Drilling to save the environment

Here is another interesting economic analysis (with a little facts and numbers for those who like hard data) from the New York Times on US offshore drilling.

According to Robert Hahn, director of the Reg-Markets Center at the American Enterprise Institute, and Peter Passell, senior fellow at the Milken Institute, coastal drilling in restricted US territories will only lower gas pump prices by a few cents in a long term. However, they also said that the failure to develop these oil resources would cost the state and federal governments hundreds of billions of dollars in royalties and taxes.

In a mathematical statement:

Let x = Benefits of drilling [oil selling at $100/bbl] = $2.1 trillion
Let y = Cost of drilling [including environmental clean-up] = around $400bn
Let z = Non-use value of Alaskan refuge [the price of untouched environment] = $11bn or more —> hey! you can put a price on anything these days!

x-y-z = Trillion dollar money left over for environmentalists to save hundreds of other US wilderness as long as they don’t happen to sit on vast oil reserves.

“One could imagine a political bargain in which several hundred billion dollars went into a fund with a charter to preserve wilderness in the United States, or climate-stabilizing rainforests in Africa and Latin America. As little as $100 billion would go a long way: the projected cost of preserving the entire Everglades against the encroachments of the Florida economy is $11 billion, while a comprehensive restoration of 200,000 acres of Louisiana’s coastal wetlands would run to $18 billion.”

With all that money, this might really sound like a good deal. The trillion dollar questions are, will there be a guarantee that some of these money be siphoned back into environmental preservation once drillers dry up the energy resources in these refuges. What is their guarantee that the health of the ecosystem in these drilled places will not be harmed?

We can always look for other alternative energy sources or cut back our energy consumption but it will take decades and even centuries to patch back a once-pristine environment. The Congress and environmentalists have to think carefully when choosing the lesser of two evils because as of now, we just have one planet to live in.

3 Responses to Drilling to save the environment

  1. Pradeep 16 September, 2008 at 7:39 pm #

    Very interesting post.
    I agree with the logic, but I do not think that environmental policy should be solely based on these net-benefit analyses..

    “What is their guarantee that the health of the ecosystem in these drilled places will not be harmed? “
    I think that the idea behind this argument is that the money we get from drilling oil will be used to remediate any environmental problems. As you point out, whether this will really happen or not is the question.

  2. Pradeep 17 September, 2008 at 4:50 am #

    As a followup to my earlier comments, here is a link for further discussion at the Environmental Economics Blog.

    “This argument seems empty to me, in the same way that revenue recycling from carbon taxes is empty. The policy of whether to drill or not, or whether carbon taxes are better than cap-and-trade without auctions, should be independent of whatever happens to the revenue that is generated. The revenue could be used for all sorts of things, foremost might be dealing with a big government budget deficit. Promising environmentalists that it could go for more protection or promising taxpayers that it could be used for lowering income taxes seems like a bribe that will never be realized.”

  3. Doris de Guzman 17 September, 2008 at 5:09 pm #

    Thanks for sharing the link! It’s great to get another insight on this issue.

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