Question

The BP spill is projected to cost over $40 billion to clean up, and the Exxon Valdez tanker spill of decades past has rung up a reported $4 billion tab. One would think that incident prevention should be top priority with all proponents, that preventing incidents would be a key strategy to stay solvent. So why is it that executive management and shareholders often dodge the zero-tolerance approach to environmental risk?

Are regulations limiting liability of firms encourage risk taking in drilling regulations, oil and gas fracking?

Does lowering of mileage limits promote environmental moral hazard?

Answer 1

There is always a concept called Moral hazard that is involved in such cases. It is said that, an ounce of prevention is worth a pound of cure for environmental risk mitigation on major projects like BP. This concept of moral hazard simply revolves around the fact that humans are more careless when they knew that they are protected, but the consequence of the carelessness is borne by someone else. So, this postulates the fact that, more the consequence is mitigated, the more likely the subjects involved will indulge in the underlying risky behaviour.

Let's say for example, a driver will full insurance coverage of his car and car full of air bags for his safety is naturally tempted to drive faster. That is because he is in a much protected zone, plus his car is fully insured. So, even if there is an unfortunate accident, driver will be safe and car will get full insurance. But, the other subject or the other party who is involved in the accident will suffer the brunt of the accident. Same happened in the case of BP. Therefore, it is always important to prevent the incident instead of dodging on the approach that is risky to the other parties or the subjects.

Executive management and shareholders often dodging on zero tolerance approach to environmental risk shows that they are simply trying to make sure they are managing risk and mitigating risk management towards the environment. But in reality, they are simply trying to play a safe game by putting the environment under risk and zero tolerance is no where seen when the events like BP are uncontrollable or preventable.

The impact of oil and gas fracking will have a huge impact on the marine life. Although firms just estimate a minor or a minimal damage, but there will be a huge unknown damage under water which is always unseen. It is just like an iceberg. A tip of the iceberg which is always seen would be very smaller when compared to the iceberg which is under water, invisible. The regulations that are limiting the liability of the firms that encourage risk taking in drilling operations do not regulate the damage that happens under water. They simply try to prevent the external damage, but the internal damage to the environment is never taken care off in fracking.

Lowering of mileage limits will not prevent environmental hazards. It is just like a driver driving very slowly and ultimately bumping over a parked vehicle. Lowering of mileage will prevent moral hazard to an extent, but it will not prevent the risk that is bound to happen to the environment.