The ongoing oil spill in the Gulf has unleashed a vibrant debate about the value of off-shore drilling. The debate is important, and calm analysis may conclude that off-shore drilling generates more harm than benefit. This debate should nevertheless recognize four points.
1. Drilling produces benefits, not just costs. As pictures of the spill appear nightly on television screens, it is easy to forget that oil has value.
2. Incidents like the Gulf spill, or the Exxon Valdez disaster in Prince William Sound, Alaska, are horrific but rare. Drilling has occurred for decades in locations around the world, with only a few incidents even approaching the harm of the current situation. This incident may show that deep-water drilling is too risky, but it might instead be just a perfect storm of ineffective regulation, poor decision-making, and bad luck, with minimal chance of recurrence.
3. The environmental damage caused by the spill, and the lost income from fishing, tourism, and so on, are enormous but finite. Eco-systems (such as Prince William Sound) recover from oil spills to a substantial degree, and within decades, not centuries. We should not understate the damages, but we should not overstate them either.
4. Even if the costs from drilling are much greater than was recognized pre-spill, that does not make Cap-and-Trade a good policy. The risks from drilling mean the social costs exceed the private costs, so policy should raise the private costs. One approach is less drilling, or more regulation, or increased liability for drillers; this discourages drilling relative to other sources of energy. A second approach is higher carbon taxes, which push markets to substitute away from oil.
Cap-and-Trade is, in principle, like a carbon tax, but real world systems – such as the one languishing in Congress – are byzantine structures that give windfall profits to politically connected carbon emitters, waste enormous resources in complication and compliance, and do little to reduce carbon emissions because their “offset” provisions are so malleable.
Calm analysis, therefore, may ultimately suggest policy changes in response to the Gulf spill. The jury is still out, however, and if it convicts, it should impose the right punishment.