Vanderbilt Law Review Volume 42 Issue 2 Issue 2 - March 1989 Article 1 3-1989 Natural Resource Damage Valuation Frank B. Cross Follow this and additional works at: https://scholarship.law.vanderbilt.edu/vlr Part of the Environmental Law Commons Recommended Citation Frank B. Cross, Natural Resource Damage Valuation, 42 Vanderbilt Law Review 269 (1989) Available at: https://scholarship.law.vanderbilt.edu/vlr/vol42/iss2/1 This Article is brought to you for free and open access by Scholarship@Vanderbilt Law. It has been accepted for inclusion in Vanderbilt Law Review by an authorized editor of Scholarship@Vanderbilt Law. For more information, please contact [email protected]. VANDERBILT LAW REVIEW VOLUME 42 MARCH 1989 NUMBER 2 Natural Resource Damage Valuation Frank B. Cross* Some consume beauty for gain; but all of us must consume it to live.1 I. INTRODUCTION ........................................... 270 II. LEGAL AUTHORITY FOR GOVERNMENT RECOVERY OF NATURAL RESOURCE DAMAGES ..................................... 273 A. Superfund ...................................... 273 B. The Clean Water Act and Other Federal Laws ..... 276 C. State Statutes and Common Law ................. 277 III. VALUES ATTRIBUTABLE TO NATURAL RESOURCES ........... 280 A . Use Value ...................................... 281 B. Existence Value ................................. 285 C. Intrinsic Value .................................. 292 D. Achieving a True Valuation of Natural Resources .. 297 IV. METHODS FOR MONETIZING DAMAGE TO NATURAL RESOURCES 297 A. Restoration and Replacement Cost ................ 298 B. M arket Valuation ............................... 302 C. Behavioral Use Valuation ........................ 309 D. Contingent Valuation ............................ 315 E. Estimating Gross and Net Value of Resources ..... 320 V. DEVELOPING A SYSTEM OF NATURAL RESOURCE VALUATION . 321 A. Department of the Interior Regulations-A First S tep ............................................ 321 * Associate Professor of Business Law, University of Texas; Associate Director, Center for Legal and Regulatory Studies; B.A., University of Kansas, 1977; J.D., Harvard University, 1980. 1. Yi-Fu Tuan, Our Treatment of the Environment in Ideal and Actuality, 58 AK ScL 244, 249 (1970). 269 VANDERBILT LAW REVIEW [Vol. 42:269 B. The Next Step-More Complete Valuation Proce- dures ........................................... 324 1. Use of Restoration Cost and the Primacy of Preservation ................................ 327 2. Cost Considerations and Alternatives to Restora- tion ........................................ 334 VI. CONCLUSION-PRIVATIZING THE ENVIRONMENT FOR ITS PRO- TECTION ............................................. 339 I. INTRODUCTION How much is beauty worth in dollars? Some people may recoil at the very phrasing of this question.2 Yet placing a monetary value on natural resources is not inherently destructive. Custom places a mone- tary value on artwork. Capitalism even values beautiful natural vistas in the form of land prices. Placing a monetary value on beauty and other features of nature may be essential if one is to protect natural resources fully. This Article explores the proper monetary valuation under Superfund and other legislation of natural objects,' including living ani- mals, aesthetic views, and water purity. The path to achieving valuation is rife with pitfalls, both philosophical and practical. Should the law focus on the monetary value to those people who "consume beauty for gain," as in the free market, or should government also consider beauty's existence and intrinsic value to the rest of society, which may "consume it to live." If the latter, then what dollar value possibly can be used? Placing an economic value on natural resources is not just an aca- demic exercise. Valuation of resources allows courts to assess damages for environmental harm, deters future pollution, and helps ensure pro- tection for natural ecosystems. When natural resources are publicly held for (almost) free use, citizens have an inexorable incentive to over- 2. See Higgs, Changing Value Perspectivesin Natural Resource Allocation: From Market to Ecosystem, 116 TRANSACTIONS AM. FISHERIES Soc'y 525, 527 (1987). To Higgs, an environmental ethicist, "to quantify values is to take away their essential power as edifying expressions of social preference." Higgs asks, "[h]ow could we measure the experiential value of Niagara Falls?" as an example of "certain types of social questions which cannot be fully considered by appeal to eco- nomic mechanisms." Id.; see also Kelnan, Cost-Benefit Analysis: An Ethical Critique, in REGULA- TION, Jan.-Feb. 1981, at 33-38. Kelman writes: Finally, one may oppose the effort to place prices on a non-market thing and hence in effect incorporate it into the market system out of a fear that the very act of doing so will reduce the thing's perceived value. To place a price on the benefit may, in other words, reduce the value of that benefit. Cost-benefit analysis thus may be like the thermometer that, when placed in a liquid to be measured, itself changes the liquid's temperature. 3. See infra notes 10-51 and accompanying text. 1989] NATURAL RESOURCE DAMAGE consume these resources. A person who pollutes natural resources may seize the economic benefit of the polluting activity, while avoiding any economic cost to himself from the harms caused by pollution. Econo- mists call this practice externalizing a cost. As a result, public natural resources are destroyed, even when contrary to the interest of society.4 One solution to this destructive situation forces those who harm the environment to bear the economic costs of this harm. Commonly de- scribed in economics as internalizing an external cost, this objective was one of the purposes of the Superfund legislation. According to the Sen- ate Report, the first purpose of Superfund was to assure "that those responsible for any damage, environmental harm, or injury from chemi- cal poisons bear the costs of their actions." 5 Natural resource valuation also may be critical to analyzing the costs and benefits of protecting the environment in government regulation.' Thus economics can form the foundation of environmental protec- tion. While some environmentalists regard environmental resource 4. See generally A. FREEMAN, R HAVEMAN & A. KNEESE, THE ECONOMICS OF ENVIRONMENTAL POLICY (1973); Ruff, The Economic Common Sense of Pollution, in MICROECONOMICS: SELECTED READINGS 498 (E. Mansfield ed. 1975); see infra notes 377-81 and accompanying text. 5. S.REP. No. 848, 96th Cong., 2d Sess. 13 (1980). Upon signing the bill into law, President Carter declared that "[miost important, it enables the Government to recover from responsible parties the costs of their actions in the disposal of toxic wastes." Comprehensive Environmental Response, Compensation, and Liability Act of 1980: Remarks on Signing H.R. 7020 Into Law, 16 WEEKLY COMP. PREs. Doc. 2797, 2798 (Dec. 11, 1980). Court interpretations of Superfund concur, finding that "Congress intended that those responsible for problems caused by the disposal of chemical poisons bear the costs and responsibility for remedying the harmful conditions they cre- ated." United States v. Reilly Tar & Chem. Corp., 546 F. Supp. 1100, 1112 (D. Minn. 1982); see also Ohio ex. rel. Brown v. Georgeoff, 562 F. Supp. 1300, 1312 (N.D. Ohio 1983). To fulfill this intent, the harms created by hazardous wastes must be monetized as damages to be imposed upon those who create the harms. 6. While cost-benefit analysis has numerous critics, the system is increasingly employed in analyzing proposed environmental protection regulations. See, e.g., Andrews, Economics and Envi- ronmental Decisions, Past and Present, in ENVIRONMENTAL POLICY UNDER REAGAN'S EXECUTIVE ORDER. THE ROLE OF BENEFIT-CosT ANALYSIS 43 (K. Smith ed. 1984). See generally COMPTROLLER GENERAL, GENERAL ACCOUNTING OFFICE, REPORT TO THE CONGRESS: COsT-BENEFIT ANALYSIS CAN BE USEFUL IN ASSESSING ENVIRONMENTAL REGULATIONS, DESPITE LIMITATIONS (1984). The application of cost-benefit analysis has been limited, however, by shortcomings in the valuation of environ- mental benefits. See OFFICE OF POLICY PLANNING & EVALUATION, ENVIRONMENTAL PROTECTION AGENCY, EPA's USE OF BENEFIT-CosT ANALYSIS: 1981-1986, at 4-4 (Aug. 1987) (stating that in a majority of EPA cost-benefit analyses, the agency was unable to monetize the benefits of the regu- lation in question). As long as cost-benefit analyses fail to monetize fully environmental benefits, relatively intangible benefits may be overlooked or understated in the cost-benefit balancing. Cost- benefit analysis tends to ignore variables that are not monetized. Tribe, Seven Deadly Sins of Straining the Constitution through a Pseudo-Scientific Sieve, 36 HASTINGS L.J. 155, 161 (1984); see also J. CAMPEN, BENEFIT, COST, AND BEYOND 63-64 (1986). The answer to this skewing in cost- benefit analysis is not to abolish the analysis, but to incorporate better environmental and other relatively intangible benefits. Id. at 99-102. Complete and accurate valuation of natural resources would contribute to the improvement of cost-benefit analysis and the better protection of environ- mental concerns. 272 VANDERBILT LAW REVIEW [Vol. 42:269 monetization as a Faustian bargain,7 use of these economic principles can provide an essential weapon for future protection of the environ- ment.8 Internalizing external environmental costs through the market can deter future ecological destruction,