On the optimal environmental liability limit for marine oil transport

Recent changes in the US liability regime for oil pollution damage have intensified a policy debate about environmental liability limits. Economic theory suggests that some type of limit may be needed under certain conditions, and that such a limit should be set so that the marginal social benefit and cost are equal. However, it is unclear how a liability limit may be determined specifically for tanker shipping in US waters. We first examine conditions under which corner solutions (no liability or unlimited liability) are desirable. We then formulate a model to determine a socially optimal liability limit for oil pollution damage in US waters when a non-zero, finite liability limit is desirable. The model captures the tradeoff between less expensive energy supply and more stringent protection of the marine environment. Numerical simulations illustrate the properties of the model and major factors affecting the public policy decision regarding a liability limit.