An oil rig exploded 50 miles off the Louisiana coast in April, exposing the state’s fragile wetlands to hundreds of thousands of gallons of oil. A week prior, two men were fined after their ship damaged the Great Barrier Reef. Christopher Beam explained how to assess the monetary damage to our natural resources. The original article is reprinted below.
Australian police arrested two Chinese men after their ship ran aground on the Great Barrier Reef, creating a 2-mile scar. One man faces a maximum fine of $51,000, while the other could serve up to three years in prison and pay a $220,000 penalty. How do you put a dollar value on a natural resource?
Ask the markets. One simple approach is to figure out how the environmental damage directly affects various economic activities. When the tanker Exxon Valdezspilled 11 million gallons of crude oil off the coast of Alaska in 1989, a court initially ordered the company to pay more than $5 billion to fishermen who could no longer catch fish and to other businesses hampered by the spill. (The award was eventually reduced to $500 million.) A court might therefore choose to calculate damage to the reef by measuring how much it affects, say, diving companies that benefit from its beauty. Another way to assess value is by measuring the replacement cost. If you cut down your neighbor’s trees, for example, you might have to pay the cost of planting new ones. Of course in this instance, the natural resource cannot be rebuilt.
Courts also consider indirect economic damages. That means thinking about the value of a natural resource in more holistic, interconnected terms—an approach known as “ecosystem valuation.” When evaluating damage to a rain forest, for example, a court might consider not just the value of the timber but also the oxygen it generates, the food it produces, or any possible drugs that might be developed from the exotic plants found there. In a famous 1997 article in Nature, Robert Costanza added up the values of all the ecosystems of the Earth and estimated that the entire biosphere is worth $33 trillion a year on average.
Market-based approaches only work, however, if there’s an actual market connected to a resource. How do you measure the value of something abstract, like a bird not having oil spilled on it? The answer: Conduct surveys. This technique, known as “contingent valuation,” involves asking people how much they would be willing to pay to preserve a natural resource—even if its preservation doesn’t affect them economically. That amount is the resource’s “existence value.” After the Exxon Valdez spill, for example, the state of Alaska commissioned a survey that found that the median American household was willing to pay $48.91 to prevent a similar spill. They then multiplied that by the 90 million households in the U.S., and got an estimated existence value of $2.81 billion. This technique is contentious, but courts often take existence value into account when measuring environmental damage.
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Explainer thanks Benjamin Barros of Widener Law School, Robert Glicksman of George Washington University Law School, Michael Greenstone of MIT, and James Salzman of Duke University School of Law.