Natural Resource Damage Assessment Methods: Lessons in Simplicity from State Trustees

I. INTRODUCTION Natural resource damages can be caused by releases of hazardous materials, such as oil and toxic chemicals into the environment. The damage may be extensive, as in the case of polychlorinated biphenyl contamination of the Lower Fox River in Wisconsin, which led to national resource damage (NRD) settlements exceeding $42 million (Ando and Wildermuth, 2004) and the American Trader spill of 40,000 gallons of oil in southern California, which led to a jury verdict of $12.7 million for damages to beach and boating uses alone (Helton and Penn, 1999). However, most releases are very small--in 2000 there were 8058 oil spills of less than 100 gallons and only 77 spills of more than 1000 gallons (U.S. Coast Guard, 2001). In all cases, government trustees (the state and federal agencies designated to act on behalf of the public to safeguard public resources) have the right and responsibility to file claims to recover the value of lost or damaged resources according to the NRD provisions of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the Oil Pollution Act (OPA), or related state law. The trustees must conduct Natural Resource Damage Assessments (NRDAs) to support NRD claims. This process is challenging because most values associated with natural resources cannot be obtained from the market trades. Environmental economists have done much to address this problem by developing economic approaches to placing monetary values on the consequences of pollution discharges. Some approaches (e.g., travel cost and hedonic wage models) rely on revealed preferences by consumers in the market place. Other approaches analyze stated preferences with such tools as contingent valuation surveys. These methods have supported NRD claims in high-profile cases such as the Exxon Valdez accident in Alaska and the Upper Clark Fork River Basin Superfund Site in Montana. (1) The state of the art in this type of NRDA methodology is impressively sophisticated. The voluminous literature on nonmarket valuation techniques embodies the efforts researchers have made to refine and improve the reliability and accuracy of these techniques in yielding values consistent with economic theory (Brookshire and Scrogin, 2000). (2) These approaches are also expensive and time-consuming to execute. For example, a contingent valuation study of the damage caused by the study the Exxon Valdez spill is estimated to have cost $3 million. Such studies can therefore only be conducted in cases in which potential damages are very large (Harrison and Lesley, 1996). Most government trustee agencies, however, are small, budget-constrained, and lightly staffed, often with no economists on board. There exist few simplified NRDA methods--tools that can be used by a person with minimal training to perform simple, low-cost, expedited NRDAs. This paucity of simplified methods has led most state trustees to opt not to pursue the majority of potential NRD cases. A few state trustees have developed such methods to estimate the monetary value of NRDs, using data on physical damages to resources and parameters that impute a value to those damages. This article sets forth theoretical arguments that support efforts to develop unbiased simplified NRDA methods for use by government trustees and proposes a set of criteria which can be used to evaluate the quality of any such simplified method. The authors then describe the simplified methods being used by some states, affording academic economists a rare view of the kinds of methods state agencies use when they do not hire expert consultants to carry out a NRDA. The authors evaluate those methods against the criteria set forth and discuss whether other nonstate-specific simplified NRDA methods (benefit transfer and Type A models) have the potential to do the job better. II. CONCEPTUAL ISSUES IN THE DESIGN OF SIMPLIFIED METHODS FOR NRDA Work dating back to Becker (1968) has emphasized that liability law can provide firms with proper incentives to engage in socially beneficial precautionary activity (Segerson, 2000). …