Valdez damages halved

2006-12-22

in Daily updates, Economics, Law, Politics, The environment

Ship and mosques in Istanbul

Today, an American court halved the punitive damages being imposed on Exxon for the 1989 Valdez oil spill from US$5 billion to $2.5 billion. Reading about it prompts a number of strands of thinking:

Firstly, it surprises me that punitive damages still have not been assigned. Chances to bemoan the slow pace of litigation in the United States (and all the problems that accompany it) are many. No doubt, a great deal of whatever settlements are reached will go to the hordes of lawyers, photocopiers, and expert witnesses who worked on the case, rather than to the people who suffered from the spill or to the rebuilding (such as is possible) of the affected ecosystems.

The second thought that comes to mind is along the lines of: “Didn’t Exxon earn record profits this year?” They earned US$10.4 billion (£5.6bn) in the second quarter of 2006. While this is a fairly natural response, it is not necessarily a very legitimate one. The damages being considered are meant to address the conduct of the company in 1989, something that is not obviously related to its present financial circumstances. At the same time, the purpose of punitive damages is to encourage a company to exercise greater caution in the future, when engaging in similar activities. Not having captains that swig vodka before heading to the bridge is a good start. Reading about that, one has feels an emotional inclination to wring them for all they are worth.

To what extent would charging Exxon $5 billion instead of $2.5 billion alter the likelihood of future spills? The purpose of such punishments is not revenge, but the inducement of desirable changes in behaviour. No punishment short of utterly bankrupting the company would actually stop them from shipping oil from Alaska to the contiguous 48 states. That said, a big punishments also catch the attention of other big oil firms who have the ability to take action to make such spills less likely, and less severe if they do take place.

A final issue to consider is that of moral hazard. If the penalty is cut in half, after seventeen years in court, it suggests to companies that they can reduce such costs just by spinning things through the legal system for as long as possible. The whole situation is like a test case from my Law and Economics course at UBC with Robert Gateman. Which outcome secures the best mix of equity and efficiency? Which establishes the best incentives for future behaviour?

Of course, I am not one of the judges in the case. I have not examined the relevant facts and laws and, as such, it is impossible to know whether this reduction is warranted or not. My personal sympathies do not lie with oil companies, but they have the same right to be treated with due process under the law as any other entity within society. Hopefully, regardless of the final amount of the penalty, mechanisms have been put into action that will prevent catastrophes like the Valdez spill in the future.

{ 6 comments… read them below or add one }

Milan December 22, 2006 at 10:08 pm

It seems the case actually began in 1994:

The case – started in 1994 by more than 32,000 fishermen, native Alaskans and property owners – is one of the longest non-criminal ones in US history.

Just twelve years of litigation, then.

(Source)

Tristan December 24, 2006 at 3:38 pm

The money that the state can extract from a coorperation for desecrating nature is representative of the power the state maintains over its economy. There is no “right” amount to fine exxon, but whatever the imposed amount, the halving of it represents an inability of the state to impose it’s law on the most powerful and the most needing of such fines for transgressions. Exxon exists in, surprise surprise, the state of exception.

Milan December 26, 2006 at 7:14 am

Here is some interesting commentary on the reduced penalty and the case in general.

Anonymous January 2, 2007 at 12:45 am

The Valdez spill caused heavy oiling of some 200 miles of coastline and light oiling of an additional 1,100 miles. It cost the lives of 300 harbour seals, 2,800 sea otters, 250,000 sea birds (including 250 bald eagles), and 22 killer whales. The total level of oil released was less than 2% of what American powerboats leak every year. The total number of birds killed is less than the number killed every day in the United States by collisions with plate glass, or the number of birds killed by domestic cats in Britain every two days.

Since 1989, the general impression is that not much damage has been done. The sea otters have recovered, as have the whales and bald eagles. According to the US National Oceanic and Atmospheric Administration (NOAA) “the number of intertidal communities we study can be considered recovered… We are impressed by the degree to which Prince William Sound has rebounded from the spill and its aftermath.”

Surprisingly, sections of beach that were experimentally left uncleaned during the spill have actually done better than sections of coastline that were pressure washed. The rates at which local ecosystems recovered there were found to be several times faster (eighteen months, rather than 3-4 years). As was reported in Scientific American: “the public wants the animals saved – at $80,000 per otter and $10,000 per eagle – even if the stress of their salvation kills them.”

Even from the perspective of doing the best of of serving the natural environment, the $2.1 billion spent on the cleanup could almost certainly have been put to better use.

Milan January 2, 2007 at 3:10 pm

This is just a truncated section from Bjorn Lomborg’s The Skeptical Environmentalist, with arguments to the contrary filtered out.

Even so, it doesn’t really address the question of punitive damages very well.

Milan October 1, 2008 at 8:41 pm

The ‘Prescott Oil’ satire in this Colbert Report clip is a pretty effective criticism of recent advertising by oil companies.

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