Effect Measure

Bruce Schneier, the security guru at Wired’s Danger Room blog, reminds us of something important:

It’s not true that no one worries about terrorists attacking chemical plants, it’s just that our politics seem to leave us unable to deal with the threat. (Wired)


The chemical security problem is as urgent as it is obvious. Chemical plants are potentially static weapons of mass destruction: large volumes of ammonia, chlorine, highly flammables like propane, large repositories of chlorinated organic solvents and chemical feedstocks like phosgene and more. It’s not just targeting the facility for destruction. Large tanker trucks and railroad cars are constantly coming out of these plants and are vulnerable to hijack or diversion. So chemical plants invest in security, if only to reduce the loss of their own property, much less the potential loss of other people’s lives and properties. The regulatory approach, that it is the businesses themselves that have the most knowledge and biggest incentive to protect themselves, as Schneir points out, seems rational and is certainly congruent with the philosophical bias of the anti-regulatory stance of the Bush administration. But it isn’t working and Schneir explains why:

The problem of securing chemical plants against terrorism — or even accidents — is actually simple once you understand the underlying economics.

[snip]

Any rational chemical plant owner will only secure the plant up to its value to him. That is, if the plant is worth $100 million, then it makes no sense to spend $200 million on securing it. If the odds of it being attacked are less than 1 percent, it doesn’t even make sense to spend $1 million on securing it.

[snip]

But to society, the cost of an actual attack can be much, much greater. If a terrorist blows up a particularly toxic plant in the middle of a densely populated area, deaths could be in the tens of thousands and damage could be in the hundreds of millions. Indirect economic damage could be in the billions. The owner of the chlorine plant would pay none of these potential costs. Sure, the owner could be sued. But he’s not at risk for more than the value of his company, and — in any case — he’d probably be smarter to take the chance. Expensive lawyers can work wonders, courts can be fickle, and the government could step in and bail him out (as it did with airlines after Sept. 11). And a smart company can often protect itself by spinning off the risky asset in a subsidiary company, or selling it off completely. The overall result is that our nation’s chemical plants are secured to a much smaller degree than the risk warrants.

This is an old and difficult problem in environmental and occupation economics, the fact that many of the costs in the production and use of a product are not included in the product: they are external costs not borne by the producer so not directly subject to the market mechanism. Thus, either we pay for the protection publicly, via tax supported police, fire and intelligence services; we subsidize the owners to do it themselves; we force the owners to do it via regulation (which of course must be enforced). Only the last of these internalizes the cost, making the products subject to “the market.” The idea that “regulation” and “the market” are somehow incompatible is not only untrue, but this example (and many others we could give) show that it is only via regulation that the market has a possibility of working. In the security area, anti-regulation combined with anti-tax is a recipe for leaving major security concerns unaddressed.

Comments

  1. #1 6EQUJ5
    October 29, 2007

    The spelling is ‘Schneier’.

    Where I once went to school, there was a train track adjacent to the school property. The trains always came through slowly, so we assumed that was somehow related to our safety. Years later I found out that those trains were hauling high explosives: the slow speed was for the railroad’s safety.

    It is easy in the US to find out where explosives are manufactured and to figure out how and when they are transported. Trailers carrying the stuff have a red symbol on the back, but nobody ever notices. It would be simple for someone to set off a truckload of high explosives in a tunnel or ‘concrete canyon’ using a shaped charge — factory-made or improvised.

    What protection against such things do we have? None. Protections cost money.

    There is a huge volume of high explosives moving around the country, and not for the Iraq adventure. Check Google Earth and see how extensively the mining companies are leveling mountains in Appalachia. There’s a whole lotta blastin’ goin’ on.

  2. #2 Joseph j7uy5
    October 29, 2007

    It is one of the most bizarre aspects of the global and perpetual war on terror: we are all supposed to be scared to death, but none of us is supposed to be inconvenienced in the slightest.

  3. #3 Ben M
    October 29, 2007

    I’ve always like the idea of having “environmental catastrophe” insurance being like car insurance — you’re required to be insured against the risk you present to *others*. If the chlorine plant owner wants to build upwind of 1000 people, make them carry $7B in no-fault insurance. If you want to run with low security, the premiums will be through the roof.

    It’d also be nice if there were a clear way to make people accept *personal*, not corporate, responsibility for public safety. Make the CEO sign a document saying ‘As a precondition of putting a methyl isocyanate tankyard in the middle of Chicago, the company and I accept individually and severally responsibility for the safety of the general public …”. Lay it all out in advance, not in lawsuits afterwards. Might make it hard to recruit executives, but there’s got to be something hard in there somewhere … that’s how incentives work.

  4. #4 Ben M
    October 29, 2007

    (I should add, lest I sound like a markets-are-the-only-answer libertarian nut: I doubt that the above would actually work. Insurance companies aren’t any better than the rest of us at assessing the *actual* risk of terrorism—they’d take some wild guess at the probability-of-an-attack, then tweaking that number until the premiums got low enough to actually sell policies. And then trying to avoid paying out after an actual attack/accident. However, I think it’d be easier to convince industry to go along with this (the insurance half, not the responsibility half) than to submit to direct regulation. )

  5. #5 Caledonian
    October 29, 2007

    I should add, lest I sound like a markets-are-the-only-answer libertarian nut

    Not even Libertarians think markets are the only answer.

    But there’s an important point here – some people are intentionally trying to cause a market failure by shielding people from consequences of our societal failure to protect things properly.

  6. #6 bar
    October 30, 2007

    I think this is an excellent idea. High premiums would act as a disincentive to building a new chemical plant in the middle of Chicago, and might cause it to be built somewhere remote where premiums would be lower.

Current ye@r *