Policy commentary

Valuing the Oil Spill’s Effects on Nature

Aug 20, 2010 | James N. Sanchirico

Sealing of the leaking oil well in the Gulf of Mexico provides an opportune time to think about how ecosystems and coastal resources might be valued and how this information might be used to improve pollution and resource management policy.

With the relief well almost complete, attention on the Gulf is waning and the potential window for political action on off-shore energy development and coastal and marine conservation is closing fast. At the same time, however, scientists are just beginning the process of assessing current and future ecological and economic damages from the spill. One action not requiring congressional approval is the establishment of an independent blue-ribbon panel to develop guidelines for the valuation of the ecological services from coastal and marine habitats. This valuation panel would complement the BP Deepwater Horizon Oil Spill and Offshore Drilling Commission, the mandate for which is to determine the cause of the spill and recommend future changes to drilling practices.

The Gulf’s coastal marshes are a prime example of an ecosystem that delivers multiple benefits to people. These include reduced damages from storms, commercial and recreational catch of fish and shellfish, clean and pleasant beaches and wetlands, and tourism and other substantial economic assets. Moreover, people who might never visit the Gulf Coast may nevertheless place a value on the health of the natural resources there. Gulf residents directly affected by the disaster are already weighing the contribution of these services against the settlement offers coming from the BP compensation fund. For those who do not settle or are not covered by the fund, the values will be debated in the coming years by judges and juries.

Following the Exxon Valdez oil spill in 1989, the Oil Pollution Act of 1990 laid the groundwork for a National Oceanographic and Atmospheric Administration panel lead by two Nobel Prize economists on techniques that use survey questions to elicit the public’s values for the environment and that can—in the right context, using carefully deliberated and tested approaches—also estimate monetary damages from oil spills. The panel released a report in 1993 that created the rubric from which to measure whether studies on these so-called nonconsumptive use values would be acceptable to use as a basis for a judicial process on damage assessments. Since then, economists valuing these resources have made considerable progress in addressing many of the panel’s concerns.                  

Defendants and trustees of the Gulf of Mexico’s natural resources, including federal and state governments, will definitely build on the panel’s guidance, especially with respect to the nonconsumptive services. However, the situation in the Gulf today differs in some important ways from the Prince William Sound spill 20 years ago. For example, in the last decade, research at the interface of economics and ecology has provided a broader and deeper understanding of ecosystem services and their valuation. The Gulf of Mexico—with its coastal marshes, seagrass, oyster beds, coral reefs, and mangroves—provides a prime example of a complex ecosystem that, even with all of the analytical advances, will challenge the science of ecosystem service valuation and in turn the measurement of damages and compensation.

James N. Sanchirico
James N. Sanchirico

Many federal and state government agencies with a natural resource interest are ramping up efforts for measuring and valuing ecosystem services. For example, earlier this year, President Obama signed an executive order creating a national ocean policy. One of its key priorities is the application of ecosystem-based management that calls for a broader suite of services to be included in resource management decisions. Another is the creation of regional bodies to develop marine and coastal spatial plans. This planning process will allocate the environment to uses based on some yet-to-be specified comparison of relative values.

With all of these efforts underway as well as the crisis in the Gulf of Mexico, now is the time to sort through the many competing proposals on ways to value these services and their worth. Developing guidelines will make it easier to sift through competing compensation claims. Because estimates of the relative values of these services across the Gulf can also be used to allocate restoration dollars, guidelines can help to ensure that we are getting the greatest bang for our buck.

Long after the crisis subsides and the damage assessments are complete, debates in the Gulf, and in many other regions, among fishermen, recreationists, nature lovers, and off-shore energy producers regarding how to manage our marine and coastal resources will continue. These discussions will revolve around the trade-offs and conflicts between different uses of coastal and ocean resources.

Guidelines on best practices for measuring and valuing these benefits could go a long way toward helping to ensure that the best available science is used in future decisions. Similar efforts occurred in 1965 with the creation of the Water Resources Council that set standardized guidelines for cost-benefit analysis applied to water projects—guidelines that have been revisited over time and applied to a broader set of issues—and following the Exxon Valdez spill with the creation of the NOAA blue-ribbon panel. We would be remiss to squander this opportunity to advance the science of measuring and valuing ecosystem services, especially because these services are so critical to our nation’s prosperity. 

James N. Sanchirico is a professor in the Environmental Science and Policy Department at the University of California at Davis and a nonresident fellow at Resources for the Future in Washington DC.

Further Readings:

Boyd, James W. 2010. How Do You Put a Price on Marine Oil Pollution Damages? Resources 175. Summer.

Polasky, S. and K. Segerson. 2009. Integrating Ecology and Economics in the Study of Ecosystem Services: Some Lessons Learned. Annual Review of Resource Economics 1:409–434.

Portney, Paul R. 1994. The Contingent Valuation Debate: Why Economists Should Care. The Journal of Economic Perspectives 8(4): 3–17.

Sanchirico, James N. and Peter Mumby. 2007. Economics, Habitats, & Biological Populations: Finding the Right Value. Resources 165. Spring.

Sanchirico, James N. and Juha Siikamäki. 2007. Natural Resource Economics and Policy in the 21st Century: Conservation of Ecosystem Services. Resources 165. Spring.