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Olin Conference on Watershed Management

Watersheds, Natural Capital, and Water

Barton H. Thompson, Jr.
Stanford Law School


The Importance of Watershed Preservation

Water planners long have recognized the importance of preserving key watershed lands. When Congress formally authorized the creation of national forests in the Organic Administration Act of 1897, it naturally hoped that national forests would provide a "continuous supply of timber for the use and necessities" of the nation. But to Congress, the first purpose of national forests was "securing favorable conditions of water flows." When cities began to import water in the 19th and early 20th centuries, they frequently and for good reason chose areas that were protected from logging and other forms of development (e.g., San Francisco's choice of the Hetch Hetchy Valley in Yosemite National Park as the site of its major water reservoir) or took active steps to protect the land (e.g., creating the Adirondacks "forever wild" preserve in New York).

Watershed preservation remains of importance today to both water quantity and water quality. On the water quantity front, watershed preservation can help ensure a steadier, and thus more readily captured and stored, supply of water in surface waterways. More importantly, watershed development can increase sedimentation that in turn can reduce the storage capacity of existing surface reservoirs. Watershed preservation may be of even greater value to groundwater yield. In paving over watersheds, development reduces groundwater recharge both by redirecting water flows and impeding filtration. One study by American Rivers, NRDC, and Smart Growth America estimated that development in the United States between 1982 and 1997 reduced annual recharge by hundreds of billions of gallons per year. The annual loss in groundwater in the Washington, D.C. metropolitan area was estimated to be as high as 55.6 billion gallons. The study concluded that large losses also were incurred in regions surrounding Charlotte (up to 31.5 billion gallons), Greenboro, N.C. (15.7 billion), Greenville, S.C. (29.5 billion), and Raleigh-Durham-Chapel Hill (21.9 billion).

Recent years have seen significant discussion of the importance of watershed preservation for water quality. When land in the vicinity of a surface waterway is developed, the uses to which the land is put frequently add contaminants to the waterway. Nonpoint pollution, in the form of runoff from agriculture, livestock operations, construction sites, parking lots, roads, and other uses, as well as the leaching of waste from septic tanks, is today the major threat to the nation's surface waterways. Undeveloped land, moreover, frequently helps reduce contamination. Both wetlands and soils filter out nutrients and other contamination from runoff before the runoff reaches the main course of a waterway. Vegetation slows down runoff, permitting solid pollutants to settle out, and stabilizes soil, thus reducing contamination from siltration. Land preservation thus performs double duty in protecting surface water quality: it eliminates a major source of contamination, while also protecting the waterway from those nonpoint sources of contamination that do exist. Development also increases the contamination threat to groundwater aquifers.

Natural Capital Versus Technological Investments

There are technological fixes to the various problems that watershed development can bring. If sedimentation reduces surface storage capacity, for example, the government can dredge the reservoir, raise the dam level, or turn to other water sources. If groundwater recharge drops, water users can mine the aquifer by pumping to ever greater depths or again seek out alternative water supplies. If watershed development leads to water contamination, water suppliers can filter the water. As a result of the fallout from prior development, many of these solutions (e.g., water filtration) already are ubiquitous.

Yet these technological fixes often are inferior to the "natural services" that intact watersheds provide. First, the technological fixes often do not solve the entire problem. Filtration systems, for example, do not treat all contaminants. Second, technological solutions typically are very expensive. Based on the experience of a number of U.S. cities, Walter Reid has estimated that every dollar used to protect existing watersheds can save anywhere from $7.50 and $200 in water treatment costs. Dredging, dam expansion, and water importation are all similarly costly. Third, technological fixes frequently raise serious environmental concerns. Groundwater mining not only will ultimately exhaust the resource, but in the interim can lead to subsidence, desertification, salt water intrusion, spreading contaminant plumes, and biodiversity loss. Dam expansion can lead to further land loss and stream modification, while new water imports bring all of the traditional environmental problems of water supply projects. Finally, watershed preservation can provide a variety of positive externalities such as biodiversity protection, open space, and even carbon sequestration.

In summary, natural capital (in the form of watershed services) and technological investments (in filtration facilities and other engineering solutions) are substitutes. And despite their ascendancy in the 20th century, technological investments in many cases are the inferior means of providing water supply and quality. An important question therefore is how key governmental and private players, including water suppliers, developers, land use planners, and environmental regulators, evaluate the choice between natural capital and technological investments. Is there a bias in favor of technological investments due to existing governmental policies, institutional structures, market imperfections, scientific uncertainties, or problems in valuing the natural watershed services? And if a bias exists, how can the United States eliminate that bias? How, in short, can we get the market for natural services to work correctly? Or is regulation the only policy solution?

New York City and the Catskills

In recent years, a number of ecologists and economists have touted New York City's efforts to preserve the Catskills watershed, one of three major basins from which the city obtains its water supply. In the view of these proponents, New York City's preservation efforts show that natural services can attract investment. In my presentation, I plan to focus on whether and how the United States can encourage water suppliers to invest in economically efficient watershed protection. New York City's experience is a good starting point for this discussion, so here I will quickly summarize New York's efforts and raise some of the interesting issues posed by those efforts.

In the late 1990s, New York City embarked on a $250 million program to acquire and preserve up to 350,000 acres of land in the Catskills watershed. A combination of federal regulation and cost realities drove New York City to this program. Under the federal Safe Drinking Water Act, municipal and other water suppliers must filter their water supplies unless they can demonstrate that they have taken other steps, including watershed protection measures, that protect their customers from harmful water contamination. Presented with a choice between building a filtration plant and preserving the watershed, New York City easily concluded that the latter was more cost effective. New York City estimated that a filtration plant would cost between $4 billion and $8 billion to build and another $300,000 annually to operate. By contrast, watershed protection efforts, which would include not only the acquisition of critical watershed lands but also a variety of other programs designed to reduce contamination sources in the watershed, would cost only about $1.5 billion.

As an empirical question, are New York City's efforts anomalous, or are they an example of a growing interest in preserving watershed lands for water quality purposes? The bottom line is that we do not know, and I and several colleagues are just embarking on a research project designed to find out. In the late 1990s, EPA estimated that more than 140 cities were considering watershed conservation as a means of ensuring high drinking water quality. Few of these efforts, however, appear to come close in scale or importance to New York City's preservation actions. Water suppliers in a few areas of the country, moreover, actually are divesting themselves of watershed lands.

Several factors helped make New York City's decision to preserve watershed lands relatively easy and help to identify the potential obstacles to duplicating New York's efforts elsewhere. First, New York City is the dominant beneficiary of Catskills preservation efforts. New York both draws sizable quantities of water from the Catskills and dwarfs all other cities drawing drinking water from the watershed. As a result, New York City gets virtually the entire benefit in improved water quality of its preservation efforts. A smaller city that draws on only a small portion of the supply from a watershed would face a tougher choice because only a fraction of the water-quality benefits from land preservation would go to it. In deciding whether to acquire land on its own, a smaller city might decide that the benefits were not worth it, and efforts to forge a coalition with other water suppliers drawing water from the same watershed might fail as a result of free-rider problems. Second, in deciding to protect the Catskills watershed rather than build a filtration plant, New York City benefitted from century-old regulatory authority over the watershed. New York City is protecting the watershed partly through land acquisition and preservation and partly through local land-use incentive programs, but also through regulation of local uses. Whether New York City would have found it worthwhile to protect the watershed through economic means even if it had not enjoyed the regulatory power is an unaddressed question. Third, most of the land that New York City has slated for preservation is in areas that are still not highly populated and thus is not astronomically expensive. Significant differences in land prices could change the cost-benefit equation for deciding whether to acquire and preserve the watershed land. Finally, the federal government put the city to a choice: protect the watershed or build an extremely expensive filtration plant. It is questionable whether New York City would have chosen to protect water quality by protecting the watershed absent that federal pressure.

The latter point raises perhaps the key policy question: how can governmental policy help promote water-quality motivated investments in watershed preservation? The government can start by forcing water suppliers to take water quality seriously through regulatory schemes such as the Safe Drinking Water Act. Although consumers might prize safe drinking water, they also savor low water rates and might not be willing to support a rate increase needed to purchase land that would promise water quality services. The government also must not favor technological investments over natural solutions. New York City chose to protect the Catskills watershed because EPA gave it a choice between a filtration facility and watershed efforts. If EPA had required New York City to build the filtration facility, the city might not have concluded that any additional water-quality benefits from protecting the watershed were worth the cost. Governments similarly must ensure that any funding aid provided to water suppliers can be spent on either technological or natural efforts to promote water quality. Although EPA has extended its revolving loan program for water quality investments to land acquisition, EPA prohibits states from spending more than 10 percent of its loan moneys on the acquisition of fee simples or conservation easements.

Non-environmental regulations sometimes may also influence water suppliers' decision whether to acquire and preserve watershed lands. Consider, for example, the rate setting system used by public utility commissions to determine how much private water companies can charge for their services. In most cases, water rates are set to permit companies a specified rate of return on the total capital invested in their business. Land is typically included in the rate base, but at original cost. Where a water supplier purchased watershed lands in the distant path, the land might be worth far more today than its value in the rate base – encouraging the water supplier to find a way to sell the land and capitalize on the land's increased value. This phenomenon might partly explain why a number of Connecticut water companies have sold off watershed lands in the last decade. Indeed, the Connecticut Department of Public Utility Control, whose mission includes reducing the water rates that consumers pay, sometimes has encouraged the water companies to sell such lands and then use part of the proceeds to lower their water rates.

A third issue is whether we currently have the scientific and economic knowledge needed to determine the natural water-quality services provided by particular watershed lands and to value those services. A number of scientists have studied the water quality services provided by watershed preservation, but the science is still fairly rough and ready. New York City has chosen which land to preserve based on geography and the "travel time" that it would take runoff from the land to reach the city's water supply. In order to convince water suppliers and their customers (or government regulators) of the benefits of natural capital rather than technological investment, moreover, economists may need to be able to value the water quality improvements that watershed preservation can supply.

A final issue of relevance is the degree of "ecosystem synergy" that is gained when water suppliers acquire and preserve watershed land for water quality purposes. Does the preservation efforts just ensure higher water quality, or do they also provide other valuable ecosystem services? It would be nice, for example, if the same land that water suppliers choose to preserve for water quality purposes also is high in biodiversity or serves as habitat for endangered species. We do not have enough information at the moment, however, to know whether this is the case. Worse, the water quality motives that drive water suppliers to acquire and preserve watershed lands might conflict in some situations with other public goals. Given their water quality goals, for example, many water suppliers do not permit public access to or use of watershed lands owned by the suppliers. Where this is the case, public recreational interests conflict with the water quality goals. Emphasis on one ecosystem services undermines the provision of another.

John M. Olin Conference on Watershed Management

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