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Monday, March 14, 2011

Liability and Compensation Issues Raised by the 2010 Gulf Oil Spill

Jonathan L. Ramseur
Specialist in Environmental Policy

The 2010 Deepwater Horizon incident produced the largest oil spill that has occurred in U.S. waters, releasing more than 200 million gallons into the Gulf of Mexico. BP has estimated the combined oil spill costs—cleanup activities, natural resource and economic damages, potential Clean Water Act (CWA) penalties, and other obligations—will be approximately $41 billion.

The Deepwater Horizon oil spill raised many issues for policymakers, including the ability of the existing oil spill liability and compensation framework to respond to a catastrophic spill. This framework determines (1) who is responsible for paying for oil spill cleanup costs and the economic and natural resource damages from an oil spill; (2) how these costs and damages are defined (i.e., what is covered?); and (3) the degree to which, and conditions in which, the costs and damages are limited and/or shared by other parties, including general taxpayers.

The existing framework includes a combination of elements that distribute the costs of an oil spill between the responsible party (or parties) and the Oil Spill Liability Trust Fund (OSLTF), which is largely financed through a per-barrel tax on domestic and imported oil. Responsible parties are liable up to their liability caps (if applicable); the trust fund covers costs above liability limits up to a per-incident cap of $1 billion.

Policymakers may want to consider the magnitude of the Deepwater Horizon incident and the liability and compensation issues raised under a scenario in which BP had refused to finance response activities or establish a claims process to comply with the relevant OPA provisions. BP has either directly funded oil spill response operations or reimbursed the federal government for actions taken by various agencies. BP has paid damage claims well above its liability limit and outside the scope of its liable damages.

Although evidence indicates that the levels of current framework (liability limits and OSLTF) may be sufficient to address the more common mix of spills that have historically occurred, the current combination of liability limits and $1 billion per-incident OSLTF cap is not sufficient to withstand a spill with damages/costs that exceed a responsible party’s liability limit by $1 billion. Even if the per-incident cap were increased, the current (and projected) level of funds in the OSLTF may not be sufficient to address costs from a catastrophic spill.

The options available to address these issues depend upon on the overall objective of Congress. One objective—which has been expressed by many in and outside Congress—is to provide full restoration and timely compensation (i.e., through channels other than litigation) for the impacts from the spill, without directly burdening the general taxpayers. If this is the objective, Congress may consider some combination of (1) increasing the offshore facility liability limit and corresponding financial responsibility demonstration; (2) increasing the OSLTF per-incident cap; or (3) increasing the level of funds available in the OSLTF. In addition, policymakers may want to consider an industry-financed fund, akin to the nuclear power industry’s fund, that could supplement or potentially replace the current system.

Another objective might be to maintain the existing system, which may be sufficient to address all but the most extreme scenarios. Catastrophic spills in U.S. waters have historically been rare. Some may argue that establishing a system that can withstand a catastrophic event would impose costs and yield consequences that would not justify the (expected) ability to address a catastrophic event.

Date of Report: March 11, 2011
Number of Pages: 27
Order Number: R41679
Price: $29.95

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