Billion Dollar Runoff
By Sharon Khan
For economists, valuing the environment is not easy. The benefits that accrue from environmental protection do not have price tags. They are not traded on Wall Street. Yet they are very tangible in terms of economic prosperity, human and ecological health, and where you will decide to vacation this summer.

Economics is the science of figuring out the best way to allocate resources – a resource is anything of which there is less than an infinite supply. Money is the common denominator that allows economists – and everyone else – to compare the relative values of different resources. They can then decide what to buy and what not to buy.

So what is the value of clean water? Economists start answering the question by assigning each resource a price. They build models of the market forces of supply and demand to determine who gets to use a resource, when they can have it, and how much they can have.

When the resource is a product, the answer is pretty straightforward: if you can afford it, you buy it and it is yours. When the “product” is a natural resource, owned by the public, shared by everyone and paid for by no one, it is much more difficult to assign a meaningful price.

Assigning a value for a natural resource is the economist’s first job when they are asked to help policymakers decide how society should use (or protect) our rivers, beaches, forests, air and other natural resources. It is the most important step in determining how we will use, or misuse, the resource. Consider stormwater runoff:

In 1998, EPA economists valued the benefits of regulating stormwater from small construction sites and municipal storm sewer systems. Using methodology that is largely accepted throughout the field of economics, EPA concluded that the benefits of stormwater regulations “fall between $106 million and $574 million [annually], with a possible upward benefit range of more than $3 billion.” The payoff was there, so EPA started drafting new stormwater regulations.

In 2002, EPA proposed stricter stormwater regulations for the construction and development industry. EPA cited the benefits of reducing stormwater runoff from these industries and municipalities to be $1.1 billion per year.

But in 2004, EPA reversed their decision. They dropped their proposed stormwater regulations because the benefits, EPA now said, were a mere $14.5 million per year. Somewhere along the way the public got soaked for $1,085,500,000.

Economics may be known as the dismal science, but we can’t blame this on those gloomy economists. This was a purely political calculation. US EPA and the White House’s financial review arm (the Office of Management and Budget) jiggled the equations and changed the rules of the game to drastically cut the value of keeping polluted stormwater runoff out of our waters. The new regulations were now “too expensive” to implement – the value of clean water was too low to bother protecting.

So where did the $14.5 million estimate come from? Between 2002 and 2004 EPA rewrote the book on how they would assign prices on our natural resources. EPA excluded their consideration of the benefits from long-term improvements of water quality, ignored the costs of flooding, and discounted the value of habitat preservation. EPA identified an “improved” model for estimating the benefits of environmental protection – a model that disregards the effects of sewage, garbage, and sediments contaminating the Chesapeake Bay, the Great Lakes, and all of our coastal waters. In one swooping change of a model, EPA forced government economists to ignore the enormous value of clean beaches and safe seafood.

But EPA’s new model was an improvement on the old system, right? Actually, EPA’s 2004 benefits value was based on 1983 hypothetical survey data. The science of economics has made a lot of progress in valuing natural resources over the past 22 years – so why is EPA reaching back to 1983 to figure out how much Americans are “hypothetically willing to pay” for clean water?

The answer is not in the numbers. Economics cannot explain the change. Politics can. EPA has reached back in time to find studies that justify relaxing the rules on stormwater pollution. They have manipulated economic theory to yield the results they want to see.

EPA has toyed with their model to recognize each dollar spent by construction and development company executives. EPA ignores the dollars that we pay to clean up from floods, to take toxins out of our drinking water, and to find something else to do when the beach is closed. Waterkeeper Alliance is determined not to let this misuse of science stand.

Stay tuned for the fall 2005 issue for more on EPA’s misuse of environmental economics.

Putting A Price Tag On Clean Water
EPA now prefers the “willingness to pay” model to estimate the dollar value of clean water, safe drinking water and healthy seafood. But it isn’t so simple to put a price tag on something you already own. The question, “How much are you willing to pay for a shirt” makes sense because it isn’t yours – you balance how much you want it against how much you want something else (or you can always save the money.) But is the question “How much are you willing to pay for clean water?” really the best way to assign a dollar value to a natural resource? The question assumes that the polluter – not the public – owns the water. But the public does own the water.

The True Value Of Clean Water
EPA’s 1995 report on the Economic Benefits of Runoff Controls states that cleaner water and “the beauty of natural surroundings” that would result from new stormwater controls could raise property values near clean waterways by up to 28 percent (that’s $64,596 for an average priced home in the US today.) Factor in the benefits from flood protection, reduced dredging to keep our harbors navigable and reducing the number of summertime beach closures and you can see how EPA reached the original $1.1 billion value.

Sharing the Waste, Not the Wealth
It’s strange how some of the most strident advocates of the free market system turn a blind eye when companies steal from the public. Economists call it an externality. Environmentalists call it pollution. In a free market each company should keep the costs of doing business to themselves, the same way they keep the profits.

Like Money For Water
Americans value clean water significantly higher than EPA economists do. The Trust for Public Land found that from 1998 to 2004 Americans voted to pay $14.2 billion on ballot measures that provide funding for water protection – that’s voters imposing new taxes on themselves. Talk about willingness to pay for clean water.

Money Does Grow On Trees
Two regional economic surveys documented that conserving forests on residential and commercial sites enhances property values by an average of 6 to 15 percent.