The Economics of Water Quality and Quantity: A Policy Perspective

1. The Economics of Water Quality and Quantity: A Policy Perspective David L. Feldman Energy, Environment and Resources Center/ Southeast Water Policy Initiative, and, Department of Political Science The University of Tennessee Cumberland River Compact – 6th Annual Meeting March 17, 2003

2. Introduction – the Environment as Economic Commodity • Environmental economics - ecosystem services are ‘externalities;’ production costs producer doesn’t pay for: • Thus, need to incorporate dollar value of ecosystem services into economics • Require polluter to pay • Determine ‘willingness to pay’ • Ecological economics - ecosystem services part of economy (K. Boulding); must “preserve natural capital” by: • Assigning an economic value to nature • Assigning $ amount to services (e.g., flood protection, pollutant filtering) • CAVEAT: $s can’t express whole cost of ecological harm

3. Willingness to pay (WTP) & Its Significance • Direct measurement: ‘How much would you pay to see a spotted owl?’ • Indirect measurement: ‘How much would you be willing to spend traveling in a car to see an endangered species?’ • Ask individuals/groups what they’re willing to pay given hypothetical scenario • Assign dollar values by asking people to choose from scenarios involving different ecosystem services/ development projects http://www.fcun.org/ecowitness/ecobulletin.html

4. Problems • Not all ecosystem services can be expressed in dollar values – no substitutes for air, water, soil • WTP estimates ecosystem values from human viewpoint • Intrinsic values of nature less important than instrumental ones (e.g., value of endangered species depends on human benefits)

5. Ecosystem Service Approach • Has potential to change economic system to ensure ecological sustainability/equitable global distribution of resources across generations •  Often used in public decision-making • Cost-benefit analysis & environmental impact assessment • Officials must compare benefits of – and prioritize – different projects, maximize environmental benefits, & assess real project costs

6. A How-to Primer – Valuing Replacement Services • Global Assessment of Ecosystem Services • Researchers from Brazil, Sweden, Holland, US estimated value of ecosystem services (1997): • Divided earth's surface into different biomes: e.g., ocean, forest, wetland, etc. • Compiled values for services estimated in studies for @ biome; multiplied times the area of that biome on earth • Total value of ecosystem services = US $16 - $54 trillion (ave. = US $33 trillion). To compare, estimated global GNP = US$18 trillion (Costanza, et al., 1997)

7. Problems • Much debate over study. Some feel estimates of ecosystem services too large; others too small • Concern that data can be misused to justify development projects that destroy ecosystem services • Called attention to fact that ecosystem services have economic value that must be incorporated into economics

8. A Water Supply Example • New York City's water comes from reservoirs in Catskills: • Quality deteriorating since 1970s due to sewage/agricultural runoff • Hardwood & evergreen forests filter water/retard erosion • Land clearance for agriculture/residential development generated pollution

9. Solution options • Replace system with artificial filtration plant: • Estimated cost $ 6-8 billion/annual operating cost of $300 million • Restoring forests/land = $1-1.5 million: • Issued bonds/used $ to purchase land, compensate property owners for growth restrictions, subsidize septic system improvements • Restoring/preserving watershed most economic option in this case

10. Quality & Supply – Tar-Pamlico Rivers, NC • Problem: low dissolved O2, fish kills, loss of submerged vegetation • Causes: increased nitrogen/phosphorus loading to the system • 1989: NC designated basin as Nutrient Sensitive – required development of strategy to manage point and non-point sources to reduce inflow •  Dischargers concerned about high capital costs

11. Solution • 1992: Coalition of dischargers + EDF, NC proposed a nutrient trading framework (NTF): • Dischargers pay for implementation of agricultural BMPs to achieve all or part of nutrient reduction goals/get break on permits. • Dischargers funds estuarine model to evaluate nutrient reduction strategies for basin • Receive break on having to improve municipal treatment facilities

12. Assessment of NTP • Popular among regulators, environmental groups, dischargers – achieves state's nutrient reduction goals & addresses non-point loadings; also reduces economic burden to municipal dischargers • Problems: • Adequacy of control costs (basis not well-documented) • Viability of wetlands restoration as strategy in phase II • Improvements to weekly effluent monitoring for phosphorous, nitrogen, flow

13. A Developing Country Example • Nigeria: Hadejia-Jama’are River Basin (Barbier, 1998): • Existing floodplain provides income/nutritional benefits from agriculture, grazing, non-timber forest products, fuel wood, fishing • Wetlands provide dry-season grazing, groundwater recharge, waterfowl habitat • Upstream dams/droughts diminished floodplains from 250,000 hectares to 70,000 over 30 years

14. Solution • Major dams proposed (Kano River Irrigation project) -- economic/hydrological analysis done: • Benefits lost due to decreased flooding = US $2.6 – 24 million depending on scenario • Conclusion: (Barbier, 1998) no new upstream developments needed • Expanding irrigation in basin “uneconomic” • State governments re-considering projects

15. Conclusions • Determining replacement costs of ecosystem services an important tool for ensuring water quality/supply • Actual economic figures widely vary: Why? Assumptions differ, real values unknown • More important than figures are their direction and magnitude! • When it works, it combines sound economics with local political commitment and education

16. Lessons for Folks Like Us • To apply these tools – need political will, organized & active public. Also, willingness to: • Realistically compare options designed to achieve same purpose • Consider full-range of present day services • Consider environmental costs as both instrumental and intrinsic