On February 14th, Chevron got issued a verdict in an 18 year long case. The judge’s verdict was for $18 billion to be payed to the Ecuadorian government for damages to the lives and properties of people who were exposed to toxic sludge that Texaco dumped in the ground for 30 years before Chevron bought Texaco. This comes a few months after Chevron released the We Agree campaign, highlighting their shared interests in the issues that impact the many constituencies they engage with.

There’s a fairly strong counterpoint to Chevron’s complicity in all of this, namely that PetroEcuador was engaged in far more toxic dumping and took over the Texaco drilling sites in 1990 and ramped up the leaking and dumping. More on that here. I really don’t want to dwell on who’s guilty here, as I’ll point out in a moment, it’s not at all who you think it is. This verdict demonstrates the validity of the economist Robert Coase’s book The Problem of Social Cost, from 1960. The work of Lionel Robbins and Murray Rothbard comes into play as well. The real guilty party here is the Ecuadorian legal system. Historically, the regions with the highest levels of resource destruction, dumping and pollution are ones with poorly enforced or foggy legal property rights. It generally has nothing to do with “market interventions” or “market failures.”

Consider this; an area of land is owned by the government and there are groups of people living on it relatively remotely. A foreign company petitions the government to lease it land so that it may explore for oil and drill it up out of the ground. The foreign company is leasing the land, or bought it so cheaply that it had a price of next to zero, compared to the profits from the prospective oil, so it has no reason to consider the resale value of the land down the road. The government had no reason to charge a high market price for it since it apparently didn’t have any intention of drilling for the oil itself because governments do not seek to fulfill market demands for resources. And, the people living around the prospective drilling site do not own the land they live on, the government does, or it is in some poorly defined sense of legal ownership for various reasons. This is probably a fairly accurate sketch of the events in question.

Now, who is the guilty party? The polluter? Yes, absolutely. But the damage is done! This situation could have been avoided in several ways, none of which include regulation per se. If the government had never owned the land in question Texaco would have had to buy up the land from a high number of self interested parties, who owned chunks of rain forest and recognized the value of the land, thus raising the price of the deal and the price to pollute. Even if Texaco had valued the land enough to buy it for a market price, it now owns the land and if it wrecks the value of it by deforesting, removing the oil resources and polluting, it is shooting itself in the foot. Even if, after all of that, Texaco still found it worthwhile to buy the land, drill, deforest and pollute it would still have to contend with the surrounding landowners who, in a country with rigid free market legal institutions, would be able to sue it and win and instant slam dunk legal case based on the obvious destruction of their lives and property.

So, with that in mind we can see the case for sticking someone with an $18 Billion clean up bill and how to get on a path towards a cleaner environment, true prices in the energy market and less intervention.

Murray Rothbard discusses conservation and property rights here.