David English explores cost estimation by examining the MV Wakashio oil spill.
MV Wakashio oil spill
In July 2020, the MV Wakashio, a cargo vessel bound for Brazil, ran aground off the coast of Mauritius, causing an oil spill that would prove to be the worst environmental disaster in the country’s history. This spill and the damage that it caused, is far from unique. Every year, all around the world oil spill incidents occur wrecking extensive environmental and economic damage that is notoriously difficult to estimate and accurately recompense. In many cases the effects of such oil damages persist for decades, rendering waters unusable, destroying rare ecosystems, and bringing an abrupt end to ways of life that have existed for centuries. For a remote, densely populated island nation like Mauritius, the sea is an essential source for prosperity. The country’s blue economy captures some 10.5% of its GDP, a figure which doesn’t include the largely ocean-dependent tourism industry that employs one in five people. For the many people that rely upon these threatened waters, a question becomes apparent: When the waters run black, who do they turn to for aid?
Who should be held accountable?
Standard economic theory indicates that the costs of this spill should fall wholly on those private entities which caused them. Obligating polluters to internalise the costs of damages they have caused should lead to appropriate compensation, effective restoration projects, as well as more cautious corporate planning and operations into the future. This economic idealism has rarely been realised. Instead, throughout recent history, the role that public and private entities have to play in oil spill responses has been highly variable, as there are numerous limiting factors which prevent full private accountability.
Among these limiting factors is the misallocation of capital between public and private entities. Where governments typically hold physical capital that enables them to act as first responders to disasters, polluting firms typically hold substantial amounts of financial capital to fund and maintain these operations. As a low to middle income country already deep in recession, evidence suggests Mauritius finds itself lacking both forms of capital. In the immediate wake of the MV Wakashio oil spill, lacking much needed government support, , thousands of volunteers took to the beaches for clean-up efforts, cutting off their own hair to make oil absorbent barriers.
The difficulties in seeking financial capital are compounded by the overwhelming task of estimating the extent of the damages done. Most economic indicators are immediately responsive to a shock of this magnitude; lower wages, lost revenues, and upticks in social welfare spending are some of the variables that can usually be aggregated to develop a preliminary estimate of a spill’s costs. In Mauritius’s case, however, the reliability of such metrics for damage appraisal are confounded due to the pandemic. For the many people already unemployed and the countless firms already mothballed before the spill, this shock doesn’t manifest into noticeable differences in their short-term income stream. As such, differentiating the impact of both of these shocks upon the economy is incredibly difficult. Total damage estimates are further complicated by the necessity of evaluating environmental costs, an issue with myriad, often-disputed estimation methodologies.
Even allowing for a longer timescale, it is believed that damages from the majority of oil spills go underestimated, and those affected, by extension, go undercompensated. While Mitsui OSK Lines, the operator of the wrecked vessel, has already offered some $9.4 million USD (¥900 million) to be paid over the next several years, this amount reflects no real established damages, and was largely made as a show of good faith. Simultaneous to this display, however, are the efforts of a number of private actuaries and insurers working to limit the amount of private responsibility that can be established over this disaster.
Though the vessel has been scuppered and the leaking stopped, the story of the Wakashio is still very much in its infancy. The frictions between public and private agencies yield unsatisfactory outcomes which more closely resemble a market failure than a resolution. Even as finances are obtained and rehabilitation projects developed, there are important social costs to oil spills which are often discounted and nearly impossible to quantify. For those communities that have had their lives and cultures inexorably affected by the disaster, no amount of compensation will ever be enough to remove the stains of this disaster.