deepwater Horizon claims. Creditors’ rights would be preserved, and BP would continue to operate
as an independent company, saving jobs.
Any earnings not paid out immediately could accumulate, ensuring fair treatment of claimants for years to come. Eventually, the bankruptcy court could separate
BP from a new ongoing restitution fund to become a public company again.
Nobody wants to send a company into bankruptcy, but using an escrow fund is signing taxpayers up for another bailout. We’ve had too many of those already.
High Risk, High Profits
Kate Gordon is the vice president of Energy Policy at the Center for American Progress.
In 1989, the Exxon Valdez spilled 11 million gallons of oil into Alaskan waters. Today, despite a massive cleanup effort, 16,000 gallons remain on the shoreline. The current BP disaster is bigger and infinitely harder
to contain.
Just as tobacco farmers were paid to grow new crops, some portion of oil profits should be invested in a new economic development plan for the gulf.
Who pays the costs of these spills decades later, when the media and politicians have gone home? Not the spiller in question: companies like BP are shielded by liability limits and fuzzy definitions of “legitimate
claims.”
Under current law, companies like BP are responsible only for cleanup costs, plus up to $75 million in environmental and economic damages. The Oil Spill Liability Trust Fund covers costs above the cap, but only up to
$1 billion. In the long run, it is the fishermen and hunters, hotel and restaurant owners, workers and tourists who pay. And they pay dearly, with their health, livelihoods and sometimes even their lives.
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We need a better plan based on two simple truths:
First, offshore drilling is an inherently risky activity performed by a highly profitable industry. There is no reason the industry cannot better internalize that risk through stricter regulation, to avoid these
disasters completely, and through higher liability caps in the event disaster does strike. Even with higher liability caps, companies should be required to set up escrow funds to cover damages as soon as
a spill or gusher occurs, much as BP has just agreed to do. With better regulation leading to better safety standards, the most responsible and well-financed companies — the companies best able to
deal with the consequences of their actions — will still be able to drill.
Second, oil is not oxygen. There are alternatives for the gulf region, and alternatives for the nation. Just as tobacco settlement funds were paid to farmers to grow new crops, so should some portion of oil
profits be invested in a new economic development plan for the Gulf, so that future disasters do not take such an enormous toll. There are alternatives for the nation, as well. It is time for Congress to
embrace a comprehensive energy plan that moves America toward cleaner energy and fuel sources, so that we can stop looking in increasingly remote and risky places for a steadily declining supply of oil.
Create a Compensation Fund
Richard Nagareda is a professor of law and director of the Cecil D. Branstetter Litigation and Dispute Resolution Program at Vanderbilt University Law School. He is the author of “Mass Torts in a World of Settlement.”
President Obama asked BP to set aside a multibillion-dollar escrow account — “administered by an independent, third party” — to compensate “workers and business owners” along
the Gulf Coast.
Develop clear criteria for determining actual losses and limit lawyers’ fees.
Three lessons emerge from compensation funds created in mass product liability lawsuits in the past. The challenge is to balance expeditious payouts today with the preservation of funds for claims years or decades into
the future.
First, the fund administrator should develop a system to determine who will be compensated, under what conditions, and in what dollar sums. A compensation grid will necessarily make distinctions in a rough, back-of-the-envelope
way. But that is precisely the attraction: an administrative grid holds the promise of getting money to the injured much more swiftly than litigation.
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Second, the administrator has to avoid rapid dissipation of the escrow account through the payment of excessive or fraudulent claims. This goal is especially important here, with speculation about “dead
zones” in the Gulf Coast decades hence.
Like all streamlined compensation funds, the BP account has the potential to become a Field of Dreams: “If you build it, they will come.” It is crucial for the administrator to develop clear-cut
economic, medical and other criteria to distinguish plausible claims from unfounded ones.
Third, the administrator should limit the contingency fees for lawyers paid from the escrow account. There are no indications thus far that the escrow account would cap the funds available for compensation.
BP, after all, remains in business. But with the uncertainty of litigation substantially reduced with a compensation grid, there is no justification for lawyers to garner the overhead of 33-40 percent that
they otherwise would charge to move the money around.
This, too, can help to ensure that escrow funds will go to the people of the Gulf Coast with real injuries, both now and in the future.
Carbon Taxes
Alex Tabarrok is associate professor of economics at George Mason University and director of research for the Independent Institute. He writes regularly at the economics blog, Marginal Revolution.
President Obama lost his cool last week when — sounding like the old president — he said he was looking for some “ass to kick.” He didn’t regain any lost cool in Tuesday’s oil
speech, which also made him sound like his predecessor: “Make no mistake: we will fight this spill with everything we’ve got for as long it takes,” he said, emphasizing “We will make
BP pay….” Call it President’s Obama’s war on error.
A tax on oil — and carbon more generally — would make the price of oil better reflect its true costs.
Turning to energy, the president called for innovation and hard choices but offered little new or courageous thinking of his own. Instead, he went back to the same well he has drawn from repeatedly; blame the previous
administration and their “failed philosophy.”
Whether justified or not, this refrain is getting old. Even the president’s appeals to America’s greatness sounded old. Can his speechwriters really do no better than remember when we won World War II
and put a man on the moon?
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Most important, nowhere did the president mention two hard ideas that the public must accept if we are to move to a cleaner energy future: nuclear power and carbon taxes. Nuclear power is among the cleanest
sources of energy, power plants can be built when and where needed and the combination of nuclear-generated electricity and hydrogen can serve virtually all of our energy needs. Is nuclear power safe? Oil
spills and coal-mine disasters should remind us that safety is always relative.
The oil spill isn’t really a new event. It’s simply another reminder that not all of the costs of oil are reflected in the price; whether it’s climate change, environmental disaster or the
financing of anti-American governments, cheap oil is a lot more expensive than it appears at the pump. A tax on oil — and carbon more generally — would make the price of oil better reflect
its true costs thus making our choices more realistic and rational. Moreover, a carbon tax would do more than any other policy to spur energy conservation and innovation.
No one likes taxes but Al Gore was right when he said we should tax burning not earning. A tax shift — not a tax increase — away from labor and toward carbon would increase the incentive to create
jobs and to use less carbon. Both changes would be welcome at the present time.
We needed bold but unfortunately the president mostly gave us old.
Beyond the Blame Game
Noah Hall is an environmental law professor at Wayne State University Law School in Detroit. He is the founder and former executive director of the Great Lakes Environmental Law Center and author of the blog, Great Lakes Law.
Lawyers love to play the blame game and the BP Deepwater Horizon oil blowout and resulting environmental disaster in the Gulf of Mexico gives us plenty of blame to play with.
The solution to oil disasters is to break our dependence on oil.
Most obvious is BP, the deep-pocket corporation that makes billions of dollars a year while evidently cutting corners on safety and environmental regulations. The federal government is another obvious target, with years
of lax oversight and corruption at Minerals Management Service, the agency that should be protecting the public and the environment from the risks of offshore oil drilling.
Many politicians and commentators have their own targets to blame, conveniently fitting with their respective agendas — blame the environmentalists for pushing oil companies to drill in dangerous deepwater locations,
blame the oil industry for ignoring environmental risks — the list goes on and on.
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If it were simply a matter of placing blame, we could easily solve this problem and prevent future disasters by filing lawsuits, firing government officials and passing popular sounding new laws like the “Big
Oil Bailout Prevention Act” being debated in Congress.
We should be doing all of these things, and the measures proposed by President Obama in his Oval Office speech are steps in the right direction – having BP create a fund for victims, putting a new sheriff
in charge at the federal Minerals Management Service and increasing the tax on oil production to pay for clean-up efforts.
But the catch with the blame game is that it focuses our attention on immediate problems and not fundamental solutions. The fundamental solution to oil disasters is not compensating victims, improving government
agencies and enacting tougher safety regulations — worthy as they are. The fundamental solution is breaking our country’s dependence on oil. It won’t be cheap and it won’t be
easy. But if we don’t do it now, we’ll have no one to blame but ourselves.
Keep BP Viable
Samuel Thernstrom is a resident fellow and the co-director of the Geoengineering Project at the American Enterprise Institute.
By now, the enormity of the spill, long underestimated by both BP and federal officials, has become clear, but its ultimate environmental and economic effects will not be felt for many years, and are likely to be hotly
contested by all parties.
The $20 billion is a substantial sum but it is unlikely to be enough to cover all costs.
BP has insisted that it will pay “all legitimate claims”— but Americans increasingly wonder what that means, and how we can be sure the company will stand by that pledge in the years ahead.
Andrew Ross Sorkin noted in the Times last week that the company has only $12 billion in cash and investments on hand; cleanup cost estimates range from $15 billion to $40 billion, but juries could add tens of billions
to BP’s tab. Even for a company with robust revenues, those are daunting figures. Bankruptcy would not free BP from its liabilities — but it could provide a measure of protection, raising concerns
that taxpayers may yet shoulder some of these costs.
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Today, BP said it would reserve $20 billion to compensate workers and businesses, but some crucial details remain murky. The company reportedly will be allowed to pay into the account over time, alleviating
the cash crunch it would have faced if it had been forced to fully fund it immediately.
In theory, this approach is appealing. The money will be escrowed to pay for future claims, protecting it from the possibility of the company’s demise, and it would give an independent arbiter control
over its disbursement. Problem solved? Not quite.
The $20 billion is a substantial sum but it is unlikely to be enough to cover all costs. Hamstrung by a crisis of investor confidence that has cut its value in half and dramatically raised the cost of credit,
BP may still struggle when confronted with the expansive Gulf Coast Restoration Plan that federal and local officials will demand.
Also unresolved, apparently, is the question of how far to extend compensation. The president’s insistence that BP bear the cost of his decision to idle thousands of oil rig workers is reportedly a point
of particular contention with the company, which might fear that such a concession would expose it to claims from companies such as Shell that are now saddled with regulatory obstacles inspired by BP’s
negligence. Where do BP’s obligations end?
Paradoxically, the best way to ensure that resources will be available for environmental restoration and economic revitalization work far in the future would be keeping BP viable under its current ownership.
If Obama pushes BP into bankruptcy, he may be left with a partially-funded escrow account that can’t cover the full cost of cleanup. The administration has been at pains to hold itself at arm’s
length from BP, but in crucial respects, the nation’s long-term recovery may require a continuing partnership with BP.
Ways to Measure Harm
Michael Greenstone is the 3M Professor of environmental economics at the Massachusetts Institute of Technology, the director of The Hamilton Project, and a senior fellow at the Brookings Institution.
The livelihoods of many people including fishermen, restaurant owners, and hotel workers are being harmed and will continue to be harmed over many years. And, the damage to the wetlands and the birds, sea turtles, dolphins
and is only beginning to come into focus.
What is the value that people place on knowing that some types of wildlife are healthy and thriving?
How can the cost of this damage be calculated? Over several decades of research, economists have developed tools to help answer this problem. But it is important to underscore that these tools may fail to capture many
people’s feelings about the spill. They likely fail to quantify the public’s disappointment, grief, and even rage about the spill’s harm to the livelihoods and lifestyles of Gulf Coast residents.
And they almost certainly fail to adequately capture the American people’s feeling about the polluted waters, tar balls on beaches, and suffering wildlife.
The easiest category of damages to calculate is those that can readily be connected to an economic activity. One especially powerful approach is to use property markets.
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It is reasonable to expect housing prices to decline to reflect restrictions on swimming, reduced opportunities for sport fishing, and less scenic views. In principle, a decline in these qualities will reduce
the price of homes, which will capture the damages no matter how long they last.
Damages that are not reflected in property values are more difficult to measure, especially over several years. Fishermen are a good example. It is straightforward to measure their income loss this year. But
if fishing is banned for two years, what is the loss in the second year?
It might seem that it should be the loss in fishing income. But this is not correct because some people will inevitably find new jobs (perhaps in new areas of the country). For these folks, the economic loss
is the difference between their former income as a fisherman and in their new profession. To make them whole, any expenses associated with switching professions should be added in—including moving
costs, licensing fees, tuition for retraining, etc.
The most difficult type of damages to measure is those that are not easily connected to an economic activity. And for many Americans — particularly the majority who live outside of the gulf region —
these are the very damages that have created a public outcry. One classic example is the value that people place on knowing that some types of wildlife are healthy and thriving, which economists refer to
as non-use values.
Consider the pictures of the brown pelicans coated in oil that many people, including myself, find heartbreaking. How much would they be willing to pay for this not to have happened to the pelicans or other
wildlife (even if they have no intention of going to the gulf)?
There is no market-based way to measure this loss, so some economists have turned to surveys that directly ask people how much they would hypothetically be willing to pay.
The appeal of these surveys is that they provide a value to total up damages, but there are many skeptics who argue that such responses are not reliable. This is an active area of research in economics and there
has been important progress in recent years.
The damages from the Deepwater Horizon spill will prove to be substantial, of that there is little doubt. While methods do exist for calculating some of the direct economic costs to local economies, the potentially
bigger question remains as to how to best measure the broader non-use value of the environment. For the time being, we will have to muddle along with the imperfect techniques that economics has developed.
In the longer run, researchers need to develop better tools. Of course, it would be even better if the absence of future oil spills rendered such tools unnecessary.
The Price of a Sea Otter
Patience Andersen Faulkner, an Alaska Native living in Cordova, Alaska, worked with the class action attorneys on processing the claims for all the classes. She represents the fishermen on the Prince William Sound Regional Citizens Advisory Council and subsistence users on the Exxon Valdez Oil Spill Trustee Council Public Advisory Committee.
It will be a huge challenge to calculate present damages and future losses from the gulf spill. In Prince William Sound after the Exxon Valdez Oil Spill, we found that some fisheries will take decades to recover while
others will recover slowly and need to be protected until a harvestable amount returns. The damage is long-term.
The lesson from Alaska: let the public have a say in the allocation of funds and the restoration process.
In Alaska, the Exxon Valdez Oil Spill Trustee Council (EVOSTC) was formed to oversee restoration of the damaged ecosystem through the use of the $900 million civil settlement. The council has also purchased Alaska Native
corporation/village lands as part of its efforts.
We found that it’s crucial to have a strong public advisory committee representing land owners, village/tribal governments, science, city governments, the subsistence community (my seat) so that the public at
large and the principal communities can have a say in the allocation of funds and the restoration process. The Prince William Sound Science Center, which has a great team of scientists on board, has also been important
to educating the public and promoting the sound’s ecological recovery.
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The subsistence claims of the Alaska Native communities were difficult to measure. How do you place a value on a sea otter, for instance? The further away from the resource/animal/vacation spot, the less folks
were willing to pay to preserve that resource. So to determine compensation, the tribal communities who depend on the wild game and fish and were closer to the spill site received more funds. In the Cordova/Eyak
region, we received about $10,000 for our subsistence claims.
But having money does not replace the nutritional value of natural foods and it definitely does not preserve the cultural experiences of connecting to nature while harvesting a product.
