Environmental regulation at the frontier: government oversight of offshore oil drilling north of Alaska.

• Author: Hults, David
• Position: V. Challenges of Regulating Infrequent, Catastrophic Risks at the Frontier through VIII. Conclusion, with footnotes, p. 803-832

5. CHALLENGES OF REGULATING INFREQUENT, CATASTROPHIC RISKS AT THE FRONTIER

   This literature review points to various weaknesses in government oversight of offshore drilling. These include a lack of transparency in oil spill response planning, underdeveloped tools for gathering information on oil company activities, and insufficient liability exposure in the event of a major spill. This Part builds on the literature to develop a basic framework for analyzing government oversight of industries capable of causing catastrophic harm. (278) Show how the Arctic presents an important case study because it sits at the technological frontier. I then explore how the problems of regulating at the frontier interact with catastrophic risks to undermine the efficacy of conventional regulatory models.

   1. Framework for Evaluating Government Action to Reduce Catastrophic Events

      The offshore drilling literature provides a way of thinking generally about government prevention of infrequent, catastrophic risks279 using the concepts above: asymmetric preferences between firms and government, asymmetric information between firms and government, and weaknesses in the government's capacity to act as society's agent. (280) With respect to asymmetric preferences, the offshore drilling literature underscores the difficulty of aligning social and firm preferences when firm activities may cause, or interact with natural forces to cause, catastrophic harm. (281) Analysis of accidents in the chemical and nuclear power industries (282) reaches similar conclusions. (283) A reason for misalignment is that catastrophes are hugely expensive, complex, and unpredictable. As a result, liability-based solutions face judgment proof problems (284) and indeterminate causality; (285) insurance markets may be unable to pool risks; (286) and taxes fail to cause industry to fully internalize social harms. (287) The inability to align preferences has myriad effects on industry behavior, (288) including reducing incentives to plan for catastrophic events in advance. (289) It also suggests a role for regulation, since regulators may mandate compliance when firm and government interests are not in sync. (290)

      Yet regulation has limitations of its own. A central challenge of regulation is overcoming information asymmetries, the second element introduced above. The offshore drilling literature indicates that many of the information imbalances plaguing regulator-industry relationships generally (291) also affect industries exhibiting catastrophic risks. (292) In fact, information asymmetries may be greater in high-risk industries to the extent those industries are more technologically sophisticated than the norm. (293)

      The third and final element is governmental failures in acting as society's agent. The short-term politics of disaster and behavioral bias in estimating the likelihood of a major oil spill indicate that government may underplan for oil spills. (294) Underplanning in the oil spill context is consistent with research on disaster planning generally. (295)

      These three elements, when pulled together, lead to a specific set of policy debates. (296) Consider the question of policy instrument choice for curbing catastrophic risks. The pervasiveness of asymmetric preferences, asymmetric information, and government's imperfections suggest that any single policy instrument may be insufficient. (297). Multiple policy tools, such as joint use of regulation and liability, may help overcome the limitations in any species and habitats that may not be easily corrected through compensation. Second, regulation may have a public goods nature and overcome coordination problems by forcing firms to take certain actions--like industry-wide safety systems--that would not occur without regulation, due to free-rider problems. See Kim, supra note 83, at 175-76. single policy instrument; such an approach would mirror the redundancy strategy that companies employ to reduce the risk of failure in industrial processes. (298) However, adopting multiple policy tools is administratively costly, and undesirable policy interactions may occur. (299) The choice of policy strategies may thus depend on the degree of asymmetric preferences, asymmetric information, and government imperfections in a particular case.

      Or consider the question of regulatory model: The problem of asymmetric information suggests that risk-based regulations may provide a better way of prioritizing regulatory interventions relative to a prescriptive model, (300) since risk-based regulations tie interventions to a data-driven picture of safety hazards. (301) However, government imperfections raise the possibility that risk-based regulations simply repackage regulation in a less transparent and more industry-dependent way. (302) Again, the degree of government imperfection or asymmetric information in a particular case may counsel in favor of a particular regulatory model.

      As I show below, the frontier nature of Arctic offshore drilling adds new texture to these policy questions. Debates over risk-based and prescriptive regulation sound in a different key when, as in the Arctic, access to information is scant and reliance on industry is high. Similarly, the question of whether to use more or fewer policy tools to combat a perceived problem may have a different answer when, as in the Arctic, the institutions needed to implement those tools are nascent or poorly developed. To make this discussion more concrete, I focus on two ways in which the Arctic casts new light on catastrophic risk regulation: uncertainty and lack of benchmarking.

   2. Uncertainty

      Uncertainty occurs when a party--in this case a regulator--lacks information about what will occur. (303) Legal scholars have devoted extensive treatment to uncertainty, (304) including for catastrophic events. (305) However, much of that work focuses on the systemic unknowns, like ecosystem changes, that may be intractable. (306) Less scholarship has considered the uncertainty that arises when an industry capable of causing catastrophic harm, like offshore drilling, moves into a new frontier. Oil companies may have little incentive to reduce the uncertainty in frontier operations due to weaknesses in the liability regime. (307) Therefore, conventional information forcing tools to reveal information, like those sketched above, may have little effect. (308)

      For several reasons, Arctic oil spill planning (309) is likely to be more uncertain than planning for oil spills generally. (310) One reason is the Arctic's extreme weather conditions, which include hostile weather, frigid water, and frequent incursions of ice. (311) Recent U.S. government reports raise questions about Arctic oil spill prevention, (312) containment, (313) and response. (314) To highlight one example: Shell's OSRPs for the Beaufort and Chukchi Seas propose, in the event of a mqjor late season spill, that spilled oil sit in the ice for the winter, even though such an approach has never before been attempted and would have unpredictable ecosystem effects. (315)

      The inaccessibility of the drilling sites in question introduces further uncertainty into oil spill response planning. (316) Compared to offshore drilling elsewhere, drilling sites in the Beaufort and Chukchi Seas have fewer human resources available and are much farther from airports, seaports, and government response infrastructure--the nearest Coast Guard base is roughly 1,000 miles away. (317) The Arctic's isolation presents major complications in the event search and rescue operations become necessary. (318)

      From a comparative perspective, the uncertainties of Arctic offshore drilling are likely more severe than elsewhere given the paucity of oil spills (319) and field testing. (320) In other settings--including deepwater--companies have carried out exploration and development for decades, oil spills have ensued, and regulators have learned about the effects of such spills on the environment. (321) The United States and other governments have committed resources to improving their understanding of Arctic-specific effects, but progress remains modest at best. (322)

      It is important to note that uncertainty alone does not spoil prospects for effective government oversight. (323) During the Deepwater Horizon disaster, many untested oil spill response methods were used, and they often proved successful. (324) The challenge posed by uncertainty is not that untested technologies will fail, but that government lacks ready metrics for regulating them effectively. (325) This piece explores how regulators might respond in the face of uncertainty in Part VI below.

   3. Benchmarking Gaps

      In addition to incomplete knowledge, another problem making regulation of Arctic offshore drilling distinct, relative to offshore drilling generally, is the lack of benchmarking available. (326) Various studies have examined how regulators use benchmarking to compare one company's experience to another (327) to draw out useful information. (328) Lack of benchmarking may skew regulatory decision making because regulators are reliant on one or few firms' experience. (329) As a result, the regulated entity may "frame" policy making options (330) in advantageous ways, (331) causing the regulator to suffer behavioral bias. (332) Little research has explored how lack of benchmarking affects regulation of offshore drilling (333) and other hazardous, technologically dynamic industries where alternative reference points are missing. (334)

      There are several reasons benchmarking is a challenge in the Arctic. First, almost no activity has occurred to date. Shell is virtually the only company to drill there in the past two decades, (335) and only Shell's

      Exploration Plans and OSRPs received regulatory approval recently. (336) Other oil companies, such as ConocoPhilhps or Statoil, may enter U.S. Arctic waters, but the total number of operating companies likely will remain small...