The Wall Street Journal Versus Moral Responsibility
In arguing against lifting liability caps on offshore drilling, the Wall Street Journal is arguing against both moral responsibility and the free market.
The Wall Street Journal, in an editorial about climate policy, argues against responsibility and free-market policies.
As for the Senate, Mr. Reid’s new nonclimate energy bill is all about trying to link Republicans to Big Oil. With BP as the corporate villain, Democrats are proposing to lift the $75 million oil spill liability cap for economic damages to infinity. And to do so retroactively on all rig leases.
This is a bad-faith exercise. Mr. Reid knows that Democrats like Mary Landrieu of Louisiana have criticized Democratic proposals to set even a $10 billion cap, while Senate Republicans have proposed giving regulators the power to raise the cap based on specific circumstances. Mr. Reid’s proposal is designed to throw a bouquet to the trial bar and undermine any grounds for compromise so Democrats can have an election issue.
The main effect, if it passed, would be to push the small- and mid-sized producers that account for most domestic drilling out of the Gulf, regardless of their safety records. Only the supermajors would be able to afford insurance under the unlimited liability regime.
This is utter nonsense. It’s a fundamental principle of American jurisprudence that bad actors should suffer the consequences of their negligence and/or willful bad acts. The cap on liability for oil spills is an abrogation of that principle which forces the victims of negligence to suffer the economic consequences without redress. It’s one thing to limit punitive damages–that’s defensible in certain instances–however, it’s quite another to limit liability on actual damages that the oil companies cause.
The $75 million cap on liability creates a moral hazard problem, especially since, as we’ve learned with the recent oil spill in the Gulf, the economic damages of a large spill can far outstrip such a paltry amount in short order. (I’m willing to predict that as soon as the spill is shut down for good and the oil spill stops making headlines, BP’s going renege on their promise to pay out claims beyond the cap.)
Furthermore, the argument that smaller rigs won’t be able to afford insurance under a lifting of the liability cap is, as Jonathan Chait rightly points out, anti-free-market.
The Journal’s position is that this is no fair — not every oil company can afford to clean up the cost of their oil spills! So the government has to subsidize offshore drilling by promising to cover the cost of any cleanup beyond a given size.
The justification for this corporate subsidy is that even oil firms with great safety records won’t be able to afford the insurance. But why not? If they have great safety records,then insurance companies ought to be willing to cover them at some price, right? And that price ought to reflect the likelihood and size of a potential spill. In other words, the free market seems capable of determining the risk level and putting a price on it. And if insurance companies won’t cover that risk at a price small oil firms can afford, that means the risk is too high.
There is a time and a place for government intervention in the market. But protecting companies from the consequences of their negligent acts isn’t one of them.
Now, don’t get me wrong. I don’t oppose offshore drilling, and I think that making the liability cap retroactive would be a bad idea if it’s implemented immediately rather than being phased in over a period of time. But a de facto subsidy for offshore drilling–which is what the liability cap is–is a bad idea that needs to go.