What's the best way to punish BP for the oil spill?

Commentary about business and finance.
May 26 2010 6:28 PM

How To Punish BP

Fine? Boycott? Lawsuit? What's the best way to make the company pay for the oil spill?

The damage from BP's oil spill is mounting. The lucrative tourism business in Florida is suffering. Housing predictor estimates that homes in the path of the leak will lose "at least 30 percent in value as a result of the environmental catastrophe." The thriving seafood industry in the Gulf has largely been shut down. Huge quantities of oil have been wasted. The spill may cause severe long-term damage to sea life in the Gulf, destroy sensitive coastal marshes, and send oil washing up on Atlantic Ocean beaches. And don't forget all the jobs and profits that could have materialized from opening up new areas to offshore drilling—but that likely won't thanks to the spill.

Meanwhile, BP is displaying a frustrating combination of incompetence and insouciance. What with this spill, the explosion in 2005 at an oil refinery in Texas City that killed 15 people, and another spill in the Trans-Alaska pipeline, which it operates, you get the sense that BP is very unlucky or not particularly good at running its operations safely or not particularly interested in the well-being of America's environment.

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Which brings us to the $64 billion question: BP should pay—and pay dearly—for the damage. But how much? And, more importantly, how? What should the United States do to BP that would be satisfying, punish the company appropriately, and, most importantly, provide incentives for BP and other oil firms to act with greater care? I've puzzled over this and have come up with a few ideas—none of them very satisfying.

We could tar and feather the senior executives and board of directors. Thanks to BP, there's an ample supply of both tar and feathers—and tarred feathers—in the Gulf. That would be emotionally satisfying and poetically just but won't have a long-term benefit.

Americans could boycott BP's products. A lot of what BP produces is sold to other industrial companies or into commodity markets. But BP does have retail operations—BP and Arco gas stations and AmPm convenience stores. We could punish BP by buying our unleaded gas, beef jerky, and Twix bars from other stores. But retail is only a tiny sliver of BP's business. And a boycott would punish franchisees, small- and midsize-business people who made an innocent decision to align with BP.

We could force BP and its colleagues to prefund the cost of cleaning up their own mess. After the Valdez disaster, Congress created the Oil Spill Liability Trust Fund, a $1 billion pool of cash funded largely by a 5-cent-per-barrel tax. Like the Federal Deposit Insurance Corp. trust fund, this is an insurance policy against the industry's own incompetency. In theory, this fund could be vastly expanded, and, as the FDIC is, be empowered to watch over offshore drillers, conduct inspections, and develop protocols and procedures for cleaning up messes. But as recent events on Wall Street have shown, deposit insurance alone isn't sufficient to ward off industrywide poor behavior.

We could make like Hugo Chavez and nationalize the company (punishment!), and then use its assets and cash flow to pay for the clean-up (remedy!) At today's price, BP has a market capitalization of about $134 billion. But, charges of Obamian socialism to the contrary, the U.S. isn't Venezuela.

We could sue BP into oblivion. It's true that the Oil Pollution Act of 1990 limits liability for economic damages stemming from oil spills to $75 million. But as Walter Olson points out, that limit just applies to assessments to the trust fund. Other parties are free to sue BP for damages. But legal retribution is slow and ultimately depends on the whims of a business-friendly Supreme Court. The $2.5 billion in damages Exxon was ordered to pay to those hurt by the spill of the Exxon Valdez was overturned by the Supreme Court in 2008.

So what would work? The challenge, as I see it, is to devise punishments, or create new incentives, that give BP, its managers, and its shareholders incentives to make sure this sort of thing never happens again.

One approach might be to flip the incentives around. Instead of holding out the stick of lawsuits and fines as a cost for screw-ups, how about giving financial rewards to companies that consistently avoid despoiling the environment? Usually, these incentives are called profits. But for BP, profits alone evidently aren't enough. We could give companies with perfect environmental and safety records a tax break or cash bonus at the end of each year.

I've written recently about the concept of social license—which is essentially a permit to operate your business in our jurisdiction. It's difficult simply to stop companies from doing business in the United States just because we don't like them. Running afoul of regulations is a great American tradition—I'm sure your favorite restaurant has been nailed with health code violations. But perhaps we can take a page from the Department of Motor Vehicles and give companies like BP a formal social license. Every time it gets hit with a violation—an oil spill, leaky pipeline, a fatal refinery accident—the license holder would be docked a few points. Businesses that accumulate several points would be placed on probation—prohibited from expanding, making acquisitions, or getting in on new drilling opportunities—until they prove they can operate safely.

What else could work? I want to hear from you, Slatereaders,about other smart, satisfying punishments. All you lawyers, business ethicists, congressional experts, Louisiana residents, tree-huggers, oil executives who don't want to kill the golden goose, libertarians, and liberals: What can we do to BP that A) produces tangible punishment; B) helps ameliorate the problems the spill has created; C) sends a message to the industry; and D) provides incentives for BP and its fellow oil producers to act with greater caution in the future?

Post your comments below or, if you prefer anonymity, send them to moneybox@slate.com; I'll publish and assess the most interesting ideas next week.

Prizes will be given!

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