External costs from major accidents in non-nuclear fuel chains

Input to D5.2 Methodology and Evaluation of external costs…

U. of Bath, May 2003, PSI

Monetary valuation of accident impacts

• Impacts: Energy chain-specific; small or large accidents

– Acute Mortality Energy chain specific; Morbidity

Physical injury in accident Mental trauma - from physical injury, evacuation

Evacuation (costs of resettlement/accommodation) Clean-up/repair costs and WTP for recreational/ecosystem losses - oil

spills Ban on consumption of food Land contamination

– Economic losses

Welfare components of impacts

• Of health (and some other) impacts– Resource costs e.g. medical costs (1)– Opportunity costs e.g. lost productivity (2)– Dis-utility e.g. pain/suffering, inconvenience

(3)

• Nb. WTP Measures are (3) + (2) and some of (1), depending on how much the individual pays

Mortality/Morbidity

• Mortality: based on road accident valuation– ExternE: 3.14M Euro/VPF– Carthy: 1M Euro/VPF

• Morbidity: literature differentiates between severe and minor injuries; we require single value since cannot categorise type of injury.

– recommend to use values as extremes of range and take mid-point: Euro 207,106 (2000 prices)

• Should we adjust these values?

Mortality/Morbidity

• What degree of internalisation can we assume in the treatment of health effects?

• Method:– literature review of wage-risk valuation studies

(ex ante)– evidence from compensation practice

Mortality/Morbidity - occupational

• Mortality risks to employees - are they internalised?

• Ideally, would need to know:– VSL if fully internalised– actual VSL, derived from wage-risk studies

• Practically, can examine:– wage risk studies to see if there are proxies that can be

used – e.g. compare VSLs from unionised and non-unionised

employees

Mortality/Morbidity - occupational

• But, wage risk studies hard to interpret in this way– Role of unions: UK - some studies found union affiliation had an

insignificant impact on risk premium, others found higher union risk premiums: Mean difference approx 20%

– internalisation increases with education level of labour force (Dorman, 1998) but difficult to use as robust proxy

• Other factors also increase uncertainty of estimates– Omitted variables bias – Endogeneity: the level of risk that workers will be willing to

undertake is negatively related to their wealth, assuming that safety is a normal good

Mortality/Morbidity - occupational

• On average we conclude that– In industrialized economies of the EU occupational risk

really is substantially internalised.

– In the less effective economies of Eastern Europe there is still some internalisation but this is less.

Summary of European Labour Market Studies of VSL

Author (year) Country Mean risk Implicit VSL(Millions, 2000 US$)

Martin and Psacharopoulos (1982) UK 0.0001 4.2

Weiss, Maier and Gerking (1986) Austria na 3.9 – 6.5

Siebert and Wei (1994) UK 0.000038 9.4 – 11.5

Sandy and Elliot (1996) UK 0.000045 5.2 – 69.4

Arabsheibani and Martin (2000) UK 0.00005 19.9

Sandy, Elliot, Siebert and Wei (2001) UK 0.000038,0.000045

5.7 – 74.1

Source: Adapted from Viscusi and Aldy (2003)

Mortality/Morbidity - public

• Standard choice models suggests individuals, depending on aversion to risk, maximise utility by choosing between two alternatives: buying insurance or mitigation measures

• But, empirical literature does not support this model. Why?– Misperception of risks– Low probability events perceived as impossible events – Role of emotions e.g. fear & dread– Lack of clarity on probabilities of losses related to

given risks • additionally, pain/suffering likely to be significant

Mortality/Morbidity

• Ex post evidence– Liability insurers pay:

• mixture of lump sum and annuities related to wage losses and medical costs for injuries (though in France: indexation borne by state)

• mixture of lump sum and annuities related to wage losses to family for fatalities

– Coverage for accidents varies over countries & industries: 70-80% average of material losses are paid. Adjustment: insurance premium + 30-40%

– if take conservative estimate of pain/suffering to be considered. Adjustment: material cost + 50%

insurance premium is 50% of full internalisation

Mortality/Morbidity - adjustments

• Scale of accident– hypothesis that risk of large scale accidents valued more

highly– evidence (J-L & Loomes) comparing road accidents with

large-scale accidents from proximity to airport does not support hypothesis

– (But spending on e.g. nuclear protection does support it).

• Size of risk– hypothesis - probability range smaller than in road transport context

so if non-linearity in risk values, different VPF– no evidence to support this

Mortality/Morbidity - adjustments

• Age of victim– Accident-derived VSL appropriate - assume average

life expectancy

• Weighting for Extra-EU impacts (ExternE consensus)– EU impacts plus impacts in other regions with globally

averaged values (‘world average’);

– EU impacts plus impacts in other regions with EU values (‘EU values’).

Recommendations

• Estimates for degree of internalisation (generic)– Occupational: 80% (70% - 100%)– Public: 50% (30% - 70%)

• No adjustments for scale & size of risk

Evacuation/resettlement

• Internalised to some degree through insurance

• Evidence on resource costs - 2 US Studies– Euro 108 - 180/day/household

• Evidence on opportunity costs UK CBI– direct costs of absenteeism: Euro 88 – 230 per

person day

• Dis-utility?

Oil Spills

• Some attention has been given to the different welfare components following high profile spills

Sea Empress - Atlantic,off S.Wales, 1996

Summary of total costs resulting from Sea Empress oil spill (£m)Financial costs Economic costs

Category Lower Bound Upper bound Lower Bound Upper boundDirect clean-up costs

49.1 58.1 49.1 58.1

Tourism 4 46 0 2.9Recreation - - 1.0 2.8Commercialfisheries

6.8 10 0.8 1.2

Recreationalfisheries

0.1 0.1 0.8 2.7

Localindustry

0 0 0 0

Conservation/non-use

- - 22.5 35.4

Human health - - 1.2 3Total 60.0 114.3 75.3 106.1 Source: Environment Agency, "Sea Empress Cost-Benefit Project. HMSO. 1998.

Oil Spills in Caspian Sea

• Estimates of damage costs average at Euro 2600 per ton.

• Typical spills around 10 - 30,000 tons

Exxon Valdes, Gulf of Alaska, 1989

Civil SettlementsWTP damage assessment (including passive use values, (aesthetic and intrinsic)measured by CVM), litigation and clean-up: $213 million;

Research, monitoring and general restoration: $180 million;

Habitat protection: $395 million

Long term restoration: $108 million

Science management, Public information and administration $31 million

Criminal settlementsHabitat protection and improvements: $100 million.

Oil Spills - conclusions

• Unit values?– Exxon Valdes: Euro 26,333/tonne crude oil

• CV study post accident: WTP Euro 31/household

– Sea Empress: Euro 2368/tonne crude oil

• Transfer of unit values for different welfare components possible though constrained by context-specific factors

Other impacts

• Ban on consumption of food– Theory - trace through market impacts

– No evidence from fuel chain though in future could use simulations

– Indicative evidence: Euro 250m to UK Beef producers for BSE-related losses

• Land Contamination– Theory - can be estimated by using differences in land values

– Evidence may exist from historical clean-ups but site-specific

• Economic losses– Theory - change in stock market value of businesses

– Historical evidence exists e.g. for oil spills but site-specific