The Role of Risk Aversion and Lay Risk in the Probabilistic Externality Assessment for Oil Tanker Routes to Europe

35 Pages Posted: 3 Jan 2007

See all articles by Andrea Bigano

Andrea Bigano

RFF-CMCC European Institute on Economics and the Environment; CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici; Ca' Foscari University of Venice

Mariaester Cassinelli

RFF-CMCC European Institute on Economics and the Environment; CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici

Anil Markandya

Basque Centre for Climate Change (BC3); University of Bath

Fabio Sferra

Fondazione Eni Enrico Mattei (FEEM)

Date Written: December 2006

Abstract

Oil spills are a major cause of environmental concern, in particular for Europe. However, the traditional approach to the evaluation of the expected external costs of these accidents fails to take into full account the implications of their probabilistic nature. By adapting a methodology originally developed for nuclear accidents to the case of oil spills, we extend the traditional approach to the assessment of the welfare losses borne by potentially affected individuals for being exposed to the risk of an oil spill. The proposed methodology differs from the traditional approach in three respects: it allows for risk aversion; it adopts an ex-ante rather than an ex-post perspective; it allows for subjective oil spill probabilities (held by the lay public) higher than those assessed by the experts in the field. In order to illustrate quantitatively this methodology, we apply it to the hypothetical (yet realistic) case of an oil spill in the Aegean Sea. We assess the risk premiums that potentially affected individuals would be willing to pay in order to avoid losses to economic activities such as tourism and fisheries, and non-use damages resulting from environmental impacts on the Aegean coasts. In the scenarios analysed, the risk premiums on expected losses for tourism and fisheries turn out to be substantial when measured as a percentage of expected losses; by contrast, they are quite small for the case of damages to the natural environment.

Keywords: Oil Spills, Probabilistic Externalities, Risk Aversion, Lay Risk Assessment, Mediterranean

JEL Classification: Q51, Q53, L91

Suggested Citation

Bigano, Andrea and Cassinelli, Mariaester and Markandya, Anil and Sferra, Fabio, The Role of Risk Aversion and Lay Risk in the Probabilistic Externality Assessment for Oil Tanker Routes to Europe (December 2006). FEEM Working Paper No. 149.06. Available at SSRN: https://ssrn.com/abstract=951458 or http://dx.doi.org/10.2139/ssrn.951458

Andrea Bigano (Contact Author)

RFF-CMCC European Institute on Economics and the Environment ( email )

Via Bergognone, 34
Milan, 20144
Italy

CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici ( email )

via Augusto Imperatore, 16
Lecce, I-73100
Italy

Ca' Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Mariaester Cassinelli

RFF-CMCC European Institute on Economics and the Environment ( email )

Via Bergognone, 34
Milan, 20144
Italy
+39.342.6133782 (Phone)

CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici ( email )

via Augusto Imperatore, 16
Lecce, I-73100
Italy

Anil Markandya

Basque Centre for Climate Change (BC3)

Gran Vía 35-2
Bilbao, Vizcaya 48009
Spain

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Fabio Sferra

Fondazione Eni Enrico Mattei (FEEM) ( email )

Corso Magenta 63
20123 Milan
Italy

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