Abstract

The Oil Pollution Act of 1990 ("OPA") seeks to "make the environment and public whole for injuries to natural resources and services resulting from an incident involving a discharge or substantial threat of a discharge of oil...." In response, the National Oceanic and Atmospheric Administration ("NOAA") developed regulations in 1996 which focus on restoring such resources and services in lieu of monetary damages for interim losses. These regulations represent a departure from the natural resource damage assessment ("NRDA") regulations promulgated by the U.S. Department of the Interior ("DOI") in 1986. Recent natural resource damage assessments reflect this new focus on compensatory restoration.

The NOAA regulations present new challenges to economists, as well as biologists and ecologists, because they raise questions different from those previously considered under the DOI regulations. Most importantly, the NOAA approach requires economists to predict how people will alter their use of natural resources in response to possible restoration actions. Thus, economists must measure the benefits of potential restoration actions in addition to measuring the losses associated with the hazardous substance release or oil spill. The objective of compensatory restoration is to provide a level of service flows that will just offset any service losses caused by an oil spill or hazardous substance release.

A consistent conceptual framework is crucial for reliably assessing losses and evaluating the efficacy of various restoration alternatives. Such a framework provides a basis for measuring welfare gains and losses as well as evaluating the adequacy of various measurement approaches. This Article provides such a conceptual framework based on microeconomic theory. The framework provides a useful perspective for examining the NOAA approach to damage assessment, including the potential effectiveness of various methods for evaluating restoration. We also present two stylized examples to illustrate the types of economic issues that arise in implementing compensatory restoration.

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