Last week, Transport minister Steven Joyce said the cost of the oil cleanup from the Rena disaster hit $19.5 million... and he expects the cost, and the salvage operation, to continue for some months.Over 350 tonnes of oil as well as other toxic chemicals spilled into the ocean from the grounded cargo ship Rena... in my opinion $19.5 million a vastly inaccurate figure concerning the true cost of the cleanup and salvage operation.
My reasoning is based on the recently released Institute for Maritime Studies report (PDF) that shows ship source pollution from 230 tonnes of bunker C oil would result in a likely cost of US$129.5 million or US$563,126 per tonne. That's over $171 million in NZ dollars.
Why the gross inaccurate costings concerning the Rena disaster?
The National Government failed to increase legal liability under the Bunker Convention, and liability for the Rena disaster is capped at $12.1 million. That means the New Zealand taxpayer will pay for any costs over and above that comparatively tiny cap.
Based on the Institute for Maritime Studies costings for oil spills from ships... that's potentially NZ$248 million above the liability cap. You can therefore see why Steven Joyce would want to minimize the cost, being that it was National's decision to ignore any proper legislation, even when they were alerted to the issue on many occasions.
The lack of any type of proper legal liability has created an oil and shipping industry predominated by cowboys. The environmental and financial consequences of the governments failure to ensure that safety is the top priority has resulted in legal action in Wellington's High Court.
An iwi and Greenpeace have been awarded a judicial review of the Government's granting of a permit to explore for oil off the East Cape.
Te Whanau-a-Apanui, Greenpeace and the Crown will put their cases at a defended hearing in the High Court in Wellington in June next year.
The eastern Bay of Plenty tribe and Greenpeace are seeking an order for the permit to be quashed on both environmental and Treaty of Waitangi grounds.
In my opinion, there are grounds to place a moratorium on all further oil drilling until environmental safety can be assured and the legal liability issue is sorted out... and I'm not the only one to think so.
In April, the Tennessee based Vanderbilt University published the study Deterring and Compensating Oil-Spill Catastrophes: The Need for Strict and Two-Tier Liability (PDF), that outlines a way forward:
Identifiable responsible party. The oil company that owns the lease and undertakes the drilling is fully responsible for all financial harms directly associated with the spill. This ensures that there is one party overseeing the whole process, a party who coordinates and monitors the actions of those beneath it. There is no separate liability for other firms involved in the drilling. Thus, for example, there is no joint and several liability under this system. The oil company can establish whatever contractual arrangements it wishes with other firms involved in the drilling operations, and the oil company in turn can recoup costs due to negligence or other specified behavior of its corporate partners based on whatever contractual arrangements it makes with them.
Strict Liability. The responsible party is strictly liable for all losses due to the spill. There is consequently no need to ascertain the appropriate level of care and whether the drilling operations met that level of care. Nor is there a need to evaluate the behavior of other partners in the drilling effort. The only informational requirement for implementing our liability proposal is to determine the amount of damages.
Tax on noncompensable risk imposed. No corporation has sufficient resources to cover the most extreme potential losses from an accident. In the case of a mega-catastrophe, the government will pay significant amounts and/or losses will go uncompensated. The operator is essentially judgment proof for extreme accidents. Absent other arrangements, operators will therefore take excessive risks. To correct this propensity, the operator should pay a tax for the expected external losses imposed beyond the amount that it will be able to pay.
Having this arrangement in place will allow operators to drill even if they do not have the resources to cover losses in excess of the BP Deepwater Horizon spill. This tax establishes what we term a tiered liability system when imposed in conjunction with liability for damages up to the cap specified in the demonstration of financial capacity.
Demonstration of financial capacity. The government should restrict deepwater oil drilling to firms that can demonstrate a combination of adequate financial resources, expected compensation from other participants, and insurance to cover the cost of catastrophic spills of the magnitude of the BP Deepwater Horizon spill.
The responsible party will be strictly liable for all damages up to its financial capacity. Although the financial capacity requirement will vary depending on the risky activity’s potential for harm, an appropriate amount for deepwater drilling in the Gulf of Mexico might be $20 billion, which is the size of the fund that BP created at President Obama’s urging after the spill.
Damages. There are three components to our damages proposal. First, it will completely eliminate any cap on damages. (The statutory cap set by the Oil Pollution Act is currently a paltry US$75 million.) Second, it will eliminate all punitive damages for oil spills. Third, it will compensate only direct losses. The elimination of the damages cap coupled with our tiered-liability system will establish efficient incentives for safety.
Because catastrophic oil spills can be readily monitored by the government, the courts, and the public, additional punitive damages are not needed to establish the efficient level of care. Payments for financial and property damage losses are limited to losses the spill caused directly. More distant economic ramifications of these losses are not compensable.
Natural resource damages and restoration. For natural resource damages, the primary emphasis should be on restoration. Restoration should continue until the natural resource benefits of additional restoration no longer exceed their costs.
Recipient of net resource value losses. For any shortfall of the restoration from complete restoration, the oil company must pay the government for the natural resource damages it incurs. Such damages would also include losses for the period before a resource is restored. The government may choose to use these funds for further restoration at the site, for restoration elsewhere, for other environmental efforts, or for other purposes.
Regulatory complement. Liability should be coupled with a regulatory regime where the regulation of drilling activities is based on a comparison of the benefits and costs of these efforts, with the goal to maximize net benefits. Full adherence to regulatory standards would not protect a firm against damages from accidents.
Focused, net economic benefits. In assessing the benefits of deepwater oil drilling, there should be no additional premium accorded to the economic benefits associated with national security or employment effects beyond the assessed benefits for other less risky drilling activities or other sources of energy.
Any crediting of oil exploration of any kind with broader economic benefits to the economy must be done on a net benefit basis that also incorporates recognition of the environmental harms associated with the production and consumption of petroleum products, including the effect on global climate change.
Moratorium on all new deepwater drilling. Until Congress adopts these proposals, the government should impose a moratorium on all new deepwater-drilling activities. Firms that accept strict liability, demonstrate adequate financial resources to pay for the costs of a major disaster, pay the tax for the expected damages beyond its financial capacity, and subject proposed drilling operations to a safety review should be exempted from the moratorium.
Although we tailored the proposals to oil drilling, they can be readily adapted to other contexts. Spills from oil tankers, such as the Exxon Valdez, represent an obvious extension. The hazards of nuclear reactors also represent an analogous situation of a low probability/catastrophic loss activity.
Clearly, we would not extend our proposal to require that all economic activity have the tiered liability structure. But we would extend our proposal to situations in which the prospect of catastrophic losses is sufficiently prominent that legislative damages caps have been enacted. Oil drilling, oil transport, and nuclear power are among the most prominent economic activities that meet this test.
Some very well thought out and practical steps there to protect the environment. Viscusi and Zeckhauser have clearly shown that without proper legal liability for oil spills; the industry will continue to cut corners.
Unfortunately without legal action, the current National government will fail to even acknowledge that the system leads to an increased likelihood of "accidents" occurring because of insignificant financial liability.
This situation should be unacceptable to anybody who likes beaches and a bank balance in that's in the black.
