Valuing the environment: courts' struggles with natural resource damages.

• Author: Thompson, Dale B.

1. INTRODUCTION

   How much is a dead seal worth? How much is a day at the beach worth? How much is the Grand Canyon worth? These are questions that courts have faced, or might face in the future, in efforts to protect natural resources. Many people, however, have raised significant moral and ethical objections to valuing the environment in this manner. Furthermore, courts seem ill-prepared to satisfactorily answer these questions.

   In the late 1980s, new economic techniques (1) seemed to offer the means to answer these questions. The shining star of these new techniques was the contingent valuation method (CVM). (2) Initially used in the early 1960s, CVM became the subject of significant research in the mid- to late-1980s, because it seemed to offer the only means for calculating what is called "nonuse values" (3) for natural resources.

   In the midst of the advancement of these techniques came perhaps the most significant case addressing natural resource damages (NRD), (4) Ohio v. United States Department of Interior (Ohio). (5) In this case, Ohio and other states challenged the regulations written by the Department of the Interior (Interior or DOI) to specify techniques for estimating natural resource damages claimed under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). (6) In overturning these regulations, the Court of Appeals for the District of Columbia Circuit laid out two general principles: 1) The principal purpose of natural resource damages is to restore the resource, and thus, damages should be based primarily on "restoration costs" (7) rather than on "use values;" and 2) "nonuse value" damages should be compensated, using the contingent valuation method.

   After the Ohio court announced its support for contingent valuation, a study using the CVM technique to calculate nonuse values estimated that possible damages in the Exxon Valdez case were approximately nine billion dollars. (8) In Southern California, a CVM study in United States v. Montrose Chemical Corp. (9) estimated that damages were over half of a billion dollars. (10)

   The Ohio decision opened the door to potentially enormous damage claims and generated significant debate among legal scholars, il Furthermore, the National Oceanic and Atmospheric Administration (NOAA), charged with drafting regulations under the Oil Pollution Act of 1990 (OPA), (12) assembled a "blue ribbon panel," including two Nobel Prize winners in economics, to determine whether it would be possible to implement this decision. (13) However, this debate and the panel's analysis have been general and abstract. Now, twelve years after Ohio, there is the opportunity to examine how these principles have held up in practice.

   Implementation of these principles requires introducing economic evidence in litigation to prove natural resource damages. Natural resource damages present a significant challenge for the legal system because in most cases they are non-market commodities. (14) As such, widely-accepted, traditional methods of valuation that rely on market prices are frequently not applicable. Instead, litigators will need to employ other economic techniques for determining monetary damages in NRD cases.

   A problem arises in applying these economic techniques in a legal forum. The legal system requires evidence to possess a certain level of certainty and concreteness. (15) While market-based methods of valuation are widely accepted, non-market techniques may not be able to achieve these levels of certainty and concreteness. "Unfortunately, in the frenzy of litigation pressure, these often unrefined or experimental [non-market] valuation methods have been pushed beyond their methodological parameters and have resulted in damage claims of highly questionable validity." (16) Thus, courts will grapple with the validity of economic evidence in NRD cases.

   This Article presents all of the cases after the Ohio decision (17) where a court has ruled on the validity of economic evidence offered to support claims for natural resource damages. In examining how courts have handled economic evidence in these cases, it determines whether emphasis on restoration costs rather than use values has been workable in specific court settings. In particular, it compares the use and acceptability of economic evidence in specific cases to support damages based on restoration costs, versus evidence based on valuation techniques. It likewise analyzes the practicality of calculating nonuse values through CVM by examining how courts have dealt with CVM studies in particular cases.

   This Article finds that courts have accepted economic evidence used to support restoration costs. In fact, disputes over economic evidence concerning use values of non-market commodities (18) suggest that courts will be more comfortable with restoration evidence. On the other hand, despite support for CVM in general, (19) the usefulness of this method in specific cases has been disappointing. The only two courts that have ruled on the validity of specific CVM studies in NRD cases have rejected these studies for calculating damages in each particular case. (20) This Article examines the reasons for rejecting these studies, and draws implications for the future use of CVM in NRD cases.

   Part II examines the Ohio decision itself. Part III discusses reactions to this decision by legal scholars. Part IV examines agency regulations and appellate challenges to these regulations. With this background, Part V then analyzes subsequent application of the two principles outlined in Ohio. The Article concludes with support for the first principle's emphasis on restoration costs and with suggestions to limit the application of nonuse values and CVM in NRD cases.

2. OHIO V. UNITED STATES DEPARTMENT OF INTERIOR

   In Ohio, the D.C. Circuit reviewed "Type B" (21) NRD assessment regulations (22) promulgated by Interior under CERCLA and the Superfund Amendments and Reauthorization Act of 1986 (SARA). (23) These regulations specified preferred techniques for conducting assessments of natural resource damages. (24) Under CERCLA, studies conducted by natural resource trustees using these preferred techniques were entitled to a rebuttable presumption. (25)

   In drafting the NRD assessment regulations, Interior decided that damages should be limited by the "lesser of" the costs of restoring a damaged resource or the lost use value of the resource. (26) Interior also developed a hierarchy of techniques for estimating use values, giving strong preference to techniques that depended on market valuations over non-market techniques such as CVM. (27) Interior did, however, include CVM as a possible technique for calculating natural resource damages, (28) further concluding that "estimation of option and existence values [i.e., nonuse values] shall be used only if ... no use values can be determined." (29)

   In its decision, the D.C. Circuit held that the "lesser of" rule was "contrary to the clearly expressed intent of Congress and therefore invalid." (30) It concluded that "Congress established a distinct preference for restoration costs as the measure of recovery in natural resource damage cases." (31) However, the court did allow that in some cases restoration costs may be "grossly disproportionate" to use values, and use values would therefore be the appropriate measure of damages. (32)

   The D.C. Circuit also held that the hierarchy of use values over nonuse values was an unreasonable interpretation of the statute, and that nonuse values "ought to be included in a damage assessment." (33) Finally, the court held that "DOI erred by establishing `a strong presumption in favor of market price and appraisal methodologies,'" (34) over non-market techniques such as CVM.

   While overturning these portions of the DOI regulations, the court upheld DOI's finding that CVM was a valid technique in theory for reliably calculating NRD. (35) In conjunction with its holding supporting nonuse values, and the lack of methods other than CVM for calculating such values, the court's decision implied that CVM would gain prominence in natural resource damage assessments as the primary technique for calculating nonuse values.

3. THE DEBATE AMONG LEGAL SCHOLARS ABOUT THE OHIO COURT'S CONCLUSIONS

   The controversy presented by these regulations and the D.C. Circuit's decision generated a considerable debate among legal scholars, which began shortly before the court announced its decision. In the spring of 1989, two legal articles were presented on the valuation of natural resource damages. (36) In Natural Resource Damages, Superfund, and the Courts, (37) Frederick R. Anderson argued that the "overall congressional purpose in enacting Superfund [was the] restoration of contaminated sites as near as possible to their prior condition." (38) He therefore urged that NRD assessments should focus on restoration costs, not lost use values. (39) In so urging, he noted that "restoration and replacement are much easier to estimate than diminution of use values." (40)

   In Natural Resource Damage Valuation, (41) Frank B. Cross argued that natural resource damages are necessary to protect the public interest in these resources in order to ensure that responsible parties "bear the costs of their actions." (42) This approach is justified by the economic theory of managing "externalities. (43) However, to achieve this goal, society must be able to calculate the value of natural resources. Cross then argued that the appropriate measure of this value should be restoration costs, (44) except in cases where restoration costs are "grossly disproportionate to the actual damages." (45)

   Cross suggested that, for these exceptions, we should turn to contingent valuation to measure the value of natural resource damages, because in these cases, "contingent valuation offers the most complete approach for monetization of natural resource damages." (46) Although he...