Faculty Spotlight

Richard T. Carson
Drilling Deep Into Cost and Prevention of Oil Spills

Economists are often assumed to spend all their time chained to a desk crunching numbers. However, in many fields of economics, researchers are getting out to study people and the environments in which they are operating to better understand and predict behavior. This is particularly true in my field—environmental economics.

Over spring break, I traveled to Norway as part of an international review team to advise the Norwegian Environmental Protection and Coastal Zone Management agencies on three important issues they face. The main issue involved the economic value of preventing oil spills of different sizes in different locations. Clearly, any oil spill is undesirable, and the easy way to avoid them is to stop drilling for oil offshore and to stop shipping oil. However, oil is Norway’s major natural resource and a primary driver of Norway’s economy and tax revenue. Further, as with most industrialized countries, Norway’s economy would quickly grind to a halt without its transportation fleet and many industrial processes. The economic cost to oil drillers and oil shippers if an oil spill occurs determines both whether they are willing to engage in these activities and how much effort they are willing to invest in preventing oil spills.

My prior work has played a large role in informing these decisions in the United States. I was the principal investigator on the damage assessment for the Exxon Valdez oil spill, where the government received $3 billion for restoration activities and the purchase of natural resources to replace those harmed. The plan put in place in Alaska after the Exxon Valdez spill was expensive but has prevented similar oil spills over the past 25 years and has a very favorable benefit-cost ratio relative to the estimate cost of the injuries associated with a very large oil spill in Alaska. More recently, I was a principal investigator on the damage assessment for the BP oil spill in the Gulf of Mexico, where government agencies recently settled for $17 billion for restoration and the purchase of resources to replace those harmed.

Norway’s problem is in many ways harder. Norway has a very long coastline and wide array of possible oil spill scenarios. The government needs to come up with estimates of the likely harm that differ by the type of oil spilled, the size of the spill and the natural resources in the area at risk. Norwegian economists are using a survey-based approach known as contingent valuation, which I played a major role in developing, to derive estimates of the monetary trade-offs the public is willing to make to prevent oil spills with different characteristics from occurring. The specific variant of contingent valuation to be used is known as a discrete choice experiment. It is tightly linked to random utility theory, which is used to derive monetized welfare estimates from the choices people make.

Oil drilling and production is also an actor in the second issue I was asked to consider—how to minimize conflict with fishing and tourism, both important components of the Norwegian economy. To get a better feeling for this, we boarded one of the cruise ships that runs up the coast to Tromso, more than 200 miles north of the Arctic Circle.

The cruise ships stop at smaller towns along the way, and it is possible to get off and spend the night, which we did in Lofoten, and catch the next ship. Lofoten is the center of fishing in northern Norway, where UC San Diego Economics Professor Dale Squires has done extensive research on the long-term technological change and productivity of the cod-fishing fleet. Even though Norwegian fish stocks are well managed, employment in the sector has fallen as fishing boats have become more efficient. This creates concern that oil production will adversely impact fishing but offers the possibility of employment in that sector. The tourism sector is worried about oil spills, as well as the visual impacts of oil rigs. Interestingly, visual impacts are also an issue with ubiquitous Norwegian salmon fish farms tucked away in fjords and the possibility of locating large windmill farms along the coast. These visual impacts clashes are good examples of the classic negative externalities of microeconomic theory and the importance of the political process in determining property rights.

The last issue we were asked to look at is more novel. The Norwegian government is interested in reforesting large parts of Norway. Like many European countries, much of Norway’s forest cover was lost to agriculture and wood used for buildings and ships. The wealth that oil has brought Norway had imbued it with a desire to offset carbon dioxide emissions by growing trees at home and reducing deforestation abroad in such places as Brazil.

From the standpoint of sequestering carbon, the optimal tree to plant is Norwegian spruce and to use a long rotation period between harvesting the trees for timber and other wood products. The drawbacks is that monoculture forests are not nearly as good at supporting a wide range of other plants and animals as a more diverse set of tree species combined with meadows. These alternative landscapes are also better for outdoor recreation and creates a much different, and, to some, a more desirable visual image. However, this type of landscape stores somewhat less carbon and costs more to implement. The questions again are what type of trade-offs does the Norwegian public want to make in terms whether to reforest Norway; if so, what that should look like; and how much will it cost the public. These are questions related to my recent work in Malaysia on preserving tropical forest and for the U.S. National Park Service on the impacts of air pollution on visibility and ecosystem services. The Norwegian researchers in charge of the project plan to employ a discrete choice experiment asking a large random sample of their citizens to make trade-offs involving the different alternatives. They have asked me to be a collaborator on the project, and I look forward to a return visit to Norway.