Posts Tagged ‘oil spill’

Environmental economics principles are in the headlines again today. BP, following meetings at the White House, has promised to meet in full its obligations to those affected by the ongoing Deepwater Horizon oil spill. This ‘obligation’ relates to ‘polluter pays’, a key principle of environmental economics. It makes the party responsible for producing pollution responsible for paying for the damage done to the natural environment.

Traditionally, definition of damage has been limited to commercial losses of others. In environmental legislation in the US and much more recently in Europe [1], this definition has been widened to include wider environmental damage estimated as decline in human welfare. Welfare changes experienced by both those who are directly affected by pollution and those who are not directly (physically or financially) affected but nonetheless suffer a welfare loss, are included.  In the BP case, this extended definition is used.

It’s good to see the polluter pays principle used in US policy making. Hopefully it will remain there, hand in hand with a political principle – consistency. So when the US arrives at the next UN climate change negotiations in Cancun in November, and discussions turn to funding actions to deal with the impact of climate change on the welfare of people around the world, what position will they take: promising to meet in full its obligations to those affected by pollution? Or political hypocrisy?

[1]Environmental Liability Directive, April 2007

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On April 20, 2010 an explosion aboard the Deepwater Horizon, a drilling rig, leased by British Petroleum, killed 11 people and set in motion a chain of events that would result in one of the most horrific environmental catastrophes of the past two decades.   Two days after the explosion, the rig sank 50 miles off the coast of Louisiana and crude oil began leaking from a broken pipe attached to a well approximately 1 mile below sea level.[1] The oil began flowing at a rate of 795,000 litres of crude per day and as of 9th May 2010 nearly 13.25 million litres had poured into the sea.[2]

Picture courtesy of Sky Truth

A comparison can be made to the 1989 incident off the coast of Alaska, where the Exxon Valdez oil tanker struck a reef and spilled nearly 50 million litres of crude oil into the Prince William Sound.[3] Studies show that 20 years after the spill, oil could still be found on the beaches and animals of this area.[4] Despite the huge clean-up effort much of the oil was never recovered. If the oil from the most recent disaster in the Gulf reaches the marshes, then the clean up would prove to be even more difficult.[5] In fact, there is already talk of this incident being more damaging and costly than Exxon Valdez.

As far as the effects associated with the oil that is now sitting on top of the water in the Gulf are concerned, marine mammals have severe trouble breathing in these areas, and any oil that gets in the plumage or fur will cause thermo-regulatory issues.  Not to mention the fact that crude oil is toxic and its ingestion has many physiological consequences.[6] In the longer term, the Exxon Valdez experience points to a decline in populations of vulnerable species for several decades. It was found that in the Prince William Sound, “harlequin duck survival was depressed for up to a decade after the spill and wildlife is still being exposed to oil 20 years later”.[7] CBC News looked at a number of species at risk in the Gulf of Mexico:

  • Sea turtles:  five species of sea turtles, four of which are classified as endangered;
  • Whales:  two species of large whales;
  • Dolphins:  nine species of Dolphins;
  • Shrimp and shellfish; and
  • Birds: Brown Pelican, beach-nesting terns and gulls, reddish Erget, and migratory songbirds: including warblers, orioles, buntings, flycatchers and swallows.

A pelican in the process of being rescued. Picture courtesy of News Hour

The timing of the spill has added another dimension to the tragedy, as it is peak nesting season for some sea turtles, peak spawning season for fish and shellfish, and the height of spring migration north for bird species.  Additionally, the Gulf of Mexico contains more than half the coastal wetlands in the lower 48 States of the US.[8] “These areas are vital as spawning grounds for many fish species and are home to other wildlife. More than 97 per cent of the commercial fish and shellfish caught in the gulf each year depend on estuaries and their wetlands at some point in their life cycle”.[9]

The cost of the spill could be as high as US$20 billion some experts argue – very early and likely incomplete assessment focusing mostly on the cost of clean up including the actions that are aimed to stop oil reaching the shore and cleaning up on the water and once on shore[10].

This amount is probably ‘nothing’ compared to what the total environmental cost of the spill could be. In addition to clean up, the total costs will include:

  • Lost revenue (now and into the future) from commercial fisheries and shellfisheries;
  • Lost revenue (now and into the future) from tourism;
  • Costs associated with reorganizing the economy in the affected areas if the spill is damaging enough to end these sectors for the foreseeable future; and
  • Loss of habitats and species, informal (unpaid for) recreation, lifestyles – as people care about environmental resources not only because they use them directly but also because they may want them to be available for others, for the benefit of future generations and for the sake of their existence. This group of motivations gives rise to the so-called ‘non-use’ values. In cases like this, there will be more people who hold non-use values for the habitats and species than there will be those who live in the area and will be affected directly by the spill.

Habitats and species affected have economic value, and hence their loss is a cost but there will be no data from the markets that will make it easy to estimate the cost.

In the case of the Exxon Valdez a large scale contingent valuation study was undertaken to assess the value of the damages caused by it.  Contingent valuation is a survey based ‘economic valuation’ method. Amongst other questions, it presents a scenario to a large and representative sample of the affected population. For example, in this context, the scenario will present the extent of the damage and ask respondents how much they are willing to pay to, say, avoid similar damage happening again, or their willingness to accept compensation for the damage[11].  The study conducted for the Exxon Valdez case was used in the compensation court case against the company in determining the level of damages to be paid.

Due to the wealth of biodiversity associated with the Gulf of Mexico, and President Obama’s statement yesterday that there will be no limit to the compensation that can be required, it is likely that a similar study will be needed to assess the total damage associated with this most recent disaster. Unfortunately.


[1] New York Times (updated 10th May 2010)

[2] CBC News (10th May 2010)

[3] CBC News (updated 5th May 2010)

[4] CBC News interviewed Dan Esler, a research associate at the Centre for Wildlife Ecology at Simon Fraser University in British Columbia, who led an international research team that measured the prolonged exposure of animals to oil in this area CBC News (14th May 2010).

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] CBC News (3rd May 2010)

[9] Ibid.

[10] http://news.bbc.co.uk/1/hi/world/americas/8680460.stm

[11] The results of the Exxon Valdez study are reported in Carson et al. (2003) Contingent Valuation and Lost Passive Use:  Damages from the Exxon Valdez Oil Spill, Environmental and Resource Economics 25: 257–286.

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