Thursday, April 07, 2005

ANWR News and Cost-Benefit Analysis Out of the Box

If you haven't been over to this site in a while, go to ANWR News and check out the fine work this journalist is doing. His recent posts, among them a senator's demand for details on U.S. oil exports that is denied, a polar bear focus, and an honest talk about the "drilling footprint" are especially worth note.

His posts brought to mind an environmental economics class I took as an undergraduate at the University of Michigan's School of Natural Resources and Environment. Aside from the usual microeconomic perspectives on natural resources, we studied somewhat "out-of-the-box" concepts like the following two, which should be discussed in light of the ANWR controversy:

1) Existence Value :

"Value from knowing environmental goods exist independent of use or option value. If we lose a species in the wild, such as the Bengal tiger, very few of us will have our welfare directly affected by not being able to see it, photograph it or hear it. That 'use value' is very small. But many people will lose the option to do that in the future, should they care to. Economists call that 'option value.' Further, many people around the world derive some benefit just from knowing that Bengal tigers exist in the wild. That is 'existence value.'"

What is the existence value of the ANWR coastal plain and its caribou, polar bears, gray wolves, nesting birds? For that matter, what existence value should or does attach to the landscape as whole, unscathed, and rare?

2) Coase's Theorem :

"The assertion that if property rights are properly defined, then people will be forced to pay for any negative externalities they impose on others, and market transactions will produced efficient outcomes."

Here, property rights are not properly defined, because ANWR, despite the provision setting aside the 1002 area for potential future drilling, is federal property; as such, oil companies should not have more influence over its use than you and I and the other 270 million Americans do. Because of lobbyists and republican-representative government (which for the most part I happen to like, don't get me wrong), the vox populi takes second seat.

I submit that because of the existence value of the ANWR coastal plain, the negative externalities of drilling (degredation of the non-economic value of the plain and its inhabitants) cannot be offset by in-kind or other "payments" of any kind. (Or payoffs by 25 years "without Saudi Oil," which is a spin concept I and many others have deflated.)

Where housing and industrial developers are usually required to offset destruction of wetlands by creating new ones (which is itself hugely controversial because the quality of the "man-created" wetlands is often strikingly less), the oil companies or the complicit federal government agencies/Congresspeople who want drilling cannot "create" another ANWR.

That said, what about paying for the negative externalities of oil production and use in order to create more efficient outcomes? Emission taxes, regulatory fees, oil prices to some extent do this. These are beginnings. I'd like to find a comprehensive evaluation of all the negative externalities of oil production and use. Does anyone know of one?

By the way, I got the two definitions from an interesting site, The Environmental Valuation and Cost-Benefit Website.

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