Is Oil Liability Cap A Dangerous Moral Hazard?
Written by Brian Garst, Posted in Energy and the Environment
Following up on my comments regarding what should be BP’s responsibility to compensate individuals, businesses and governments economically damaged by the oil spill, relevant federal law caps the liability of oil companies at $75 million. Oil Spill Liability Trust Fund was established in 1986 and funded by the Oil Pollution Act of 1990, which imposed a tax on oil companies in exchange for a cap on direct liabilities.
The fund serves a good purpose by insuring that an industry where there is always risk of causing major damage will be able to pay for that damage, even if the company responsible is small and lacks the funds itself. On the other hand, is it also possible that companies like BP might be encouraged to take greater risk, knowing that they are only on the hook directly for $75 million if something goes wrong?
Obviously there are plenty of other incentives to insure the quality of their rigs. A broken rig can’t produce oil and bring in profits. But might they also be encouraged to create a rig in a dangerous location or to a greater depth than they otherwise would? It’s something to ponder.
I serve as Vice President of the Center for Freedom and Prosperity, a non-profit think tank dedicated to preserving tax competition and free markets. This site features my personal views, which are not reflective of CF&P.