Putting a Value on Damaged Natural Resources

How much do you value your week at the lake in the mountains each summer? Even if you don't like lakeside vacations, how much is it worth to you merely to know that there are lakes whose waters are clean enough for swimming, boating, and fishing? How much would you pay to help keep them that way for future generations?

Such questions are becoming more than academic. Finding the answers and transferring them into a workable economic and legal framework is becoming an increasingly pressing matter. Under the provisions of CERCLA—the Comprehensive Environmental Response, Compensation, and Liability Act of 1980—potentially responsible parties are being sued for damages to natural resources that have sustained injury from oil spills or releases of hazardous substances. Plaintiffs, who are acting as trustees for these publicly owned resources, include state governments, Indian tribes, and the federal government. The damage award they are requesting is based on assessing the injuries sustained by the resources and then assigning these injuries a monetary value.

How do claims originate?

Natural resource damage claims can involve rivers, harbors, estuaries, beaches, groundwater, and soil as well as the fish and wildlife species that rely on these resources for their habitats. They tend to originate from instances in which someone has discovered that hazardous substances from either an active or abandoned site have leached into surrounding public land or water resources. Very rarely, if at all, do the claims involve circumstances that pose an immediate threat to human health. Many claims so far have concerned abandoned mining sites in the West. Others pertain to other locations and to more current incidents such as tanker spills and hazardous releases from active sites.

To the best of anyone's knowledge—and information on these cases is extremely difficult to obtain—only one natural resource damages claim thus far (it is believed to have involved a pig farm) has been settled in court. The remainder of the claims have either been settled out of court or are pending.

Out-of-court settlements have been obtained through negotiations between lawyers representing the plaintiffs and the defendants. For those claims that are pending, a preliminary trial date has been set and in some instances experts have been called in, but the trial date subsequently has been pushed back several times and thus no evidence has actually been heard in court. Of course, during this interim period, pretrial evidence in the form of depositions is being gathered and economic analyses performed by both plaintiffs and defendants. The depositions involve taking down testimony in writing under oath; this testimony may then be used as evidence if the claim eventually comes to trial.

Pretrial evidence

Though no cases have yet been heard, it is only a matter of time before several currently pending claims or new claims come to trial. In the meantime, litigation is being prepared for use in out-of-court settlements and as pretrial evidence. This litigation relies upon guidelines and methods that, not surprisingly, reflect the uncertainties that characterize any new field of research. For instance, the Department of the Interior (DOI) issued guidelines for natural resource damage valuation in August 1986. But experience to date with attempting to apply them to damage claims has shown that many underlying concepts and procedures remain poorly defined.

In the words of one senior-level employee from DOI, current efforts to come to an effective legal decision on claims involving damages to natural resources involve "an attempt to combine law, economics, and the natural sciences—with nobody entirely happy." Yet decisions are currently being made and the number of claims that will be filed over the next several years is likely to increase.

The plaintiffs in these pretrial damage claims are seeking financial compensation on two counts. First, they are claiming compensation for the costs of cleaning up the damaged sites in order to protect public health. In addition—and it is this second area that is beset with uncertainties—they are demanding that they receive a dollar sum to cover the cost of either restoring or replacing the damaged resource. The sum also should compensate the public for any residual damage, thus reflecting the value of the natural resources and the services they provided when they were in an undamaged state.

This residual damage takes several forms. For cases in which sites and the surrounding environment can be restored to their original condition, defendants remain liable for the damage that occurred between the release of the hazardous substance or oil and completion of site restoration as well as the cost of restoration. If the site and the surrounding area cannot be restored, defendants are liable in addition for the loss of future services the resource would have provided had it not sustained injury.

Confusion

Lack of legal precedent for decisions involving injury to natural resources has greatly contributed to present confusion over valuation procedures. Natural resources are not exchanged in organized markets, where transaction prices provide a means for determining value. Yet, seeing no viable alternative, judges who are eventually faced with damage assessment decisions may be tempted to rely upon a market-based common law approach to natural resource damage compensation. Such an approach consists of applying rules guiding the valuation of damaged private goods to the valuation of damaged natural resources, which are public goods. Under this system, the aim is to set a price that reflects the value of the resources in an undamaged state and that is equal to the transaction prices of what are deemed to be like assets.

Coming up with a good match for like assets, however, can be problematic. Natural resources can be unique "assets" with correspondingly high values. How does one put a market value on Yosemite Valley, for example? Even in cases where similar assets exist, valuation can prove difficult. For instance, damage assessment claims can involve reaches of rivers in areas where there are available alternatives supporting similar but not identical recreational opportunities. How does one value the loss of five miles of a trout stream within a state that has one hundred comparable miles of such streams?

The DOI route

DOI guidelines provide one path to follow in carrying out valuation procedures for damage claims. For example, they require that "off-the-shelf' information be used to assess damages in those cases considered to be Type A, that is, relatively straightforward and limited in nature. They say that existing information and statistics such as the number and species of fish that were used to stock a damaged lake, for example, should be used as the basis for Type A assessments.

In reality, since little off-the-shelf information is actually available, valuations of a resource in one area of the country are used as approximations of the value of a seemingly similar resource elsewhere. The latter resource, however, may have a very different value due to local ecological and economic conditions.

For Type B cases, those that are more extensive and complicated, the DOI guidelines require a full assessment that includes scientific confirmation of injury, determination of which damage assessment methods will be used, data gathering and quantification of injury by natural scientists, and a final damage determination by economists, who assign a dollar value to these injuries. Obtaining such information on complex natural systems is a costly and time-consuming process. Even if statistics on the quantity and nature of the resources that existed prior to damage are at hand or can be gathered, work is often hampered because only sketchy empirical information is available on exactly which services the resource provided and to what extent each of them was used before the injury occurred.

For instance, in a case involving a lake that has been contaminated by chemical solvents, a plaintiff may claim that the lake was used for fishing, boating, and swimming by thousands of people from across the county, while a defendant may argue that only a handful of local residents fished there from time to time. If the actual nature of the lake's services and the extent to which they were used are unclear, the total value of the damages cannot be assessed even with knowledge of the value that some of its former users placed on its services. This grey area is responsible in large part for the enormous variation in damage estimate figures that are being put forward in individual cases. In fact, in some instances, the estimates differ by several orders of magnitude.

Another issue arising from the application of DOI rules is that they restrict the type of values for which trustees can seek compensation. In the case of the lake contaminated by chemical solvents, for example, valuation under DOI rules can be based only on compensation for its lost "use" values, that is, the diminished quality and quantity of services it formerly provided, such as fishing, boating, and swimming. "Nonuse" values, such as the values people might have to assure the lake would be available for future generations, can only be considered if no use values are found.

Sidestepping DOI rules when preparing pretrial evidence has a major advantage. It potentially enables plaintiffs to gain recompense for damages that incorporates nonuse values, a factor that may greatly increase the dollar amount they are eligible to receive from the potentially responsible party.

Doing so, however, has one major drawback: plaintiffs' cases no longer have the force of rebuttable presumption, i.e., their information is no longer correct until proven false; defendants' damage estimates gain equal footing in court with those of the plaintiffs. Despite this drawback, some plaintiffs appear to be deciding that the potential monetary benefit of including nonuse values in damage estimates outweighs the loss of rebuttable presumption and are preparing their cases outside DOI guidelines.

Question of time

A more fundamental issue, one that affects both use and nonuse values, concerns how to assess and value residual damages over time. For instance, how does one assign a value to the recreational services an injured fish population would have provided in the future had it not been affected by an oil spill? DOI rules specify that an across-the-board 10 percent real discount rate be applied to adjust for these intertemporal changes. Many resource valuation experts suggest, however, that the appropriate real rate may be closer to 3 percent because people are willing to sacrifice certain types of current consumption for opportunities in the future, either for themselves or others.

Choosing one or the other of these discount rates results in enormous differences in damage costs, especially over an extensive period of time into the future. In a case where the dollar value of the damage is determined to be $100,000 per year, for instance, application of a 10 percent discount rate would yield a total of $851,360 over a twenty-year period, while a 3 percent rate would result in a total damage award of $1,487,747 for the same period.

An equally important intertemporal issue is how to value the damage that took place between the occurrence of an oil spill or the release of a hazardous substance, the discovery of its effects on natural resources in the area, and the date on which settlement with the potentially responsible party is reached. Assigning a monetary value to this loss of past services involves capitalization of these past losses to calculate their current equivalents.

If past losses were equal to $100,000 per year for the last twenty years, for example, use of a 10 percent discount rate as a capitalization factor would yield past damages of $6,727,000, while a 3 percent rate would produce $1,806,000. Use of a 10 percent rate definitely cuts in the opposite direction, say some experts—a point not fully appreciated when the DOI guidelines were written.

What next?

Clearly, we need to enhance our ability to value the damages sustained by natural resources both effectively and efficiently. As a first step, experts agree, we must evaluate what we know about how to value natural resources and, equally important, identify what we don't know. In order to fully assess their services, we should continue to view them in the widest possible context, as assets that provide diverse services which, in turn, directly and indirectly promote general welfare. Experts also suggest that we need to more closely examine the state of the information that is already available to apply to the valuation process—conceptual, methodological, and empirical—and begin to build from this base.

"Greater consistency in gathering information and applying methods so as to narrow the gap between what are sometimes enormous differences in damage estimate values is essential," says Raymond J. Kopp, director of the Quality of the Environment Division at Resources for the Future. "To achieve this consistency, we must gain a clearer sense of exactly which services were provided by the injured resource and the extent to which these services were used or would have been used in the future.

"Once information on the injured resources is obtained," Kopp says, "we must make certain that the methods we use are appropriate to the information that is being processed so that use and nonuse values are correctly differentiated." He points out that a total damage estimate may become greatly distorted if, for instance, one of the subcategories of damage is accounted for twice by incorrectly applying a travel-cost model for recreational demand and a willingness-to-pay survey of local residents, both of which may yield values for the same type of damage.

"Confusion over the appropriate application of valuation methods to gain information on intertemporal issues also must be resolved if damage estimates are accurately to reflect the conditions that apply to the damaged resource," Kopp says. For instance, damage estimates derived from property value studies implicitly include future effects while a travel-cost/recreation-demand model considers only current effects.

V. Kerry Smith, RFF university fellow and university distinguished professor, North Carolina State University, calls for new approaches to valuation techniques. "Besides being certain that we are applying existing valuation methods and models appropriately, we also should strive to refine the capabilities of these methods and perhaps develop new approaches to help quantify nonuse values," says Smith. "Progress in these areas would greatly enhance our ability to reflect the full values generated by natural resources and to include them in the assessment process."

In the meantime, Smith says, current methods and models can yield useful information and can contribute to estimating a part of the value of natural assets. Methods such as survey techniques—including the contingent valuation method, which involves questioning individuals about such issues as how much they would be willing to pay to change some feature of the quality or availability of a natural or environmental resource—offer opportunities as valuation tools.

Bridge the gap

According to Kopp, "Better valuation estimates might also help cut down on the isolation that currently exists among those groups upon whose collective efforts an effective damage assessment depends—natural scientists, social scientists, and lawyers."

He suggests that natural scientists would then have a clearer understanding of the values society attaches to the services supplied by natural resources and thus could set priorities for their own research efforts to make them more cost-effective. More of their efforts could be directed toward determining the nature of injury suffered by services considered to have relatively high value by society. Kopp says this focus would, in turn, enhance the quality of information they supply to social scientists charged with assigning a dollar value to damages.

Social scientists involved in preparing pretrial evidence have an added responsibility. In part, the onus is upon them to provide information that is clear, relevant, and relatively easily transferrable to a legal framework. Application of sophisticated methodology to produce extensive data on how to value services that are lost because of injury to a natural resource is only part of the process involved in understanding and interpreting the complexities of natural resource damages claims.