You are here

A Social CBA on the BP Spill

Adam Rust's picture

Posted June 15, 2010

Most efforts to monetize the costs to taxpayers from the Deepwater Horizon oil spill in the Gulf suffer from one big problem. They do not have a means to account for people that do not have a financial stake in the health of the Gulf of Mexico.

It seems easy to agree that Gulf Coast fishermen and fish house restauranteurs would experience a loss as the result of BP's folly. Their livelihoods have been destroyed, or at least harmed, by this disaster. Once the days of skimming oil off of the surface have passed, things will get really bad. It seems possible that it could be years, or even decades, before fisherman can genuinely make a good living in Louisiana or Alabama.

The protagonist of this nightmare is clear. BP is on the hook for a lot of damages. It wouldn't surprise me if Transocean and Halliburton experience some hurt, too. But, for how much?

My thought is that there are a lot of people that still care about the Gulf Coast, even though they don't work there or own property there. Those include people that are fairly well affected, such as anyone that operates a business that is indirectly dependent for their revenue from demand created by wages made in the Gulf. That would include ice cream salesman in Houma, or mall operators in Gulf Shores. It could include municipalities in the Gulf area. It could include turf grass installers in Pensacola. All of those groups are likely to experience some downside because of the Gulf spill.  There will be less demand for new turf grass if there are fewer vacationers seeking to play golf in the area, and there will probably be fewer families taking their earnings to see a movie at the Houma mall.

Those are people with indirect financial losses.

Then, there are another group that stands to lose, even though they can't quantify those losses in dollars.

This is the group that with a social cost as a result of the spill. Academics call this "experience" cost. It is very hard to quantify, and it is even harder to agree on how to interpret whatever estimates can be made of those costs.

The ball got rolling on this idea after the Exxon Valdez, when many people realized that the magnitude of the costs from spill of this size in a place as remote as Alaska presents some problems for valuation. People care a lot about Alaska. It is part of our national pride in a way that few other states can match. People rarely mention that they would love to travel to the Yukon Territory. Many more think about a cruise to Alaska. Unfortunately, not a lot of people were directly harmed by the Valdez spill. Birds were harmed, and so was the local economy of Prince William Sound.  It was a disaster, but in financial terms, it was hardly a blip on our nation's financial lifeline.

A ruling in 1989, Ohio v. US Department of Interior, said that loss of a passive use was a compensable event.

The theory of contingent valuation attempts to use supply and demand to identify the value of a "passive" use. The approach is simple, and although there are plenty of methodological variations on this theme, the basic idea has two elements.  First, a random set of respondents is asked how much they are willing to pay to have a use. Then, another random group is asked how much they would be willing to accept to give up such a passive use.

How much, then, would you be willing to accept to lose the opportunity to make use of the Gulf Coast for the predicted lifespan of this ecological disaster? Alternatively, how much would you have been willing to pay to have access to those resources.

The instrument works best when it can answer the costs for people near and far to a problem. A person from Kazakhstan, for instance, is really less likely to ever lose any value from the destruction of the Gulf. On the other hand, a 4th grader in Gwinnet County, Georgia may have more to give up.

BP is bound to not like this approach. It raises costs on a disaster exponentially.  I like it. It goes beyond the short-sighted standards of financial losses, and attempts to tell us something about what we have really given up. I was in New Orleans the week before the oil spill.  I had some gumbo, but I didn't have crawfish or any etoufee. What would I pay to have a chance to have a fresh catch in the Big Easy, or another stuffed flounder on Dauphin Island? What should I have to accept in order for BP to have the privilege of eliminating the possibility?