Friday, December 29, 2006

Should non-use values be reduced on appeal?

The Exxon Valdez oil spill in 1989 was notable for a number of reasons. Firstly, it was the largest oil spill in North American history and one of the largest in the world. But secondly, in the litigation that followed, it was decided that non-use values, determined by contingent valuation, could form part of the damages which Exxon would have to pay.

This was a landmark legal ruling. Exxon was not only responsible for lost income to those who fish these waters but would also have to pay the costs of those who felt they have suffered as a result of the environmental damage even though they don't actually use the 'assets' that have been damaged. A Blue Ribbon panel of economists deemed the contingent valuation method reliable enough, if performed in a certain manner, to be used as a means of determining non-use (also known as passive use) values in a court of law. Exxon was subsequently told to pay $5 billion in damages.

However, some years later this sum of $5 billion was reduced to $4.5 billion on appeal. Just before Christmas the sum was slashed yet further to £2.5 billion, again on appeal. The reason for doing this is unclear and appears to largely due to the original damage sum being 'too punitive'. But where does this leave the original contingent valuation study? If these estimated non-use values were 'incorrect' shouldn't somebody have to point out the manner in which they were incorrect? If the results of a contingent valuation study can be arbitrarily slashed on appeal it makes something of a mockery of the painstaking detail and analysis which goes into such a study. Why bother with such an analysis? Why not simply pluck a figure out of the air which seems punitively 'about right'?

http://news.bbc.co.uk/1/hi/business/6204819.stm

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