Public risk, private profits – why cap liability?

Humans are not perfect.  Engineering, while amazing, is not perfect.  Accidents ( including spills) will happen. What should environmental law, and lawyers, do about it?

We tend to do the easy things,  more often than the important ones. For example,   it is easy and popular to make accidents illegal. Almost every country has laws against spills, and they are comparatively easy to prosecute.

A few spills can and do cause catastrophic harm — we only need to look at BP’s oil spill in the Gulf of Mexico. But environmental lawyers often rue the amount of time that we spend dealing with  minor spills,  which are  usually unimportant in comparison to the perfectly legal destruction that goes on around us. As we consume ever more and population soars, the earth warms, species disappear, and subdivisions take over the countryside.   Not to mention wars.

There is a lot that  lawyers and engineers can do to reduce the frequency and severity of spills. Making spills illegal, with serious penalties,  does  encourage organizations to improve their environmental management. Ever since John Braithwaite’s pioneering research in Australian coal mines in the 1980s, it has been clear that thorough, well-documented management systems can  help.  It was differences in management, communication, and the methodical application of precautions that distinguished coal mines having high death rates from those where employees went home at night.    These differences were elaborated into  environmental management systems, like ISO 14000  that are now widely adopted around the world.

But accidents still happen: the Challenger; the Exxon Valdez; Three Mile Island, not to mention Chernobyl and Bhopal. Isn’t there more that we lawyers can do?  Are we really reduced to fighting over who pays for the disaster after it happens?

Environmental law’s most durable successes have probably been bans: on DDT, so that egg shells would stop collapsing beneath  mother birds;  on the slaughter of whales; on PCBs. Banning CFCs stopped the destruction of the ozone layer. The ban on cod fishing  halted further destruction of our once great cod stocks, but not until they had been devastated by “regulated” fishing.  Promises to be careful  just don’t seem to last for long.

But we can’t ban everything. In fact, we don’t seem to be able to ban very much for long. The national wildlife refuge in Alaska has been under constant attack, despite the extreme sensitivity of its fragile and irreplaceable caribou herds. The American moratorium on offshore drilling was lifted just weeks before the Gulf oil spill, as part of President Obama’s campaign to pass a badly needed climate change bill.   (A drill rig immediately set off for Alaska.)  And enforcement is a constant challenge, as we saw this spring when a Chinese oil tanker  plowed into a banned area of the Great Barrier Reef, gushing oil into its critical ecosystem.

Environmental assessment (EA) was supposed to help us figure out, among other things, which risks of failure we cannot bear.   But it doesn’t work very well.  For example, we build nuclear plants, with nowhere to put the waste. If BP had conducted a fuller environmental assessment of its well, it would probably still have  obtained its permit.  Environmental assessment also does a poor job of comparing real-life trade-offs. If the US blocks offshore drilling,  but remains dependent on oil,  it will have to keep buying that oil overseas, from hostile countries. That means constant movements of crude across the oceans in  tankers,  which have their own frequent spills. It also transfers trillions of dollars to those hostile countries and entangles the US in foreign wars. It will be a dreadful irony if the BP oil spill prevents the US from reducing its dependence on oil, and its contribution to climate change.

There is one area, however, in which the legal system makes a clear, simple and unique contribution to making things worse. We  encourage investors, insurers, and other financial players to take  ultra high risks by  capping their exposure to third-party damages.  Canada’s Nuclear Liability Act,

for example, limits the liability of the nuclear industry for a Chernobyl style accident to the relatively tiny amount of $75 million. (A bill  to increase the cap to $650 million  received first reading in April, again.)

Offshore drilling benefits from a similar, enormous, hidden subsidy. The American Oil Pollution Act limits liability to $75 million. Congress now proposes to retroactively change this to $10 billion although BP has undertaken  to pay full compensation. Canada has even lower caps. For example, the Canada-Nova Scotia Oil and Gas Spills and Debris Liability Regulations, SOR/95-123 under the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act,  put a $30 million cap on third-party liability.  If an accident happens,  the general taxpayer,  the natural environment, and nearby communities will bear any extra costs. Thus, profits are privatized while the  public bears the risk.

Would removing the caps help reduce the frequency  and severity of spills? it might. It  would certainly give all the financial players a much greater incentive to take every possible precaution, and perhaps to invest instead in alternative sources of energy. Without such hidden subsidies, would oil look so cheap?

This article was previously published in Lawyers Weekly.

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