Deterring and Compensating Oil Spill Catastrophes: The Need for Strict and Two-Tier Liability
AbstractThe BP Deepwater Horizon oil spill highlighted the glaring weakness in the current liability and regulatory regime for oil spills and for environmental catastrophes more broadly. This article proposes a new liability structure for deep sea oil drilling and for catastrophic risks generally. It delineates a two-tier system of liability. The first tier would impose strict liability up to the firm's financial resources plus insurance coverage. The second tier would be an annual tax equal to the expected costs in the coming year beyond this damages amount. A single firm will be identified as responsible for generating the risk. It would be required to demonstrate substantial ability to pay in the first tier before being permitted to engage in the risky activity. This structure provides for efficient deterrence for environmental catastrophes, since the responsible party is bearing in expectation the risks it is imposing. It also addresses the challenges posed by the fat-tailed distributions of catastrophic environmental risks and provides for more assured and adequate compensation of potential losses than current liability and regulatory arrangements.
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Bibliographic InfoPaper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp11-025.
Date of creation: Jul 2011
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Other versions of this item:
- Kip, Viscusi, W. & Zeckhauser, Richard Jay, 2011. "Deterring and Compensating Oil Spill Catastrophes: The Need for Strict and Two-Tier Liablility," Scholarly Articles 5027954, Harvard Kennedy School of Government.
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
- Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-21 (All new papers)
- NEP-ENE-2011-07-21 (Energy Economics)
- NEP-ENV-2011-07-21 (Environmental Economics)
- NEP-REG-2011-07-21 (Regulation)
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- Viscusi, W. Kip & Zeckhauser, Richard J., 2011.
"Addressing Catastrophic Risks: Disparate Anatomies Require Tailored Therapies,"
Working Paper Series
rwp11-045, Harvard University, John F. Kennedy School of Government.
- Viscusi, Kip W. & Zeckhauser, Richard Jay, 2011. "Addressing Catastrophic Risks: Disparate Anatomies Require Tailored Therapies," Scholarly Articles 5688700, Harvard Kennedy School of Government.
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