Page1 Economic Valuation of Natural Resource Damages The Trustees Perspective Presented to National Advanced Conference on Natural Resource Damage Litigation Jeffrey R. Wakefield, Ph.D. Santa Fe, New Mexico July 16, 2007 Presentation Outline Disclaimers Key Damage Concepts Trustee versus RP conceptual approaches The Key Concept of Substitution Uncertainty and Risk aversion Baseline, Baseline, Baseline Theoretical damages v- real behavior Ground water 1
Page2 Disclaimer 1 I am not a Trustee expert! Disclaimer 2 The Trustees are not a single entity so some but not all and Some of the time but not always should be kept in mind 2
Page3 Key Natural Resource Damage (NRD) Concepts Natural Resource Damages Government Trustees Hold Valued Natural Resources In Trust For The Public 3
Page4 Natural Resource Damages Government Trustees Hold Valued Natural Resources In Trust For The Public Spills and Historic Releases Can Injure Natural Resources Natural Resource Damages Government Trustees Hold Valued Natural Resources In Trust For The Public Spills and Historic Releases Can Injure Natural Resources RPs are Obligated to Pay Damages to Restore Injured Natural Resources and Compensate for Interim Losses 4
Page5 Natural Resource Damages Government Trustees Hold Valued Natural Resources In Trust For The Public Spills and Historic Releases Can Injure Natural Resources RPs are Obligated to Pay Damages to Restore Injured Natural Resources and Compensate for Interim Losses Recovered monies are to be spent on natural resource restoration (depending on the State or cause of action) How Much Restoration: Scaling Focus on natural resources services After a release services decrease and then return to baseline Primary restoration or natural recovery Estimate interim service loss due to release Injury Offset injury with monetary payout Liability = Value of Lost Services + Trustees Assessment Costs OR Offset injury via environmental restoration Liability = Restoration Cost + Trustees Costs 5
Page6 Ecological Services Ecological services are beneficial outcomes of biophysical functioning in ecosystems Valued directly or indirectly by people Example Services Provided By Trees Nutrient Cycling Direct/Indirect Food Source Scrubbing of Particulates Nesting Sites Wind Break Resting/Stopover Sites Nest Materials Protection Shade Perching Sites Indirect Food Source Soil Stabilization 6
Page7 Ecological Services of Sediments Filtering Food Source Substrate for Rooting of SAV Nutrient Cycling Substrate for Attachment Value-to-cost Scaling Approaches Estimate injury and value it in dollars (compensable value) Spend that much on restoration 7
Page8 Value-to-cost Value-to-value Scaling Approaches Estimate injury and measure it in dollars Measure benefits of restoration in dollars Do enough restoration to equate the two Value-to-cost Value-to-value Scaling Approaches Resource-to-resource Approximation of value-to-value Uses ecological metrics (not dollars) but the assessment is still grounded in economic concepts of value 8
Page9 Economic Concepts of Value There is a general consensus, for individuals who use a resource, a release can cause a change behavior Take fewer recreational trips to injured site Buy a house in a different area Switch to bottled water Behavioral responses provide data for monetization Measuring Value Basic concept is willingness-to-pay (WTP) How much money would an individual pay to preclude the injuries? Can be measured as a change in consumer surplus 9
Page10 Consumer Surplus $ Consumer surplus P Expenditure Demand (WTP) at baseline 0 T(P,Q B ) Recreation Trips Simple Travel Cost Model 50 mi 100 mi 25 mi 10 trips 5 trips 3 trips 50 mi 25 mi 100 mi 3 5 10 10
Page11 Change in Water Quality Change in Consumption Advisories for Recreational Game Fish Change in Amount of Fishing Change in Fishing Locations Change in Cost and/or Demand for site Change in Consumer Surplus $ Change in Consumer Surplus (Benefits) P Expenditure 0 T(P,Q I ) T(P,Q B ) WTP at Baseline WTP with Injuries Recreation trips 11
Page12 Estimating Changes in Consumer Surplus: Random Utility Models Site A 20 miles away Boat ramp Fish consumption advisory Catch rate =.5 fish per hour Site B 50 miles away No boat ramp No consumption advisory Catch rate =.3 fish per hour Using data on the choices individuals make, economists estimate demand for site characteristics Can monetize OR trade one characteristic for another Existence/Passive Use Value There is less consensus surrounding potential non-use values People may value resources they do not use directly. A release may reduce that value but leave no behavioral trail Impacts to Grand Canyon, Extinction of California Condor, Wild Salmon Extirpation Are such values ubiquitous? Do they apply to more than just unique resources and irreversible effects? 12
Page13 Existence/Passive Use Value Trustees tend to believe non-use values are ubiquitous. When given the opportunity with a constructed choice situation, People can sensibly express their values via a behavioral intention that closely corresponds to a real behavior Existence/Passive Use Value Use surveys to obtain data on passive use value even for common resources and reversible effects What would you do if? Would you pay $X for a program that does? Given a choice between X and Y, which do you prefer? Trustee view is that, carefully done, such studies provide useful data in monetizing damage assessment Contingent valuation, conjoint analysis Most RPs are not so certain 13
Page14 Lawyers and Biologists Agree: Economists Make Their Eyes Twitch Lawyers and Biologists Agree: Economists Make Their eyes Twitch Can we avoid dollars and passive use issues? Perhaps if we scale using Ecological Metrics Habitat equivalency analysis (HEA) Resource Equivalency Analysis (REA) Passive use values included in principle 14
Page15 Value-to-Value Approach Value per Unit of Injured Resource X Change in Service Metric from Injury = Value per Unit of Restored Resource X Change in Service Metric from Restoration HEA Value per Unit of Injured Resource X Change in Service Metric from Injury = Value per Unit of Restored Resource X Change in Service Metric from Restoration HEA Change in Service Metric from Injury = Change in Service Metric from Restoration 15
Page16 Interim Lost Use Model 100% Baseline Services No Change in Services Without Release Time me Interim Lost Use Model 100% Baseline Services Services Decrease Due to Release (Initial Injury) Time me 16
Page17 Interim Lost Use Model 100% Baseline Services Services Recover to Baseline through Time Time Interim Lost Use Model 100% Baseline Services Shaded Area = Injury Measured in DSAYs Time 17
Page18 Restoration Scaling: Damage is Cost of Restoration 100% Services from Compensatory Restoration Services Interim Lost Services Scale restoration project such that: New Services = Interim Lost Services Time Issues in HEA Scientifically defensible if Only one service is affected (or all move together proportionally) Small effects In kind restoration In negotiated settlements ad hoc adjustments are often made to circumvent these requirements 18
Page19 Resource Equivalency Analysis Focus on 1 resource and in kind restoration Unit of measure is a Discounted Animal Year (DAY) Compensation requires the population to produce the same number of DAYs as it otherwise would have Population Level Debit Credit With Release and Restoration Baseline Population Years Even in HEA and REA, What Drives Differences between Trustee and RP Conceptual Approaches? 19
Page20 Substitution Trustee approaches often specify limited substitution E.g. age structure of the prey base matters, not just the species mix and volume of food present Impacts to individuals matter even given compensatory mechanisms in populations E.g. reduced clutch size is an injury even if compensatory chick survival results in no reduction in population numbers Some Trustees believe nature is to be compensated not people People make substitutions. However, restoring pelicans does not compensate the seagull population Substitution Simplified scaling methods (HEA) do not (readily) admit substitution across services or metrics What is the exchange rate between marbled murrelet years and spotted owl years? How many acres of mud flat are required to replace 1 acre of wetland? 20
Page21 Substitution and Ancillary Credit Given this view of substitution, Trustees tend not to give ancillary credit for additional services provided by restoration projects E.g. purchase and protect habitat for an injured species (redwoods for murrelets), but no credit given for other species helped by that preservation (spotted owls, salmon ) This view is evolving re: banking/trading NRD credits Substitution, Uncertainty, and Risk Aversion Trustees have expressed the following Mankind lacks knowledge of ecological mechanisms and ecological thresholds. Coupling this with A strong desire to avoid potential for negative outcome Leads to a desire among Trustees to return to a prespill condition Final result is a restrictive criteria for restoration selection On-site, in-kind narrowly defined 21
Page22 Baseline What services would be provided but for this spill requires Disentangling physical effects from release, past contamination, land use What if humans don t think of specific factors degrading the environment but act on a composite perception Joint and several issues come into play Theories of Damages Trustees see damages from potential effects Exceedance of regulatory standard implies service loss Fact of contamination (above detection limit but below a standard) implies a service loss Change in the provision of ecological services is not the focus 22
Page23 Theories of Damage Valuation Some Trustees Multiply a volume of affected media by some indicator of per unit value as a proxy for a service loss approach Assert that replacement costs are a good proxy for value per unit even if the resource will not actually be replaced Theories of Damage Valuation Trustee view on survey tools (conjoint analysis, contingent valuation) Individuals can answer questions in surveys accurately as long as basic design principles are adhered to Those surveyed represent those not surveyed, even those who have never heard of the resource or injury A person can experience an injury even if they have no knowledge of a resource or event 23
Page24 NRD Measurement Issues Ground Water Ground Water Services Extractive Services Extracting and using water for residential, commercial, industrial, agricultural purposes Buffer (insurance) value future extraction In-Situ Services Subsidence prevention Prevention of salt water intrusion Ecological Services Discharge to aquatic systems GW as pathway rather than receptor 24
Page25 Trustee View of GW Focus on the stock of water that exceeds some concentration criterion Value that stock using a proxy for service values E.g. the New Jersey formula South Valley New Mexico Heavy focus on potential existence value for GW Little applicable literature for existence values associated with GW 25