Environmental Economics

Sherry Larkin describes the BP oil spill "economic loss research for the state of Florida" in the May AERE Newsletter

The AERE Newsletter is available here: http://www.aere.org/newsletters/documents/AERE%20Newsletter%20May%202016%20%20FINAL.pdf

In case you missed it

The court approved the settlement between the government and BP for the Deepwater Horizon NRDA:

Today—nearly six years after the Deepwater Horizon oil spill began—the court approved a settlement with BP for natural resource injuries stemming from the spill. This settlement concludes the largest natural resource damage assessment ever undertaken. We will now begin implementing restoration as laid out in the Trustees’ comprehensive restoration plan.

Under this settlement, BP will pay the Trustees up to $8.8 billion for restoration to address natural resource injuries. The settlement—the largest recovery of damages ever for injuries to natural resources—includes:

• $1 billion already committed during early restoration
• $7.1 billion for restoration over 15-plus years, beginning in April 2017
• Up to an additional $700 million to respond to natural resource damages unknown at the time of the agreement and/or to provide for adaptive management.

Source: http://www.gulfspillrestoration.noaa.gov/2016/04/trustees-settle-with-bp-for-natural-resource-injuries-to-the-gulf-of-mexico/

 

This work is not a product of the United States Government or the United States Environmental Protection Agency, and the author is not doing this work in any governmental capacity.  The views expressed are those of the author only and do not necessarily represent those of the United States or the US EPA.

"How much do oil spills cost? Controversy over paper oozes into larger debate"

Shelley DuBois at Retraction Watch:

A controversy surrounding a 2014 Journal of Environmental Management paper has tapped into a larger scientific and economic issue — how to tally up the damage after an oil spill.

The original paper, called “A revealed preference approach to valuing non-market recreational fishing losses from the Deepwater Horizon oil spill,” estimates the 2010 explosion of the BP-owned drilling rig cost the Gulf-Coast recreational saltwater angler fishing industry alone nearly $600 million. But Kenneth Train, an economics professor at the University of California, Berkeley who was hired by BP to review the study, has questioned the methods used — both publicly, in a comment that was published in the Journal of Environmental Management, and privately through personal calls with the authors. The first author says Train asked them to retract the paper; he denies ever making that request. While Train, in his comment, says he doubts the accuracy of the $600 million estimate, he does not provide an alternative number.

I'm going to leave a comment in response to the last paragraph:

Indeed, this debate about the proper methodology to calculate oil spill damages has been boiling in the literature before this paper. For example, the authors of the Journal of Environmental Management paper used a technique called contingent valuation to estimate the economic worth of non-market resources. But the method is controversial in some circles. In 2012, an economics professor at MIT named Jerry Hausman decries it in a Journal of Economic Perspectives paper titled, “Contingent Valuation: From Dubious to Hopeless.” Hausman, like Train, previously worked as an oil company consultant. He was hired by Exxon after the 1989 Valdez spill.

Just to be clear, the JEM paper that is the subject of this story used the travel cost method. We also conducted a contingent valuation study for the state of Florida but those results have not been published since they were tied up in the litigation process until late in 2015.  

 

The BP/Deepwater Horizon federal CVM study estimated damages of $17 billion

Go to the Deepwater Horizon Response & Restoration website and click on:

• 5. Preassessment/Assessment
  • 5.15 Other lines of investigation
    • 5.15.3 Other materials

Obvious, right?

You'll see a bunch of memos from the "Total Value Team" that can be pieced together to form a coherent report. Here is the bottom line:

Reply to “Comment on: A revealed preference approach to valuing non-market recreational fishing losses from the deepwater horizon oil spill and its corrigendum”

Here is the introduction:

In his comment, Train (2015) claims to have uncovered “numerous errors and misstatements” in our recently published article (Alvarez et al., 2014) and accompanying corrigendum (Alvarez et al., 2015), yet close inspection reveals that all these errors and misstatements have been discussed at length in the article and corrigendum. This document outlines Train's claims and the corresponding section of the article and corrigendum that address each of his concerns. However, we first offer some background on the evolution of the research and the ensuing response from Train and BP plc.

The Alvarez et al. (2014) study relies on data continuously collected by a third party, the National Marine Fisheries Service, for purposes other than measuring the effects of oil spills and made publicly available online as the MRFSS/MRIP data. The study was conceived as an illustration of using the MRFSS/MRIP data to create a choice model capable of depicting angler behavior in response to a quality change brought about by an oil spill. In doing so, our study diverges from the previous literature on the effects of oil spills on recreational use of natural resources, which relied entirely on post-hoc surveys of recreational users designed for the sole purpose of fulfilling the data needs for the creation of these models. While our approach overcomes the post-hoc nature of data collection prevalent in the previous literature, it suffers from the necessary shortcoming of relying on data that was not collected for the purpose at hand. To get around these shortcomings, a series of assumptions must be made, and it is with these assumptions that Train appears to be taking issue. As will be discussed in this reply, these assumptions are clearly documented in the original article.

Furthermore, the Alvarez et al. (2014) study was conceived, designed, and carried out completely independent of the legal process surrounding the Deepwater Horizon spill. It did not rely on funding from any stakeholder group, and its objectives or content were never reviewed by attorneys involved in either side of the legal process. However, the research was presented at various conferences and other venues, and comments and suggestions received from participating scholars shaped the research process, which began in late 2010 and culminated with the publication of the article in late June 2014.

In August 2014, we were contacted by Train, who expressed concerns about the compensation estimate documented in Alvarez et al. (2014), in particular the use of the ‘short-cut’ formula for estimation of welfare changes, or equation (7) in Alvarez et al. (2014). He also suggested we retract the article. In response, we developed the corrigendum which was submitted to the journal and shared with Train as a courtesy during September 2014. The corrigendum focuses on the use, and misapplication, of the ‘short-cut’ formula, explains the relationship between the welfare estimate and the number of sites affected, and provides a number of alternate welfare estimates that would result under different scenarios of sites affected. Besides addressing Train's initial concern, the corrigendum adds to the literature by shedding light on the correct use of the short-cut formula, and as such, it should prove useful to the Journal of Environmental Management's readership.

In October 2014, we were again contacted by Train with additional concerns. As a professional courtesy we shared all of our raw data, computer code, and estimation datasets that offered complete disclosure of our approach and assumptions, which we had already fully disclosed in Alvarez et al. (2014). Disclosure of the data and computer code allowed Train to re-estimate or re-design the model using differing assumptions, and these results could be used for their scholarly merit or as evidence in the legal process.

In the following section we list the issues that Train claims to have uncovered and outline the sections of the article and corrigendum where they have been discussed. In summary, none of these topics add to the peer-reviewed literature with respect to either the theory or empirical application. ...

via www.sciencedirect.com

Big BP news

The DOJ announced that the Trustees in the BP Deepwater Horizon NRDA case have proposed to accept the settlement in principle with BP. The numbers appear to be pretty much the same as previously announced, with additional payments of $500 million for unanticipated restoration (in addition to the $232 million originally announced), $350 million for NRDA costs, and $250 for response costs, lost royalties, and a False Claims Act investigation (see this consent decree document).

The Trustees also released the Programmatic Damage Assessment and Restoration Plan (PDARP) and Programmatic Environmental Impact Statement (PEIS). Environmental economists will be especially interested in Section 4-10 (especially the footnote on the data--more on that if I can find the time).

 

This work is not a product of the United States Government or the United States Environmental Protection Agency, and the author is not doing this work in any governmental capacity.  The views expressed are those of the author only and do not necessarily represent those of the United States or the US EPA.

 

Well, all I can smell is molasses*

Today in natural resource damage assessment:

A shipping company will pay Hawaii more than $15 million to settle a spill that put 233,000 gallons of molasses into Honolulu Harbor in 2013.

The $15.4 million settlement -- a combination of cash, restoration and funding of environmental programs -- from Matson Navigation Company will reimburse Hawaii for costs related to cleaning up the harbor, regrow a coral nursery to replace coral damaged or destroyed by the spill, remove a molasses tank facility and support an upcoming international environmental conference.

The September 2013 spill occurred when a Matson ship, bound for the West coast, was being loaded with 1,600 tons of molasses. But a leak in a pipeline to the ship spewed the sticky stuff into the water, killing large amounts of coral and fish.

To put the spill in some perspective, the BP Deepwater Horizon oil spill was about 180,000,000 gallons.  The settlement there was $18.7b.  That's about $104 per gallon.  The molasses spill was 230,000 gallons with a settlement of $15.4m.  That's $66 per gallon.  Conclusion: I have no freaking idea. I was hoping the math came out closer per gallon so I could say something snarky about how damages are calculated. 

*A mother, father and baby mole are emerging from their tunnel.  The mother mole sticks her head out into the bright sunshine, sniffs and declares "Yummm, I smell maple syrup."  The father mole sticks his head out and declares, "Yummm, I smell honey."  The baby mole, yells from the rear "Well, all I can smell is molasses."

How much is a loon worth?

At today's exchange rates, a Canadian one dollar coin is worth about $0.78. But right over the border, this is different:

Minnesota loons could benefit from an $18.7 billion legal settlement over the massive 2010 Gulf of Mexico oil spill, a Department of Natural Resources official said Wednesday.

Minnesota could receive up to $25 million over the next 15 years from the settlement between oil company BP and the federal government, Carrol Henderson, the department's nongame wildlife supervisor, told MPR News.

Scientists have conducted a large amount of research documenting the effects of the April 2010 oil spill on wildlife, and the settlement might not have been reached without that research, Henderson said.

"Loons and pelicans were actually in the gulf in April when the oil spill first occurred," he said. "My recollection is that there was just shy of 200 loons that were found dead in the oil."

Henderson said that number may only be a fraction of the loons that were affected by the oil spill. Many that died were never recovered.

Minnesota and Wisconsin likely will be the only non-coastal states to receive settlement money from the spill primarily because of the loon concentration. Minnesota is home to 12,000 loons.

Many loons were contaminated in the oil spill but survived. But those birds have passed health problems on through their eggs. There is some evidence that white pelicans also were affected by the oil spill but the evidence is not as clear.

via www.mprnews.org

$25 million divided by 200 dead loons is equal to $125,000 per loon. But since 200 is only a fraction of the loons that were (negatively) affected, the number is an upper bound. 

Some BP Settlement Math: When is $18.7B really only $11.7B?

After yesterday's announcement of a tentative settlement between BP and federal and state negotiators, BP has provided details of the payment schedule for the $18.7B settlement.  The settlement consists of payments for civil penalties ($5.5B), natural resource damages ($7.33B), and state damages ($4.9B) over 18 years.  An additional $1B is set aside for payments to over 400 local entities bringing the total to the reported $18.7B. 

Year after consent decree	Civil Penalty payments	Natural Resource Damages (NRD) payments	NRD additional final payment	State Claims payments
0				$1,000,000,000
1	$379,310,345	$489,655,172
2	$189,655,712	$244,827,586
3	$379,310,345	$489,655,172		$260,000,000
4	$379,310,345	$489,655,172		$260,000,000
5	$379,310,345	$489,655,172		$260,000,000
6	$379,310,345	$489,655,172		$260,000,000
7	$379,310,345	$489,655,172		$260,000,000
8	$379,310,345	$489,655,172		$260,000,000
9	$379,310,345	$489,655,172		$260,000,000
10	$379,310,345	$489,655,172		$260,000,000
11	$379,310,345	$489,655,172		$260,000,000
12	$379,310,345	$489,655,172		$260,000,000
13	$379,310,345	$489,655,172		$260,000,000
14	$379,310,345	$489,655,172		$260,000,000
15	$379,310,343	$489,655,172		$260,000,000
16			$232,000,000	$260,000,000
17				$260,000,000
Totals	$5.50 billion	$7.10 billion	$0.23 billion	$4.90 billion

When performing benefit-cost analysis, a dollar today is not worth the same as a dollar tomorrow. Spreading the payments over 18 years means that BP will be laying out less than $18.7B out of pocket. How much less depends on the interest (discount) rate assumed for calculations.

Using the payment schedule above, and standard present value calculations, the present value of BP's $18.7B is between $11.7B* (at a 7% discount rate) and $15.0B (at a 3% discount rate)**.  In other words, if BP were making a cash payment today, they would be on the hook for significantly less than the reported $18.7B. 

I'm not making a judgment.  Just pointing out the math.  I will leave it to others to make the judgment.

UPDATE: Hmmm...I just realized this note at the bottom of BP's press release might render the present value calculations moot:

"Interest will accrue at a fixed rate on the unpaid balance of the civil penalty and natural resource damges payments, compounded annually and payable in years 15 (CWA) and 16 (NRD).

The interest rate will be fixed at the average market yield on U.S. Treasury securities at 2-year and 3-year constant maturities, quoted on an investment basis by the US Federal Reserve (H.15 Release), for the period from 28 May 2014 to 27 May 2015."

If I am reading that right, that means BP will effectively borrow against future payments which offsets the savings that would occur from delaying payments, 

*I've assumed the $1B payment to local entities is being made immediately.  Not a realistic assumption but without more information, we can't predict when these payments will be made.  Delaying or spreading these payments over time would reduce the present value of the outlay further.

**And just for reference, BP's profits in Q1 of 2015 were $2.6B.

"Gulf states reach $18.7 billion settlement with BP over oil spill"

I think I've scooped all of the other environmental economics bloggers on this one (the story is from the ABC TV station in Fresno):

Officials in Florida, Alabama, Mississippi and Louisiana announced an $18.7 billion settlement with BP on Thursday that resolves years of litigation over the 2010 Gulf of Mexico oil spill.

The settlement announcement comes as a federal judge was preparing to rule on how much BP owed in federal Clean Water Act penalties after millions of gallons of oil spewed into the Gulf. Individual states also were pursuing litigation. Most of those penalties were to be distributed among the states for environmental and economic restoration projects along the Gulf Coast.

The settlement money will be used to resolve the Clean Water Act penalties; resolve natural resources damage claims; settle economic claims; and resolve economic damage claims of local governments, according to an outline filed in federal court Thursday morning.

So, does this mean that it is over?

Update: from the BP website:

The principal payments are as follows:

• BPXP is to pay the United States a civil penalty of $5.5 billion under the Clean Water Act (CWA) – payable over 15 years.
• BPXP will pay $7.1 billion to the United States and the five Gulf states over 15 years for natural resource damages (NRD). This is in addition to the $1 billion already committed for early restoration. BPXP will also set aside an additional amount of $232 million to be added to the NRD interest payment at the end of the payment period to cover any further natural resource damages that are unknown at the time of the agreement.
• A total of $4.9 billion will be paid over 18 years to settle economic and other claims made by the five Gulf Coast states.
• Up to $1 billion will be paid to resolve claims made by more than 400 local government entities.