海角大神

Hard to believe it鈥檚 been almost a month since 鈥搘hich I noted at the time was more appropriately considered an 鈥渆xplosion鈥� and not just a 鈥渟pill.鈥� (Actually, an 鈥渦nstoppable gusher鈥� is a still better description, as we鈥檝e since learned.)

I wrote at the time that the temptation would be to say it鈥檚 all BP鈥檚 fault and just punish and fine the hell out of BP until we鈥檝e squeezed every last dollar out of them. We would get very angry and shout that BP got us into this mess, so BP would have to fix it. I said then that taking such a position might be emotionally accommodating (it鈥檚 always someone 别濒蝉别鈥檚 fault, not our own), but it wouldn鈥檛 be very smart from a public policy perspective. I made the argument that if government has a goal of 鈥渕aximizing social welfare,鈥� the best policy response would be to recognize this as a classic 鈥渘egative externality鈥� situation and use the best policy tool we have to address it鈥搒ome sort of tax or charge on fossil fuels鈥揺xplaining it this way (emphasis added):

The right policy needs to indeed spread the burden of the costs of cleaning up the oil spill to all participants in the oil marketplace, including those of us who innocently just fill up our tanks with gasoline. Only when the extra social costs of the environmental risks associated with both fossil fuel production (e.g., risk of offshore drilling mishaps) and fossil fuel consumption (e.g., global warming, pollution) are incorporated into the prices all of us face in the fossil fuel markets we participate in, will we be led to make the correct, or at least better, decisions from a social welfare standpoint, not just from our own selfish standpoints. These better decisions include the oil companies using safer production methods (which likely means producing less offshore), and consumers buying less gasoline.

But what I neglected to consider is that a tax or charge on fossil fuels in general would not really get at putting a price on the extra social costs associated with the risky offshore drilling methods. A carbon tax would be able to price the external costs associated with global warming (a cost that quite appropriately should be designed to hit both consumers and producers), but would not put an extra marginal cost on riskier versus safer ways of producing (or more specifically, extracting) oil. That additional social cost needs to be imposed on the producers making the decisions about how to produce the oil, or else the incentives to produce using safer methods (especially if they are more expensive than dangerous methods) won鈥檛 be there.

So, I want to make an addendum to the post from almost a month ago. I stick by my position that this is a very public problem in need of a very public (policy not just relations) solution. But imposing higher prices on fossil fuels in general, to correct for the global-warming-type environmental costs, is not enough. To get this right, we need to somehow price the expected marginal external costs of offshore oil production as well, if we determine that that production method in particular indeed imposes social costs that exceed private costs. The lump-sum punitive fine on BP imposed after the incident (as well as what has just happened to BP stock prices, pictured above) may have a deterrent effect on other oil companies who engage in offshore drilling, but it鈥檚 not an offshore drilling policy. If the government鈥檚 response is just an ex-post fine on BP alone, going forward, oil companies in general will still have the incentive to produce at least expected private cost regardless of potential external social costs associated with potential (but still low-probability) accidents.

It seems to me that in our negligence regarding public policy toward the oil and gas industry, we have greatly underpriced the cost of fossil fuels produced from offshore drilling methods for two reasons: (i) for the potential social costs associated with the global warming caused by the consumption and use of fossil fuels in general, and (ii) for the expected environmental costs associated with offshore oil and gas production in particular. The first problem would be solved by turning to a carbon tax or charge, but the second requires another tax or fee that would be charged to any oil company who engages in offshore drilling based perhaps on the quantity of oil they produce offshore or wells drilled or whatever is best correlated with the imposed social risks. The revenue from these latter fees/taxes could go into some sort of trust fund designed to cover the (large) costs of cleaning up (low-probability) accidents. This sounds a lot like an insurance policy, doesn鈥檛 it? But it鈥檚 like a social insurance program, because these are social costs and a very public problem.

What I describe above is a public policy approach that relies on creating the right market incentives, correcting how the price system allocates resources in the case of a 鈥渕arket failure.鈥� The alternative or additional public policy tool is regulation. It may be the case that we need both better prices and more 鈥渃ommand and control鈥� requiring safer production methods.

I don鈥檛 know much at all about the Superfund program, but it strikes me that there may be some similarities there in terms of the 鈥渋nsurance鈥� quality of the system I describe. As , Superfund taxes that went into the Superfund fund expired in 1995, but the Obama Administration鈥檚 budget proposes to reinstate them. I鈥檇 love to hear from any of you who know more about Superfund regarding any public policy lessons there for the current mess we鈥檙e in with this BP disaster.

------------------------------

海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.