The true cost of risk [REPRINT]

Criminal Minds: Suspect Behavior
Criminal Minds: Suspect Behavior (Photo credit: Wikipedia)

 

I came across this article in the recent edition of Canadian Business magazine, and I have taken the liberty of reprinting it in its’ entirety here. One of my strong beliefs about company/business performance is that incentive structures [see related blog post here] drive a great deal of the realities of the kind of behavior you get.

In this particular instance, if the maximum fines available to penalize negligent corporate behavior  are dramatically lower than the perceived additional costs placed on the company by adopting a more cautious “prudent” behavior by their corporate actors, you’ll get a lot of costly accidents imposed on society. Here’s the article from Canadian Business:

The true cost of risk

When accidents happen, responsible businesses must pay up. But how much should they pay?

Jul 18, 2013 Matthew McClearn

Illustration by Chris Philpot

Illustration by Chris Philpot

When an off shore oil rig has a blowout or there’s a nuclear accident, the responsible party should cover the cleanup costs, right? Not in Canada. In many industries, the government has placed liability caps that limit how much companies must contribute to remediation when there’s an accident. As you can see below, often those caps are so low compared to the actual cost of cleanup, some wonder if there’s enough incentive to prevent disasters from happening in the first place.

OFFSHORE DRILLING BLOWOUT

CAPPED AT: $40 MILLION

The cap: Under the Canada Oil and Gas Operations Act, the company that gained approval for offshore drilling work is liable in the event of a blowout. But the compensation payable is capped at $30 million off the East Coast, or $40 million in Arctic waters (that is, north of the 60th parallel).

In the real world: The cost of cleaning up BP’s notorious Macondo spill in the Gulf of Mexico has been estimated at more than $42 billion. A commission that investigated the incident deemed America’s US$75-million liability cap “totally inadequate.”

BP HORIZON CLEANUP: $42 BILLION

costofrisk-offshoreblowout

OIL TANKER SPILL

CAPPED AT: $136 MILLION

The cap: The federal Marine Liability Act (MLA) limits ship-owners’ liability for oil spills based on a vessel’s tonnage. Vessels below 5,000 tonnes have an effective maximum liability of about $7 million; above that threshold, liability can reach as much as $136 million. Theoretically, these caps don’t apply in situations of recklessness.

In the real world: In 2010, the environment commissioner’s office alleged deficiencies in the federal government’s ability to respond to tanker spills. Transport Canada is now reviewing its tanker-spill liability regime. Cleaning up the infamous Exxon Valdez spill cost a reported $4 billion.

EXXON VALDEZ CLEANUP: $4 BILLION

costofrisk-tankerspill

NUCLEAR DISASTER

CAPPED AT: $75 MILLION

The cap: For decades, Canada’s Nuclear Liability Act provided that, in the event of a catastrophe at a nuclear facility, its operators faced a maximum liability of just $75 million. In June, the federal government announced plans to increase that limit to $1 billion. Several previous attempts to raise the limit came to nothing, however.

In the real world: Elizabeth Brubaker, executive director of Environment Probe, argues this liability cap encourages disasters. “Safety measures cost money,” she writes, “and electric utilities, under pressure to minimize costs, must find it hard to justify large safety expenditures if their liability is limited.” One estimate pegs the cost of cleaning up Japan’s Fukushima nuclear power plant at more than $216 billion.

FUKUSHIMA CLEANUP: $216 BILLION

costofrisk-nuclear

ANIMAL WASTE RELEASE

CAPPED AT: $0*

The cap: Enacted in every province, right-to-farm legislations exempt farms from a wide variety of common-law nuisances—so long as they’re employing “normal farming practices.” *These laws effectively block neighbours from suing farms over foul odors, noise and health concerns—although farms must still abide by relevant safety regulations and are liable for accidents.

In the real world: Livestock manure is one of the largest sources of pollution in the nation. A deadly 1993 cryptosporidium outbreak in Milwaukee linked to manure contamination killed more than 100 people, sickened 400,000 and cost US$37 million in lost wages and productivity. Right-to-farm legislations may reduce incentives to properly manage manure.

MILWAUKEE OUTBREAK: $37 MILLION

costofrisk-animalwaste

OILSANDS RECLAMATION

RECLAMATION FUND TOTALS: $875 MILLION

The cap: Oilsands operators in northern Alberta must reclaim disturbed land once they’re finished with it. They’re required to post security deposits—currently totalling $875 million—into the Environmental Protection Security Fund to finance reclamation in the event they subsequently prove unable to do it. Because reclamation processes are in their infancy, “the public doesn’t know whether or not the current security deposits are adequate,” the Pembina Institute, an NGO, claimed in a report.

In the real world: Pembina claims actual reclamation costs could be 24 times higher than the funds available in the EPSF—leaving Albertan taxpayers “vulnerable to major financial risks.”

PEMBINA ESTIMATE: $21 BILLION

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