California’s new funding paradigm for water storage infrastructure requires that projects provide environmental benefits as well as hundreds of thousands of acre-feet of new storage. How will the state reconcile this apparent paradox? The answer is via the Water Storage Investment Program (WSIP). This carefully designed, competitive program includes long-term, state agency oversight to ensure that environmental promises are kept. In this Hydro Note, M&A’s Matt Weber examines WSIP’s mandate for providing public and ecosystem benefits… and the challenges associated with monetizing them.
Criteria for WSIP funding: Public and ecosystem benefits
California’s Water Commission is currently in the midst of a challenging rulemaking process to guide the selection of WSIP projects. The key phrase for projects competing for WSIP funds — which total $2.7B — is “return on public investment.” In other words, given that funding originates from a public bond, projects must fulfill public as well as private benefits. As an example, under the statutory language, two goals — increasing water supply reliability and improving the Bay-Delta ecosystem — would be considered co-equal.
The statute lists five categories of public benefits for WSIP purposes: ecosystem improvements, water quality improvements, flood control, emergency response, and recreation.
Under WSIP, only the portion of a project providing public benefits may receive state funds, and only 50% of the total project cost may be funded. Furthermore, ecosystem benefits must account for at least 50% of these public benefits. These requirements have two important impacts. First, the public benefits of a potential project must be monetized, or quantified in dollars. Second, despite their importance, ecosystem benefits are typically the most difficult type of public benefit to quantify.
To understand ecosystem benefits in the context of WSIP, consider the salmon that use the Bay-Delta as a gateway to spawning grounds. In addition to their recreational or commercial fishing value, salmon provide a “non-use” value. As repeatedly documented in environmental economics studies, non-use values reflect the public’s concern about the fate of environmental resources such as endangered salmon — even if they don’t physically utilize them. Surveys of “willingness-to-pay” are the best practices method for quantifying public benefits when non-use values are an issue ,.
Monetizing public ecosystem benefits
As rulemaking has proceeded, California’s progressive experiment has received plenty of public comment from all sides. Interestingly, the crux of the matter — that is, the nuts and bolts of monetizing public benefits — has received relatively little attention. There are probably two reasons for this.
First, before an ecosystem service can be monetized, it must be defined — a rigorous process that requires hydrological, ecological, and/or other types of scientific modeling. For example, to claim ecosystem benefits related to salmon improvements, the applicant must first prove that it has excess water to store, which requires the use of state-issued models and climate change projections. The applicant must then show how operations would positively affect salmon as compared to baseline conditions. This involves using a model such as SALMOD. Only then is there an adequate foundation for monetizing fish abundance changes. And, of course, this process must be repeated for each type of public benefit.
The second reason is that few water planning professionals are familiar with monetizing ecological resources. Although the practice is well-known in niche academic circles, evidence of its application to resource management decisions is sparse, except at the federal level, where it has been applied for actions such as new air or water standards that are likely to cause significant economic impacts.
Key challenges for WSIP applicants
Given the unfamiliarity and difficulty of estimating public benefits, the California Water Commission has prepared a 400+ page technical guidance document for WSIP applicants. The document provides clarity on many hurdles applicants will face; however, as expected with any new process, multiple challenges remain:
- Projects must compete on their relative return on public investment. It isn’t enough to prove 50% public benefits and 50% ecosystem benefits; rather, the higher the ratio, the more likely the project is to be funded. Unfortunately, comparing projects will be extremely difficult given the varying sources of public benefits and techniques for monetization, as well as the uncertainty in both the biophysical and economic analyses. The precedent for projects to compete in this way is new; until now, it has been considered progressive if a single, one-off project even attempts to consider ecosystem service values.
- Data for ecosystem service valuation is lacking. A huge portion of the ecosystem benefits share is likely to be claimed for salmon improvements. However, the most recent published salmon value in California’s Bay-Delta dates back to 1990. Given the importance of salmon values, it would make sense for California to sponsor a study using current preference data and best practices. Such a study could also establish values for additional types of relevant ecological changes, such as those affecting birds, amphibians, and non-salmonid fish. Although individual applicants have no incentive to conduct intensive research of this type, they could all use this data in formulating projects. Reducing the uncertainty of ecosystem values would put the spending of $2.7B of WSIP funds on a much stronger foundation.
- Projects will have to account for net ecosystem benefits — in other words, degradation as well as improvements. Environmental impacts are a concern with any new project, but likely a greater concern for surface storage projects than for groundwater storage projects. Monetizing environmental losses is complex, and the Water Commission’s technical reference appears to provide little guidance on this.
Challenges notwithstanding, WSIP marks an exciting time for California — and actually for environmental management in general. California’s ongoing investment in terms of money, program design, and ultimately evaluation will yield dividends for a long while to come.
About Matthew Weber, Ph.D.
Matt Weber is a Senior Water Resource Economist with M&A. His background in hydrology and environmental economics integrates biophysical science with the social dimensions of water planning. He has used cutting-edge econometric modeling techniques to quantify ecosystem service values associated with rivers, including recreational and nonuse values, publishing extensively on these and other topics. Matt also applies qualitative research techniques to glean defensible and meaningful insights on water management. Prior to joining M&A, he spent 7 years as a postdoctoral economist at the USEPA.
- Learn more about Matt and his work.
- Read Matt’s Hydro Note on quantifying ecosystem service values for the Santa Cruz River.
Adamowicz, W.L. 2004. What’s it worth? An examination of historical trends and future directions in environmental valuation. Australian Journal of Agricultural and Resource Economics, 48(3), 419-443.
Bateman, I.J., R.T. Carson, B. Day, M. Hanemann, N. Hanley, T. Hett, M. Jones-Lee, G. Loomes, S. Mourato, and E. Özdemiroglu. 2002. Economic Valuation with Stated Preference Techniques: A Manual. Edward Elgar, Northampton, MA.
Louviere, J.J., D.A. Hensher, and J.D. Swait. 2000. Stated Choice Methods: Analysis and Applications. Cambridge University Press, Cambridge, UK.
Mitchell, R.C., and R.T. Carson. 1989. Using Surveys to Value Public Goods: The Contingent Valuation Method. Resources for the Future, Washington, DC.
Morgenstern, Richard D. ed., Economic Analyses at EPA Assessing Regulatory Impact, Washington, DC: Resources for the Future, 1997.
Weber, M.A. EPA Use of Ecological Nonmarket Valuation. May, 2010. Association of Environmental and Resource Economists Newsletter 30(1): 26-35.
Weber, M.A. 2015. Navigating Benefits Transfer for Salmon Improvements in the Western US. Frontiers in Marine Science 2: 74.
Weber, M.A., Meixner, T., and J. Stromberg. 2016. Valuing Ecosystem Services of an Effluent-Dominated River in the Southwestern US. Ecosystem Services 21: 59-71.
 See California Assembly Bill 1471
 Bateman et al., 2002; Louviere et al., 2000; Mitchell and Carson, 1989
 To learn more about non-use values, see Weber (2015, 2016) and/or read Matt’s previous Hydro Note on the Santa Cruz River
 Adamowicz, 2004
 Morgenstern, 1997; Weber, 2010