Economic Assessment of Rapid Land-Building

Technologies for Coastal Restoration

Daniel Petrolia and Tae-goun KimDept. of Agricultural Economics, Mississippi State

University

Rex CaffeyCenter for Natural Resource Economics & Policy,

LSU

2008 PIANC ConferenceNovember 13, 2008

Mobile, AL

Where are we? Katrina and Rita changed everything.

Prior to, restoration focused almost solely on ecological services

Things appeared to move slowly Post, focus has shifted toward more hurricane protection,

i.e., more human-focused Time has become critical

“A sustainable landscape is a prerequisite for both storm protection and ecological restoration.” – CPRA Master Plan

Restoration Options:Freshwater 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

“FWD are excellent options for protecting an existing marsh, but as a reconstructive tool, they aren’t the first choice.” – Penland (2005)

Restoration Options:Rapid Land Building“Pumping sediments…can build marsh quickly…However, wetlands that are built via pipeline may not function in the same ways as wetlands built through natural processes…pumping in sediment is expensive…” – CPRA Master Plan

What are the specific benefits? Expected benefits are usually qualitative,

not necessarily quantitative Storm surge reductions Ecosystem benefits Fisheries benefits Recreational benefits

Even if we can quantify the benefits, how likely are the benefits?

When will the benefits accrue? What is the value of these benefits?

From an economist’s perspective: What is lacking?

An explicit accounting for: Time Risk

Restoration projects, like CWPPRA, have projected acreage changes, reduced erosion rates, etc., but how likely are these outcomes? What is the probability p that x acres of land benefits will

be built at time t? This implies that there is some prob (1-p) that they

won’t. Given that the land is built, what is the probability that

the expected benefits will accrue?

Risk and Time What are the risks?

Technology may not work as expected. Storm activity may affect land-building efforts. Benefits may be dependent on project scale.

What about time? The probability that benefits will be delivered in any given year

likely depends on the probability that certain progress was made the prior year, which depends on its prior year, etc.

What if some major weather event occurs between years 0 and t that significantly affects project efforts?

Time value of money: discounting

Developing a framework for analysis We cannot address all of the benefits and costs

involved in this complex issue

But what we can do is develop a framework for analyzing the impact of time and risk, whatever the benefits and costs may to be.

Basic Model Each acre of land built has some suite of

benefits associated with it caveat: this abstracts away from the “land quality”

issue This suite of benefits can be expressed in

dollar terms, i.e., value, which is unknown Given that we have costs and quantity of

acres, we can solve for the value per acre necessary for the project to have a positive NPV i.e., the value per acre necessary to justify the cost

Data example: CWPPRA Project BA-36: Dedicated Dredging on the Barataria Basin Land Bridge

Acres

Year No Action Proj Cost

2008 502.0 502.0 $28,712,267

2009 492.0 1282.0 $0

2010 482.1 1269.2 $0

2011 472.5 1256.5 $0

2012 463.0 1243.9 $0

2013 453.8 1231.5 $0

2014 444.7 1219.2 $0

2015 435.8 1207.0 $0

2016 427.1 1194.9 $0

2017 418.5 1183.0 $0

2018 410.2 1171.1 $0

2019 402.0 1159.4 $0

2020 393.9 1147.8 $0

2021 386.0 1136.3 $0

2022 378.3 1125.0 $0

2023 370.8 1113.7 $0

2024 363.3 1102.6 $0

2025 356.1 1091.6 $0

2026 349.0 1080.7 $0

2027 342.0 1069.8 $0

2028 335.1 1059.1 $0

2029 328.4 1048.6 $0

2030 321.9 1038.1 $0

2031 315.4 1027.7 $0

Cases No Risk / No Discounting Storm Risk

Assumes that probability of accruing benefits is equal to 1 – probability that a major storm hits (i.e., a major storm would destroy benefits)Probability is cumulative over timeUse landfall probabilities for a major storm (Klotzbach & Gray) for SE LA parishes (site of projects)

Storm Risk + Scale RiskAssumes that probability of accruing benefits is positively related to the number of acres in project site (i.e., that benefits are dependent on how many other acres are present)I use Pr(bens) = 1 – (10/ac)

Storm Risk + Scale Risk + DiscountingAdds 3% discount rate to account for time value of money

Case study: CWPPRA projects Data we have:

construction cost data (LA DNR) Projected no-action and with-project land

changes (acres built and erosion rates) (CWPPRA completion & monitoring reports)

Project time frame (usually 20 yrs) Data we don’t have:

Specific benefits Likelihood of benefits Value of benefits

BA-35: Pass Chaland to Grand Bayou Pass Barrier Shoreline Restoration (BI)

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

Mill

ion

s

Thousands

$Benefits / Acre / Year

NP

V

SQ

RLB

SQ-hurr

RLB-hurr

SQ-hurr/land

RLB-hurr/land

SQ-hurr/land/disc

RLB-hurr/land/disc

BA-36: Dedicated Dredging on Barataria Basin Landbridge (MC)

-$30

-$20

-$10

$0

$10

$20

$30

$0 $2 $4 $6 $8 $10 $12 $14

Mill

ion

s

Thousands

$ Benefits / Acre / Year

NP

V

SQ

RLB

SQ-hurr

RLB-hurr

SQ-hurr/land

RLB-hurr/land

SQ-hurr/land/disc

RLB-hurr/land/disc

BA-37: Little Lake Shoreline Protection / Dedicated Dredging near Round Lake (MC)

-$25

-$15

-$5

$5

$15

$25

$0 $2 $4 $6 $8 $10 $12 $14

Mill

ion

s

Thousands

$Benefits / Acre / Year

NP

V

SQ

RLB

SQ-hurr

RLB-hurr

SQ-hurr/land

RLB-hurr/land

SQ-hurr/land/disc

RLB-hurr/land/disc

General Results Incorporating risk and time:

increases the necessary value of benefits per acre to justify project (i.e., for benefits to exceed costs)

marginal contribution of benefits to overall project NPV decreases because benefits are in the distant uncertain future

If accounting for these risks is appropriate, then we need to be willing to invest large sums of money for very risky future benefits.

Thinking about restoration options Freshwater Diversions

Build land more slowly Mimics nature’s way of building new land; expected to be “high-quality” land Is sustainable: continuous delivery of water and sediment But will it actually deliver what we expect?

Will the sediment remain where it is directed? Will enough sediment be delivered?

Is the process too slow for our immediate needs? Tradeoff: Do the benefits of restoring in a natural way that delivers high-quality

land outweigh the risks of waiting for this land to be restored?

Rapid Land-Building Builds land quickly

But is it “low-quality” land? Will it “stick”? Is there enough sediment?

There are, thus, obvious tradeoffs: Can be built quickly: earlier benefits may mean less risky benefits

So does the risk reduction by moving benefits up in time outweigh the potential liabilities of land restored using this technology?

A test case RLB: builds 780 acres up-front that erode

at 1% / year, at cost of $28.7 M FWD: builds 2,500 acres over 20-year

period (12%/yr), at cost of $9.6 M

Rapid Land Building vs. Freshwater Diversion

-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000

Mill

ion

s

$ Benefits / Acre / Year

NP

V

FWD

RLB

FWD-hurr/land/disc

RLB-hurr/land/disc

Concluding Thoughts This is only a very preliminary look at the issue of risk in

assessing restoration projects I need help!

Is my thinking regarding these risks correct? Is there a better way to account for them?

Do the data exist to appropriately account for these risks? Do the models used to predict restoration project

performance account for the risks cited here? Are policymakers accounting for the risks?

Rapid land-building versus “slower”, more natural land-building processes: future benefits are more risky and worth less in present-value terms: are we accounting for this in our policy comparisons?

Questions? Comments?