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Hey Taxpayers, Guess Who Foots the Bill For Arctic Oil Spills?

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Last week the Canadian Government closed biding from oil companies to explore 905,000 hectares in the Arctic Ocean. The area is equivalent to 1.1 million football fields.

After 20 years of inactivity, a new wave of exploration is expected. In the wake of the 2010 BP Horizon spill in the Gulf of Mexico, our government needs to make changes to our outdated liability regime. Currently, the Canadian taxpayer is liable for offshore oil spills in the Arctic. Our government needs to adhere to the polluter pays principle.

Under current law, the company is responsible for damages up to $40 million of absolute liability, regardless of fault or negligence. Beyond the $40 million, it is either Canadian taxpayers or the company paying, depending on fault.

Why are we providing public insurance -- and in the process, creating a moral hazard -- for oil companies? We do not provide public insurance for homeowners in the case of a fire, or car owners in the case of a motor vehicle accident. Individual Canadians buy insurance for these events.

The liability cap is paltry when compared to the $40 billion in damages caused by BP after the Gulf of Mexico disaster in April 2010. The damages are 1,000 times the current Canadian liability cap for offshore drilling under the Canada Oil and Gas Operations Act (COGOA).

"If a company with less financial means than BP had caused the Gulf of Mexico spill, the company would likely have declared bankruptcy long before paying anything close to the damages caused, regardless of fault," explains Will Amos, Director of the Environmental Law Clinic at the University of Ottawa. Amos says the situation in Canada is identical.

The auctioned leases are in the relatively shallow waters, most less than 500 metres, in the Beaufort Sea and Mackenzie Delta, along the Yukon-Alaska border. The BP Horizon well was in 1,500 metres of water. The depth contributed to the agonizing 87 days it took to cap the well.

Although the Canadian parcels are relatively shallow, drilling in the arctic presents different challenges than the Gulf of Mexico. The Arctic is extremely cold, has long seasons of darkness, experiences hurricane-strength storms, and is regularly fog covered. Further, the remote location is thousands of kilometres from equipment and technical expertise. It took 87 days in the Gulf of Mexico, how long would it take in the Arctic?

These harsh conditions and the barely-existent offshore spill response infrastructure make a potential spill prolonged and costly to the underwriters -- the Canadian taxpayer.

Only one offshore well has been drilled in the Canadian Arctic in the past 20 years. While over 400 wells have been drilled and 65 fields discovered, drilling has been dormant since the 1980s, except for Devon's Paktoa C-60 well, drilled in the winter of 2005. The past is not necessarily indicative of the future, especially with the recent mineral auction.

On his annual trip to the Canadian Arctic in August, Prime Minister Harper rightly emphasized the importance of the region's economic development. He should also promote appropriate regulations to protect the Canadian taxpayer.

In an effort to encourage efficiency the federal government has streamlined environmental regulations, in favour of often duplicative provincial ones. But offshore drilling in the Canadian arctic is overseen exclusively by the federal government.

In the absence of provincial or territorial oversight, federal bodies need to take a leadership role. Thankfully they have. In December 2011 the NEB upheld the "same season relief well policy" despite pressure from industry. This policy is relevant for the Beaufort Sea and Mackenzie Delta explorations leases, which are covered by some degrees of ice for eight to nine months each year. If needed, drilling a relief well must be possible before freeze-up occurs.

Upholding this rule is a good first step in lowering the risk of a prolonged sub-surface gusher, but by itself is inadequate in eliminating the liability placed on Canadian taxpayers. Natural Resources Canada (NRCan) has been quietly considering liability reform for two years. NRCan needs to take action now and raise the absolute liability cap above $40 million.

The U.K. has raised their strict liability cap from $125 million to $250 million after the BP Horizon spill.

U.S. Congressional and Senate proposals have floated absolute liability caps between $300 million and $10 billion. The debate in the U.S. is not simply whether the absolute cap in the U.S. of $75 million should be raised, but if there should even be a limit.

There are concerns that this might exclude smaller independent firms from drilling offshore, and dampen competition and economic development. Finding a balance is important, but Canada needs to raise our cap above $40 million.

The federal government should also consider establishing a rainy day fund. After the Exxon Valdez spill U.S. President George H. W. Bush established the Oil Spill Liability Trust Fund, which is paid for by an excise tax on the oil industry, currently set at $0.08 per barrel. The fund can contribute up to $1 billion for any one incident.

Raising the cap and establishing a rainy day fund creates incentives for companies to reduce the risk of the drilling activity by paying closer attention to safety. These proposals eliminating the moral hazard by guaranteeing sufficient money is in place to cover damages caused by a potential blowout without forcing the taxpayer to shoulder the burden while.

The polluter pays is a principle of Canadian law. However, it is not enshrined in the existing offshore drilling regulations. As new exploration in the Canadian Arctic begins, the government must let industry bear the full risk of their activity by removing the public provision of insurance for oil spill liability.