Economic Evaluations of Stormwater BMPs

Retrofitting urban areas to control stormwater and CSOs will require billions of dollars in capital investment. Stormwater BMPs are often less costly or are cost-competitive with conventional centralized systems. While studies have shown stormwater BMPs as cost-effective and efficient at achieving water quality goals, accurately assessing their costs and benefits is a difficult process. Traditional engineering costing methods commonly used to assess infrastructure systems fail to adequately value the multiple benefits and improved life-cycle costs that stormwater BMPs provide. By better understanding the economic and fiscal tradeoffs between conventional practices and stormwater BMPs, local and regional leaders can make more informed, effective allocation decisions.

Economic analysis of stormwater retrofits focuses on three key components of the financing process. The first component is revenue. A critical issue facing watershed restoration efforts is the need to leverage sufficient, sustainable revenues necessary to implement and maintain critical stormwater management programs. The second key financing component is institutional capacity. Effective financing requires efficiency, and the complex nature of water infrastructure and water quality programs requires effective financing institutions. Many communities have explicitly made increasing institutional capacity a priority in their efforts to better allocate and manage fiscal resources. The third component is for financing decision-makers to develop investment strategies that maximize return on investment.

Communities and public agencies charged with implementing and managing stormwater programs must justify their decisions, not only in terms of benefits to the natural environment, but also in terms of fiscal accountability and public support. They are being asked to demonstrate the economic and fiscal benefits of their investments. Even when it is impossible or impractical to measure benefits in dollars, agency staff can often provide evidence that their environmental investments are being managed to maximize environmental benefits per dollar spent (Ecosystem Valuation, 2007).

Potential Economic Benefits and Challenges of Stormwater BMPs
(Wise, 2007)
Benefits Challenges
  • Incremental implementation and funding can result in less debt service.
  • Stormwater BMPs are less capital intensive and may have overall lower costs.
  • Can extend existing capacity of current infrastructure.
  • Captures the asset values of clean water, soil capacity, and open space amenities: values ecosystem services.
  • Increases property values to the benefit of the private sector and public revenue collection.
  • New financing mechanisms can create new administrative responsibilities within and across agencies.
  • Change in operational and maintenance needs and coordination with private sector.

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Examples of the economic benefits gained by using stormwater BMPs include improvements in water quality, reductions in downstream impact, and savings for infrastructure spending, as described below (Haugland, 2007):

  • Reduced frequency, area, and impact of flooding
    Upstream use of stormwater BMPs that reduce runoff volumes (and consequently flood volumes) can change the delineation of flood plains, potentially "removing" properties from the 100-yeaqr flood plain and increasing their value. Additionally, the decrease in potential flood damage provides economic benefit to those properties that remain within the 100-year flood plain.
  • Reduced cost of public infrastructure
    On-site volume control with stormwater BMPs can downsize or eliminate stormwater conveyance infrastructure and provide public cost savings.
  • Reduced pollution and water treatment costs and improved water quality
    The reduction in runoff volume reduces erosion and pollutant delivery, thereby reducing the downstream costs of water treatment. The resulting improvements in water quality, stream channel stabilization, and aesthetics can also increase the value of riparian properties. The increased infiltration gained from stormwater BMPs can improve and sustain stream base flow conditions to better maintain downstream habitat.

Analyzing Cost-Effectiveness

Public agencies and community leaders are always looking for new sources to fund restoration activities, and what makes financing urban stormwater management such a challenge is the complexity and difficulty of leveraging sufficient revenue sources. As a result of federal Clean Water Act requirements and the corresponding state implementation and enforcement programs, it is local municipalities and communities that are responsible for developing and implementing stormwater management programs. Having a clear understanding of the economic trade-offs that exist between conventional and decentralized approaches is critical if local decision-makers are to allocate resources efficiently and invest specifically in the stormwater management practices and programs that enable communities to maximize the return on their investment.

Cost-effectiveness analysis identifies the least expensive way of achieving a given environmental quality target, or the way of achieving the greatest improvement in some environmental target for a given expenditure of resources (Ecosystem Valuation, 2007). Perhaps the most direct benefit or value associated with stormwater BMPs is the cost savings and fiscal efficiencies that are generated. Communities across the country have realized cost savings and other fiscal benefits associated with reducing volume to combined and separate stormwater infrastructure systems. Though there are many ways to measure cost-effectiveness, the following five techniques are the most appropriate when measuring the value of stormwater BMPs:

  • Damage cost avoided, replacement cost, and substitute cost methods
  • Lifecycle cost analysis
  • Benefit-cost analysis
  • Productivity method
  • Hedonic pricing method

These methods are explored in more detail below:

Comparison of Costing Methodologies
Method Description Positives Drawbacks
Damage cost avoided, replacement cost, and substitute cost methods
  • Estimates values of ecosystem services based on the cost of avoiding damages due to lost services, replacing ecosystem services, or providing substitute services.
  • Most useful and appropriate when actual damage or avoidance costs can be measured.
  • Do not provide strict measures of economic values, but rather assume that avoided or replacement costs provide useful estimates of value.
Life-cycle cost analysis
  • Considers all costs from planning and design through disposal.
  • Good method for evaluating competing alternatives that have different initial costs, O&M costs, and life spans.
  • Subjective nature of determining life span complicates analysis.
Benefit-cost analysis
  • Considers benefits gained from investment as well as costs.
  • More accurately reflects the full range of environmental and economic benefits and costs.
  • Valuation of community and environmental benefits currently inadequate.
Productivity method
  • Estimates the economic value of ecosystem services or products that contribute to commercially marketed goods.
  • Can effectively estimate costs when treatment costs of environmental goods (e.g., water) are known.
  • Only estimates the value of commercially marketable products.
Hedonic pricing method
  • Estimates economic values for environmental services that directly affect market prices.
  • Useful for estimating property value changes from use of stormwater BMPs.
  • Limited to assessing affect on market prices.

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Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods

The damage cost avoided, replacement cost, and substitute cost methods are related methods that estimate values of ecosystem services based on either the costs of avoiding damages due to lost services, the cost of replacing ecosystem services, or the cost of providing substitute services. These methods do not provide strict measures of economic values, which are based on people's willingness to pay for a product or service. Instead, they assume that the costs of avoiding damages or replacing ecosystems or their services provide useful estimates of the value of these ecosystems or services. This is based on the assumption that, if people incur costs to avoid damages caused by lost ecosystem services, or to replace the services of ecosystems, then those services must be worth at least what people paid to replace them. Thus, the methods are most appropriately applied in cases where damage avoidance or replacement expenditures have actually been, or will actually be, made (Ecosystem Valuation, 2007).

Some examples of cases where these methods might be applied include:

  • Researchers at the University of California at Davis have estimated that for every 1,000 deciduous trees in California's Central Valley, stormwater runoff is reduced nearly 1 million gallons—a value of almost $7,000. Preserving trees reduces polluted stormwater discharges and the need for engineered controls to replace those lost functions. When those trees are cut down and their functions are lost, those costs are passed on to municipal governments (NRDC, 2006).
  • The Washington, D.C. Water and Sewer Authority (WASA) has determined that the use of stormwater BMPs will help reduce the costs associated with managing the city's CSO problem. Fiscal analysis comparing implementation scenarios with and without stormwater BMPs indicated an overall cost savings with BMP use. In addition, WASA expects important secondary savings from these distributed retrofits. Stormwater diverted from the city's collection system will reduce the flow that will need to be processed at the city's wastewater treatment facility, which in turn could improve the capacity of the plant without the construction of additional facilities (WASA, 2002).
  • Using its CITY green software program, the non-profit group American Forests has calculated the value of urban tree canopy for stormwater and CSO management in a number of cities and urban centers across the country. The calculations are based on the avoided construction costs associated with conventional stormwater management systems. The total volume of avoided water storage is multiplied by local stormwater and CSO retainment facility construction costs to determine the dollars saved by trees. For example, in the Delaware Valley region of Pennsylvania, it is estimated that tree canopy saves $2 per cubic foot of water for stormwater and $52 per cubic foot of water for CSO management (American Forests, 2003).

The damage cost avoided method uses either the value of property protected, or the cost of actions taken to avoid damages, as a measure of the benefits provided by an ecosystem. For example, if a wetland protects adjacent property from flooding, the flood protection benefits may be estimated by the damages avoided if the flooding does not occur or by the expenditures property owners make to protect their property from flooding (Ecosystem Valuation, 2007). Because these methods are based on using costs to estimate benefits, it is important to note that they do not provide a technically correct or total measure of economic value, which is properly measured by the maximum amount of money or other goods that a person is willing to give up to have a particular good, less the actual cost of the good. The methods are most appropriately applied in cases where damage avoidance or replacement expenditures have actually been, or will actually be, made, as is the case with CSO and stormwater management and mitigation (Ecosystem Valuation, 2007).

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Life-Cycle Cost Analysis

Most of the studies that support the use of stormwater BMPs have focused on the construction or capitalcosts associated with various management alternatives. However, to accurately gauge cost-effectiveness or efficiency of these systems, it is critical to consider costs over the entire life of the project. Life-cycle cost analysis (LCCA) is the tool used for calculating these costs.

LCCA is a method of project evaluation that considers all project costs arising from planning, designing, constructing, operating, and ultimately disposing of an asset (Powell, et al., 2005). This type of analysis has been used extensively by federal, state, and local governments to evaluate the total cost of equipment purchases and maintenance. It is also a common tool for evaluating real estate investments and transportation projects. This approach to valuation is particularly suitable for the evaluation of stormwater and combined sewer system design alternatives that satisfy a required level of performance (including pollutant removal and stormwater retention rates) but that have different initial costs, operations and maintenance costs, and life spans. The life-cycle cost approach is critical in estimating stormwater BMP costs because often their operations and maintenance costs can be significantly lower than conventional approaches (Powell, et al., 2005).

Though the potential "lifetime" value of stormwater BMPs could be significant relative to conventional approaches, the subjective nature of determining the time horizon for the project life cycle (such as 20 or 50 years) complicates LCCA. To fairly analyze the life cycle cost (LCC) of different alternatives, the estimator must use the same life cycle. In addition, the analysis should span the expected life of the major system components. Determining the reach of the costs considered also complicates LCCA. Some methods look at the broader societal costs, and others focus strictly on the direct project costs. Again, to fairly analyze the LCC of different alternatives, the estimator must use the same assumptions of cost reach for each (Powell, et al., 2005).

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Benefit-Cost Analysis

Case studies that compare the cost-effectiveness of stormwater BMPs and conventional systems report that decentralized approaches can help reduce infrastructure and development costs as well as minimize operations and maintenance costs. Some researchers, however, note that a lack of information on the additional economic benefits provided by stormwater BMPs can ultimately impede adoption and implementation (MacMullen, 2007). Since stormwater BMPs can offer more benefits than conventional stormwater management systems, cost-effectiveness analysis fails to offer decision makers adequate information for evaluating the alternatives. Analysis based on benefits as well as costs (benefit-cost analysis, or BCA) more accurately depicts the full range of environmental and economic benefits and costs of decentralized and conventional systems.

Stormwater BMPs potentially provide myriad community benefits, many of which are not captured in cost-efficiency calculations. For example, in order for efficient allocation decisions to be made, local leaders must understand the connections between issues such as stormwater BMPs and economic development; the impact of urban green spaces on human health; and the benefits of distributed practices such as green roofs on energy requirements. Strict cost-efficiency calculations cannot provide sufficient information in these areas. Therefore, more robust valuation exercises are necessary.

The comparison of costs and benefits allows an explicit consideration of the trade-offs that are inevitably involved in most environmental policy decisions. It recognizes that achieving a particular objective or goal such as preservation of a particular ecosystem comes at a cost, since the resources that must be devoted to this preservation are not available for use in providing other goods and services. A typical BCA asks whether the benefits of preservation (or restoration) are "worth" the costs involved. In this sense, it ensures that the limited resources used to provide goods and services to society are used in the most efficient way—that is, to achieve the greatest net benefit (NRC, undated).

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Productivity Method

The productivity valuation method, also referred to as the net factor income or derived value method, is used to estimate the economic value of ecosystem products or services that contribute to the production of commercially marketed goods. It is applied in cases where the products or services of an ecosystem are used, along with other inputs, to produce a marketed good (Ecosystem Valuation, 2007).

For example, water quality affects the costs of treating municipal drinking water. Thus, the economic benefits of improved water quality can be measured by the decreased costs of providing clean drinking water (Ecosystem Valuation, 2007). The productivity method is most appropriate for this valuation calculation because this is a straightforward case where environmental quality directly affects the cost of producing a marketed good—in this case providing municipal drinking water. This example is one of the simplest cases, where cleaner water is a direct substitute for other production inputs, such as water purification chemicals and filtration, and it can be especially appropriate for communities that have CSOs that impact municipal water supplies.

The 850 billion gallons per year of stormwater and raw sewage that is released from CSOs contribute to elevated levels of pathogens, solid materials, debris, and toxic pollutants that can create significant public health and water quality concerns (University of North Carolina Environmental Finance Center, 2007). Therefore, reducing the impacts of CSOs positively impacts the production of drinking water.

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The Hedonic Pricing Method

The hedonic pricing method is used to estimate economic values for ecosystem or environmental services that directly affect market prices. It is most commonly applied to variations in housing prices that reflect the value of local environmental attributes (Ecosystem Valuation, 2007). It can be used to estimate economic benefits or costs associated with environmental quality, including air pollution, water pollution, or noise; and, environmental amenities, such as aesthetic views or proximity to recreational sites. The basic premise of the hedonic pricing method is that the price of a marketed good is related to its characteristics, or the services it provides. For example, the price of a car reflects the characteristics of that car—transportation, comfort, style, luxury, fuel economy, etc. Therefore, we can value the individual characteristics of a car or other goods by looking at how the price people are willing to pay for it changes when the characteristics change. The hedonic pricing method is most often used to value environmental amenities that affect the price of residential properties (Ecosystem Valuation, 2007).

A recent study by researchers at the Wharton School of Business at the University of Pennsylvania provides an example of how the hedonic pricing method can be effectively used to value ecosystem services in urban communities. The study calculated the value of public investments in Philadelphia in "neighborhood greening," a general term to denote everything from adding parks to improving streetscapes to planting new trees in public spaces. The study showed that proximity to a greening event positively affects home values in the city. Proximity to a new tree planting is associated with overall increases in house prices of 9 percent (Wachter and Gillen, 2006).

Streetscapes are part of the "green infrastructure" of the urban environment. A streetscape project represents horticultural treatments to a sidewalk or roadway that improve the appearance of the area, making it a more attractive and pleasant place. Treatments can include tree plantings, container plantings, small pocket parks, parking lot screens, and median plantings. Streetscapes tend to focus on commercial corridors with high visibility and high levels of pedestrian and/or vehicular traffic. Study results indicate that streetscaping imparts a considerable increase in surrounding home values as well, on the order of a 28 percent gain in value relative to similar homes in comparable areas without streetscape improvements (Wachter and Gillen, 2006).

Hedonic calculations can also be used to show the negative impact that degraded environments or natural resources can have on local communities. Studies have been done to show the impact of property values based on proximity to landfills, toxic waste sites, and water bodies impaired by CSOs.

References

  • American Forests. 2003. Urban Ecosystem Analysis Delaware Valley Region; Calculating the Value of Nature (PDF, 3.1MB) Accessed February 2010.
  • District of Columbia Water and Sewer Authority. 2002. Combined Sewer System Long Term Control Plan.
  • Ecosystem Valuation. 2007. Accessed February 2010.
  • Haugland, J. 2007. Gently Down the Stream: Economic Benefits of Conservation Development. Conservation Research Institute.
  • MacMullen, E. 2007. Using Benefit-Cost Analyses to Assess Low-Impact Developments. Presentation abstract for the 2nd National Low Impact Development Conference.
  • Natural Resources Defense Council. 2006. Rooftops to Rivers: Green Strategies for Controlling Stormwater and Combined Sewer Overflows.
  • National Research Council of the National Academies. Undated. Valuing Ecosystem Services: Toward Better Environmental Decision-Making. Accessed February 2010.
  • Powell, L. M., Rohr, E. S., Canes, M. E., Cornet, J. L., Dzuray, E. J., and McDougle, L. M. 2005. Low-Impact Development Strategies and Tools for Local Governments: Building a Business Case. Report Lid50t1. LMI Government Consulting.
  • University of North Carolina Environmental Finance Center. Accessed March 2010.
  • Wachter, S. M. and Gillen, K. C. 2006. Public Investment Strategies: How They Matter for Neighborhoods in Philadelphia (PDF, 219K) The Wharton School - University of Pennsylvania.
  • Wise, S. 2007. Bringing Benefits Together: Capturing the Value(s) of Raindrops Where They Fall. Center for Neighborhood Technology. Presented at the U.S. EPA Wet Weather and CSO Technology Workshop, Florence, KY, September 2007.
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