Valuing Spatially Delineated Nutrient Pollution

1. Valuing Spatially Delineated Nutrient Pollution Martin D. Smith Larry B. Crowder Nicholas School of the Environment and Earth Sciences Duke University Image source: Dr. James Bowen, UNC Charlotte http://www.coe.uncc.edu/~jdbowen/neem/

2. What can we learn from a lumped-parameter bioeconomic model about valuing ecosystem services?

3. Preview • Develop a method that provides an exact welfare measure of a portion of ecosystem service value • A 30% reduction in nitrogen loading in the Neuse generates $2.04 million in fisheries benefits under open access • The value of the environmental change is contingent on the institutional arrangement

4. Outline • Background and literature • Analytical Model with Open Access • Parameterizing the model (briefly) • Qualitative and Quantitative Results • Discussion of the results • Linking Models of Economics and Ecosystems • Preliminary results from a “quasi-optimized” model

5. The Problem Oxygen demand Nitrogen in the estuary algae hypoxia Prey Mortality Migration into oxygenated areas (crowding)

6. TMDL and the Neuse • Nutrient pollution in Neuse linked to hypoxia/anoxia, toxic algal blooms, fish kills, effects on the trophic system • Clean Water Act requires Total Maximum Daily Load (TMDL) plan • Neuse TMDL recommends 30% reduction in nitrogen loadings • Schwabe (2001) estimates annualized cost of 30% reduction ranges from $5.4 million to $9.1 million (1999 dollars) • 9 species that depend on estuarine soft-bottom habitat make up > 2/3 dockside value of NC commercial fisheries (Peterson et al., 2000) Image Source: NCSU Center for Applied Aquatic Ecology www.ncsu.edu/wq/ pics-dp/dpncmap.gif Image Source: http://www.usdoj.gov/dea/pubs/states/northcarolina2003.html

7. NC Blue Crab Fishery • Largest commercial fishery in NC ($34.4 million ex vessel revenues in 2002) • 80,000 – 100,000 trips per year • 35% in Neuse River and Pamlico Sound • Essentially open access • ~ 25 % of East Coast production from NC Image Source: Dept. of Fisheries Science, VIMS, William and Mary http://www.fisheries.vims.edu/femap/fish%20pages/blue%20crab.htm

8. Total Catch and Revenues

9. 4 strands of the bioeconomic literature • Multispecies models with predator-prey interaction (Hannesson, 1983; Ragozin and Brown, 1985; Kaplan and Smith, 2001; Brock and Xepapadeas, 2004) • Habitat dependence of a renewable resource (Swallow, 1990; Barbier and Strand, 1998) • Spatial fisheries models (Sanchirico and Wilen, 1999; Smith and Wilen, 2003) • Empirical bioeconomics of open access (Wilen, 1976; Bjorndal and Conrad, 1987)

10. Model Structure Lumped-parameter system of 8 ordinary differential equations 1. Nutrient loadings accumulate in the estuary 2. Nutrient accumulation increases algal carrying capacity Two species 3. blue crabs as harvested mobile predator 4. clams as unharvested stationary prey Two patches 5. Patch 1 subject to hypoxia 6. Patch 2 has no hypoxia 7. Dynamic open access 8. Discrete choice model of fishing locations

11. Nutrients (N) and Algae (A) Loadings minus natural decay Logistic growth a function of nutrients This parameter will matter a lot.

12. Blue Crab (X) population dynamics harvest predation Logistic growth Migration from relative prey availability Hypoxia-induced migration

13. Blue Crab (X) population dynamics

14. Prey (Y) population dynamics Predation Hypoxia-induced mortality Logistic growth

15. Dynamic Open Access • Rents are dissipated in the long run • Transitional rents are the welfare metric • Reducing hypoxia generates a short-run economic benefit by increasing prey stocks and reducing predator crowding

16. Dynamic Open Access Profit/Rent Function costs revenues Marginal cost of effort + opp cost of capital (per unit effort) Vernon Smith Rent Dissipation g is speed of adjustment

17. Spatial Effort Adding up Define an effort share state variable Based on empirical fisheries economics literature Implied Dynamic Spatial Adjustment

18. Closing the Model Schaefer Production q is “catchability”

19. Parameterization(Short Version) • Nitrogen loadings, algal production, hypoxia, and prey mortality: Various pieces of the Neu-BERN model due to Borsuk, Stow, Reckhow, and others • Blue Crab population dynamics: Eggleston et al. (2004) stock assessment and related work • Blue crab migration: Eby and Crowder • Costs – Rhodes, Lipton, and Shabman survey of Chesapeake blue crabbers • Prices and trips– NC DMF data + BLS CPI South Size D • Discount rate – 2.5% • Other parameters – used nonlinear solver to back them out or used 1-period-ahead forecasting to choose them

20. Results Summary

21. No Reduction in Nitrogen – Initial Condition at ½ kx

22. No Reduction in Nitrogen – Initial Condition at ½ kx

23. No Reduction in Nitrogen – Initial Condition at ½ kx Stretched cycles reflect sluggish adjustment

24. No Reduction in Nitrogen – Initial Condition at ½ kx

25. No Reduction in Nitrogen – Initial Condition at ½ kx

26. Time Path of Policy Impacts on Rents

27. Time Path of Policy Impacts on Rents Long dynamics troughs peaks

28. Time Path of Policy Impacts on Rents Stretching

29. Time Path of Policy Impacts on Rents Starts negative: initial effort level with more pollution closer to the optimal level

30. Time Path of Policy Impacts on Rents Most of gains in first 15 years

31. Time Path of Policy Impacts on Rents Bioeconomic Overshooting

32. Time Path of Policy Impacts on Rents Rent dissipation

33. Gains from reduced nutrient pollution could be much larger under a rationalized fishery

34. Time Path of Policy Impacts on Catch

35. Time Path of Policy Impacts on Effort

36. Sensitivity to Impact of Nitrogen on Primary Production

37. Sensitivity to Per Trip Costs

38. Sensitivity to Speed of Adjustment

39. Discussion • PV cost of permanent 30% reduction (from Schwabe, 2000) using 2.5% discount rate $259.7 million (2002 dollars) • Blue crab benefits are <1% of this cost • Open access the culprit? • Benefits to other fisheries • Non-fishery benefits of ecosystem services

40. Linking Models in Economics and Ecology • Direction of Effects • Magnitude of Effects • Timing of Effects • Parameter Lumping

41. Direction of Effects • Prey response to hypoxia • Hypoxia-induced catchability increase • Nutrients and hormesis

42. Magnitude of Effects • Carrying capacities and the pristine system • Patch 2 as “insurance”

43. Timing of Effects • Hysteresis in oxygen demand • Nitrogen stocks • Algae stocks • Intrinsic growth rates – how fast predators, prey, and algae “recover” • Economic speed of adjustment (both timing and magnitude)

44. Parameter lumping • Like a partial reduced-form • Use available information to put structure on the problem • Lumped parameters not directly measurable quantities in nature • Example: Prey Death Parameter • Lumps algae-dissolved oxygen and dissolved oxygen-death together • Does not distinguish between “death” and growth retardation

45. How does ecosystem value depend on the management institution?Compare open access to optimal!

46. A “Quasi-Optimum” • Grid Search over constant effort solutions • Search over total effort and share allocation to the patches • Lower bound on total rents • Difference in rents not necessarily bigger or smaller

47. Preliminary Results

48. Biological Dispersal and Effort Allocation A Marine Reserve in the “dirty” patch

49. Crab Indifference • Two countervailing forces: • Crabs move away from hypoxic zones – increases relative prey availability • Hypoxia decreases absolute prey availability • Crabs may respond to low oxygen at levels that are sub-lethal for prey • Sink or source? A question for behavioral ecology

50. Preliminary Work on the Optimized Model