Evaluating the Cost Effectiveness of Restoration

Ecological restoration techniques expand the water quality manager's range of treatment options. Selecting the most cost-effective techniques is critical to the success of any restoration project. The two primary economic approaches for evaluating projects are cost-benefit analysis and cost-effectiveness analysis. Cost-benefit analysis is used to evaluate whether a project should be undertaken, by ensuring that its benefits are commensurate with its costs. Cost-effectiveness analysis is used to compare two or more alternatives that achieve the same objective and can also be used to evaluate whether benefits are commensurate with costs. This chapter focuses on cost-effectiveness analysis, which is the most appropriate analytical technique for projects in which project objectives have already been defined.

Defining Cost Effectiveness: Cost Minimization and Benefit Maximization

Two possible approaches for evaluating the cost effectiveness of restoration approaches are cost minimization and benefit maximization. The most cost-effective restoration technique either (a) achieves the water resource objective at the lowest cost (cost minimization) or (b) produces the greatest benefits for the same cost (benefit maximization).

Cost Minimization

Cost minimization evaluates the relative cost effectiveness of alternatives based solely on cost. This approach is appropriate for comparing point source controls alone with various alternative restoration techniques, if they all have the same objectives and benefits.

Benefit Maximization

Benefit maximization encompasses evaluations of benefits. Because ecological restoration has the potential to produce many additional ecological and social benefits compared to traditional point source controls alone (Table 5-1), benefit maximization analysis is often preferable for evaluating the cost effectiveness of restoration projects.

Current Limitations of Cost-Effectiveness Analysis

Cost-effectiveness analysis has only recently been applied to ecological restoration efforts, and several challenges must be surmounted, especially a general lack of information. Measures of stream restoration costs and benefits are not widely available, partly because the science of stream restoration is in its early stages. Although considerable restoration work has been done, much of the success of restoration either has not yet been realized or has not been properly documented. Additionally, restoration objectives and benefits are often not easily quantifiable, and alternative projects may vary widely in both the types of techniques used and benefits they may provide. Moreover, because restoration techniques often may complement rather than replace point source controls, assessing relative cost effectiveness can be a complex process.

Current Limitations of Cost-Effectiveness Analysis

Cost-effectiveness analysis has only recently been applied to ecological restoration efforts, and several challenges must be surmounted, especially a general lack of information. Measures of stream restoration costs and benefits are not widely available, partly because the science of stream restoration is in its early stages. Although considerable restoration work has been done, much of the success of restoration either has not yet been realized or has not been properly documented. Additionally, restoration objectives and benefits are often not easily quantifiable, and alternative projects may vary widely in both the types of techniques used and benefits they may provide. Moreover, because restoration techniques often may complement rather than replace point source controls, assessing relative cost effectiveness can be a complex process.

Existing restoration studies provide some information that can be used to approximate costs and benefits, and more information will become available as restoration techniques are applied more widely.

Why is Restoration Cost Effective?

The two primary economic reasons why restoration may be more cost effective than point source controls are that (1) restoration often has lower marginal costs, and (2) restoration provides a wider range of ecological benefits. Marginal costs refer to the incremental costs of removing an additional unit (e.g., kilogram) of pollutant.

Because stringent controls of point source dischargers have been required for many years, the most cost-effective point source pollution reduction often has already been achieved. The incremental cost of removing remaining pollution with additional point source control will be greater than the average costs of existing point source controls on a per unit basis (e.g., per kilogram of BOD removed). For example, 80 percent of BOD may have been removed by secondary treatment at an average of $260 per metricton removed. Removing an additional 10 percent by combining secondary treatment and nutrient removal may cost $560 per metric ton removed, or more than twice the cost per ton of secondary treatment. Using advanced secondary or tertiary treatment to remove an additional 5-8 percent, for a total reduction of 95-98 percent, may cost approximately $2,600 per metric ton removed, or ten times the cost per ton of secondary treatment (EPA 1978). By comparison, using ecological restoration techniques, such as wetlands, to remove BOD, will likely be far more economical per unit of pollutant removed. This comparison indicates that restoration has the potential to achieve water quality improvements for some parameters equivalent to new point source controls at a lower cost. Finally, because ecological restoration has not been extensively used to manage stream quality, many cost-effective restoration opportunities still exist.

Additionally, restoration generally achieves a broader range of benefits with additional value compared to additional point source controls (Table 5-1). Because the range of benefits is so broad, assessing the benefits of restoration will often rely on best professional judgment.

Evaluation Cost Effectiveness

Because procedures for cost minimization and benefit maximization analyses differ, the type of evaluation to be used must be selected early in the cost effectiveness assessment process (Figure 5-1, not available electronically). Benefit maximization includes a benefit estimate component that the cost minimization approach does not. However, the first step for each is identical. Estimating benefits for Step 2 of the benefit maximization approach can be complex and contains significant uncertainties.

Cost Categories: Costs are divided into two primary categories, capital costs and operating costs. Capital costs are all costs incurred to get a project underway, including planning, purchasing, land acquisition, construction, and financing. Operating costs are all costs incurred to continue operation of an ongoing project, including maintenance, monitoring, and equipment repair and replacement.

Cost Distribution: All potentially affected institutions should be identified to determine how costs might be apportioned fairly. The availability of financing is clearly a matter of practical concern for most projects, particularly projects with joint funding or cost-sharing arrangements. Adequate funds must be obtained from all potential sources to finance restoration projects, and public funding sources are frequently so constrained that only limited projects can be funded. Project managers should understand these limitations when planning how to obtain sufficient financing.

Timing: Different alternatives may incur costs and generate benefits in different years. These differences can be accounted for using a standard technique called net present value analysis, which converts future costs and benefits into present ones based on society's preference for the timing of cash flows. The key parameter in net present value analysis is the discount rate, a numeric expression of the preference for benefits in the present over benefits in the future. Selecting an appropriate discount rate is an important consideration, because the selected discount rate can dramatically affect the analysis. Individuals generally prefer to have benefits of value sooner rather than later and are less concerned about future costs than immediate costs. The discount rate used in project analysis attempts to quantify these preferences. Higher discount rates favor projects with more immediate benefits or costs incurred further into the future by effectively reducing future values. Lower discount rates increase the value of future benefits or costs. Federal agencies such as the Office of Management and Budget (OMB), Congressional Budget Office (CBO), and General Accounting Office (GAO) have developed policies for selecting appropriate discount rates for evaluating government investments that are useful guides for restoration projects (OMB 1983 and 1986; Hartman 1990; and GAO 1983). In general, project managers use discount rates to reflect a project's cost of capital, or the interest rate on loans used to fund the project. Estimating Benefits

Determining the benefits of each project to be evaluated is critical to comparing costs and benefits. Types of Benefits: Benefits fall into three general categories:

• Prioritized benefits are ranked by preference or priority, such as best, next best, and worst. In many cases, available information may be limited to qualitative descriptions of benefits and some indication of their magnitude; such information may be sufficient, however, to rank the benefits of the alternatives. Establishing priorities using this method requires only that results of comparing costs and benefits can be ranked.
• Quantifiable benefits can be counted but not priced. If benefits are quantifiable on some common scale (e.g., percent removal of fine sediment as an index of spawning substrate improvement), a cost per unit of benefits can be devised that identifies the most efficient producer of benefits. If all options being considered can be applied at any one scale, then the best option is the most efficient one.
• Monetary benefits can be described in monetary terms. Knowing the economic value of ecological benefits is desirable for evaluations of alternatives. For example, when restoration provides better fish habitat than point source controls, the monetary value of improved fish habitat (e.g., economic benefits of better fishing) needs to be described. Assigning a monetary value to game or commercial species may be relatively easy; other benefits of improved habitat quality (e.g., improved aesthetics) are not as easily determined; and some (e.g., improved biodiversity) cannot be quantified monetarily. Each benefit must, therefore, be analyzed differently.

The scale of benefits and costs is an important consideration. Restoration projects may sometimes be small components of larger watershed restoration programs. Results of a project may be realized quickly only at the local level with relatively small results at the watershed level. Summing all potential benefits and costs across all projects within a watershed over a number of years provides a cumulative perspective through which the cost effectiveness of ecological restoration can be more realistically determined. Value is also an important consideration in the identification of benefits. There are several ways to value the environment based on human use and appreciation. Commercial fish values can be calculated, recreational or sportfishing values can be estimated by evaluating the costs of travel and expenditures, some aesthetic and improved flood control values can be estimated through changes in local land or housing markets, and social values (such as wildlife, aesthetics, and biodiversity) can be estimated by surveying people to determine their willingness to pay for the achievement or maintenance of these values. Integrating Costs and Benefits

If all benefits can be quantified monetarily, total costs can be compared to benefits in two ways. The first comparison is expressed as a cost-to-benefits ratio, from which the alternative with the lowest cost-to-benefits ratio is selected. The second comparison is expressed in terms of net value (i.e., subtracting costs from benefits), from which the alternative with the highest net value is selected. Neither approach is the most appropriate in all cases. In many cases, considering as many measures as practicable—cost per unit, cost-to-benefits ratios, and net present value —is advisable. A clear understanding of objectives is essential for the analysis. Moreover, cost effectiveness is relative and may change under different circumstances. For example,

• A specific combination of restoration practices in one location may produce great benefits at a low cost, whereas others may produce few benefits at a large cost (Schueler 1992);
• Some water quality problems (e.g., loss of habitat) are not amenable to point source treatment at any cost; and
• Some water quality problems cannot be reduced through any reasonable degree of restoration. In summary, evaluating the cost effectiveness of restoration techniques requires considerable preparation, including the following:
• Identifying water quality objectives;
• Understanding how well each alternative achieves objectives and creates benefits;
• Understanding costs of alternatives for achieving objectives;
• Estimating prioritized, quantifiable, or monetary benefits obtained from each alternative;
• Estimating the value of the range of benefits created by each alternative;
• Understanding the appropriate scale of the analysis; and
• Selecting the method for comparing costs and benefits of alternatives.

Also, information on costs and benefits or outcomes should be carefully collected and organized by project managers. Sharing information on restoration efforts with other practitioners will help to establish a cost-effectiveness track record for restoration that will allow easier and more accurate evaluations in the future.

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