Benefit and Cost Analyses of the Chesapeake Bay TMDL Chesapeake Bay Program Office Kevin DeBell Office of Policy, National Center for Environmental Economics David Simpson

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. 2

Progress EPA is collecting and analyzing data for benefits and cost analyses. EPA is providing extensive outreach to interested parties. o CBP advisory committees o Bay watershed jurisdictions o Environmental and other non-governmental organizations EPA is coordinating with regional and national experts. o Benefits workshop o Coordination with outside projects, including USDA o Urban stormwater costs o Peer review 3

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 Review of analysis after formal peer review TBD. 4

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? 5

Revenues, surplus, and values 6 Millions of pounds of fish landed Price of fish [NB: in a real example wed 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 ¢/lb Revenue = $435 M

Economic benefits = Surpluses 7 Millions of pounds of fish landed Price of fish [NB: in a real example wed 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 ¢/lb Producer surplus = profit Consumer surplus = What you would pay for it over and above what you do pay for it.

How does water quality enter in? 8 Millions of pounds of fish landed Price of fish [NB: in a real example wed be much more specific] Demand New supply: its easier to catch fish when there are more fish to catch 696 M lbs ¢/lb Economic benefit = increase in surplus

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 – its complicated! Example was of shift in supply, in other cases its a shift in demand, or both – E. g., people may pay more for healthier fish. 9

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 thats not a valid estimate of water quality improvement benefits. 10

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 11

Anticipating some questions What about health effects? – Partially reflected in other categories – We havent found evidence of wide-spread mortality/morbidity effects (except, possibly, from air quality?) What about jobs? – Were 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. 12

NCEE benefit estimation efforts: Stated preference Some values cannot be inferred from observed behavior (= revealed preference) – What market transaction will reveal what youd 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). Were on a very compressed timetable for this work, and have a literature review (= benefit transfer) backup plan. 13

Tentative Timeline DecemberResponses from jurisdictions on unit costs January-FebruaryDevelopment of draft cost analysis March-MayRevisions based on Phase II WIPs Summer 2012Peer review Fall 2012Continued revisions and improvements December 2012Delivery of analyses to DA Perciasepe 14