Sustainability Continued...

A comparative economic assessment of dredge- and diversion-based land buildingCPRA BoardApril 16, 2014 Baton Rouge, LARex H. Caffey1, Hua Wang2, Daniel Petrolia31Professor /Director and 2Graduate Research Assistant Center for Natural Resource Economics & PolicyLSU AgCenter and Louisiana Sea Grant 3Associate Professor, Center for Natural Resource Economics & PolicyDept. of Ag. Economics, Mississippi State University

1Economics is the study of how limited or scarce resources are allocated amongst competing needs.

2Benefit-Cost Analysis vs. Cost EfficacyTotal Benefits ($) Total Costs ($) B:C Ratio =Total Costs ($)Benefits (Resource Units)C:E Ratio =

1.0 3...coastal wetland restoration projects in Louisiana (will) provide for the long-term conservation of such wetlands... based on the cost-effectiveness of such projects in creating, restoring, protecting, or enhancing coastal wetlands... (1990 - Public Law 646: CWPPRA, Sec. 3952 1(b)).Efficiency as a Primary Criteria?

4Is cost-efficacy driving project selection? (C. Aust 2006, Merino et al. 2011)Candidate Selection Model using CWPPRA nominee data Binary Logit, 1991-2001, n=350 Probability of Selection = f {CE, Total Cost, Size, Type, Pop, etc.)Cost ($/AAHU) Years 1-5 significant (-)

Cumulative Wetland Loss not significant

Total Area of Project

not significant

Total Cost of Project (FFC) significant (-)

Rapid-Land Building Projects (MC) significant (+)

Population not significant

significant (+)

Cost ($/AAHU) Years 10-15VariablePr.>z; (=0.05)5Restoration Project Selection by CWPPRA (n=124)6An Evolving Benefits Construct Pre 2005: Restoration was habitat-driven under CWPPRA with a standard efficiency metric ($ per AAHU)

Katrina changed things... scale of the crisis is much greater than originally thought

The integration of coastal protection and restoration has shifted the definition of benefits

Post 2005: Emergence of a land-building focus has fueled scientific/ideological debate over competing methods ($/acre)

7Monetized Estimates of Ecosystem ServicesYear/AuthorEcosystem ServiceValuation Method($/acre/year)Farber (1996)Fisheries ProductionContingent Valuation (Stated)$63Bergstrom et al., (1990)Cultural/RecreationTravel Cost Method (Revealed)$91Woodward and Wui (1990)Wetland Habitat Contingent Valuation (Stated)$306Kazmierczak (2001)Water QualityMeta (Stated and Revealed)$825Petrolia and Kim (2010)Barrier IslandsContingent Valuation (Stated)$2,500Costanza (2008)Hurricane ProtectionAvoided Damage (Revealed)$3,336

8Terminal Stocks vs. Aggregate FlowsHow do MC and DIV projects compare?YearsAcresYearsDIVMCAcres5050Presumably9

Freshwater/Sediment Diversions Although this technique helps protect and sustain existing wetlands, it could take decades for new land to be built with new diversions alone. CPRA Master Plan (2007)Tradeoff: Do the benefits of this more natural method outweigh the risks of waiting for this land to be restored?10Rapid Land Building (Marsh Creation)

Pumping sedimentscan build marsh quickly(but) wetlands built via pipeline may not function in the same ways as wetlands built through natural processes(and) pumping in sediment is expensive CPRA Master Plan 2007Tradeoff: Does the risk reduction by moving benefits up in time outweigh the potentially higher costs of this technology?11Objectives(Caffey and Petrolia CREST 2008)(Caffey, Wang, and Petrolia 2011)Construct generic benefit trajectories and generic cost models for each project type

Develop break-even derivations via ecosystem-service-flow based benefit-cost analysis

Conduct sensitivity analyses using risk-adjusted case studies to illustrate trade-offs

12Data and MethodsData: - CWPPRA, CIAP, LCA,WRDA, STATE (prior to 2012) - Authorized projects and project bids (n=146) Methods: - Generic Benefit and Costs Models (regression, mass-balance) 1. Dredge-based Marsh Creation (MC) 2. Diversion-based:- Fitted model from projections (DIV1) - Exogenous model: Boustany 2010 (DIV2)- Benefit-Cost Analysis ESV derived via break-even sensitivity analysis ESV specified for case studies using benefits-transfer

13Total Acreage Benefits ($)Total Acreage Costs ($)B:C Ratio =...where:

b = $benefits (ESV), c = $costs, t = year, and r = discount ratebt(1+r)t= Tt = 0(1+r)tct Tt = 0 1.0 B:C Ratio Benefit-Cost Analysis

14Generic Benefit Modeling: Marsh Creation Projects (MC)Restoration Trajectory (Percentage of Completion)TMC=1/(1+exp(-(t-0.96)/0.08))R2=0.90Time LagTarget acreage Restoration (1-2 years)15Generic Benefit Modeling: Diversion Projects (DIV1) Target Acreage Restoration (20-50 years)Restoration Trajectory(Percentage of Completion)TDIV=-0.0029+0.0501*tR2=0.91Time Lag16Parameters for Cost-Benefit AnalysisSpecified and DerivedComponentParameterComponentParameterTime period (year)SpecifiedNet BI Accretion Rate (%)DerivedDesired Scale (acres)SpecifiedTotal Sediments-MC (cuyds)DerivedDiscount rate (%)SpecifiedTotal Sediments-BI (cuyds)DerivedWater Flow Rate- DIV 2 (cfs)SpecifiedWater Flow Rate- DIV1 (cfs)DerivedMob/Demob($)SpecifiedConstruction Cost-MC ($)DerivedDistance (miles)SpecifiedE&D cost-MC ($)DerivedAccess Dredging/Channel ($)SpecifiedO&M cost-MC ($)DerivedE&D Lag (MC)SpecifiedFully Funded Cost-MC ($)DerivedE&D Lag (BI)SpecifiedConstruction Cost-BI ($)DerivedE&D Lag (DIV)SpecifiedE&D cost-BI ($)DerivedProjected Construction Costs ($)SpecifiedO&M cost-BI ($)DerivedProjected E&D cost ($)SpecifiedFully-Funded Cost-BI ($)DerivedProjected O&M cost ($)SpecifiedConstruction Cost-DIV1 ($)DerivedLand Loss Rate (%/year)SpecifiedE&D cost-DIV 1 ($)DerivedLong-shore Transport (%/year)SpecifiedO&M cost-DIV1 ($)DerivedEcosystem Value (Habitat) Specified/DerivedFully-Funded Cost-FWD1 ($)DerivedEcosystem Value (Water Quality)Specified/DerivedE&D cost-DIV 2 ($)DerivedEcosystem Value (Storm Surge)Specified/DerivedO&M cost-DIV2 ($)DerivedFully-Funded cost-DIV2 ($)Derived17Unconstrained Break-Even AnalysisWhat are the annual ecosystem service values required for B:C=1.0?Time (years)Scale (acres)Discount (%)Distance (miles)Break-Even ($/acre/yr)DIV2 (Boustany 2010) DIV1 (fitted trajectory) MC DIV2 DIV1 MC DIV2 DIV1 MC DIV2 DIV1 MCBreak-Even ($/acre/yr)18 Social OppositionRisks? (DIV projects)

Data: Case Studies, operational regimes of diversions What does history tell us about their operation? How might location and scale affect flow? (25-80% of maxmimum)Refining for Risks

Climatological Risks? (MC and DIV projects) Data: Hurricane Landfall Probabilities (Klotzbach and Gray 2011) Expected valuation construct (will it hit? + will it not hit?) What if it does hit? - Static vs. Dynamic impacts: (20-50% acreage loss)

19Case Study AssumptionsLocation:Upper and Lower EstuaryProject Types:MC and DIV2Project life time: 20 years and 50 yearsTarget scales: 1000 and 5000 acresTime lag: 4 to 10 years Land loss rates: 0.003 to 0.006 per year Hurricane probability: 0.1 to 0.2, XHNDiversion Type: ControlledDiversion Flow:0.25 to 0.80 of capacityMob/Demob Cost:$1,000,000Pumping Distance: 4 milesAccess Dredging:$600,000Construction Costs 85%E&D cost 10%O&M cost 5%Ecosystem service values$4,410 per year (Surge, Habitat, W.Q.)

20Case Study Simulations (16)MCDIV2Upper M-1 1000ac/20yUpper M-2 1000ac/50yUpper M-3 5000ac/20yUpper M-4 5000ac/50yUpper D-1 1000ac/20yUpper D-2 1000ac/50yUpper D-3 5000ac/20yUpper D-4 5000ac/50yNet Acres934853467042671933216021003NPV Costs ($)37,798,40037,423,57547,801,52947,327,50912,035,23011,830,91612,082,69511,900,929NPV Benefits ($)40,687,95871,993,875203,439,791359,969,3732,399,5967,323,3287,496,97722,880,297B-C Ratio1.081.924.267.610.20.620.621.92$/acre40,46943,87310,23611,09262,35936,85620,07111,865MCDIV2Lower M-1 1000ac/20yLower M-2 1000ac/50yLower M-3 5000ac/20yLower M-4 5000ac/50yLower D-1 1000ac/20yLower D-2 1000ac/50yLower D-3 5000ac/20yLower D-4 5000ac/50yNet Acres8727284359363950867115202098NPV Costs ($)37,798,40037,423,57547,801,52947,327,50913,366,46513,151,14013,419,17913,229,091NPV Benefits ($)38,885,39667,044,229194,426,982335,221,1448,161,17216,722,89424,271,47652,247,394B-C Ratio1.031.794.077.080.611.271.813.95$/acre43,34751,40610,96613,00626,31219,5998,8286,30621Results and Conclusions

Efficiency is relative: This analysis was acreage-focusedwith $-benefits expressed via ecosystem service values

Data is limited: Project data is sparse, variable, estimate-based More confidence in MC estimates (some performance data)Less confidence in DIV estimates (entirely projection-based)

Reality: Same project data available to state and feds. Refinement is needed, but not likely to change shape of restoration trajectories.MC (rapid, sigmoid, subject to erosion)

DIV (slower, physical sustainability)

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Tradeoff: Do the benefits of this more natural method outweigh the risks of waiting for this land to be restored?Results and Conclusions: DiversionsIt depends., but in our simulations, no.Scale, Time, LocationB-C Ratios ranged from 0.2 to 3.95(DIV2 in all simulations)Efficiency generally increases with scale. Breakeven cost curves for MC converged with DIV (unconstrained) at:4,000-10,000 ac, 25-35 yrs, 10-20 miles for DIV2 and DIV1, Butwith risks accounted for, convergence points increase.Apparent high costs diminish under time and risk considerationsRapid rate of restoration is an economic and ecological advantage24

Louisianas Comprehensive Master Plan for a Sustainable Coast (2012), Fig. 9. p 35

Master Plan Implications?Momentum towards large-scale diversions is grounded inthe geologic history of coastal Louisianathe predominance of biophysical sciences in restoration

...but current assertions regarding the economic supremacy of diversion efficiency are only technically accurate if weassume the benefit projections for sediment diversions are mostly correctassume the cost projections for sediment diversions are mostly correctassume social/transition costs external to the project (or inconsequential)assume sustainability is defined on biophysical terms onlyassume diversion flow > 80% of design capacity (our study) assume a diversion trajectory of a minimum of 50 years assume diversion benefits > 17x projections (> ???X performance)assume a discount rate of zeroassume an acre of wetland in 50 years is of equal value to an acre todayassume $/acre is a better metric than BC ratio

Conventional Wisdom on Diversions

26Our research is not intended as an argument for or against a particular method of restoration. DIV and MC projects are not infinitely substitutable.

Our study indicatesWhile the estimated costs of terminal stocks (i.e. acres) may indeed be higher for MC (~ 3x)

analysis of benefit flows (i.e. monetized ecosystem services) suggests that MC projects may achieve higher BC ratios (within a 50 year horizon)

Trajectory Economics - Its not only important to address how we get the benefits, but also when we get the benefits. The operational definition of efficiency needs to be expanded from stocks to flows.

Future revisions needed to address projects of the scale in the SMP, but the generic shape of these trajectories is not likely to change and that shape has tremendous implications for the underlying economics.

Take-Home Points 27Thank you

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