1

Hopkins: cost/benefit analysis



# The Cost

‐ Benefit Hurdle

for Safety Case Regulation

A discussion paper prepared for the US Chemical Safety Board

Andrew Hopkins

Emeritus Professor of Sociology

Australian National University

12 December 20132

Hopkins: cost/benefit analysis

Introduction

Following the Macondo accident, the Presidential Commission advocated the adoption of safety case

regulation for offshore petroleum production in the United States 1

. The US Chemical Safety Board is

also preparing a report on the Macondo accident which will address the issue of safety case

regulation 2

. The present paper does not seek to describe the safety case approach. It assumes that

the reader has some familiarity with safety case principles. Readers who would like more

information are referred to my article

– “Explaining Safety Case”. 3

One of the hurdles that any agency advocating new regulations must face is the requirement that

such regulation be justified, so far as possible, using cost/benefit analysis. The proponents of safety

case regulation therefore bear the onus of either justifying the new regulatory regime on

cost/benefit grounds, or explaining why strict cost/benefit analysis is impossible or inapplicable in

the case at hand. The purpose of this discussion paper is to consider the cost/benefit hurdle and to

argue that safety case regulation for offshore petroleum production can in fact surmount it.

The presidential order

The starting point for this discussion must be the presidential order of January 18, 2011 on

“Improving Regulation and Regulatory Review” (Executive Order 13563) 4

. The relevant parts are as

follows:

“By the authority vested in me as President by the Constitution and the laws of the United

States of America, and in order to improve regulation and regulatory review, it is hereby

ordered as follows:

... [Regulation] must identify and use the best, most innovative and least burdensome tools for

achieving regulatory ends. It must take into account benefits and costs, both quantitative and

qualitative.

....

... [E]ach agency must, among other things: (1) propose or adopt a regulation only upon a

reasoned determination that its benefits justify its costs (recognizing that some benefits and

costs are difficult to quantify)...

... Where appropriate and permitted by laws, each agency may consider (and discuss

qualitatively) values that are difficult or impossible to quantify, including equity, human

dignity, fairness, and distributive impacts....”

In short, the order recognises that

 costs and benefits may not always be readily quantified and may need to be discussed

qualitatively, and

1 National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. Deepwater: The Gulf Oil

Disaster and the Future of Offshore Drilling, p252

2 The CSB’s “Chevron report” will canvas the introduction of a safety case regime for onshore facilities. This

paper deals specifically with the offshore environment, but the issues and arguments would be broadly similar

for the onshore case.

3 http://regnet.anu.edu.au/sites/default/files/WorkingPaper_87.pdf

4 Reproduced in C Sunstein, Simpler: The Future of Government

. (Simon & Schuster, New York, 2013), pp217

‐ 193

Hopkins: cost/benefit analysis

 an argument for regulation may be based on values such as equity and dignity. Such

values are in principle not reducible to monetary amounts and the argument

therefore cannot involve weighing costs against benefits in any quantitative way.

The organisation responsible for policing the presidential order is the White House Office of

Information and Regulatory Affairs. For three years, from 2009 to 2012, the office was headed by

Cass Sunstein, often described as President Obama’s “regulatory czar”. Sunstein has subsequently

written a book describing the principles on which he operated. I shall return to the presidential order

and Sunstein’s interpretation of it later.

The difficulty of doing cost/benefit analysis for safety case regulation

Cost/benefit analysis must begin by identifying and if possible providing a numerical estimate of the

benefits. For example, a cost/benefit analysis for a regulation requiring a particular safety feature in

new cars would need to begin by estimating the number of lives that would be saved by the

implementation of such a regulation. Subsequent steps would include estimating the dollar value of

the benefits, which includes placing a dollar value on the lives saved 5

. One then needs to calculate

the cost that companies would incur complying with the new requirement, and finally, compare the

costs with the benefits 6

.

For safety case regulation the very first step

– quantifying the benefits

‐ is impossibly difficult. There

are various reasons for this. Safety case regulation is designed primarily to prevent major accident

events, disasters in simple terms. But whereas the concept of fatality is well defined in the car safety

scenario, a disaster is much more difficult to define. So exactly what it is you are counting is hard to

pin down. How many deaths does it take to make a disaster? Or alternatively, how much

environmental damage is necessary to qualify as a disaster? Furthermore, whatever the definition,

disasters are rare, making it very difficult to make estimates of the number of disaster prevented. To

give an example, suppose you wanted to show quantitatively that the UK and Norwegian offshore

industry is safer as a result of the introduction of safety case regimes in UK waters in the early 90s

and in Norway at about the same time. DNV expert Robin Pitblado lays out the problem as follows 7

.

If by disaster we mean an event with large scale loss of life, there were two in the 1980s

‐ the

Alexandre Kielland, a semi

‐ submersible drilling rig which capsized in Norway in 1980, killing 123

people, and the Piper Alpha platform off the coast of Scotland that caught fire in 1987, killing 167

people. That, says Pitblado, is 2 in 8 years. “Straight line projection, might suggest 6 could have

occurred in the following 25 years

– when in fact there have been none”. On the face of it, this is a

dramatic improvement, presumably attributable to the new safety case regimes. But it is obvious, he

says, that the numbers are far too small to be relied on in this way. He also highlights the definitional

issue by noting that he is not counting the 1991 sinking and total loss of a platform that was being

towed out of a fjord in Norway 8

. No one was on board and the platform was not operating, but in

5 There are numerous methodological and moral objections that can be made to valuing human life in this way.

See Heinzerling L and Ackerman F, Pricing the Priceless: Cost

‐ Benefit Analysis of Environmental Protection

Georgetown University Law Center, 2002. These objections will not be canvassed here, since the aim of this

paper is to make the argument for safety case regulation within the parameters laid down by the Office of

Information and Regulatory Affairs, as far as possible.

6 For examples see Sunstein, op cit p158

7 Personal communication

8 Sleipner A platform4

Hopkins: cost/benefit analysis

slightly different circumstances there could easily have been major loss of life. This occurred after

the new regime had taken effect in Norway. Counting this as a disaster gives a rate of one disaster in

the 25 years since the advent of safety case regimes

– still a 6

‐ fold improvement over the decade of

the 1980s. But to repeat, the numbers are too small to be conclusive.

The problem came into sharp focus in the European Union in 2011/2012. In response to the

Macondo accident the European Commission proposed to issue a directive to all member states to

introduce safety case regimes for offshore petroleum production. In support of the new regulation,

it commissioned a cost/benefit analysis that concluded that the benefits of the new regulation

outweighed the costs, although not dramatically so. 9 This analysis was a detailed effort to provide

the kind of supporting argument envisaged by the presidential order on cost/benefit analysis.

Nevertheless, it proved so controversial that a special expert review was commissioned to pinpoint

the areas of dispute and if possible account for the differences. This expert review highlighted the

difficulties involved in any attempt to carry out a cost/benefit analysis of safety case regulation and

its chair concluded:

“In light of the inherent uncertainties

... it is difficult

... to evaluate the extent to which any

analysis is or is not conservative. In essence, none of the analyses is wholly right or wrong.

They reflect the effect of differing assumptions and approaches. Some may be more

conservative than others, although the extent of any conservatism, or its converse, is difficult

to judge” 10

.

The following paragraphs canvas some of the issues that undermined the Commission’s attempt to

carry out a quantitative cost/benefit analysis.

Defining major accidents

The first challenge for the Commission was to clarify the definition of major accident, so that it was

clearer what was to be counted. This is a vital first step if one is to talk about any reduction in

numbers that might be achieved by introducing a safety case regime. The cost/benefit analysis

identifies two distinct categories of major accident. The first is accidents that result in major damage

to or loss of installations. This definition is independent of and takes no account of whether there

was any significant loss of life 11

. The second category of major accident is oil well blow out lasting

more than 14 days 12

. The evidence is that these longer

‐ lasting blowouts result in major oil spills with

environmentally costly consequences.

It is striking that the number of fatalities played no role in determining whether an incident counted

as a major accident for the purposes of cost/benefit analysis. The Commission notes that the UK

authorities place a value on life of $US 2.4million and concludes that “loss

‐ of

‐ life costs are not

estimated to be significant when put into the context of the very large costs this report focuses

9 European Commission. Commission Staff Working Paper. Impact Assessment

, p 58. In fact the Impact

Assessment (IA) considers various options of increasing complexity and it concludes that “the costs and

benefits increase hand in hand with the complexity of the options” p 56. This is not an overwhelming

endorsement.

10 Peer review meetings on the assessment of risks in the offshore oil and gas industry, 28 March & 2May

2012, Summary Report. http://ec.europa.eu/energy/oil/offshore/doc/20120703_summary_report_en.pdf

11 www.ogp.org.uk/pubs/434

‐ 17.pdf

12 European Commission. Commission Staff Working Paper. Impact Assessment, Annexes (A), p175

Hopkins: cost/benefit analysis

on.” 13 This is one of the critical dilemmas of cost/benefit analysis of safety case regulation. It

necessarily turns on the cost of infrastructure lost or damaged and the clean

‐ up and compensation

costs for major oil spills, which dwarf the monetised value of life lost. Yet in the minds of many

people, a crucial part of the justification of a safety case regime is its capacity to protect human life,

and in particular to reduce the risk of large scale loss of life such as occurred in Piper Alpha or

Macondo. One might conclude from this that monetising the value of life in this context undermines

the whole approach and that benefits in relation to loss of life must be treated qualitatively, not

quantitatively. I return to this later.

The cost of major accidents

Leaving aside the issue of the value of life, there are numerous other problems that beset any

attempt to estimate the true cost of a major accident. The Commission acknowledges this and

restricts itself to “directly quantifiable costs”

– clean

‐ up and compensation costs in the case of oil

spills, and property costs in the case of infrastructure loss or damage 14

. There are numerous

technical difficulties involved in identifying even these direct costs that for the most part will not be

addressed here. The statement of the chair of the independent review previously cited provides

some indication of these problems.

There are various reasons why the true costs of a major accident may be much greater than the

direct costs described above. First, there is the question of the extent to which compensation paid

reflects the full costs of all those whose livelihoods have been damaged by a major accident. We

know that major oil spills will affect industries such as fisheries and tourism in relevant coastal

communities. But the impact on businesses in these industries spreads far and wide through their

suppliers and employees. Compensation regimes will at best compensate for only some of this

economic loss. As the Commission observes,

“care must be taken when using compensation costs as proxy for the true economic cost of

an oil spill because the scope of the compensation regimes and the admissible claims are not

all

‐ inclusive,

... and the total amount of compensation is capped”. 15

Casting the net even wider, the Commission states that its cost calculation “does not include indirect

costs such as the effect on oil prices, the health of the oil industry, or security of energy supply.

Although unquantifiable, these costs could also be very significant. They should, therefore, also be

factored into any cost/benefit analysis of polices aimed at improving offshore safety, albeit

qualitatively” 16

.

“Other important indirect impacts include the potential loss of major corporate earnings and

its effect on investments (pension funds, for example, suffered badly as a result of the

Deepwater Horizon incident), interruptions to other offshore sectors, such as wind farm

construction and operation, or maritime transport”. 17

13 A p4

14 A p11

15 A p9

16 A p11

17 IA p106

Hopkins: cost/benefit analysis

Finally, a very large oil spill could trigger a moratorium on drilling such as was imposed following the

Macondo accident. This is estimated to have cost billions of dollars and tens of thousands of jobs 18

. It

could even lead to the termination of offshore licensing 19

. Such economic costs are not included in

the Commission’s calculations.

The Commission is quite clear about all these limitations. It describes its technique therefore as a

“partial cost

‐ benefit analysis” 20

. The implication is that the true costs of major accidents are much

greater than any conceivable quantitatively derived estimate. A corollary of course is that the

benefit to be achieved by any reduction in accident rate will be far greater than the quantitative cost

estimates suggest.

Estimating expected risk reduction

I turn now to the reduction in major accident rate that could be expected to follow from the

introduction of safety case regimes throughout Europe. The evidence the Commission relies on is

primarily from the UK, where such a regime was introduced for offshore oil and gas in 1992 21

. It

concludes that the new regime reduced the major accident rate by 50% 22 and that therefore

countries in the EU not currently using safety case regimes could achieve a 50% reduction in

accident costs by doing so 23

.

Let us consider the basis of this claimed 50% reduction. The Commission makes no attempt to

demonstrate it directly by looking at major accident rates. The fact is that the numbers of major

accidents in the UK offshore sector are too small to be able to identify trends 24

.

The problem of small numbers was highlighted in a 2006 report commissioned by the UK regulator

–

the Health and Safety Executive. The report addressed the effectiveness of the UK onshore safety

case regime set up in 1999 under the Control of Major Accident Hazard (COMAH) Regulations. It did

so by comparing the major accident rate before and after the introduction of the safety case regime.

The report stated:

“We found no direct evidence that COMAH is resulting in a reduction of the risk of major

accidents. However as COMAH is designed to manage risks from rare events we would not

expect to be able to see statistically robust evidence of an effect” 25

.

18 A p3

19 IA p11

20 A p30

21 A p34

22 IA p12

23 A p38. The Commission also considered the option of introducing a superior version of the safety case

regime that would involve making improvements to the regimes operating in the North Sea, to date, the best

in class. It assumed that this too would effectively halve major accident losses across the EU. It provided no

further argument in support of this assumption, other than that discussed in the text. A p52

24 One can get some indication of the numbers involved from statistics produced by The Oil and Gas Producers

Association. It does not provide stats for the UK in particular but rather for “Europe North Sea”, obviously a

substantially larger pool. Furthermore the data are a summation of all accidents from 1970 to 2007. Apart

from helicopter losses there were only 17 instances of the total loss of a facility of any type during that whole

37 year period. One can reasonably conclude from this that the number of losses in UK waters in this period

was substantially less than 17. Hence, whatever trends might be apparent in the data would probably not be

statistically significant.7

Hopkins: cost/benefit analysis

How, then, did the European Commission conclude that there had been a 50% reduction in the risk

of a major accident? It did so by noting that the injury and fatality rate dropped by 50% during this

period 26

. It attributed this, cautiously, to the introduction of the safety case regime. The caution is

expressed in the following paragraph. 27

“It is difficult to wholly attribute these improvements to regulatory changes for a number of

reasons. Industry practices may improve over time and some regulatory changes may reflect

an already widely implemented industry practice...and compliance levels may significantly

vary over time.”

However there is a much stronger reason to question the way the commission has used these injury

statistics. It is now widely recognised that injury stats are at best a measure of how conventional

occupational hazards are being managed. They are not a valid indicator of how well major hazards

are managed. When major accidents occur it is often found that the organisation concerned had

very low injury rates, arguably indicating that they were managing conventional hazards well, but in

the aftermath of the accident it becomes clear that major accident hazards were not being managed

at all well 28

. As one commentator has put it: “the road to disaster is paved with low and falling injury

rates”. In other words, the Commission is quite unjustified in concluding that because the injury rate

has halved, so too has the risk of a major accident 29

.

In summary, the basis on which the Commission concludes that there has been a 50% reduction risk

in the UK following the introduction of a safety case regime is weak, and hence the prediction that

introducing a safety case regime will result in a reduction of risk by 50% remains largely a guess

rather than an evidence

‐ based conclusion.

“Expert opinion based on the best available information”

The conclusion at this point is that the quantitative estimates of cost of major accidents made by the

commission underestimate the real cost by a substantial but unknowable amount and the extent to

which safety case regulation will reduce the risk of a major accident is little more than a guess. Any

attempt to provide a quantitative comparison of benefits and costs is therefore largely futile. All this

the Commission acknowledged. Ultimately, it said, its safety case recommendation was based on

expert judgement. Here are its words:

“Estimating the effectiveness of the proposed policy options in reducing the probability and

therefore the cost of major accidents is a difficult task and can only be made by expert opinion

based on the best available information”. 30

What then is the best available information? Here is some of the data that the Commission refers to.

25 Fenning N and Boath M. Impact of the Control of Major Accident Hazards (COMAH) Regulations1999.

Research Report 343

. HSE 2006, p11

26 A p12

27 A p35

28 See for example, Hopkins A, Failure to Learn: the Texas City Refinery Disaster

. (CCH, Sydney, 2008)

29 The Commission seems to be aware of this point (A p51,52) but does not recognise that it undermines its

analysis.

30 IA p448

Hopkins: cost/benefit analysis

One indicator of major hazard risk in the petroleum industry is the number of unintended

hydrocarbon releases. Such releases are a precursor to a major accident, and hence, reducing their

rate reduces the risk of a major accident. The Commission notes that since safety case regulations

were introduced in the UK in 1992, “there has been no consistent trend in the number of ‘minor’

hydrocarbon releases

... and that the number of major and significant hydrocarbon releases seems

to have plateaued as of 2006/2007 and may even be creeping up again” 31

. The Commission in short,

plays down the significance of these data. However the same data reveal that both significant and

major hydrocarbon releases have dropped by at least 50% during the relevant period. While one

might not want to conclude from this that overall risk has dropped by 50% it would be reasonable to

conclude that there has been some reduction in the risk of major accidents.

Table 1 Global Offshore Safety Indicators gathered by the International Regulator's Forum

31 A p59

Hopkins: cost/benefit analysis

Another relevant piece of information is the data collected by the International Regulators Forum

comparing the US with Norway (which operates what is essentially a safety case regime 32 ), for the

years 2007

‐ 2009. The data are presented in Table 1 33

.

The figures show that loss of well control events and collisions and fires were less likely in Norwegian

than in US waters. The fatality rate was also less in Norway than in the US. Injury rates were an

exception to this trend, with reported injuries about twice as common in Norway as in the US.

However it is well known that reported injury rates are very sensitive to reporting practices, while

fatality rates are less so. Be that as it may, the data demonstrate that major accident risk is better

controlled in Norway than in the US.

In commenting on these figures, the commission notes that, “different countries and regions have

contextual, cultural and historical differences that may affect offshore safety. Nevertheless, ..[the]

statistics suggest that objective

‐ based [safety case] regulation in the offshore sector leads to

improved safety...”. Note that the claim is merely that the safety case regulation leads to improved

safety, not that it reduces risk or cost by 50%.

This more modest claim is endorsed by many experts. According to Wilkinson, a former UK safety

case regulator, “the near universal opinion of managers and most of the workforce at hazardous

installations is that safety cases have been very successful.” 34 His own experience is that safety case

regulation has

 improved understanding hazards and risk

 enhanced knowledge of the technical and managerial controls required to manage them,

 improved oversight by the regulator.

Again, in a paper titled “Has the Safety Case failed?” Fitzgerald and Breen conclude, after an

extensive discussion, that “the safety case has not failed. It is still accepted as the most effective way

of managing major hazard industries. When properly applied it is indeed effective” 35

.

Notice that such experts do not claim that safety case regulation will reduce the level of risk by any

particular amount. It follows that they cannot have a view on the extent of the financial benefit

involved beyond concluding that there would indeed be a financial benefit. Strictly speaking,

therefore, cost/benefit comparisons based on expert opinion are not possible.

Finally, in view of the fact that the European Commission essentially failed to provide a convincing

cost/benefit analysis to justify the introduction of safety case legislation in the EU, it seems unlikely

that a convincing cost/benefit argument could be mounted in the United States.

32 From a US perspective this is a reasonable claim, although of course there are differences. For a detailed

description of the Norwegian system, see Rosness R & Forseth U. “Boxing and dancing: tripartite collaboration

as an integral part of a regulatory regime”, Chapter 10 in Baram M and Lindoe (eds) Risk governance of

Offshore Oil and Gas Operations

, Cambridge UP, 2013

33 A p37. For details of measures, see http://www.irfoffshoresafety.com/c ountry/performance/scope.aspx

34 Wilkinson P, “Safety Cases: Success or Failure”, Presentation to the NRCOH, May 2002 p9

35 Fitzgerald B and Breen, “Has the Safety Case Failed?” Paper presented to SPE ,Brisbane, October 2010, p15.

See also Haines, Fiona and Platania

‐ Phung, Chris. (February 2010). “Thoughts, feelings, action: survey of

Victorian managers of major hazard facilities”, 26 Journal of Health, Safety and Environment 1, 47

‐ 62.10

Hopkins: cost/benefit analysis

Estimating costs –an aside

Given that the benefits of safety case regulation cannot be adequately quantified, there is little point

in seeking to estimate the costs of such regulation, for the purposes of cost/benefit comparisons.

Nevertheless, it is worth making a comment here about costs. It is true that safety case regimes

require operators to go to considerably greater effort and expense to control major hazards than do

prescriptive regimes, such as existed in the Gulf of Mexico prior to Macondo. But post

‐ Macondo,

regulations now require operators to implement a Safety and Environment Management System

(SEMS). At the heart of this lies a hazard analysis which is not unlike the hazard analysis required in a

safety case regime. Let us suppose that an operator complies with this requirement properly, that is,

carries out the hazard analysis process conscientiously and implements the necessary risk reduction

measures, taking proper account of the hierarchy of controls (designing out hazards, etc). Under

these circumstances the additional compliance burden imposed by a safety case regime will be

negligible. But experience around the world is that many operators will only comply with such

requirements properly, if there is a competent, independent, engaged, well

‐ resourced regulator,

actively overseeing compliance and passing judgement on the quality of an operator’s hazard

analysis and the adequacy of the control measures. For such operators a safety case regime will

indeed increase compliance costs. Presumably that is as it should be. In a sense what a safety case

regime would do in the US context is compel operators to manage the risks as is now required by the

SEMS regulation.

Of course, under a safety case regime the regulatory agency itself will cost more, and under most

funding arrangements it will be the operators who bear this cost. In this respect a safety case regime

will place additional costs on all operators.

But it is important to distinguish compliance costs from regulatory costs in this way, because for

operators who are complying as they should be with the requirement to identify, assess and controls

risks, the costs of a safety case regime are correspondingly reduced.

Basing the case on values

Given the earlier conclusion about the impossibility of carrying out a proper cost/benefit analysis of

the safety case proposal, let us return to the words of the presidential order.

“...Where appropriate and permitted by laws, each agency may consider (and discuss

qualitatively) values that are difficult or impossible to quantify, including equity, human

dignity, fairness, and distributive impacts....”

Cass Sunstein took this provision seriously whilst head of the Office of Information and Regulatory

Affairs. Indeed he argues in his book that “equity, human dignity, fairness, and distributive impacts”

can at times over

‐ ride a simplistic cost benefit analysis. He cites the case of the Department of

Transport which wanted to introduce a rule requiring the installation of rear view cameras on new

cars to prevent backovers. This would have cost about $2billion annually and, at around $9million

per life saved, the proposal did not survive the cost/benefit test. However the department argued

that 40% of backover fatalities are very young children, run over by their parents, who therefore

suffered lifelong anguish. It was impossible to put a monetary value on preventing this anguish, but11

Hopkins: cost/benefit analysis

it was something that should be given weight in determining whether the regulation was justified 36

. Similarly, says Sunstein, a rule requiring that employers provide wheelchair

‐ bound employees access

to toilets, though quite unjustifiable in terms of the monetised benefits, might nevertheless be

justified on grounds of equity and human dignity 37

.

Let us therefore consider how safety case regimes might be justified using value

‐ based arguments.

The polluter

‐ pays principle

The polluter

‐ pays principle is based in part on the value of equity or fairness. Specifically, if polluters

damage the livelihood of other citizens, it is only fair that they should pay. The Organisation for

Economic Cooperation and Development (OECD), of which the United States is a member, describes

the principle thus:

"[T]he Polluter

‐ Pays Principle... means that the polluter should bear the expenses of carrying

out the pollution prevention and control measures introduced by public authorities in

Member countries.” 38

Interestingly, the OECD has specifically considered the case of accidental pollution from hazardous

facilities.

“In matters of accidental pollution risks, the Polluter

‐ Pays Principle implies that the operator

of a hazardous installation should bear the cost of reasonable measures to prevent and

control accidental pollution from that installation which are introduced by public authorities

in Member countries...”

As was pointed out in the European Commission impact assessment discussed above, in cases such

as the Macondo oil spill, the full cost can never be known, or even estimated. It follows that the only

way in which the polluter pays principle can be implemented in such cases is to prevent the spill in

the first place and to make all potential polluters pay.

This is something that OECD statement specifically endorses.

“Public authorities of Member countries that have responsibilities in the implementation of

policies for prevention of, and response to, accidents involving hazardous substances, may

take specific measures to prevent accidents occurring at hazardous installations and to

control accidental pollution. ...[P]ublic authorities may

... introduce specific fees or taxes

payable by certain installations on account of their hazardous nature (e.g. licensing fees), the

proceeds of which are to be allocated to accidental pollution prevention and control.”

Notice that the OECD formulation of the pollution pays principle bypasses cost/benefit hurdle. The

principle is that governments have an obligation to prevent major accidents that create massive

pollution, with the cost of this preventive activity borne by potential polluters, and that this

obligation is not dependent on any calculation of the financial benefit to those who might otherwise

36 Sunstein, op cit, p167

37 Sunstein, op cit, p160, 170

38 OECD Recommendation of the Council concerning the Application of the Polluter

‐ Pays Principle to

Accidental Pollution, 7 July 1989

‐ C(89)88/FINAL

. http://acts.oecd.org/Instruments/ShowInstrumentView.aspx?InstrumentID=38&InstrumentPID=305&Lang=en

&Book=False12

Hopkins: cost/benefit analysis

have been affected by the pollution. The principle does not allow polluters to argue that the cost to

them of preventing pollution outweighs the benefits to those who would otherwise be affected by

the pollution.

There is one qualification that might be made to the previous conclusion. There is a sense in which

the polluter

‐ pays principle reverses the onus that is placed on proponents of regulation by the

cost/benefit analysis requirement. If polluters could identify all the costs of their pollution, both

direct and indirect, and show that they were less than the cost of safety case regulation, then it

would be open to them to argue that they would prefer to compensate all those affected by their

pollution rather than have preventive regulatory requirements imposed on them. That would

honour the spirit of the polluter

‐ pays principle. However since the full costs of an event like

Macondo are unknowable, the point is of academic interest only.

To conclude, therefore, if it is accepted that safety case regimes represent regulatory best practice,

then the polluter

‐ pays principle provides a potential justification for the introduction of such a

regime in the US.

The issue of multiple fatalities

As noted earlier, one of the most disturbing features of the European Commission cost/benefit

analysis is that the life

‐ saving benefits of safety case regimes disappeared from view, because the

monetised value of life lost in major accidents was insignificant in comparison to other costs.

However, major accidents, when they occur, can result in major loss of life, and any analysis that

ignores this fact is intuitively problematic.

Interestingly, Cass Sunstein has much to say about this. In a book written before he became head of

the Office of Information and Regulatory Affairs, he devotes considerable attention to disasters,

arguing that their cost is not confined to the monetised value of the individual lives lost.

Consequently the case for preventing them cannot be based on a conventional cost/benefit analysis.

“Some deaths produce unusually high externalities in the sense that they generate

widespread losses, including those stemming from empathy and fear, in a way that leads to

predictable pecuniary and nonpecuniary costs”...

For example, “An airplane crash might be especially disturbing because the sudden loss of

dozens or hundreds of people seems so unusually and senselessly tragic, in a way that

produces large empathetic reactions, or because it signals the further possibility of random,

apparently inexplicable events in which large numbers of people die.” 39

The consequences can be far

‐ reaching.

“If the social meaning of an airline disaster is that air travel has “become unsafe”,

governments may have an obligation to respond with special intensity because the social

39 Cass Sunstein, Risk and Reason: Safety, Law, and the Environment

. (Cambridge University Press, Cambridge,

2002), p72,7313

Hopkins: cost/benefit analysis

perception will produce significant social losses in varies spheres (including

... net mortality

itself, if people shift to more dangerous forms of travel) 40

.

“These considerations suggest that special attention is justifiably devoted to air safety in the

time following a crash, even if the relevant precautions do not cause a significant drop in

deaths”.

Sunstein gets even closer to the matters at hand in the following passage.

“Special public concern about catastrophic events may thus reflect a judgement that certain

kinds of deaths have many harmful effects extending beyond the deaths themselves.

Consider in this regard the Buffalo Creek syndrome, documented several times in the

aftermath of major disasters. Nearly two years after the collapse of the dam that left 120

dead and 4000 homeless, psychiatric researchers continued to find significant psychological

and sociological changes; survivors were characterised by a loss of direction and energy,

other disabling character changes, and a loss of communality. One evaluator attributed this

loss of direction specifically to the loss of traditional bonds of kinship and neighbourliness.

When ordinary people are especially concerned with catastrophes, it may be because they

appreciate these points. To the extent that this is so, differences between lay and expert

assessments [of the costs of such disasters] rest on genuine value differences (four times as

many deaths may be much more than four times as bad) rather than on factual errors in

cognitive processes of ordinary people.”

Sunstein’s conclusion that four times as many deaths is much more than four times as bad, is quite

widely acknowledged among risk analysts. In fact, one rule of thumb is that 10 deaths occurring

together are 100 (10 2 ) times worse than one death, and a hundred deaths together are 10,000

(100 2 ) times worse than one death 41

. We could easily convert this into monetary terms as follow.

Assuming the value of a single life is $10 million, the value of ten lives lost together is $1 billion and

the value of 100 lives lost together $100 billion, and so on.

Such a rule of thumb could well make a big difference to cost/benefit calculations. If we recall that

there were two accidents in the North Sea prior to the introduction of safety case regimes in the UK

and Norway, each with well in excess of 100 fatalities, and none since, and if we attribute this

improvement to the introduction of safety case regimes (and not to chance), then the monetised

value of life saved becomes an important consideration 42

. Indeed, saving 100 lives is worth a lot

more ($100 billion) than preventing an environmental disaster such as Macondo ($40 billion).

The preceding rule of thumb is of course little more than that, a rule of thumb, and I am not

suggesting here that this be adopted in cost/benefit calculations. It is simply a dramatic way of

making Sunstein’s point that multiple deaths affect society far more than the multiple would

40 Op cit p74

41 See Ball D & Floyd P Societal Risks, Final Report

, http://www.rpaltd.co.uk/documents/J198

‐ SocietalRisk.pdf

Tweeddale M, 2003, Managing Risk and Reliability of Process Plants (Gulf, Amsterdam). p72

‐ 3

42 A third accident involving major loss of life occurred in Canadian waters in 1982, when the drilling rig Ocean

Ranger sank with the loss of 84 lives. EC IA p6. There are also accidents on this scale in less developed

countries that are not discussed here because the value of life in those countries may be orders of magnitude

less. For further comment on the ethical issues involved in placing a monetary value on life (statistical or

otherwise), see my paper on “explaining safety case”, op cit, note 3.14

Hopkins: cost/benefit analysis

suggest. If a safety case regime in the US prevented even one disaster on the scale of Piper Alpha

(167 deaths), that in itself could well be enough to justify the introduction of such a scheme.

Sunstein’s argument in relation to multiple fatalities is implicitly still a cost/benefit argument,

namely that the benefits of preventing such disasters, although unquantifiable, nevertheless

outweigh the costs. The argument does not draw explicitly on any of the values listed in the

presidential order. However that list is obviously not intended to be exhaustive, and we could easily

formulate the conclusion here as follows. Society places special value on the prevention of large

scale loss of life, and safety case regimes can be justified on the grounds that they reduce the risk of

such events.

Justice

A final justification for safety case regimes can be based on ideas about justice.

Cost/benefit analysis treats major accidents as chance events, with a probability of occurrence that

may vary with circumstances, but which can never be zero, no matter what measures we take.

An alternative view is that every accident is preventable and that major accidents are caused by

poor management and, ultimately, corporate negligence which, in many jurisdictions, is criminal.

Companies in the UK and Australia are routinely charged and convicted of criminal offences

following serious accidents and in the US, when the stakes are high, the Department of Justice brings

criminal proceedings. In the Macondo case, for example, BP was charged with and pled guilty to

various felony offences, including manslaughter. 43

If we view major accidents as criminal incidents rather than chance events, then our perspective on

prevention changes. Corporate citizens must refrain from criminal behaviour no matter what the

cost. Moreover, human citizens expect their governments to protect them from crime, as a matter

of right, not on the basis of a cost/benefit calculation. If the necessary regulatory apparatus imposes

additional costs on potential offenders, so be it. That is what justice demands.

Conclusion

The requirement that new regulations be justified on the basis of a cost/benefit analysis has been

seen by some as an impediment to the introduction of safety case legislation. The problem is that it

is virtually impossible to quantify the benefits of preventing rare but catastrophic events.

However the presidential order that is the basis of the cost/benefit analysis requirement is not

inflexible on this matter. It recognises that there may be situations where the benefits are

unquantifiable. In such circumstances, advocates of new regulation are invited to make their case on

the basis of qualitative arguments about benefits, as well as by appealing to other values, such as

equity or human dignity. Cass Sunstein, former head of Office of Information and Regulatory Affairs,

has written extensively about what this all means in practice and has provided a number of ideas

about how this can be done. This paper has taken its cue from Sunstein to show how various value

‐

based arguments might be made in favour of safety case regulation. In particular, the polluter

‐ pays

principle, based as it is on the value of fairness, provides a rationale for supporting the pollution

‐

43 http://www.justice.gov/opa/pr/2013/January/13

‐ ag

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Hopkins: cost/benefit analysis

prevention purposes of safety case regulation, independently of cost/benefit analysis. Again,

multiple deaths affect society far more than the multiple would suggest, which means that the

economic and social value of safety case regulation in preventing large scale loss of life is far greater

than any simple cost/benefit analysis might indicate. Finally, if one views major accidents as criminal

incidents, then questions of justice need to be taken into account in ways that cost/benefit analysis

fails to do.