Thursday, June 17, 2010

Gas Taxes and BP

BP could, legally, just pay the $75 million cap on liability due to an oil spill and call it done. They won't do that, of course, because they know there'd be hell to pay in the future. Maybe they could get away with paying only the maximum this time, but the U.S. could just revoke their licenses to drill in U.S. territory, and that would have a serious impact on their bottom line. So for basically political reasons, BP is caving to the White House's escrow demand, even though it isn't technically "legal." (As an aside: I seem to remember some Presidential candidate in the last election who made a big deal about the law being the law, and that we shouldn't make exceptions when it was convenient. Who was that? Hmmm.)

All that aside, what interests me here is the question of who pays for what? We're being urged, from some directions, to create a gas tax that would cover some of the externalities of using oil. One of those externalities is oil spills. OK, then the gas tax should go to paying for them; an economically efficient gas tax would raise an amount exactly equal to the cost of the externalities.

But if we had that, then BP would be off the hook, because the government would be in charge of cleanup. That would only be fair, since after all, we would have prepaid the cleanup costs. This creates a moral hazard, though, doesn't it? If BP, via its shareholders, isn't liable for the cleanup cost, then what incentive does it have to be careful? It still has some, of course: if it's caught violating the rules, then it would owe fines and might lose licenses. But the incentives would be reduced. Certainly in the wake of the Deepwater Horizon spill, oil company shareholders should be requiring a thorough review of the safety and emergency response measures of the companies they own. The same reviews would not be a matter of fiduciary duty if the government were cleaning up the mess and paying for it instead of BP.

With reduced safety precautions, the expected result of a gas tax, then, would be that there would be more accidents, resulting in more cleanup costs (requiring higher taxes to pay for them), and more environmental damage. It could perversely worsen the situation.


  1. James, you know damn well that not a penny of money collected by a gas tax would ever be set aside in a dedicated fund for oil spill clean-up. That's just the way politicians (on all sides of the political spectrum) get you to agree to a new tax, so they can take a greater percentage of your money. Then they raid the "dedicated fund" for other purposes -- for which they should go to jail, since it is stealing, after all

  2. @Gary: You're right, but my point has nothing to do with whether gas taxes are set aside.