Figuring the Worth of an Otter or Whale

By , Michael Edesess is a consultant in institutional investments living in Evergreen, Colorado.

AT a symposium in Denver recently on economics and the environment, a participant asserted that Exxon's decision not to spend more on oil spill prevention and preparedness was probably its best economic decision. The cost of reducing the likelihood of a spill like the recent one in Alaska would have been greater than the cost of damage control and compensation. To the public at large it looks like the wrong decision. This disparity of viewpoints is because of ``externalities'' - costs not borne by the decisionmaker. The cost to the public will be much greater than the investment Exxon could have made in prevention. But since Exxon pays only a small part of the cost, the investment was not warranted.

Where the public is adversely affected by the self-interested actions of a private entity, regulation is the answer. Proposing new regulations is not in vogue these days. But rules and regulations are integral to the free-market system, ensuring that the activities of one participant do not detract from the freedom of others.

For enforcing environmental rights, most economists and legislators now believe that economic carrots and sticks are the best form of regulation. The objective is to ``internalize the externalities'' - to make the polluter pay for the damage; that is, to bear internally the costs formerly externalized to others.

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For example, Exxon should have to reimburse the public and affected private parties for damages caused by the oil spill at Valdez. If this rule had been in place 10 or 15 years ago, Exxon would likely have opted for prevention as the best economic decision from a company viewpoint.

There is now solid public commitment to this principle. Yet the chances of its being put into practice are slim.

Exxon and others will no doubt oppose such regulation, in a perhaps too-strict interpretation of their duty to stockholders, as an ``infringement on the free market.'' This is a bogus argument, just as similar arguments against the regulation of price-fixing are bogus.

But there is another reason that appropriate legislation and regulation will not be easy: It will require quantifying the unquantifiable. It will require, for example, attaching a cost to the loss of an otter, a whale, or a tern. More difficult yet, it will require assigning a cost to the unpredictable future effect on the ecology of environmental degradation.

Such costs are usually referred to with words like ``incalculable'' or ``invaluable.'' Environmentalists are reluctant to get into the game of quantifying things in dollars for fear they will lose in that game. They are afraid that dollar values assigned to environmental amenities and to life itself will underestimate their worth.

This is not necessarily the case. One can go to court almost any day and see, in personal injury suits, dollar values placed on the loss of a limb or an eye or a life. The valuations are vouched for by economic experts, with respectable credentials, and are taken seriously.

The same thing can be done for the loss of a sea otter or the spoiling of a beautiful scene. The daunting task will be to establish a set of quantifying procedures and to get them widely accepted.

Quantitative economics has become a pervasive cross-disciplinary language, a coin of objective interaction among engineers, economists, and social scientists. Hard scientists accustomed to quantification only in precise statements view imprecise, cross-disciplinary use as fraudulent.

As a lark, Environmental Protection Agency staff estimated the dollar value of a living tree. The estimate was $500,000. Considering the tree's value as part of a forest managed for sustainable yield, its value in preventing erosion, absorbing carbon dioxide and producing oxygen, its value in sheltering animal and plant life and serving as an important node on the ecological chain, its pure amenity value, and its value for recreation and for wilderness lovers, the figure may be accurate. But unfortunately, the estimators did not take themselves seriously.

Estimates like these must be made with deadly seriousness. Legislators seeking to formulate economic incentives and penalties for polluters of the ecology will need them. Environmentalists should hold their noses if they have to, but set themselves to this essential task.

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