Course:ECON371/UBCO20010WT1/GROUP3/Article7

Article 7 - Exxon to Pay $25 Million to Settle Brooklyn Spill Suit

Article Summary

Exxon to pay 25 million to settle Brooklyn spill suit This is a unique oil spill for two reasons. Firstly, the spill is underground. Secondly, the 'spill' was a gradually seepage into the ground over many years of industrial activity from the years 1860 to 1960.

In the late 1800s, the neighbourhood of Greenpoint, Brooklyn, housed over 50 refineries (most of which were owned by Standard Oil - now called Exxon). It was a time of lax environmental policy and the seepage of oil likely started around this point. Exxon is now left to clean up the mess of its past.

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Today, Exxon is in the midst of several class-action lawsuits regarding the Brooklyn spill because it owns the land in Greenpoint, Brooklyn, where the oil damages are located. The residents claim that the oil has contaminated "at least 55 acres of the community" which has led to decreased property damages and even (supposedly) an increase in cancer rates.

This article focuses on the settlement of the decades-old lawsuit. Exxon is to pay $25 million, which will include:

1) $500,000 in civil penalties and damages

2) $1.5 million in compensation to the state for past cleanups associated with the spill

3) $3.5 million for future oversight costs

4) The remainder goes towards cleanup costs, of which Exxon obliges "to address soil, groundwater, and air concerns"

This settlement arrives despite the fact that Exxon has been actively cleaning the site since 1979. The site was only discovered to be a spill in 1978, when a Coast Guard patrol boat spotted an oil plume in the water. Since 1979, Exxon claims it has cleaned up "more than 11 million gallons" (although the company refused to discuss the costs of this cleanup).

Furthermore, this settlement resolves only one claim against Exxon regarding the Brooklyn oil spill. There remains a massive $58 billion claim by the residents of the surrounding neighbourhoods, although this suit is also equally leveled against several other oil companies.

The plaintiffs are obviously delighted that their case if finally being settled, and that their neighbourhood will be a cleaner and healthier place to live in which to live in the near future.

Analysis

Open Access Resource The property rights for this case are complex. The damages took place more than half a century ago, and took place on land on which there were factories owned by several oil companies. One of these oil companies was Standard Oil (now called Exxon). The land was not cooperatively owned by any one person, yet each factor was alleged to have polluted it. Thus...

This makes the oil in Greenpoint a 'non-point-source emission'. It is difficult to trace where the original points of pollution were because the pollutant collected in a sort of underground aquifer for oil. As we learned in the textbook, firms with no incentive to clean up will choose not to abate their pollution. The lack of liability laws, government regulations, standards, or any other regulation policy we have discussed all contributed to the pollution of Greenpoint.

Modern Laws Our textbook extensively describes Canadian and American environmental economic policy. I will now look at a few of these concepts in relation to the Brooklyn oil spill.

Land use: Canadian communities have a 'police power' with which they can prohibit the exploitation of surrounding land if it is proven that it has low or negative social returns (even if the private returns are high). Theoretically, a law such as this would have prevented the Brooklyn oil spill from occurring because the development would not have stood up to a cost/benefit analysis. The lost property values, health costs, and other social costs associated with this oil spill would have been taken into account and the people of the surrounding community could have exercised their 'police power'.

Water pollution-control policy: The water pollution from the Brooklyn oil spill would also have been mitigated under current U.S. laws and regulations. Our textbook states that the U.S. federal government has the power to set binding standards (such as technology based standards) for the whole country. Unlike Canadian law, these become federally mandated and, thus, carry far more weight to them. A technology based standard in early 20th century Brooklyn would have regulated the factories based on the the Best Available Technology Economically Achievable (BATEA) and forced them to reduce their emissions - theoretically - to the efficient level. Unfortunately for Greenpoint, Brooklyn, most of the United States' water pollution control policies began in the 1970s, long after the factories had polluted.

Is this a toxic or hazardous substance? As defined by the Canadian Environmental Protection Act of 1999, a toxic substance:

1) Has or may have an immediate or long-term harmful effect on the environment or its biological diversity This is true mainly in large quantities for oil, as it is not uncommon to see shiny patches on the surface of water in big cities.

2) Constitutes or may constitute a danger to the environment on which life depends Oil can be very deadly to delicate marine life and birds, who become grounded and die as oil sticks to their feathers.

3) Constitutes or may constitute a danger in Canada to human life or health One lawsuit against Exxon's Brooklyn oil spill is in regards to the long-term effects on human health. The lawsuit alleges an increase in cancer diagnoses in the neighbourhood is related to the oil spill.

Obviously, there would be no lawsuit filed by the citizens of Greenpoint if they did not feel that oil was having an adverse effect on their community. However, this is not taking the form of immediate health concerns for humans and wildlife, but rather as monetary concerns as they see their property values plummet. Although oil may not quite be a toxin in itself, it is often composed of toxins such as arsenic and is clearly not a desirable effluent to have present in a community.

Achieving Social Equilibrium Essentially, this lawsuit boils down to discovering which pollution - and resulting damages - Exxon is liable for. A cost-benefit analysis, done in the early 20th century, could not possibly have accounted for all the future costs that are just now surfacing, such as the loss of property values or cancer related illnesses.

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However, if Exxon, then Standard Oil, could have accounted for these social losses and balanced them against the social gains, they would have achieved social equilibrium. However, I suspect that a true social equilibrium is rarely, if ever achieved, especially when examining the costs over 100 years in the future.

Nevertheless, Exxon's $25 million settlement will help to push the oil spill in Brooklyn towards a more socially efficient level, even if it remains far from that equilibrium point.

Prof's Comments

I think an important thing to recognize here is Coase's Theorem. There are two steps in this thing, one is the clarification of the property rights, and the second is the negotiation over payments and actions to move towards a more efficient solution. The court was the route to accomplish both of these. Given the time and costs involved, it highlights the points made in class about court being expensive.