Environmental Economics

"If it was my home"

Click on the link to see how big the spill is relative to where you live: http://www.ifitwasmyhome.com/.

Hat tip: The Earl of Mo.

xkcd: Worst-Case Scenario

Source: http://xkcd.com/748/

Does ex post Coasian bargaining work?

I think not. Negotiations amongst business firms and/or governments will only end up in the courts, so this seems like good public policy (US to demand BP fund):

The Obama administration, facing growing public anger over the Gulf of Mexico oil spill, plans to ask BP PLC to establish an independently administered fund for reimbursing victims—in effect, taking some of the compensation decisions out of the company's hands. ...

White House officials on Sunday said they wanted BP to put "substantial" funds into an escrow account to cover claims by Gulf Coast businesses and residents affected by the spill. ...

The call was echoed by congressional leaders and state officials. In a June 10 letter to BP released on Sunday, Senate Majority Leader Harry Reid (D., Nev.) and other Democrats asked BP to establish a $20 billion account, administered by an independent trustee, that would be used to pay the damages and clean-up costs associated with the spill. ...

Such a fund would provide a measure of security, proponents argue, for people concerned BP might file for bankruptcy protection or otherwise stop paying claims at some point in the future. It also has the potential to give the government or its designees control of distributing a significant pool of relief money. ...

While not opposed to the idea of the fund, BP objects to the implication that if it isn't required to set money aside, it might try to avoid paying it in full, according to a person familiar with the company's position. BP insists it has the financial muscle to settle the final bill for the clean-up, as well as pay its dividend.

BP's hurt feelings aside, how about an ex-ante fund increasing in magnitude for each offshore well across the industry? If the total amount needed is $20 billion and there are about 4000 wells in the Gulf of Mexico, then each well would require a $5 million contribution. The fee for new deepwater wells could be set at $75 million.

"What do you do?"

I have an idea for oil companies:

Lawmakers hope to erase a cap on damages that the state could collect from BP before an oil slick arrives at the state's shores.

A state House committee approved a bill Thursday that wipes out a limit on damages the state could collect from an oil spill. Currently the state's cap mirrors a federal limit of $75 million. That cap was set for North Carolina in 1989 after the Exxon Valdez oil spill in Alaska.

The bill would apply to all spills of oil or hazardous materials in the state's waters, but the backers specifically aimed it at the oil gushing in the Gulf of Mexico, said Rep. Pricey Harrison, a Greensboro Democrat and one of the primary sponsors.

...

The bill has hurdles to clear before the full House and Senate vote on the proposal. Along the way, opponents will argue that unlimited liability on oil companies would force businesses to leave or avoid the state. The bill could not only affect the potential for offshore drilling but also any business that has a gas or oil storage tank or a company that hauls fuel or oil, said Bill Weatherspoon, executive director of the N.C. Petroleum Council, an arm of a national industry group.

Unlimited liability would create an impossible choice for businesses across the state, he said.

"What do you do? Do you stay in business and gamble every day, or do you find an insurance policy that will cost you through the teeth to cover you for some unlimited number?" he said. "The legislature needs to take it slow and easy on something like this and make sure they understand the law of unintended consequences."

Read more: http://www.newsobserver.com/2010/06/11/526611/state-bill-would-strike-cap-on.html##ixzz0qZs4kcW7

My idea: they can implement reliable safety measures to prevent oil spills in order to avoid paying the true cost of a spill. Imagine.

Don't be Matt Lauer in Land of the Lost

David Leonhardt considers the benefits and costs of oil spill prevention and climate change (Spillonomics):

... The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely — and may even have been unlikely — but that would bring enormous costs.

... For all the criticism BP executives may deserve, they are far from the only people to struggle with such low-probability, high-cost events. Nearly everyone does. “These are precisely the kinds of events that are hard for us as humans to get our hands around and react to rationally,” Robert N. Stavins, an environmental economist at Harvard, says. We make two basic — and opposite — types of mistakes. When an event is difficult to imagine, we tend to underestimate its likelihood. This is the proverbial black swan. Most of the people running Deepwater Horizon probably never had a rig explode on them. So they assumed it would not happen, at least not to them.

... When the stakes are high enough, it falls to government to help its citizens avoid these entirely human errors. The market, left to its own devices, often cannot do so. Yet in the case of Deepwater Horizon, government policy actually went the other way. It encouraged BP to underestimate the odds of a catastrophe.

In a little-noticed provision in a 1990 law passed after the Exxon Valdez spill, Congress capped a spiller’s liability over and above cleanup costs at $75 million for a rig spill. Even if the economic damages — to tourism, fishing and the like — stretch into the billions, the responsible party is on the hook for only $75 million. (In this instance, BP has agreed to waive the cap for claims it deems legitimate.) Michael Greenstone, an M.I.T. economist who runs the Hamilton Project in Washington, says the law fundamentally distorts a company’s decision making. Without the cap, executives would have to weigh the possible revenue from a well against the cost of drilling there and the risk of damage. With the cap, they can largely ignore the potential damage beyond cleanup costs. So they end up drilling wells even in places where the damage can be horrific, like close to a shoreline. To put it another way, human frailty helped BP’s executives underestimate the chance of a low-probability, high-cost event. Federal law helped them underestimate the costs.

I should know this, but how did that $75 million cap come about? It seems like a silly thing to add in, even ex-ante.

Up Close and Personal: BP Oil Spill

UCAP: BP Oil Spill - watch more funny videos

Perfectly inelastic demand

Oil spill reaches NC in form of higher oyster prices:

A few weeks ago, Earp's Seafood Market in Raleigh sold oysters in the shell for 40 bucks a bushel. This week they're 50 bucks.

Blame the catastrophic oil spill in the Gulf of Mexico.

David Salmon, the manager of Earp's, said he's just passing on higher costs - his profit per bushel remains $12 - and that so far he hasn't met price resistance from oyster fans. ...

Oyster fans must have perfectly inelastic demand between $40 and $50 per bushel. Otherwise that profit margin can't stay constant.

I have a long position on hay

Tim: adjust your damage estimate

NOAA has modified and expanded the boundaries of the closed fishing area to better reflect the current location of the BP oil spill, and is extending the fishing restriction until May 17.

Fishery Closure Boundary as of May 7, 2010.

High Resolution [pdf] (Credit: NOAA)

The closed area now represents slightly less than 4.5 percent of Gulf of Mexico federal waters. The original closure boundaries, which took effect last Sunday, encompassed less than three percent. This leaves many areas that are still available for fishing. The vast majority of Gulf waters has not been affected by the oil spill and continues to support productive fisheries and tourism activities.

via www.noaanews.noaa.gov

Looking for a Natural Resource/Water Economist/Modeler

Sign #1,986 the economy might be on the upswing:  We're hiring.

The Ohio State University-Assistant Professor: The Department of Agricultural, Environmental, and Development Economics (AEDE) is searching for a tenure-track assistant professor. The position is funded jointly with the university initiative in Climate, Water, and Carbon (CWC), and is one of several such positions in various departments. We seek outstanding applicants with high potential for achieving scholarly excellence in natural resource economics and modeling, with primary interests in regional and/or global water resource issues. Complementary interests in climate change, land use, and energy issues would be helpful.  Expectations include teaching and research to serve AEDE’s mission, and collaboration with colleagues in the CWC initiative. Faculty members are expected to achieve national scholarly recognition, and to contribute to outreach and public engagement.  The appointee will have an academic year (9 month) appointment with competitive salary and benefits package.