BP Disaster Highlights Need to Value Ecosystem Services

BP says it will pay at least $20 billion for lost income and clean-up in the wake of its Deepwater Horizon debacle, but that doesn’t begin to cover the cost of ecosystem services lost in the spill.   Ecosystem Marketplace examines the role that environmental finance can play in preventing future disasters, and in helping us recover from this one.

17 June 2010 | With grim words and a take-no-prisoners approach, President Barack Obama spoke from the presidential Oval Office this week to address BP’s Deepwater Horizon offshore-drilling debacle, his nation’s worst environmental disaster.  

Since then, attention has focused on BP’s pledge to set aside $20 billion in an escrow fund to compensate US businesses and workers hurt by the spill.  

That sounds magnanimous – until you go beyond the cost of scrubbing birds and compensating fishermen and examine the true cost of this disaster.  

Tropical mangroves, for example, serve as a fortress against hurricane-force winds and storm-surge and buffers against coastal erosion.   They provide nurseries for fish and shellfish species, and this production then sustains many different kinds of ecosystems and commercial fisheries.   They filter water.   They act as tourist destinations and they help sponge up carbon.  

All of these are ecosystem services provided free of charge, and because they’re free they’re taken for granted.   One study published just before the disaster pegged the value of just the Mississippi River Delta’s ecosystem services at between $330 billion and $1.3 trillion.

That study was commissioned to highlight the Gulf’s already fragile state — for even before the BP Horizon sunk, this was home to one of the world’s fastest growing dead zones, largely because fertilizers from farms all along the Mississippi River and its tributaries were accumulating there.

The Valuation Conundrum

No one is saying that the BP disaster stripped the gulf of all its ecosystem services, but it’s clear the knock-on damages reach far beyond short-term job loss and damaged habitat.   The trouble is that we don’t really know the full cost, and it’s that lack of knowledge that makes such disasters possible.

Theoretical values like those cited above may be useful in making a point, but they don’t carry the same weight as do values derived from markets.   The greatest economist in the world, for example, can declare a company undervalued – but it’s the share price that acts as a benchmark of value.   If Warren Buffet declares a $1 stock worth $100, the market may adjust to his valuation – or it may not.   Either way, the price is what people are willing to pay.

And, because people don’t value what they get for free, they value living ecosystems less than they do apples and fish – even though the production of apples and fish depends on that undervalued ecosystem.

Payments for Ecosystem Services

Over the last four decades, we’ve seen scores of efforts to measure the economic value of services provided by wetlands, forests, and other living ecosystems – as well as habitat supporting endangered species – and then enticing those who either benefit from these services or contribute to their destruction to instead pay for their upkeep.

That’s what payments for ecosystem services (PES) are all about, and some of the more exciting emerging PES schemes involve water.

Indeed, water quality trading (WQT) schemes are proliferating in streams, rivers, and lakes across the United States, Latin America, Europe, and Africa.

These schemes promote healthy rivers, streams, and lakes by creating a financial incentive for practicing good stewardship of the watershed surrounding them.

The City of New York offers a prime example.   Faced with the prospect of spending nearly $10 billion on a new filtration plant or paying landowners in the surrounding Catskill Mountains to maintain the watershed, they chose to pay the landowners.

Marine Ecosystem Services

As “tar blobs” enter the vernacular and wash up on once-pristine beaches along the Gulf and even the Eastern Seaboard, the value of our coastal economy becomes clear.

Indeed, America’s coastal states make up more than four-fifths of the overall US GDP, according to the California-based National Ocean Economics Program (NOEP).

“The coastal economy drives the (overall) market system,” says NOEP director Judith Kildow – adding that the very same economy can also end up poisoning the coastal systems upon which it depends if it fails to account for the cost of environmental degradation.

That was the message behind Katoomba XVI (see sidebar, right), an event hosted by Ecosystem Marketplace publisher Forest Trends earlier this year in Palo Alto, California.   The mission was to explore both the potential and limitations of using investments in Marine Ecosystem Services (MARES) to preserve the oceans.

Investment in MARES will also be the focal point of Katoomba XVII, which takes place next week in Hanoi and can be followed online here.

Mangroves Revisited

The Gulf basin spreads over roughly 615,000 square miles (1.6 million square kilometers), and mangrove forests are clustered along some of the fringes.   Fortunately, most of the gulf’s mangroves appear to have dodged the oil slick, but these valuable aquatic trees, whose interlocking stilt-like roots grow along the interface of land and sea, cover over a million square miles of coastline along the Gulf and provide a good illustration of how ecosystem services work.  

As we mentioned earlier, they protect the shoreline from both sudden storms and gradual erosion; they provide shelter for young fish, breeding grounds for shrimp, and wood for local villagers.   All told, they provide billions of dollars of ecosystem services.  

Unfortunately, mangroves are particularly vulnerable to oil spills, as demonstrated in the Persian Gulf following the Gulf War as well as in Panama following a major spill in 1986, reports the Society of Wetland Journalists in its recent statement about the BP disaster.

The tropical wetlands salt marshes nestled along the Gulf also provide significant ecosystem services – including storm-surge protection, carbon sequestration, water quality filtration, and fish nursery grounds — that may have been severely damaged by the disaster. Wetland scientists say that if coastal Louisiana had the 7,000 square miles of wetlands it had in 1930, much of the nearly $200 billion in damages from Katrina might have been avoided.  

Seagrass within the Gulf similarly serve as breading grounds for fish, protect coastal areas from storm-surge, and serve as effective sinks for carbon.   And their existence is threatened as well by encroaching oil.

If you need more numbers, crack open the Convention on Biological Diversity’s Global Biodiversity Outlook 3 report, which found that every hectare of mangrove along the Gulf of California supported fisheries generating a median of $37,000 per year.   The value of those mangroves as coastal protection was pegged as high as $300,000 per kilometer of coastline.    

Now, as hurricane season approaches, the Gulf of Mexico   could be more vulnerable than during Katrina.   BP estimates that up to 60,000 barrels of oil per day may be spewing into the Gulf since its drilling platform blew up on April 20 and sank two days later.

Time for Fresh Carrots and Sticks

Solutions to the crisis listed by President Obama during his Oval Office address echo those of prior presidents as they struggled to take charge of environmental disasters that exploded beyond control.

“We need better regulations,” he said, flanked by the American and presidential flags, “better safety standards and better enforcement.”

But in   economic carrots-and-sticks reality, regulations, safety standards and environmental enforcement have repeatedly proven insufficient to insure against environmental disasters. President George W. Bush learned this from Hurricane Katrina; his father, President George H. W. Bush, learned it from the Exxon Valdez oil spill.

Clearly this is not a partisan battle.   Nor is it a traditional one where green environmentalists line up against what they call the greed of businessmen.   Lines blur as millions of barrels of oil-stained water bleed across state and national lines and force us to think outside the box of traditional solutions.

The Foundation is Already There

Going forward, we need to value ecosystem services from the start so businesses and governments can better extrapolate risk vs. potential reward.   Fortunately, a structure for this already exists.  

The Office of Ecosystem   Services and Markets (OESM), launched by the recent Farm Bill and embraced by the Obama team, is tasked with developing the first-ever standardized, universal guidelines for developing procedures to measure, register and report environmental service benefits.  

Locally, the Gulf of Mexico Alliance teams up representatives from local, state and federal agencies to formulate Marine Spatial Planning (MSP) strategies to create protected marine reserves, determine a long-term management plan and use regulations combined with market mechanisms to ensure the preservation of marine life within these reserves.   Its approach can be used to provide economic incentives that model against worst-case scenarios.

BP along with numerous other corporations has already bought in to the concept of valuing ecosystem services.   BP’s Cherry Point refinery in the US, for example, used an ecosystems services approach that restores an environmental asset to compensate for a future environmental loss as part of the permitting process for a facilities relocation project.   Specifically, it built a water retention pond and drainage system to compensate for the loss of the natural services previously provided by the undeveloped land.

Valuing vs. Marketing Ecosystem Services

BP’s Cherry Point refinery illustrates how an ecosystem service analysis can be combined with an environmental market approach. In terms of analysis, it assessed the value of ecosystem services its project threatened.   In terms of market solutions, it paid for restoration of another site to compensate for damage it might cause on the site where it needed to work.

This distinction is critical for determining damages done and avoiding future damages.   The private sector needs to be involved in protecting marine and coastal resources it uses, relies on and impacts.   To encourage this, a dollar value must be placed on the ecosystem services BP’s oil disaster destroyed.

Markets and Liability

Unfortunately, it’s not at all clear that a market-based mechanism could have prevented the Deepwater Horizon disaster. All the collective dollar values for the ecosystems services provided by coastal wetlands and fisheries may not have come near the profits BP hoped to make from this clearly fertile well.

Moreover, while ecosystem services should be quantified and valued as part of the permitting process, the total ecosystem services threatened by offshore drilling could never be fully defined because the scale of potential impacts could not be determined beforehand. Impacts could have been minor or, as it turned out, significant depending on numerous unpredictable intervening factors, including currents.   These uncertainties would likely prove too great for private investors.  

From an ethical perspective, BP and other corporations clearly should not be permitted to pay to destroy ecosystems and avoid liability for this type of disaster.   And from a practical perspective, the people impacted by the placement of an oil rig in the middle of the ocean would be too dispersed across geographies and sectors for effective use of ecosystem markets.   The bottom line is that BP should have demonstrated that it possessed the proper mitigation technology in the event of such a disaster before drilling was authorized.

Averting Future Disasters

Shrimpers, fishermen, maids and hoteliers across the Gulf Coast are lining up to apply for compensation from BP. Over 40,000 claims have already been filed, according to government figures, offering a small glimpse of lives ruined and incomes lost. Yet workers and business owners comprise only a fraction of the economic and environmental disaster this oil leak has caused.

During President Obama’s Oval Office address, he offered a call to action to incorporate the cost of energy production into our economy.   But why stop there?

Our nation cringes when it sees front-page photos of pelicans drowning in oily goo; news sources ask what a pelican is worth but most offer no solutions.   At the same time, President Obama says we should put money aside to pay for BP’s damage, but he doesn’t say how to quantify the damage, distribute the money[sh2], or pay for lost ecosystem services.  

Fortunately, there is a growing body of experience that points us in the right direction. If ecosystem services had been valued from the outset, BP would have had different numbers to work with when calculating how much it was willing to spend on preventative measures.   And if we were able to rewind life’s tape, perhaps this disaster would have been averted.

Alice Kenny is a prize-winning science writer and a regular contributor to Ecosystem Marketplace. She may be reached at [email protected].

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