Benefit and Cost Analysesof the Chesapeake Bay TMDL

Chesapeake Bay Program OfficeKevin DeBell debell.kevin@epa.gov

Office of Policy, National Center for Environmental Economics

David Simpson simpson.david@epa.gov

What are We Trying to Do?

• Develop an analysis of the total benefits and costs of the TMDL for the Chesapeake Bay watershed and for individual jurisdictions.

• Place benefits and costs of the TMDL into the context of the effort Bay watershed states have made over the years.

• Assist states in development of Phase II WIPs and subsequent analyses.

• Develop better methods for water quality improvement benefit estimation.

• Use transparent methodologies, data, and tools that can be easily employed in updates of this analysis.

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Progress

• EPA is collecting and analyzing data for benefits and cost analyses.

• EPA is providing extensive outreach to interested parties.o CBP advisory committeeso Bay watershed jurisdictionso Environmental and other non-governmental organizations

• EPA is coordinating with regional and national experts.o Benefits workshopo Coordination with outside projects, including USDAo Urban stormwater costso Peer review

Cost Estimation

Annualized per unit costs for practices identified in the WIPs for:•Agriculture•Municipal Wastewater•Industrial Wastewater•Urban Stormwater•On-site Systems•Administrative Costs

Scope of implementation identified in the Phase II WIPs.•Unit costs will be applied to the units of implementation to identify state specific costs.

•Costs will be presented by state and as a total.

Analyze costs relative to baseline and policy scenarios.•This approach will provide perspective on the amount of spending directly attributable to the TMDL.

Unit costs sent to states in fall 2011

Final Phase II WIPs transmitted March 2012.

Review of analysis after formal peer review TBD .

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Benefit Estimation

“In 2009, commercial fishermen in the Mid-Atlantic Region landed 696 million pounds of finfish and shellfish, earning $435 million in landings revenue.”

National Marine Fisheries Service 2009 Regional Report

for the mid-Atlantic Region

How are facts like these related to “economic values”?

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Revenues, surplus, and values

Millions of poundsof fish landed

Price of “fish” [NB: in a real example we’d be much more specific]

Demand = what consumers are

willing to pay for another fish

Supply = what it cost to catch another fish

696 M lbs.

62.5 ¢/lb

Revenue = $435 M

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Economic benefits = “Surpluses”

Millions of poundsof fish landed

Price of “fish” [NB: in a real example we’d be much more specific]

Demand = what consumers are

willing to pay for another fish

Supply = what it cost to catch another fish

696 M lbs.

62.5 ¢/lb

Producer surplus =

profit

Consumer surplus = “What you would pay for it over and above what you do pay for it.”

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How does water quality enter in?

Millions of poundsof fish landed

Price of “fish” [NB: in a real example we’d be much more specific]

Demand

New supply: it’s easier to catch fish

when there are more fish to catch

696 M lbs.

62.5 ¢/lb Economic benefit = increase in surplus

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Valuation principles• Total expenditures are poor guides to value.• Values are incremental; not “How much is water

worth?” but “How much would it be worth to improve water quality by x relative to a baseline?”

• You can almost never infer benefits with easily available data – it’s complicated!

• Example was of shift in supply, in other cases it’s a shift in demand, or both– E. g., people may pay more for “healthier” fish.

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Some misleading examples• Costanza et al.’s famous “Value of natural capital and

ecosystem services” provided a “serious understimate of infinity” (M. Toman)

• The legendary 1989 MD study (“$1 trillion, after inflation”) is rife with errors:– Shipping through the Port of Baltimore has next to nothing to

do with water quality– According to the study, the value of all real estate in MD would

more than double.

• Marylanders may spend more than $2B/year on recreational boating, but that’s not a valid estimate of water quality improvement benefits.

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NCEE benefit estimation efforts:“Revealed preference”

• Commercial fishing• Recreational fishing and other recreation• Property values• Avoided costs of water treatment & dredging• Ecological co-benefits of BMPs

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Anticipating some questions• “What about health effects?”– Partially reflected in other categories– We haven’t found evidence of wide-spread mortality/morbidity

effects (except, possibly, from air quality?)

• “What about jobs?”– We’re doing a parallel “impacts analysis”.– Are jobs a benefit or a cost? It depends.

• “What about spillover effects?”– Generally effects in other markets would double-count effects

already measured.

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NCEE benefit estimation efforts:“Stated preference”

• Some values cannot be inferred from observed behavior (= “revealed preference”)– What market transaction will reveal what you’d be

willing to pay to save an endangered species?– To pass along a better world to your grandchildren?

• To infer these values, we conduct surveys (= “stated preference”).

• We’re on a very compressed timetable for this work, and have a literature review (= “benefit transfer”) backup plan.

Tentative Timeline

December Responses from jurisdictions on unit costsJanuary-FebruaryDevelopment of draft cost analysisMarch-May Revisions based on Phase II WIPsSummer 2012 Peer reviewFall 2012 Continued revisions and improvementsDecember 2012 Delivery of analyses to DA Perciasepe

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