Environmental Economics and Policy, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy,

Opaluch, James J.

English

Research Papers in Economics

Marine Resource Economics, Vol. 4, pp. 151-154 0738-1360/88 $3.00 -f- .00
Printed in the UK. All rights reserved. Copyright © 1987 Taylor & Francis
Marine Pollution and Environmental Damage
Assessment: Introduction
JAMES J. OPALUCH
Department of Resource Economics
University of Rhode Island
Kingston, Rhode Island 02881
The marine environment was once viewed as an infinite expanse, capable of as-
similating all the wastes we could dump into it. More recently we have become
aware that the world is a small place, and that even given the size of the oceans,
we could easily impact this global environment. Perhaps more significantly, pol-
lution is not uniformly distributed throughout the oceans, but rather is concen-
trated in the same coastal areas where large numbers of people live, work, and
recreate. Thus, even if the aggregate assimilative capacity of the oceans was
sufficient for all of our wastes, pollutants can easily have deleterious impacts on
local environments, particularly in some of the low flushing and densely populated
estuarine areas, which are among the most productive environments on earth.
While pollution disposal is an important function of the oceans, excessive levels
of disposal can be incompatible with other uses, resulting in use conflicts partic-
ularly with food and recreation.
Economic methodologies for damage assessment are of real and immediate
concern, both from practical and conceptual viewpoints. Strict liability for dam-
ages from oil spills and hazardous substance releases is provided under various
pieces of environmental legislation, including Comprehensive Environmental Re-
sponse Compensation and Liability Act (CERCLA), its recent amendments, Su-
perfund Amendments and Reauthorization Act (SARA), the Clean Water Act,
the Outer Continental Shelf Lands Act, as well as other Acts. These pieces of
legislation provide liability for damages from injury to natural resources. It is
important to note that damages are stipulated, and not penalties. Damages need
to be tied to the social impact of the spill, while penalties can be punitive and
need not be directly related to the impact. Clearly these liability provisions are
intended for purposes of distributional equity by compelling the polluter to com-
pensate injured parties for damages resulting from spills. In addition, however,
liability rules have the potential to act as a Pigouvian tax, causing firms to inter-
nalize damages from a pollution incident. Note that this secondary benefit was
not completely unnoticed by the legislation. For example, the liability provision
under the Clean Water Act mentions "... methods, mechanisms and procedures
to create incentives to achieve a higher standard of care in all aspects of the
management of hazardous substances . . ." (Sec. 311 (b)(2)(B)) and requires an
associated study be conducted and a report be made to Congress. However,
coverage of the liability rules is narrow in that they relate only to oil spills or
hazardous substance releases, and not, for example, to more routine pollution
151152 James J. Opaluch
emissions such as those permitted under the National Pollution Discharge Elim-
ination System (NPDES) of the Clean Water Act.
Liability is one of the few examples where federal environmental policy pro-
vides financial incentives related to damages from pollution, which economists
typically argue is potentially a more cost-effective approach to pollution control
than are traditional Command-and-Control regulations. This legislative stipulation
is as close to a Pigouvian tax as has ever been instituted within the US legal
system and in this sense, we are in the center of a great social experiment. The
challenge to economists then is threefold:
1. We should develop skills and methods to provide cost effective approaches
to measurement of damages. As economists we must always recognize that
research expenditures in damage assessment are a cost of pollution inci-
dents not a benefit. Obtaining more accuracy in measurement comes only
at a substantial cost of carrying out the assessment, thus it is important to
develop and improve methodologies which obtain reasonable results at low
costs, which is the intent of the type A, or simplified approach under
CERCLA.
2. Secondly, we should develop our abilities to test whether liability is suc-
cessful in providing incentives for pollution control, as theory suggests.
There is reason to believe that because spills are not "representative"
events, liability will not provide appropriate incentives (see, for example,
Conrad (1980)). However, the only empirical work on the topic to date
suggests that there is at least some evidence that firms do indeed appear
to respond to the incentives provided by liability rules (Opaluch and Gri-
galunas 1984).
3. If liability provisions are effective in providing incentives which prove ef-
ficient in controlling pollution, we should attempt to use the argument to
extend the financial incentive framework to cover pollution more generally.
This implies a need to improve our abilities to carry out damage assessments,
to provide more comprehensive coverage of the kinds of values which we are
able to include, particularly for nonuse values, to provide better evidence of the
level of accuracy concerning these assessments, and to advance the state of the
art in testing the effectiveness of incentive-based approaches. Further, we must
hone our skills at interacting with natural scientists, to benefit from the vast knowl-
edge they have collected. One way in which this knowledge can be used is to
provide better a priori, structural information which can be used to specify func-
tional relationships, to measure parameters we cannot statistically identify, and
to provide values for parameters we can estimate in order to validate our esti-
mation process. In doing so, we can potentially improve the reliability of our
modeling and can possibly increase the confidence which social decision makers
have in our policy prescriptions.
In order to address these kinds of issues, a workshop was held in Narragansett,
R.I. in June 1986 cosponsored by the Association of Environmental and Resource
Economists (AERE), U.S. Environmental Protection Agency (EPA), and Na-
tional Oceanographic and Atmospheric Administration (NOAA). The papers con-
tained in this volume are selected from those presented at this AERE workshop
on marine pollution and environmental damage assessment.
The first paper by Dower and Scodari discusses the emerging national frame-Marine Pollution and Environmental Damage Assessment: Introduction 153
work for compensation for natural resource damages under CERCLA, with par-
ticular emphasis on the Type B regulations, which are meant to guide the more
detailed damage assessments of major incidents. Dower and Scodari conclude
that several provisions of the Type B regulations will tend to skew the assessments
towards under-compensation of damages at relatively high assessment costs,
while recognizing that it is impossible to predict whether assessments will tend
to under- or over-estimate damages, prior to actual experience with its
implementation.
The second paper by Kathleen Segerson examines the general issue of risk
sharing under liability rules. With polluter liability, the firm pays for damage from
stochastic pollution, which implies that the firm bears the risk. In effect, the firm
acts as an insurer for damaged parties. However, for certain types of risks society
can spread risk over a large number of actors, and so may be less risk averse
than an individual actor. This suggests that some combination of ex-post liability
and regulation may be a more efficient manner of controlling risks. The paper
examines different types of risks and different levels of risk preferences of the
actors, deriving the optimal combination of ex-post liability and ex-ante
regulation.
The third paper by James Kahn examines the assessment of marine damages
which are associated with onshore activities. In the paper, Kahn proposes to link
environmental variables of interest to the equilibrium levels of commercial catch,
for example, using reduced form modeling with traditional bioeconomic models,
rather than a detailed ecosystem, or structural modeling. This approach is po-
tentially capable of measuring indirect impacts through the food chain, for ex-
ample, while requiring less information and associated data than is required for
a complete ecosystem model.
The next paper, by Lichtenberg and Zilberman, examines ex-ante regulation
of stochastic pollution from dairy runoff which contaminates shellfish. The paper
employs the concept of the uncertainty adjusted cost curve, which relates the
costs faced by industry to the provision of a predetermined degree of environ-
mental protection. Using this methodology, Lichtenberg and Zilberman generate
cost curves for the dairy industry, including costs of providing shellfish grounds
with protection from contamination from runoff from storms which occur in a
particular year with probability a. By varying a, one can generate cost effective
tradeoffs between environmental protection and control costs faced by industry,
allowing a decision-maker to choose an acceptable level of environmental risk.
The final paper by Shabman and Batie examines the issue of mitigation of
damages to coastal wetlands. They discuss a proposed method of regulation based
on the same logic of achieving an ambient environment standard through least
cost means. Under this proposal, wetlands acreage targets would be set as a guide
for wetlands programs, with certain areas or types of wetlands expressly pro-
tected. Development of wetlands which are not expressly protected would require
payment of a fixed fee. The fee would be used for the region to finance wetlands
replacement activities through creation of artificial wetlands in order to maintain
the target level.
All those involved in the second AERE workshop owe special gratitude to U.S.
EPA and NOAA for funding, and to Glen Anderson, Norman Meade, and Kerry
Smith for their efforts in organizing the workshop.154 James J. Opaluch
References
Conrad, J. M. 1980. Oil spills: policies for prevention, recovery and compensation. Public
Policy 28:
Opaluch, J. J. and Grigalunas, T. A. 1984. Controlling stochastic pollution events through
liability rules: some evidence from OCS leasing. Rand Journal of Economics 15:

Marine Pollution and Environmental Damage Assessment: Introduction

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics