Externalities, conflict, and offshore lands: resolution through the institutions of private property.

• Author: Bratland, John

How should coastal ocean lands be used? The answer to this question has been the source of intense political and legal conflict in recent decades. The ostensible cause of the conflict is the external costs (externalities) associated with offshore petroleum development. An externality occurs when petroleum producers engage in activities for which they do not bear the full opportunity costs of their actions. The legitimate concerns about environmental externalities are focused most directly on the risks of oil spills arising from blowout accidents on offshore petroleum facilities. Oil spills such as the 1969 Santa Barbara accident are matters of historical record, but it is important to note that since that event most spills have occurred in connection with transportation of crude oil rather than with offshore production operations (Anderson and Leal 2001, 82). Moreover, no serious accident has occurred in connection with exploration and production since the use of blowout-prevention technology has become part of standard universal practice.

A second type of externality appears to account for much of the conflict over the use of these lands. Here, too, one segment of the public is engaging in activities for which the actors avoid beating the full opportunity costs of their actions: political externalities occur because political stakeholders bear little of the opportunity cost of the policies they advocate and succeed in implementing with respect to the use of offshore lands. Thus, government ownership and control have fostered institutions that facilitate and aggravate discord. This article proceeds from the premise that both categories of externality are a source of discord and that a reasonable resolution to both can be found in the institutions of private-property rights.

Government Ownership and the Discordance of Current Policy

One might reasonably make the case that modern-day conflict over offshore lands has its origins in the Santa Barbara oil spill, an event that is generally recognized to have imposed genuine environmental externalities. Since that spill, public policy with respect to public offshore lands has been directed toward the implementation of stringent sanctions on petroleum leasing designed to prevent the repetition of such an accident. First, the five-year leasing programs implemented by the federal government include cost-benefit analyses ostensibly to ensure that the social costs do not outweigh the social benefits of leasing. Second, stakeholder participation has been designed to deal with the possibility that the rights and preferences of affected constituencies are not ignored in leasing decisions. The leasing procedure that emerged from this process is routinely implemented within Five-Year Plans mandated by the 1978 Amendments to the Outer Continental Shelf Lands Act (OCSLA). These procedures are designed to assure maximum political participation by all possible stakeholders at the federal, state, and local levels. Also, the Five-Year Plan must satisfy the requirements of Coastal Zone Management Consistency as mandated under the Coastal Zone Management Act. Third, although the petroleum industry has a good record on environmental issues since the Santa Barbara oil spill, legislatures and courts have resorted to broad, sweeping moratoria on leasing in several regions of federal offshore lands, including the federal waters off California.

Cost-Benefit Analysis: Issues of Scientific Legitimacy and Rights

The 1969 National Environmental Protection Act mandates that federal agencies must prepare an environmental impact statement (EIS) "for any major federal action significantly affecting the quality of the human environment" (42 USC Sec. 4321). The Five-Year Plan mandated under the OCSLA lays out planned leasing activity for a particular five-year period--an obvious example of a federal action requiring an EIS. A central element in each EIS done for federal offshore leasing is the assessment of benefits and costs. In principle, cost-benefit analyses are intended to provide decision makers with a supposedly scientifically legitimate estimate of the extent to which the present value of benefits exceeds the present value of estimated social costs. Notice, however, that cost-benefit analysis has never been applied with any particular vigor or rigor to the sweeping moratoria on federal offshore leasing.

In actual practice, cost-benefit analysis tends to serve two distinct purposes: first, it is a pro forma political requirement that must be satisfied before the government can proceed on some major effort, such as the leasing of federal offshore lands; second, it provides purportedly scientific evidence to support what the government has already decided to do.

Hardly any part of this process, however, is immune from sharp criticism. Issues bearing on the choice of discount rates and methods of aggregation have been perennial sources of controversy in attempts to apply cost-benefit analyses to public decision making (Formaini 1990, 39-65; Lind et al. 1982). Amid this unresolved controversy and criticism, there can be no reasonable assurance of scientific legitimacy. Such assurance can be provided only if the time streams of benefits and costs are objectively measurable. By definition, however, the projects the government undertakes are those that presumably would not be undertaken in response to market incentives, and they necessarily involve sacrifices and presumed benefits that are inherently subjective in nature. James Buchanan observes: "The cost-benefit expert cannot have it both ways. He cannot claim 'scientific' precision for his estimates unless he restricts himself rigidly to objectively-observable magnitudes. But if he does this, he cannot claim that his estimates reflect reasonable norms upon which 'social' choices should be based" (1969, 60). (1)

The blunt reality identified by Buchanan becomes painfully clear when one honestly considers the application of cost-benefit analysis to the presumed benefits associated with activities designed to protect the environment. Environmental amenities, as may be affected by offshore petroleum operations, cannot be defined with sufficient operational precision to warrant the imposition of sweeping regulatory sanctions. Each individual's reaction to certain features of the environment will define the individual's perception of what constitutes an environmental amenity. These reactions range from subjective responses to sensory experiences to subjective interpretation of quantitative information. Some individuals may view the absence of unpleasant smells as the principal amenity. Others may focus on some minimum standard of coastal water quality and evidence that subsea wildlife in the area is thriving. For others, the major concern may be the absence of visual blight in the form of offshore facilities. At the same time, certain people may take comfort primarily from an assurance that there will be restitution for damage to property. In other cases, the major source of value may be the knowledge that the risk of an environmental accident has somehow been reduced. Some individuals may find ease of mind in an assurance that no offshore operations exist within so many hundred miles of a certain location. For yet other individuals, environmental enjoyment may be impossible as long as the petroleum industry continues to exist. Where individuals stand in this array of concerns determines what the amenity is for them. Obvously, no objective value with any validity in cost-benefit analyses can emerge from these subjective reactions. (2)

Moreover, cost-benefit analysis has been criticized because of the conflict between individual rights and the utilitarian ethic that dominates its application. If cost-benefit analyses yield positive results, the property rights of those directly affected by the governmental decision are given, at best, secondary weight. "The doctrine underlying cost-benefit analysis is ethically flawed ... for its willingness to 'tradeoff' values that should be considered absolute .... A right is not something that can be assigned on 'efficiency' grounds; a right is precisely an individual's trump against the claims of efficiency, his protection against social utility monsters.... [T]he logic of conceiving the regulatory problem as an ad hoc 'social decision' is very much refractory to the logic of rights" (Langlois 1982, 280,283,289). Whether one accepts or rejects criticism of this sort, it is clear that policies undertaken on the basis of cost-benefit analyses can engender social antagonism. Do these issues arise in the context of governmental management of offshore lands, and do attempts to involve so-called stakeholders in public decisions resolve the issue of ignored individual rights?

Political Self-Selection of Stakeholders and Their Participation

One might argue that efforts to involve stakeholders in the offshore leasing process represent attempts to deal with the possibility that individuals' rights tend to be ignored or overridden by government policies sanctioned on the basis of cost-benefit analyses. For present purposes, however, the important question is: Who is a stakeholder with respect to the use of public lands? Does the category stakeholder include all those who feel that they are affected in some way by land-use decisions? Unfortunately, there is no unambiguous answer to these questions. Does the category refer to peoples' mental state of being traumatized by the loss or the prospective loss of property or amenities? Or does it refer to the irritation, petulance, or anger experienced by people who simply harbor negative feelings toward the petroleum industry? Inclusion of the latter category of people in the allocative decisions for offshore lands may and often does embroil an electorate in political conflict over alternatives uses of offshore lands. Once a large number of people define themselves as...