Saturday, May 13, 2017

Putting a value on injuries to natural assets: The BP oil spill

When large-scale accidents cause catastrophic damage to natural or cultural resources, government and industry are faced with the challenge of assessing the extent of damages and the magnitude of restoration that is warranted. Although market transactions for privately owned assets provide information about how valuable they are to the people involved, the public services of natural assets are not exchanged on markets; thus, efforts to learn about people's values involve either untestable assumptions about how other things people do relate to these services or empirical estimates based on responses to stated-preference surveys. Valuation based on such surveys has been criticized because the respondents are not engaged in real transactions. Our research in the aftermath of the 2010 BP Deepwater Horizon oil spill addresses these criticisms using the first, nationally representative, stated-preference survey that tests whether responses are consistent with rational economic choices that are expected with real transactions. Our results confirm that the survey findings are consistent with economic decisions and would support investing at least $17.2 billion to prevent such injuries in the future to the Gulf of Mexico's natural resources.
The federal judge in an initial phase of the lawsuit involving BP determined that the best estimate of the amount of oil released was 134 million gallons, making it the largest maritime oil spill in U.S. history. On behalf of the trustees of the Gulf's natural resources and under the guidance of the lead agency for this process, the U.S. National Oceanic and Atmospheric Administration (NOAA), we estimated the monetary value of the natural resource damage from the spill, as specified by the Oil Pollution Act (OPA) of 1990. Such estimates can inform settlement negotiations between the government and the responsible parties, be entered as evidence at trial, and contribute to choosing projects to restore injured environmental resources (1). Trustees undertook a number of studies to quantify ecological impacts and economic damages caused by the spill, including what we describe here. The natural resource–damage case was settled in April 2016. The Consent Decree called for total payments of $20.8 billion, $8.8 billion of which was for natural resource damages. Decisions related to the settlement details are confidential.

Economic measures of the damages to natural resources consider the effects on use (or active use) and nonuse (or passive use) values (2). “Use values” arise when an individual derives satisfaction from using a resource (e.g., fishing or visiting a beach), either now or in the future. “Nonuse values” arise when an individual derives satisfaction from the existence of a resource, even though that individual would not visit or use it. The OPA regulation specifies that damage measures include both use and nonuse or the total economic value lost. Private claims by those engaged in commercial fishing or in operating hotels are handled separately.

After the 1989 Exxon Valdez oil spill and controversy over assessing monetary damages with stated-preference surveys, an expert panel (3) recommended criteria for conducting these studies. Research has since established ways to ask stated-choice questions that induce truthful responses and meet these proposed criteria. Subsequent criticism of stated-preference research has focused on how large the change in the average person's value should be with changes in the size of injuries to natural resources. The research we discuss here identified what can be expected on the basis of a conventional economic model of an individual's choices, with minimal assumptions. It also offers evidence that the average individual's likelihood to vote for a program to avoid injuries is causally linked to a consistent understanding of the severity of the injuries.
The study interviewed a large random sample of American adults who were told about (i) the state of the Gulf before the 2010 accident; (ii) what caused the accident; (iii) injuries to Gulf natural resources due to the spill; (iv) a proposed program for preventing a similar accident in the future; and (v) how much their household would pay in extra taxes if the program were implemented. The program can be seen as insurance, at a specified cost, that is completely effective against a specific set of future, spill-related injuries, with respondents told that another spill will take place in the next 15 years. They were then asked to vote for or against the program, which would impose a one-time tax on their household. Each respondent was randomly assigned to one of five different tax amounts: $15, $65, $135, $265, and $435.
The final questionnaire was administered to a random sample of households in the contiguous United States that included at least one English-speaking adult. Face-to-face interviews were completed between October 2013 and July 2014 by nearly 150 trained interviewers. A total of 3,656 people completed the survey for a weighted response rate of 48%. A nonresponse followup (NRFU) survey involved mailing paper questionnaires to households at which no main study interview had been completed. NRFU questionnaires were received from 1492 households, representing a NRFU household response rate of 51% (see SM for details of weighting and nonresponse)....

For each injury description, support for the program declines as the tax increases, consistent with the first test for consistent decisions. For each tax amount, support for the program increases as the set of injuries increases, consistent with the second test.
The estimate for the lower-bound mean WTP for the smaller set of injuries is $136 (standard error $6.34) and for the larger set is $153 (standard error $6.87). The aggregate estimate reported at the outset—$17.2 billion—uses the WTP lower-bound estimate for the larger set of injuries ($153) multiplied by the number of households (112,647,215) represented by the sample.
by Richard C. Bishop, Kevin J. Boyle, Richard T. Carson, David Chapman, W. Michael Hanemann, Barbara Kanninen, Raymond J. Kopp, Jon A. Krosnick, John List, Norman Meade, Robert Paterson, Stanley Presser, V. Kerry Smith, Roger Tourangeau, Michael Welsh, Jeffrey M. Wooldridge, Matthew DeBell, Colleen Donovan, Matthew Konopka, Nora Scherer
Volume 356, Issue 6335;  21 Apr 2017; pages 253-254

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