Avoided Costs: The Economics of Watershed Restoration

Forested headwaters are the source of much of the West’s drinking water. Protecting and restoring these watersheds makes economic sense, especially in forests prone to catastrophic wildfire, as many of the West’s headwaters are or are becoming due to the impacts of climate change. The costs of protecting and restoring watersheds before disaster strikes can help avoid costs associated with emergency fire suppression, fire recovery efforts, and the increased cost of water treatment and loss of power production when waterways and reservoirs fill with ash and debris following catastrophic wildfire.

In the Academy’s June 18, 2014 webinar, our guests Kim Carr, Sustainable Initiatives Coordinator at the Sierra Nevada Conservancy, and Dale Lyons, Director of Freshwater Programs at The Nature Conservancy, New Mexico and former water resource manager for the City of Santa Fe, showed us how two approaches to avoided costs assessment help water managers make the economic case for the value of watershed health.

A Rigorous Approach to Avoided Costs: The Mokelumne River Watershed

Many of the forests of California’s Sierra Nevada are in poor health, due to over growth and a build up of dry fuels. In addition to poor forest health, the state is experiencing a third year of drought and an unprecedented wildfire season, in that it has been year round. There are not enough resources to treat the number of acres necessary to achieve a historic forest state. In this historical state, the number of trees per acre is reduced to the point that when fires inevitably come through, they are actually beneficial to the health of the forest.

Untreated (left) and treated (right) Sierra Nevada forests in Amador County, CA. Photos: Sierra Nevada Conservancy
Untreated (left) and treated (right) Sierra Nevada forests in Amador County, CA. Photos: Sierra Nevada Conservancy

The Sierra Nevada Conservancy is a California state agency that works to increase environmental and economic sustainability and social well being of the Sierra Nevada region and its communities. The Conservancy recently undertook an analysis to determine if it makes economic sense to increase investment in fuel treatments to reduce the risk of large, damaging wildfires in the Sierra Nevada. They chose to highlight the Mokelumne River watershed as a case study. The Mokelumne is located just south of Lake Tahoe and supplies 90% of the water used in San Francisco East Bay communities, such as Berkeley and Oakland.

The Conservancy’s study was inspired by forest to faucet programs that have come online in the last few years, particularly Denver Water’s partnership with the US Forest Service, which highlighted the need for water providers to work cooperatively with upstream land managers. The primary approach of the study was to calculate the avoided costs of implementing forest treatments to reduce fire risk compared to paying costs associated with wildfire.

There were four main goals for the project:

  • Through collaboration, identify forest treatments and locations that show multiple benefits such as biodiversity, wildlife habitat, and water protection
  • Encourage new investment in forest treatment to increase pace and scale of restoration and reduce fire risk
  • Identify new investment/investors
  • Educate water users and ratepayers in the more populated regions of the state on the link between forests and water supply

The Sierra Nevada Conservancy worked with nearly 20 partners including the US Forest Service, the Nature Conservancy, the water provider for the East Bay, and the local electric utility who operates hydropower dams in the watershed, as well as local community groups. Together, these partners modeled a series of fires in the watershed both before and after fuel treatments. The models showed that after treatment the fires would burn 40% less acres and 75% less acres would burn at high intensity. After the fire models were completed, the Conservancy conducted an economic analysis to determine the costs and benefits associated with fuel treatments.
 

Table 1. Costs and benefits of treating a third of the forest in the watershed. Source: Mokelumne Avoided Cost Analysis
Costs Low High
Fuel Treatment $16,000,000 $68,000,000
Benefits Low High
Structures Saved $32,000,000 $45,600,000
Avoided Fire Cleanup $22,500,000 $22,500,000
Carbon Sequestered $19,000,000 $71,000,000
Merchantable Timber from Treatment $14,000,000 $27,000,000
Avoided Suppression $12,500,000 $20,800,000
Biomass from Treatment $12,000,000 $21,000,000
Avoided Road Repairs and Reconstruction $10,630,000 $10,630,000
Transmission Lines Saved $1,600,000 $1,600,000
Timber Saved $1,200,000 $3,130,250
Avoided Sediment for Utilities (water supply) $1,000,000 $1,000,000
Total Benefits $126,430,000 $224,260,250

 

The key findings of the Mokelumne avoided cost analysis were:

  • Fuel treatments can significantly reduce size and intensity of wildfires
  • The economic benefits of fuel treatments can be three or more times their costs (versus suppression and post-fire restoration)
  • There are many beneficiaries from increased fuel treatments, especially taxpayers
  • The estimated volume of sediment from post-fire erosion is estimated to be large, however the avoided costs to downstream utilities were less than anticipated

One of the major action items to come out of the study was a partnership with the National Forest Foundation to establish the Mokelumne Watershed Fund. This is the first step toward identifying new forest health investors and creates mechanisms where organizations and individuals can contribute to fuel treatments in the watershed.

A Local Approach: Santa Fe River Watershed

Forty percent of the municipal water supply for Santa Fe’s 80,000 residents comes from the Santa Fe River, which flows from the Sangre de Cristo Mountains, just east of town. Most of the river’s watershed lies in the Santa Fe National Forest. The water supply is threatened by drought and the impacts of climate change to the local hydrologic cycle. In particular, these factors, combined with a history of fire suppression and subsequent forest overgrowth, increase the risk of catastrophic wildfire in the area. For example, sediment and debris from the 2000 Cerro Grande Fire caused $17 million in damage to the water supply delivery infrastructure of Los Alamos, New Mexico.

The forested headwaters of the Sangre de Cristo Mountains provide drinking water to the City of Santa Fe. Photo: Barbara Reddoch
The forested headwaters of the Sangre de Cristo Mountains provide drinking water to the City of Santa Fe. Photo: Barbara Reddoch

In response to the threat of wildfire, the City of Santa Fe launched the Santa Fe Municipal Watershed Project in 2002 in partnership with the US Forest Service to treat over 5,500 acres of forest. Recognizing the need for a long-term solution, the City formed a collaborative planning group with the Forest Service, the Santa Fe Watershed Association and The Nature Conservancy. The group was awarded a USFS Collaborative Forest Landscape Program grant to develop a watershed management plan. The resulting 2009 twenty-year Santa Fe Municipal Watershed Plan established the method and plan for forest treatments, the protocol for water quality and quantity monitoring, promoted public awareness and outreach, and recommended establishing a permanent funding source financed by rate payers for ongoing watershed protection.

To make the transition from a grant-funded program to a ratepayer supported program, the City of Santa Fe needed to make the case that the money that had been spent in the municipal watershed to protect water supply was effective and less than the avoided costs of fire suppression and rehabilitation. The difference between the planned treatments and the avoided costs were stark: the cost to the City to retain the restored forest condition over 20 years was estimated at $5.1 million, or an average of $258,000 per year. In contrast, fire suppression and rehabilitation costs for a 10,000 to 40,000 acre wildfire impacting some portion of the municipal watershed could be between $11.9 and $48 million. The cost to dredge, haul and dispose of 2,000 acre feet of sediment and ash that could accumulate in the City’s reservoirs following a wildfire would likely be between $80 million and $240 million. Without treatment, the likelihood of such a wildfire occurring would be 1 in 5 in any given year.
 

Table 2. Data Sources for Avoided Cost Estimates of Santa Fe River Watershed Treatment
Avoided Cost Type Assumptions
US Forest Service Fire Suppression and Rehabilitation Costs Pacheco and Las Conchas Fires, 2011

  • Average suppression cost: $640/acre
  • Average rehab cost: $550/acre
Water Utility Impacts Assumed 4 month loss of supply

  • $2M associated with additional well pumping costs

Reservoir dredging

  • Assumed 415 to 2,000 acre-feet sediment/debris through fire and debris flow modeling
  • Literature review revealed dredging costs for Denver Water and Aurora Water at the Strontia Springs Reservoir after Hayman and Buffalo Creek Fires were $75/cubic yard

No data available for potential increase in water treatment costs

 

With this information in hand, The Nature Conservancy and the Watershed Association conducted a survey in 2011 that found that 82% of ratepayers were willing to pay a charge of 65 cents per month to protect the City’s water supply from the risk of catastrophic wildfire. With the community on board, rate increases took effect in 2013 and provide $220,000 annually for forest restoration through Santa Fe’s Watershed Investment Program.

The Bottom Line

Avoided costs assessments can be completed with any level of effort and resources. The Mokelumne Avoided Cost Analysis was a three year effort that cost approximately $1 million. Most of the expertise and resources, however, were in-kind with less than 20% of the total budget being actual cash. That 20% was used for a consultant to do the economic analysis. The overall costs were driven by an emphasis on scientific rigor and methods that would withstand intense scrutiny, since results were expected to show great cost savings on the preventative side that had not been considered in prior decision making.

However, an initial avoided cost study can be done with fewer resources and in less time. The development of early avoided cost estimates for Santa Fe’s 20-year forest management plan took one year at a cost of approximately $75,000. Those estimates were refined during a NEPA Environmental Assessment process. While the Environmental Assessment cost $200,000 in consulting fees, City staff completed the portion of that assessment that focused on avoided cost.

An avoided cost analysis, no matter the level of resources available to complete it, is a helpful tool in communicating to stakeholders why it’s worth the cost of investing in restoration and protection of forested headwaters. Whether your organization is prepared to undertake a rigorous study with implications for your entire region, or has just enough resources for a simpler local analysis, avoided cost estimates may be a key element in your efforts to protect your water system from the impacts of climate change.

Tools

Data Tools:

Benefit-Cost Analysis Tool. Federal Emergency Management Agency. This FEMA software facilitates the process of preparing a Benefit Cost Analysis (BCA). Using FEMA-approved BCA software will ensure that the calculations are prepared in accordance with OMB Circular A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs and FEMA’s standardized methodologies.
http://www.fema.gov/benefit-cost-analysis

Institute of Water Resources (IWR) Planning Suite. US Army Corps of Engineers. This tool was developed by the U.S. Army Corps of Engineers in collaboration with the USDA Natural Resources Conservation Service. This is a tool to support cost effectiveness and incremental cost analysis for environmental planning. The analysis has three dimensions:

  • measurable environmental outputs (e.g., species diversity, forest productivity, water quality),
  • costs (e.g., implementation costs, costs of lost opportunities, incidental benefits), and
  • management actions (i.e., incremental versions of potential policies and management plans).

The analysis highlights those combinations that score the highest for different objectives that you may select (e.g., cost effectiveness). The tutorials and manual are good, and tool development is ongoing to incorporate multi-criteria analysis and an uncertainty module.
http://www.pmcl.com/iwrplan/SoftwareInfo_1_0_11_0.asp

Report:

Mokelumne Avoided Cost Analysis. Sierra Nevada Conservancy. This report and its appendices comprehensively described the motivation, methodologies, data, analysis results, and implications of a landscape-scale fuel treatments program in the upper Mokelumne watershed in the Sierra Nevada mountains of California.
http://www.sierranevada.ca.gov/our-work/mokelumne-watershed-analysis

Resources