Research & Commentary: Oil Spill Liability Caps and the Oil Pollution Act

Published November 3, 2011

Oil spills can cause long-term damage to the environment and cost billions of dollars to clean up. In the aftermath of a major spill, sorting out who is responsible for the costs has proven very difficult.

After the Exxon Valdez spill (then the largest such event in U.S. history), Congress passed the Oil Pollution Act (OPA), which created an Oil Spill Liability Trust Fund, funded by an 8 cents per-barrel tax on oil produced in or imported into the United States. The trust fund then seeks (but does not always get) repayment of the funds from the company or entity found to be responsible for the damages. The OPA set a $75 million cap on the liability those responsible for a spill can face.

The liability caps have proven controversial. Opponents include both pro-market groups such as the Reason Foundation and environmental organizations such as the National Wildlife Federation (NWF). Reason Foundation says taxpayers should not be required to cover damages caused by a private entity. The NWF argues strengthening the OPA, especially the liability cap, is essential to ensure disasters like Deepwater Horizon are not repeated.

After the Deepwater Horizon oil spill of 2010, legislators immediately began proposing bills to raise or eliminate the liability cap. One proposal would have hiked the cap as high as $10 billion, an amount some legislators argued was not still not sufficient.

Supporters of the cap, including legislators in drilling areas across the nation, say unlimited liability would make insuring for new drilling impossible for all but the biggest companies, driving out smaller competitors. Noting existing rules under the OPA allow for unlimited liability in cases of gross negligence, these critics say the proposed legislation is merely an effort to punish oil companies to score political points.

The following articles examine the Oil Pollution Act and the oil spill liability cap from multiple perspectives.

Who’s Liable for the Gulf Oil Spill? You Are
Ronald Bailey of the Reason Foundation argues for removal of the oil spill liability cap. This would align the future incentives of drillers and their insurers to take into better account the risks of offshore oil production.

Deepwater Horizon and the Patchwork of Oil Spill Liability Law
Nathan Richardson of Resources for the Future examines the patchwork of laws covering the liabilities following an oil spill and who pays for damages. Richardson finds these laws often change following a major spill, and further changes can be expected due to Deepwater Horizon.

Oil Spill Liability: A Plan for Reform
Nicolas Loris, Jack Spencer, and James Jay Carafano of The Heritage Foundation outline a comprehensive plan for responsible and common-sense measures to ensure offshore oil and gas safety, keeping the public informed and government bureaucracy in check.

Why We Need to Raise or Eliminate the Oil Spillers’ Liability Cap
Kate Gordon of the Center for American Progress testifies before the House Transportation and Infrastructure Committee that the liability cap for damages must be raised, and other measures implemented, to account more realistically for the true environmental and economic costs of oil spills.

Deepwater Horizon Oil Spill Disaster: Risk, Recovery, and Insurance Implications
This Congressional Research Service report reviews the Deepwater Horizon incident and identifies the limits of liability facing the operators of offshore oil rigs. The report also discusses four specific policy issues for Congress: new liability limits and insurance capacity, future insurability of offshore oil spill perils, availability of insurance, and the potential effects on domestic offshore energy production.

Inadequacies of the Oil Pollution Act of 1990: Why the United States Should Adopt the Convention on Civil Liability
In the Fordham Law Journal, Jaclyn A. Zimmermann compares the Oil Pollution Act with the Convention of Civil Liability. She examines various groups’ viewpoints on the OPA and advocates that the United States should become a member of the CCL.

Post-Deepwater Horizon: The Changing Landscape of Liability for Oil Pollution in the United States
Environmental liability attorney Vincent J. Foley describes the current oil spill compensation and liability scheme in the United States, focusing on the critical role of limits of liability in setting a minimum baseline for strict liability of the responsible party, and a guaranteed source of immediately available compensation funds to pay oil spill victims.

What Cap? How the Alternative Fines Act Nullifies the OPA Liability Cap
Writing for the American Bar Association, William A. Anderson II and Michael Hipps argue that existing laws, including the Alternative Fines Act, make it unlikely the nominal $75 million cap on OPA liability will impede the government’s ability to persuade oil companies to pay damages after a spill.