ENVIR 450: Choices and Change Field Studies in the Arctic National Wildlife Refuge

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• ENVIR 450 Choices and Change Field Studies in
  the Arctic National Wildlife Refuge
• The economic paradigm Weighing costs and
  benefits
• Thursday, June 22, 2006
• Professor Jonathan M. Karpoff

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Outline

• My background
• Why some economics in this course
• Benefits costs of ANWR development
• Quantifying the benefits and costs of oil
  development in ANWR

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My background

• High school and college (U.A.A.) in Anchorage
• Institute for Cultural Affairs - community
  organizing
• Rural Alaska Community Action Program (RurAL CAP)
  rural energy services and prices
• Alaska Commercial Fisheries Entry Commission
• Taught at U.A.A. for two years

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Related research 1. Fishing, the common pool
problem, and fishing regulations
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2. The ANCSA Corporations
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3. History of Arctic Exploration
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Aside 19th Century fascination with the sublime
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The sublime The personal journey of going
through hell
19th Century fascination with the sublime
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to get to heaven.
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Other activitiesExxon Valdez Oil Spill (civil)
litigation
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The UW Business School Environmental Management
Program (1992-98)

• We now have to consider the impact on the
  environment in almost everything we do.
• William Fowble, Vice President, Eastman Kodak
  Co.
• Most MBAs seem to be well trained in the
  functional areas of finance, accounting, and
  marketing. However, these same students seem to
  have a superficial or at best topical
  understanding of the relationship of business,
  the environment, the market economy and public
  policy.
• Harry E. Teasley, President, Coca-Cola Nestle
  Refreshments Company

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B. Why some economics in this course?

• The relevant task for policy-oriented research
  is not a measurement of just one side of the
  issue and not simply fact gathering to support
  the predisposition of the researcher
• From a letter criticizing last years course

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Or from the conservation side

• I'm on two conservation boards and I'm always
  astounded at how little economics figures into
  their campaigns. I think its the most powerful
  tool we can use -- maybe even more so than
  litigation but it's almost always neglected in
  the equation.
• Mimi Hogan (Alaska Audubon Society and
  30- year USFWS biologist)

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Biologists vs. Economics

• Large literature criticizing the use of economics
  in environmental policy formation
• Most economists dont know of this, or ignore it
• Similar to how scientists view creation science
  or intelligent design critiques

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Some common misconceptions about economic analysis

• It ignores intangible things
• It promotes materialism
• It assumes that people care only about narrow
  self-interest
• It is based on a belief in the market system
• It can be used only in a capitalist setting
• It is unrealistic because it requires people to
  have identical and perfect knowledge about all
  opportunities

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Sweeping assertions that raise red flags

• Corporations are the problem
• The corporate form is one way of organizing
  productive activities, and has survival
  properties for some such activities (large scale
  economies, high risk).
• Greed is the problem
• Self-interest is a fact of life, as is altruism.
  Theories that allow for self-interest can be
  useful in explaining incentives, power politics,
  etc.
• We need a new kind of economics
• Do we need a new kind of physics if we dont like
  the law of gravity?

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C. Benefits costs of ANWR development

• Key question Whats the benefit versus the cost
  of developing the Federal 1002 Area?
• This is not a mechanical process, but a useful
  heuristic.
• It can be useful in any decision-making.
• The NRC Summary (p. 10) calls this The Essential
  Trade-Off

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Benefit cost analysis

• To some people, wilderness is so important that
  it is offensive even to entertain the notion that
  it could be thought of in terms of costs and
  benefits.
• To others, the benefits of wilderness are so
  ephemeral as to be unimportant.
• The goal is to take into account as best as
  possible all the things people care about.

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Issues in identifying the benefits and costs from
oil development

• What are the uncertainties?
• What is the right metric?
• To whom do the benefits go?
• How do you measure intangibles?

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What are the uncertainties?

• How much oil is there?
• What is oil going to be worth?
• What is the cost of finding the oil?
• What is the cost of extraction?
• What is the production rate likely to be over
  time?
• How will future legislation affect these costs?

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What is the right metric?

• Jobs?
• Months of U.S. oil consumption?
• State and federal royalties and taxes?
• Value of the oil?

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Are jobs a benefit, or a cost?

• Politicians always talk about job-creation as a
  good thing.
• But new jobs in ANWR pull labor away from other
  uses
• There are ways to estimate the value gained from
  a new job, but the main point is that the value
  to society of a new job is much smaller than the
  wage earned by the new job-holder many analysts
  place it at zero.

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To whom does the benefit go?

• State of Alaska government
• U.S. Federal government
• Arctic Slope Regional Corporation shareholders
• Kaktovik residents and village corporation
  shareholders
• Oil company employees and shareholders
• Oil service suppliers
• Suppliers of other affected goods and services

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How do you measure intangibles?

• Surveys
• Willingness to pay (WTP) to protect something is
  always lower than willingness to accept (WTA)
  compensation for something lost
• How trustworthy are surveys when the respondents
  bear no consequence of their responses?
• Do hard numbers drive out soft numbers?

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D. Quantifying ANWR development benefits and
costs
From The Anchorage Daily NewsJune 21, 2006
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How much oil is there?

• From McDowell Group report (pp. 7-8)
• Technically recoverable oil in 1002 area
• Low estimate 4.3 billion bbls
• Mean estimate 7.7 billion bbls
• High estimate 11.8 billion bbls
• Economically recoverable oil (using mean
  values)
• At 30/bbl 6.3 billion bbls
• At 67/bbl 7.0 billion bbls(?)

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Whats the value?

• Price per bbl 67
• Less Transportation costs 10
• Wellhead price 57
• Less Finding and development 7
• Extraction costs 15
• Total costs 22
• Net value per bbl 35

Total value of 7 billion bbls
245,000,000,000(!)
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What are the non-use values?(From Larson 1998)

• Option value
• Bequest value
• Aesthetic value
• Scientific and education value
• Historical value
• Cultural symbolism value
• Character building value
• Stability and spontaneity value
• Dialectical value
• Life value
• Religious value
• ss

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How large are the non-use values?

• See Larson (1998, Table 24, page 64)
• Per household non-use values range from 25 50
  per year. Take the mean of 37.50 per household
  per year.
• At a 3 discount rate, this is a lump sum of
  37.50/.03 1,250 per household.
• Approximately 120 million households in the U.S.

Total non-use value 150,000,000,000(!)
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What are we leaving out?

• Lost caribou hunt?
• About 100 families in Arctic Village
• Non-use values outside of the U.S.?
• The costs of other external effects
• Oil spills
• Greater oil use emissions
• The benefits of unforeseen technological
  improvements

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Appendix
A benefit-cost analysis of drilling in ANWR is
available at http//john-whitehead.net/research/
back/ANWR/ANWR.htm A discussion of this type of
analysis is at http//www.env-econ.net/2005/08/a
nwr_ready_set_.html An overview of Alaskas
natural assets, by Eric Larson (University of
Alaska, Anchorage, 1998) is at http//www.iser.u
aa.alaska.edu/Projects/SustainableDevelopment/Sust
ain1.PDF
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What does a benefit of 245 billion mean?

• What would the Audubon Society do if it owned the
  oil rights?
• What if you owned 1 of the oil rights, or you
  lived in Kaktovik?
• Did Arctic Village residents favor oil
  exploration when it was on their land?
• The upshot The dollar benefit represent things
  that at least some people care about (e.g.,
  snowmobiles, trips to ANWR, etc.).

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Is 245 billion really what we lose if oil is not
developed now?

• It is still in the ground(!).
• Not developing now leaves open the option to
  develop in the future.
• If delayed one year, the lost value is merely the
  interest lost on 245 billion.
• At 3 interest, this is 3 x 245 billion 7.35
  billion.
• (There may also be a loss from having to re-build
  or refurbish the pipeline.)