Why Society Should Pay the True Costs of Security

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. Toxins such as ammonia, chlorine, propane and flammable mixtures are being produced or stored as a result of legitimate industrial processes. Chlorine gas is particularly toxic; in addition to bombing a plant, someone could hijack a chlorine truck or blow up a railcar. Phosgene is even more dangerous. And many chemical plants are located in places where an act of sabotage – or an accident – could threaten thousands of people.

The problem of securing chemical plants is simple once you understand the underlying economics. Normally, we leave the security of something up to its owner. The basic idea is that the owner of each chemical plant 1) best understands the risks, and 2) is the one who loses out if security fails. Any outsider – ie, regulatory agency – is just going to get it wrong. It’s the basic free-market argument, and in most instances it makes a lot of sense.

And chemical plants have security. They have cameras, fences, guards. They have built-in fail-safe mechanisms. For example, many large chemical companies use hazardous substances like phosgene, methyl isocyanate and ethylene oxide in their plants, but don’t ship them between locations. They minimise the amounts that are stored.

This is all good and right, and what free-market capitalism dictates. The problem is, that isn’t enough. Any rational owner of a chemical plant will only secure the plant up to its value to him or her. That is, if the plant is worth $100m (£55m), then it makes no sense to spend $200m on securing it. If the odds of it being attacked are less than 1%, it doesn’t even make sense to spend $1m on securing it. The maths is more complicated than this, because you have to factor in such things as the reputational cost of having your name splashed all over the media after an incident, but that’s the basic idea.

But to society, the cost of an 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 they’re not at risk for more than the value of the company – and, in any case, they’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 the company out. 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 chemical plants are secured to a much smaller degree than the risk warrants.

If we – the community living near the chemical plant, or the nation as a whole – expect the owner of that plant to spend money for increased security to account for those externalities, we’re going to have to pay for it.

We have three ways of doing that. One, we can do it ourselves, stationing government police or military or contractors around the chemical plants. Two, we can pay the owners to do it, subsidising some sort of security standard. Or three, we could regulate security and force the companies to pay for it themselves.

There’s no free lunch, of course. “We,” as in society, still pay for it in increased prices for whatever the chemical plants are producing, but the cost is paid for by the consumers rather than by taxpayers. Asking nicely just isn’t going to work.

Categories: National Security Policy, Terrorism

Sidebar photo of Bruce Schneier by Joe MacInnis.