The BP and MMS Spill: More of the Story Begins to Emerge

by Mario Rizzo  

Sometimes, amid the yakking and incessant moralization, a fact or two will emerge that is big with meaning. From today’s Wall Street Journal:   

BP has come under heavy fire from Congress and environmental groups for its lack of readiness to handle a worst-case spill. But that criticism has overlooked a key fact: BP was required by federal regulators to base its preparations on Interior Department models that were last updated in 2004.

The government models… assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models, prepared by the Interior Department’s Mineral Management Service, wrong.

The government’s optimistic forecasts reinforced the oil industry’s confidence in its spill-prevention technology, leading to decisions that left both oil companies and the government ill-prepared for the disaster that has unfolded in the Gulf since April 20.

Therefore, it should be clear that this Gulf oil spill is not simply the BP spill but it is the joint result of BP and the Interior Department’s Mineral Management Service’s actions or omissions.

This should also make us think about the relative feasibility of comprehensive regulation and a strict liabilty regime for dealing with this kind of problem. Richard Epstein discussed this recently in the Wall Street Journal.

We want the party with the greater knowledge about the situation to be incentivized to act upon it. The current system opens up all sorts of opportunities to ex ante cozy relationships between regulators and the regulated. Of course, every once in awhile, things don’t work out as expected.

Once again, be careful what you wish for

by Sandy Ikeda

I’d wager that many of us who’ve lectured to our classes on environmental economics have at some point suggested that one way to eliminate pollution is to stop all forms of energy-consuming and pollution-generating production.  That would kill most of the human (and a lot of the non-human) inhabitants on earth, but it would probably preserve the natural environment (in the long-run, that is, after all those nasty carcasses get washed away).  The point being, of course, that there’s such a thing as having too little pollution, and that there are better and worse ways to lower pollution.

Next time, you might want to use this article from the latest (November 22, 2008) The Economist.  Thanks to skyrocketing gas prices (at least until lately), the housing collapse, and the impending recession, Californians may actually come close to hitting the ambitious targets for renewable energy and greenhouse-gas emissions mandated by Governor Arnold Schwartzenegger for 2020. Continue reading