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profpr.... A recently released study estimated the total value of these ecosystem services for the Mississippi River Delta to be in the range of $12-47 billion per year. Based on the flow of these services into the future, the value of the Delta as a natural asset was estimated to be in the range of $330 billion to $1.3 trillion, far more than the total market value of BP ($189 billion) before the spill. Unlike BP, ecosystem service values are outside the market. They continue to produce benefits unless an action like the spill damages them.... If we assume that the Mississippi River Delta will be the most affected region and that there will be a 10 to 50 percent reduction in the ecosystem services provided by the Delta, this amounts to a loss of $1.2 – $23.5 billion per year into the indefinite future until ecological recovery, or $34 – $670 billion in present value (at a 3.5 percent discount rate).
... Our best guess of the potential damages would thus be in the range of $34-$270 billion, as discussed above. Let’s say that a scientific review panel, after assessing the risk in more detail, settled on an estimate of $50 billion. This immediately makes it very apparent to BP and others drilling in deep water in the Gulf of Mexico that they are engaged in a very risky business—several orders of magnitude riskier than the $50 million liability limit previously in force. The size of this bond, for one deepwater well, would be close to one quarter of the total value of the company! What could they do? Either not drill at all or find ways to reduce the size of the risk and the bond. They might be able to do this very cost-effectively if they spent some money on risk-reduction procedures or technology, such as the acoustic blowout preventer costing a mere $500,000.
...The Deepwater Horizon incident, like the banking crisis, resulted from inadequate attention to the risks that the public was left to bear. Precautionary measures were known but not taken. Investments in safety devices (like the acoustic blowout preventer) were not made. Corners were cut. Short-term private profits motivated taking high risks with public assets.
The fundamental problem is that while private interests are ultimately liable for damages to public assets, they are only held accountable long after the fact and only partially. This gives private interests strong incentives to take large risks with public assets—far larger than they should from society’s point of view.
...The Deepwater Horizon incident offers a strong lesson in risk management. Our entire society is taking far too many risks with public assets whose real value we are only now beginning to recognize. By shifting the financial burden of those risks onto the private interests who benefit from them, we can establish the right incentives, shift investment to less risky, more productive pursuits, and create a more sustainable and desirable future.
