OPA establishes a “polluter pays” system that places the primary burden of liability for the costs of spills on the party responsible for the spill in return for financial limitations on that liability. Under this system, the responsible party assumes, up to a specified limit, the burden of paying for spill costs—which can include both removal costs (cleaning up the spill) and damage claims (restoring the environment and payment of compensation to parties that were economically harmed by the spill). Above the specified limit, the responsible party generally is no longer financially liable. Responsible parties are liable without limit, however, if the oil discharge is the result of gross negligence or willful misconduct, or a violation of federal operation, safety, and construction regulations. OPA’s “polluter pays” system is intended to provide a deterrent for responsible parties who could potentially spill oil by requiring that they assume the burden of responding to the spill, restoring natural resources, and compensating those damaged by the spill, up to the specified limit of liability. (See table 1 for the limits of liability for vessels and offshore facilities.) In general, liability limits under the OPA depend on the kind of vessel or facility from which a spill comes. For an offshore facility, liability is limited to all removal costs plus $75 million. For tank vessels, liability limits are based on the vessel’s tonnage and hull type. In both cases, certain circumstances, such as gross negligence, eliminate the caps on liability altogether. According to the Coast Guard, the leaking well in the current spill is an offshore facility. As noted earlier, pursuant to OPA, the liability limit for offshore facilities is all removal costs plus $75 million for damage claims. The Coast Guard also notes that liability for any spill on or above the surface of the water in this case would be between $65 million and $75 million. The range derives from a statutory division of liability for mobile offshore drilling units. For spills on or above the surface of the water, mobile offshore drilling units are treated first as tank vessels up to the limit of liability for tank vessels and then as offshore facilities. For example, if an offshore facility’s limit of liability is $75 million (not counting removal costs, for which there is unlimited liability for offshore facilities) and a spill resulted in $100 million in costs, the responsible party has to pay up to $75 million in damage claims—leaving $25 million in costs beyond the limit of liability. Under OPA, the authorized limit on federal expenditures for a response to a single spill is currently set at $1 billion, and natural resource damage assessments and claims may not exceed $500 million. OPA requires that responsible parties must demonstrate their ability to pay for oil spill response up to statutorily specified limits. Specifically, by statute, with few exceptions, offshore facilities that are used for exploring for, drilling for, producing, or transporting oil from facilities engaged in oil exploration, drilling, or production are required to have a certificate of financial responsibility that demonstrates their ability to pay for oil spill response up to statutorily specified limits. If the responsible party denies a claim or does not settle it within 90 days, a claimant may commence action in court against the responsible party, or present the claim to the NPFC. OPA also provides that the Fund can be used to pay for oil spill removal costs and damages when those responsible do not pay or cannot be located. This may occur when the source of the spill and, therefore, the responsible party is unknown, or when the responsible party does not have the ability to pay. In other cases, since the cost recovery can take a period of years, the responsible party may become bankrupt or dissolved. NPFC manages the Fund by disbursing funds for federal cleanup, monitoring the sources and uses of funds, adjudicating claims submitted to the Fund for payment, and pursuing reimbursement from the responsible party for costs and damages paid by the Fund. The Coast Guard is responsible for adjusting vessels’ limits of liability for significant increases in inflation and for making recommendations to Congress on whether other adjustments are necessary to help protect the Fund. DOI’s Minerals Management Service is responsible for adjusting limits of liability of offshore facilities. Response to large oil spills is typically a cooperative effort between the public and private sector, and there are numerous players who participate in responding to and paying for oil spills. To manage the response effort, the responsible party, the Coast Guard, EPA, and the pertinent state and local agencies form the unified command, which implements and manages the spill response. OPA defines the costs for which responsible parties are liable and the costs for which the Fund is made available for compensation in the event that the responsible party does not pay or is not identified. These costs, or “OPA compensable” costs, are of two main types: Removal costs: Removal costs are incurred by the federal government or any other entity taking approved action to respond to, contain, and clean up the spill. For example, removal costs include the equipment used in the response—skimmers to pull oil from the water, booms to contain the oil, planes for aerial observation—as well as salaries and travel and lodging costs for responders. Damages caused by the oil spill: Damages that can be compensated under OPA cover a wide range of both actual and potential adverse effects from an oil spill, for which a claim may be made to either the responsible party or the Fund. Claims include natural resource damage claims filed by trustees, claims for uncompensated removal costs and third-party damage claims for lost or damaged property and lost profits, among other things. The Fund has two major components—the Principal Fund and the Emergency Fund. The Principal Fund provides the funds for third-party and natural resource damage claims, limit of liability claims, reimbursement of government agencies’ removal costs, and provides for oil spill-related appropriations. A number of agencies—including the Coast Guard, EPA, and DOI—receive an annual appropriation from the Principal Fund to cover administrative, operational, personnel, and enforcement costs. To ensure rapid response to oil spills, OPA created an Emergency Fund that authorizes the President to spend $50 million each year to fund spill response and the initiation of natural resource damage assessments, which provide the basis for determining the natural resource restoration needs that address the public’s loss and use of natural resources as a result of a spill. Emergency funds not used in a fiscal year are carried over to the subsequent fiscal years and remain available until expended. To the extent that $50 million is inadequate, authority under the Maritime Transportation Security Act of 2002 grants authority to advance up to $100 million from the Fund to pay for removal activities. These emergency funds may be used for containing and removing oil from water and shorelines, preventing or minimizing a substantial threat of discharge, and monitoring the removal activities of the responsible party. NPFC officials told us in June 2010 that the emergency fund has received the advanced authority of $100 million for the Federal On-Scene Coordinator to respond to the spill and for federal trustees to initiate natural resource damage assessments along with an additional $50 million that had not been apportioned in 2006. Officials said they began using emergency funds at the beginning of May to pay for removal activities in the Gulf of Mexico. The Fund is financed primarily from a per-barrel tax on petroleum products either produced in the United States or imported from other countries. The balance of the Fund (including both the Principal and the Emergency Fund) has varied over the years (see fig. 1). The Fund’s balance generally declined from 1995 through 2006, and from fiscal year 2003 through 2007, its balance was less than the authorized limit on federal expenditures for the response to a single spill, which is currently set at $1 billion. This was in part because the Fund’s main source of revenue—a $0.05 per barrel tax on U.S. produced and imported oil—was not collected for most of the time from 1995 through 2006. However, the Energy Policy Act of 2005 reinstated the barrel tax beginning in April 2006. Subsequently, the Emergency Economic Stabilization Act of 2008 increased the tax rate to $0.08 per barrel through 2016. The balance in the Fund as of June 1, 2010, was about $1.6 billion. With the barrel tax once again in place, NPFC anticipates that the Fund will be able to cover potential noncatastrophic liabilities. In 2007 we reported several risks to the Fund, including the threat of a catastrophic spill. Although the Fund’s balance has increased, significant uncertainties remain regarding the impact of a catastrophic spill—such as the Deepwater Horizon—or —or multiple catastrophic spills on the Fund’s viability. multiple catastrophic spills on the Fund’s viability. Location, time of year, and type of oil are key factors affecting oil spill costs of noncatastrophic spills, according to industry experts, agency officials, and our analysis of spills. Given the magnitude of the current spill, however, the size of this spill will also be a factor that affects the costs. Officials also identified two other factors that may influence oil spill costs to a lesser extent—the effectiveness of the spill response and the level of public interest in a spill. In ways that are unique to each spill, these factors can affect the breadth and difficulty of the response effort or the extent of damage that requires mitigation. According to state officials with whom we spoke and industry experts, there are three primary characteristics of location that affect costs: Remoteness: For spills that occur in remote areas, spill response can be particularly difficult in terms of mobilizing responders and equipment, and they can complicate the logistics of removing oil from the water—all of which can increase the costs of a spill. Proximity to shore: There are also significant costs associated with spills that occur close to shore.