Outdoor Recreation Damages from Oil Spills: Why Current Assessments are Typically Wrong and What can be Done to Fix Them

Abstract

Abstract This study reviews methods for assessing natural resource damages to outdoor recreation resulting from oil spills, often a substantial component of total damages. The usual approach for assessing recreational damages, called value-to-cost (VTC), is deficient. It almost always provides a biased estimate of damages because it ignores the benefits of restoration projects on which damage awards must be spent. VTC is the least preferred method under the Oil Pollution Act NRDA regulations unless alternative methods are cost-prohibitive. This paper first reviews the methods available for computing damages, noting the differences among them. We provide a model for evaluating alternative methods and a decision tree for selection of VTC or alternative approaches. Next, we delve deeper into arguments pro and con VTC, and provide recommendations for improvements in the NRDA process to incorporate improved methods that recognize the benefits of restoration where appropriate. We provide evidence on the benefits of human use restoration projects, which both reveal the magnitude of potential bias of the VTC approach and provide a basis for improved assessment methods. The bias in VTC is proportional to the ratio of benefits of human use restoration projects to their costs (the BCR). A BCR of 4 implies that a VTC estimate of damages is biased upwards by 400%. We review existing evidence on the BCR and present preliminary estimates from a pilot study of BCRs for actual human use restoration projects. The paper concludes with recommendations for continued research that we believe would simultaneously improve the accuracy of future assessments while reducing transaction costs.