INTEGRATING ECONOMIC AND ENVIRONMENTAL ASPECTS IN WATER MANAGEMENT: THE IMPORTANCE OF
DISTRIBUTION VERSUS EFFICIENCY
Michael Hanemann
Department of Agricultural & Resource Economics University of California, Berkeley
For presentation at the conference on
Water Management: Technology, Economics and the Environment Fundacion Ramon Areces
Madrid, January 19-20, 2007-01-19
1. INTRODUCTION
This paper reviews some of the experience in the United States with regard to assessing the adverse environmental impacts of water projects and modifying or limiting the project operation in order to reduce those impacts. As I observed in Hanemann (2006), since the mid-1980s, it has not been acceptable in the US to perform an economic assessment of a major water project without including some non-market valuation of the project’s environmental impact. This is a profound difference from the situation prior to that time, in which environmental consequences of water supply projects were generally given modest consideration at best and the economic analysis was limited to market outcomes (water supply, flood control, hydropower generation, and perhaps recreation).
In this paper, I give some examples where, within the last dozen or so years, major administrative or legal interventions were undertaken to ameliorate adverse environmental impacts being caused by the operation of these water supply systems, even at the cost of reducing the delivery of surface water supplies. A distinctive feature of these examples is that they all involve existing water supply systems that had been approved long ago in a form that was now deemed to be environmentally damaging, and they were being modified retroactively to lessen the adverse environmental impacts. In effect, the past was being re-opened to permit an ex post reduction in the property rights of water users.
My analysis focuses on three questions: (1) How could this come about? What was the legal basis for re-opening the past and retroactively modifying what were considered settled property rights? (2) What economic analysis was performed as part of the intervention to assess the non-market values associated with environmental impacts, and what role did it play in the intervention? (3) How did the economic analysis square with legal basis for the intervention? The key questions for me are (1) and (3). I shall show that there now exists in the US a multiplicity of legal tools that can be used to engineer an intervention aimed at modifying the balance between water supply for off- stream water users and instream environmental protection. Some of these legal tools are rooted in ancient legal doctrines, while others are quite new. Second, I shall show that
The paper is organized as follows. Section 2 presents the four case studies in which the operation of water systems was modified and water supplies were reduced in order to lessen harmful environmental impacts associated with the projects’ operation.
Section 3 discusses the legal basis for the interventions that occurred. Section 4 analyzes the implications of the legal doctrines for the way cost-benefit analysis should be conducted in trading off the environmental costs versus water supply benefits.
2. ENVIRONMENTAL IMPACTS OF SURFACE WATER SYSTEMS
Depending on how they are designed, water projects can have significant environmental consequences, both adverse and beneficial. Here are some examples of adverse impacts from surface water diversion projects in the United States:1 the flooding of spawning habitat for anadromous fish due to the construction of dams (Sacramento River, California); the dewatering of a river due to the diversion of flow (Mono Lake and the San Joaquin River, California; the Colorado River in Mexico); and changing the water temperature or the freshwater/saltwater composition in an aquatic habitat due to the pattern of freshwater releases from a reservoir (Colorado River, US; Sacramento River).
If impacts such as these do occur, it is certainly appropriate – both economically and politically -- that they be taken into consideration when considering the benefits and costs of alternative project configurations or alternative operating procedures. In fact, with one important exception, these are examples where, within the last dozen or so years, major administrative or legal interventions were undertaken to ameliorate adverse environmental impacts being caused by the operation of these water supply systems, even at the cost of reducing the delivery of surface water supplies.2 A distinctive feature of these examples is that they all involved existing water supply systems that had been approved long ago in a form that was now being identified as environmentally damaging;
they were being modified retroactively rather than prospectively.
Here I will give a brief sketch of the four case studies that I intend to discuss.
The Colorado River and Glen Canyon Dam
Glen Canyon Dam is situated upstream of the Grand Canyon National Park. It was authorized by Congress in 1956 amid a great public controversy that had been triggered by the publication ten years earlier of an ambitious plan by the Bureau of Reclamation for the systematic “development” of the water resources of the Colorado River. The plan included three major dams and numerous smaller projects. Starting in 1950, a spirited public opposition to these dams arose, marking one of the initial moments in the modern environmental movement in the United States. In 1955, the Sierra Club and the Bureau reached a compromise whereby the Bureau would drop two of the dams in exchange for proceeding with an enlarged version of the third, which was Glen Canyon Dam. Construction of the dam was completed in 1963, and the new reservoir behind the dam, named Lake Powell, was filled between 1964 and 1980.
Subsequently, the flooding of Glen Canyon came to be regarded by environmental groups as a major environmental loss and a great blunder by the Sierra Club. Officially, the
1 I focus on surface water rather than groundwater because, in the United States, public water supply systems have generally been organized to supply surface water. Groundwater is generally exploited by individual users or, at most, by very small, highly localized groups of users. Hence, most of the literature in the US on the (adverse) environmental consequences of water supply has focused on surface water supply projects. However, Glennon (2002) is an important exception, dealing with the harmful effects of the private utilization of groundwater.
2 The exception is the Colorado River in Mexico.
primary purpose for the building of the dam was to store water for delivery to downstream users in the Lower Basin of the Colorado River, and flood control. However, there was also a hydropower component because the dam incorporated eight large generators, with a total combined generating capacity of 1,200,000 kilowatts. In fact, once completed, the dam was operated to maximize power generation and flatwater recreational opportunities in Lake Powell, with little attention given to downstream impacts on the Colorado River through Grand Canyon National Park. These impacts were substantial. The flow of water released through the turbines fluctuated greatly within a matter of hours – from as low as 1,000 cfs up to a maximum of 31,500 cfs -- as the Bureau sought to maximize revenues by generating power at the tines of peak demand.
The clear, sediment–hungry water released by the dam greatly eroded downstream sand bars and beaches, thereby destroying habitat for plants, insects and birds as well as for native fish within the Grand Canyon corridor. The damage to riparian habitat provoked a growing public concern about damage to the riparian habitat in the Grand Canyon. In 1982, the Bureau decided to rewind and upgrade the electrical generators at the dam, and the public opposition intensified. The Bureau considered that this upgrading would have no significant environmental impact but, nevertheless it agree to initiate research on the environmental consequences of the dam – what became known as the Glen Canyon Environmental Studies (GCES) program. The program was led by an unusually thoughtful and creative staff member who, as the program was nearing completion in 1984, decided to invite the National Research Council (NRC) to establish a committee to review the research. The NRC Committee’s report, issued in 1987, commended the Bureau for its efforts but found that several parts of the GCES scientific and economic research were inadequately designed or incomplete, and it called for a continuation and expansion of the GCES research program. With regard to the economic analysis, the GCES program conducted a limited investigation; it had not explicitly assessed the economic value of the hydropower being generated (this was treated as a sacred cow), and it assessed only the economic use value associated with rafting on the Colorado River, which was being impaired by the fluctuation in water levels. It did not consider the potential non-use that might be held by the broader public for protection of the riparian habitat in the Grand Canyon corridor, which was potentially very large.
The Bureau accepted the recommendations of the NRC Committee and, in extending the GCES research, it decided to conduct a formal environmental impact assessment of alternative modifications to the operation of Glen Canyon Dam. The new research included an economic assessment of both the hydropower revenues and the non- use value associated with protection of the riparian habitat, which was found to be very large. The resulting Environmental Impact Statement (EIS) was released in 1996, and it led to the adoption of several changes in the dam’s operation, including the imposition of a higher minimum flow and a limitation on the permitted hourly/daily fluctuation in releases.
Mono Lake
In 1905, the city of Los Angeles approved a plan to acquire land and water rights in Owens Valley, 223 miles northeast of the city, and construct an aqueduct to bring the
water diverted from the Owens River to the city. In 1913, the aqueduct was completed and diversions commenced. In 1934, with population growing in the city, the Los Angeles' Department of Water & Power (LADWP) started construction of a 115 mile extension of the Owens Valley aqueduct into the Mono Basin to the north. The new aqueduct was completed in 1940, and in that year LADWP obtained a water right to divert water from streams feeding into Mono Lake, on the eastern side of the Sierras. In 1963, LADWP started construction of a second aqueduct to be filled by increased diversions from Mono Basin and Owens Valley, almost doubling the diversion capacity from 300,000 to 570,000 acre-feet per year. The new aqueduct went into operation in 1970. By the late 1970's, the level of water in Mono Lake began to fall; as a result, Negit Island, an island in the lake that serves as a major breeding area for birds along the Pacific Flyway, became connected to the mainland and therefore vulnerable to invasion by predators that destroyed the bird nests and ate the bird eggs.3 In 1979, the National Audubon Society initiated a lawsuit to halt LADWP's diversions. This was initially rejected on the grounds that LADWP had a valid water right as it had been granted the rights to abstraction "fair and square" in 1940; it was held that any challenge to this right on environmental or other grounds should have been made at that time. The ruling was challenged, and the challenge went to the California Supreme Court, which issued a landmark ruling in 1983. The California Supreme Court held that existing water rights were not sacrosanct and could be overturned if it were warranted by a threat to "public trust" resources; and Mono Lake could be considered such a public trust resource.
While this was a historic ruling, it merely established a principle that existing property rights could be rescinded or modified in the interests of the environment. Thus, whilst it established that the needs of in-stream protection and those of traditional water abstractors should be balanced, it did not determine how this balancing should be performed, nor what the relative weights of abstraction and non-abstraction should be.
Instead, the Supreme Court stated that the states’ water rights agency, the State Water resources Control Board SWRCB, should make this determination. In 1989, six years after the Supreme Court ruling, and prompted by several lawsuits by environmentalists the SWRCB began a process to establish how much, if at all, LADWP should reduce its water diversions. An economic analysis was initiated to derive the total economic value of environmental protection in order to inform the process of balancing the competing needs of the environment and Los Angeles, given that any reduction in diversions would have to be compensated for by employment of more expensive water supplies.
The issue in the analysis related to the adverse environmental impacts caused by the water diversions and major scientific studies dealing with the environmental effects were carried out in order to underpin the economic analysis related to the various use and non-use of Mono Lake. The economic analysis addressed non-use values related to the environmental effects on Mono Lake and three areas of use value were examined. Firstly, there was recreation associated to Mono Lake and environmental preservation. Secondly, the value of the use of water for hydropower generation during its 200 mile transfer to Los Angeles was considered. Thirdly, the value of water supply was looked at. The issue
3 Other impacts brought about by the drop in water levels were the dust clouds and associated health impacts from the exposed (alkaline) soil of the lake bed.
of the value of future water supply was addressed from both short run and long run perspectives. That is, respectively, the effects of a decrease in water supply on security of supply during drought periods and population growth and the associated increases in water demand. A variety of methods was employed in the economic analysis, ranging from analysis of energy markets to the travel cost method, for recreation uses, and contingent valuation, for both recreation and non-use.
In 1993, SWRCB issued a draft Environmental Impact Report (EIR)4 recommending as the preferred alternative a raised water level that was the third highest of seven alternatives considered (including the extreme alternatives of no diversions and no restriction on diversions), which was considered optimal on scientific grounds and also, as it happened, maximized the net economic benefit from diversions, including environmental protection, water supply, and hydropower generation. The SWRCB then began a series of water rights hearings, after which the it deliberated on the issue. About six months after the hearings had ended, the SWRCB issued its water rights decision in 1994, which adopted the preferred alternative recommended in the EIR. Los Angeles’
diversions from Mono Lake and Owens Valley were reduced by about 60%, the dry streambed of the Owens River upstream of Owens Valley was repaired, and flows commenced in the upper Owens River earlier this year.
Water Diversions from the San Francisco Bay/Delta
In the 1860’s a prosperous agriculture developed in the Central Valley of California to support the state’s growing population, the n located mainly in Northern California. Because of the lack of summer rainfall, the first crop to be grown was wheat which could be supported by winter rainfall, especially in the Sacramento Valley. The San Joaquin Valley, the southern component of the Central Valley, had several rivers on the east side of the Valley that could be dammed and used to supply summer-time irrigation, but these resources were limited, especially in the southern part of the San Joaquin Valley. Around 1915, however, groundwater pumps were developed that were suitable to tap into groundwater in the southern part of the valley, and a booming agriculture developed based primarily on high value fruits and vegetables, which were exported around the entire country. Within a decade or so the groundwater table had fallen substantially and the specter of groundwater depletion and overdraft threatened the prosperity of the area’s agriculture. At that point, the State of California commenced planning for an ambitious water project which would transport water from the Sacramento River system in the north to the San Joaquin Valley, thereby both bolstering the existing agriculture there and also permitting a further expansion of irrigated agriculture along the west side of the Valley, which had relatively few surface or groundwater resources. The state’s efforts to implement this water project were frustrated by the Great Depression: the state was unable to sell the bonds in order to raise the funds needed to finance the construction of the project. In 1935, Congress voted to take over a portion of the project mainly supporting the irrigated agriculture in the southern and eastern part of the san Joaquin Valley that was dependent on declining groundwater resources. This was implemented as project of the Bureau of Reclamation, known as the
4 This is the state of California’s equivalent to a federal environmental impact statement (EIS).
Central Valley Project (CVP). Construction of the CVP facilities was delayed by World War II, but the project finally commenced operation in 1949. In 1960 two major expansions occurred, one federal and the other state. The federal expansion of the CVP entailed the development of a second aqueduct system aimed at serving the west side of the San Joaquin Valley. The state project, known as the State Water project (SWP) served agriculture in the far southern part of the San Joaquin Valley as well as agricultural and, especially, urban users in Southern California.
The CVP and SWP systems both have a similar logic; they store water behind dams on Sacramento River and its tributaries in the Sacramento Valley for use in the San Joaquin Valley and Southern California. To economize on the need for aqueducts, the water is released into the Sacramento River and flows naturally into the Delta at the junction of the Sacramento and San Joaquin Valleys, to the east of San Francisco (the San Francisco Bay/Delta); the water is then pumped out in the southern end of the Delta where it is diverted into aqueducts that carry it south to the San Joaquin Valley and, in the case of the SWP, to southern California. The dams upstream in the Sacramento valley have an adverse environmental impacts because they have destroyed some spawning areas for salmon, and the release of water alters the natural pattern of streamflow and water temperature in the river downstream (however, there are some minimum flow requirements), as well as changing the timing and volume of freshwater inflow into the Delta and altering the freshwater/saltwater balance there. The pumping from the Delta has an environmental impact because it changes the flow through the Delta and entrains some fish in the pumps where they are killed.
The CVP applied for a water right in 1949, once the project was completed and ready to commence operation. The state regulatory agency at the time, mindful of the potential environmental impacts, played for time and issued a temporary water rights permit. This situation was continued until 1975/76, when the agency that had authority by then, the State Water Resources Control Board (SWRCB), finally got around to a full- blown water rights hearing for both the CVP and SWP projects. It issued a water right subject to certain salinity limits in the Delta. However, the water right was challenged by all sides, and was thrown out in 1986 by a state court judge, in what was known as the Racanelli Decision (named after the judge). The judge held that the SWRCB does have the right to modify existing water rights to meet water quality standards that it sets under federal authority from the Clean Water Act as delegated to the State of California. It has a dual obligation to allocate water rights in a manner that ensures that the water allocated does not exceed the amount of water in the stream, and also to serve the public interest.
The public interest requirement is that water be used for the greatest public benefit, which requires a balancing among competing uses. The judge ruled that the Board’s 1976 decision had been defective with regard to this requirement for balancing because it had focused narrowly on the water rights that were presented for consideration (primarily the water rights applications of the CVP and SWP), rather than considering all uses of water emanating from the Sacramento and San Joaquin Basins, both uses within the basin and uses of water transferred outside the Basins. The focus should have been on beneficial uses of water rather than just on water rights per se, and the Board should have adopted a more comprehensive perspective to balance the public trust requirements to protect the
estuary and the interests of water users throughout the system.
The SWRCB therefore restarted its water rights hearing process in the summer of 1987. After 6 months of public hearings and almost a year of staff analysis, the SWRCB issued a draft report in November 1988, recommending the limitation of water exports from the San Francisco Bay/Delta to their level in 1985.5 This was greeted with howls of protest – from water users who argued that the limitation was too stringent, and from environmental groups who argued that it was too lax. The Board decided to abandon the staff report and initiate a new process based more on stakeholder negotiation. During the course of this process, a majority opinion emerged that reflected a coalition between the urban water users and the environmental interests (many of whom were urban anyway), as opposed to the agricultural water users. The resulting draft staff report recommended a somewhat similar limitation of water diversions, but with a reallocation favoring urban and environmental uses as opposed to agricultural uses. The agricultural interests promptly appealed to the Governor who in effect vetoed the draft report.
Around this time, however, the federal government, impatient with the state’s inability to resolve the issue internally, was threatening to intervene under its authority from the Clean Water Act and also its authority under the Endangered Species Act: in 1992, the spring run of Sacramento Valley salmon had been listed as endangered because of the reduction in streamflow along the Sacramento River and in the Delta. In response to this threat, the water user groups in the state agreed to try to work out their disagreements; at the same time, the federal government was interested in fashioning a cooperative solution with the state. The outcome was the creation in 1995 of what became known as CALFED, a joint federal-state, interagency organization that in effect constituted a new quasi-agency, with a staff, a budget and a set of operating procedures, dedicated to the development of a science-based, stakeholder-driven process focused on how to protect and restore the Delta. By 2000, the various stakeholder groups had agreed on a broad menu of potential actions, which involved a mix of some water supply facilities, environmental restoration projects in the Delta, and water conservation programs for urban and agricultural uses. The specific projects to be undertaken would be selected from the broad menu on the basis of further analysis and refinement of the options. Now, in 2007, that process of refinement and decision-making is still under way, but is essentially stalemated through disagreement on how to finance the mix of activities that would be undertaken – the issue is cost sharing between agricultural water users, urban water users, and the general taxpayer.
The CALFED process is stalemated but not terminated. Meanwhile some actions have been taken. The SWRCB set interim water quality standards for salinity; the urban water users agreed to a voluntary set of best management practices for urban water conservation, there has been funding to promote water conservation by agricultural and
5 Both in this staff report and in subsequent staff r analyses, the Board eschewed economic analysis, including both the valuation of urban and agriculture water and the non-market valuation of instream flows.
It was felt that an economic analysis would be too controversial and would also be unnecessary because all the parties knew the relative values of these uses. This was a mistaken view because, as subsequent events amply indicated, there was no consensus on the relative values of the competing uses of water.
urban water users and to finance environmental restoration projects in the Delta. While the state of California has still not acted formally on water diversions, the federal government did: in 1992, Congress passed the Central Valley project Improvement Act which mandates the central valley project to set aside 800,000 – about 10% of the water supply it delivers – to meet environmental needs for water in the Central Valley: this is, in effect, a forced reduction in the amount of water that can be delivered to water users by the CVP. The other major development was the creation in 2001 of the Environmental Water Account by CALFED, a fund to be used to purchase water through water market transactions for environmental purposes .
Restoration of Flow in the San Joaquin River
One component of the Central Valley project was the Friant Dam on the San Joaquin River just by Fresno in the San Joaquin Valley. Friant Dam intercepts almost the entire flow of the San Joaquin River and diverts it into two canals that run north and south and serve irrigation districts along the east side in the southern part of the San Joaquin Valley. Only about 5% of the streamflow is released to the river downstream of the dam, and this runs into the ground in a sandy stretch of the river about 20 miles downstream, leaving a 40-mile stretch of the river bone dry. Further downstream, the river begins to be fed by return flows from irrigation districts adjacent to the river supplied by the Delta Mendota Canal, and then by tributary rivers which flow into the San Joaquin River. Friant Dam was completed in 1949, and for the first couple of years when the San Joaquin River ran dry attempts were made to “bus” salmon returning to spawn upstream of the dam to their traditional spawning habitat but this proved futile and the attempts were abandoned, thus terminating the salmon run on the river. This was an integral component of the Friant project, and attempts at the time by the California Department of Fish & Game to block the project’s full implementation were vetoed by the state’s Attorney General.
The issue was revived in 1989 when the Bureau of Reclamation’s 40 year water supply contracts with irrigation districts served by the Friant project expired. In the normal course of events, the irrigation districts share of the project costs would have been paid off, and ownership of the project facilities would have been turned over to the irrigation districts. This did not happen because the districts had negotiated a fixed-price water supply contract with the Bureau in 1949, and the contract did not anticipate the dramatic escalation in power costs (used for pumping water) that occurred in the 1970’s;
as a result of the cost escalation, not only did the revenues from water supply fail to cover interest associated with the capital costs of project construction (from which, by the Bureau’s interpretation, irrigation users were exempted) but they also failed to cover the projects operating costs after the mid-1970s, leaving the project in debt. The Bureau proposed to renew the contracts for another 40 years. This was challenged in a law suit brought in 1988 by an environmental NGO, the Natural Resources Defense Council (NRDC). At first the law suit called for the Bureau to conduct a formal environmental impact assessment before renewing the contracts. However, the Bush administration in Washington engineered a resolution whereby the Bureau agreed to conduct an informal
assessment of the operation of the Friant project while the EPA agreed to waive the requirement for a formal EIS. The Bureau’s informal assessment fizzled into nothingness, but the NRDC law suit persisted. After several evolutions it morphed into a challenge based on the Bureau’s violation of a relatively obscure provision of the State Fish &
Game Code, article 5937, which states that it is mandatory for the operator of a dam in California to allow enough water to remain in a stream to keep the fish in good condition.
The Bureau argued that there were no longer any fish in the river and, therefore, the article did not apply. However, in a major ruling in 2004, the judge in federal district court in Sacramento ruled that the article did apply, and that the Bureau was in violation of state law and must correct its violation. In a further ruling the next year, the judge ruled that the Bureau was in violation of the federal Endangered Species Act.6 The judge had called for a trial in February 2006 to determine the specific amount of water that would need to be released from Friant Dam in order to bring the Bureau into compliance with the law. Shortly before the trial was to start, negotiations renewed between the Friant water users Association and the NRDC, and a compromise agreement was reached in the summer of 2006, whereby the dry streambed would be repaired, water diversions to irrigation users would be reduced by about 25%, and a substantial flow would be restored the San Joaquin River that would be adequate to restore a salmon population. During the summer of 2005, in preparation for the anticipated trial, the NRDC had hired me as its testifying economic expert and I conducted both an economic analysis of the economic cost to farming from reducing their water supply from the San Joaquin River and also a contingent valuation study of the California population to measure the non-use economic value associated with restoring flows and a salmon population to the San Joaquin river. I estimated the annual economic benefit to be an the order of a billion dollars, while the economic cost to farmers using Friant water was on the order of about $10 million.
3. THE LEGAL FRAMEWORK: HOW ENVIRONMENTAL IMPACTS CAME TO BE CONSIDERED
When I was reviewing the Spanish National Water Plan in 2002, it seemed very clear to me that both the overall conceptualization of the Ebro River Transfer Project and the specific economic analysis prepared by the Spanish government were highly inadequate, but I recognized these inadequacies as something quite familiar to me – they were typical of how water projects were designed and assessed in the United States until about the mid 1980s. The core inadequacy up to that time was a general failure to pay attention to the potential adverse environmental consequences of a water project – both a failure to design the project in such a way as to minimize adverse environmental outcomes (or, indeed, maximize potential beneficial environmental outcomes), and a failure in the economic assessment to include an economic assessment of environmental impacts alongside those associated with water supply. Both of these began to be corrected in the US some time during the 1980s. The case studies to be summarized in section 4
6 While the Bureau was the primary defendant in this litigation, the Friant Water Users Association FWUA also joined in the litigation and was, in fact if not in theory, the primary defendant; FWUA hired most of the experts and presented most of the testimony in opposition to NRDC.
below are example of this change. However, before presenting the case studies, it is important to review the legal framework that the environmental impacts to receive the weight they did in these cases.
It would be natural to suppose that the main reason for the change is NEPA -- the National Environmental Policy Act of 1969. NEPA applies to agencies of the federal government and programs that they fund, and it requires that, prior to taking any “major”
or “significant” action, the agency must assess the environmental impacts of that action.7 An environmental impact statement (EIS) is required to be written for any major federal which may have a significant impact on the environment.8 If a major federal action will not have a significant impact on the environment, the agency must prepare a shorter document known as an “Environmental Assessment” (EA); an EA is allowed only if the agency has issued a “Finding of No Significant Impact” (FONSI).9 In either case, the agency must identify feasible alternatives to the action being evaluated, including the
“no-action” alternative, and consider the likely environmental consequences of those alternatives. It must identify both the preferred alternative (which is what it plans to implement) and also the environmentally preferred alternative. If the preferred alternative has significant adverse environmental impacts, the agency must assess mitigation options to lessen these impacts, and it must identify those that are unavoidable. Furthermore, with both an EIS and an EA, the agency must involve the public in the assessment process, including providing them with notice and allowing them to comment. These requirements – especially for public involvement and for explicit consideration of alternatives – are designed to encourage federal agencies to make informed decisions and to take a hard look at the environmental consequences of their actions.
However, while three of the cases – the imposition of restrictions on the Bureau of Reclamation’s operation of Glen Canyon Dam on the Colorado River, on the Los Angeles Water & Power Department’s diversion of water from Mono Lake, and on the water diversions from the San Francisco Bay Delta by the Central Valley Project, the State Water Project, and other diverters -- did indeed involve the preparation of an EIS, this was not the major factor responsible for the imposition of the restrictions.10 The preparation of the EIS occurred after there was a political decision to commit to imposing some degree of restriction: the EIS process served to determine the specific details of the restriction.
The limited role of the environmental impact assessment process itself is not a surprise – it is integral to the NEPA process. This is because, while NEPA requires the federal agencies to identify adverse environmental impacts, it does not specify the weight
7 However, California has passed its own version of NEPA, known as CEQA, which requires state agencies in California to conduct a similar assessment of the environmental impacts of their action.
8 A “major” action includes constructing facilities; awarding grants; approving permits; leasing, acquiring or disposing of real estate; R&D; and the issuance of regulations or prohibitions.
9 Whereas an EIS typically takes 18 months or more to complete and costs about $150,000 or more – considerably more in the case of a major project – an EA is a shorter document that typically takes about six months to complete and costs on the order of $20-80,000.
10 The fourth case – the imposition of restrictions on the diversion of water from the San Joaquin River – did not involve an EIS process: it came about as the result of litigation as described above.
to be placed on environmental impacts versus other considerations (economic, etc) when selecting the preferred alternative. It does not required the agency to select the environmentally least damaging alternative, and while it does require the agency to consider mitigation options for any adverse environmental consequences of the alternative identified as preferred, it does not force any specific degree of mitigation on the agency. NEPA essentially imposes a process of information gathering and fact finding, not a process of decision making. An EIS can be challenged if the process is grossly flawed – for example, there was a failure to consider the no action alternative – but not, for example, because the set of alternatives considered was biased because it omitted some specific alternative. For example, in the case of Glen Canyon Dam, the EIS process considered several alternative modifications to the operation of the dam, but not the removal of the dam: this would not be a valid reason sustaining a successful challenge of the EIS.
In short, in the case of Glen Canyon Dam, Mono Lake, and the San Francisco Bay/Delta, the heavy lifting – the force that powered the decision to curtail water system operations in order to lessen the harmful environmental impacts – was done by something other than NEPA. What, then, was responsible for the outcome? The answer varies but, essentially, it is a combination of politics – the growing political power of the environmental movement in state and national politics – and an innovative legal doctrine, the public trust doctrine, that so far has been applied mainly at the state (but not federal) level.
The notion of public trust is an ancient one, dating back at least to Roman law, and appearing later in the laws of France and Spain as well as in English common law. In the United States, the seminal case is Illinois Central Railroad v Illinois (1892), in which the Supreme Court, drawing on the English common law, determined that the state’s title in navigable waters and underlying land has a special character. They declared that the title “is a title held in trust for the people of the State that they may enjoy the navigation of the waters, carry on commerce over them, and have the liberty of fishing therein freed from the obstruction or interference of private parties.” Because the trust “can only be discharged by the management and control of property in which the public has an interest”, the court held that such lands can be sold to a private party only to the extent that the public’s interest in the property is preserved, and the state’s ultimate control over those resources can never be alienated. Since 1892, the scope of the public trust doctrine had been extended through judicial decisions and legislation from navigable waters to tidelands, public lands, and parks.
From around 1970 application of the public trust doctrine was extended dramatically, due in no small measure to a law journal article by Joe Sax (1970). He suggested that it could be used to justify judicial intervention to protect public interest in environmental values more generally than had been conceived as being possible up until that point. In these applications, the public trust doctrine has often become conjoined with a related doctrine of parens patriae. Traditionally in common law parens patriae refers to the role of the state as sovereign or guardian of persons under legal disability. In 1901, the Supreme Court first recognized that a state had standing under parens patriae to
sue as a guardian or representative of its citizens generally when their health or welfare were threatened. In 1907, the Supreme Court held that a state in its capacity as a quasi- sovereign entity “has an interest independent of and behind the titles of its citizens, in all the earth and air within its domain.” In that case, the Court upheld the right of the State of Georgia to sue to prohibit the emission of noxious gasses that caused injuries to forests, orchards and crops within Georgia, with or without the consent of the affected landowners.
In this and most of the other suits brought by states under the public trust and parens patriae doctrines prior to the late 1960's, the goal was injunctive relief rather than recovery for damages. In the late 1960's, however, some states began to sue for polluters for compensatory damages. These cases produced rulings upholding the right of state governments to recover for damages to natural resources under the public trust and parens patriae doctrines. For example, when the State of Virginia and the federal government sued for damage to migratory waterfowl following an oil spill in Chesapeake Bay in 1976, the US District Court ruled that, while “no individual citizen could seek recovery for the waterfowl” and “the State of Virginia does not ‘own’ the migratory waterfowl in question,” nevertheless “[u]nder the public trust doctrine the State of Virginia and the United States have the right and the duty to protect and preserve the public’s interest in natural wildlife resources. Such right does not derive from ownership of the resources but from a duty owing to the people. […] Likewise, under the doctrine of parens patriae, the state acts to protect a quasi-sovereign interest where no individual cause of action would lie.”
With regard to instream flow and water quantity as opposed to water quality, the public trust doctrine is coming to have a powerful effect on state water rights law in those western states that have chosen to apply to it. Historically, water law in the American West favored the abstraction of water from the natural environment in order to put it to agricultural, urban or mining uses. Leaving water in the stream, or aquifer, in order to protect or enhance the aquatic environment was neither a legally necessitated use nor a politically important one but this is now changing, as the Mono Lake case illustrates.
Besides the public trust doctrine, there are three other legal mechanisms that have been invoked in the case studies which need to be mentioned. Two are federal -- the water quality standards and the non-degradation requirement of the federal Clean Water Act, and the Endangered Species Act; the third is a specific requirement of the California Fish & Game code forbidding the operator of a dam to dewater a downstream river.
In principle, the Clean Water Act deals with water quality rather than water quantity. The issue raised in the San Francisco Bay/Delta proceedings was whether water diversions that reduce instream flow, thereby causing water temperature to rides because of the low flow in late summer, or diversions that reduce the freshwater inflow into an estuary, thereby causing an increase in salinity in some parts of the estuary, can be considered to cause a degradation of water quality and, therefore, constitute a violation of the Clean Water Act. The legal and administrative proceedings in California on
diversions determined that the answer, essentially, is yes: the water quality consequences of water diversions can be found to a violation of water quality law.
The Endangered Species Act, passed in 1973, provides broad protection for species of fish, wildlife and plants – in the US or elsewhere-- that the Secretary of the Interior lists as threatened or endangered. There is a formal procedure for listing a species, based on an investigation by the US Fish & Wildlife Service. Were possible, once a species is listed, the agency develops a recovery plan for the species, and it can designate critical habitat for the listed species. Although exceptions can be granted in certain cases, Federal agencies and other parties are generally enjoined from taking action that would jeopardize listed species or harm their designated critical habitat. If the species listed is aquatic, such as an anadromous fish, and the habitat is aquatic, the Endangered Species Act can be invoked to limit or prevent a surface water diversion. This happened in California in connection with the San Francisco Bay/Delta, where the spring run of salmon were listed as threatened leading to the threat of federal restrictions on
In the case of the San Joaquin River, the California Fish and Game Code article 5937 had a somewhat similar force to that of the Endangered Species Act, in that it enjoins the operator of a dam from reducing the streamflow downstream of the river to the point where it impairs a fish population.
4. IMPLICATIONS FOR ECONOMIC COST-BENEFIT ANALYSIS
To an economist, the notion of balancing environmental benefits versus water supply benefits seems entirely natural and uncontroversial. However, the way an economist is normally likely to conduct a cost benefit analysis is not necessarily consistent with the legal doctrines outlined above.
The conventional perspective from which economists conventionally conduct cost benefit analysis is the Potential Pareto Principle (the Kaldor-Hicks criterion) whereby one considers only the aggregate net (monetary) benefits: a project is deemed to be in the public interest if and only if the aggregate benefits exceed the aggregate costs, regardless of how and to whom the benefits and costs are distributed. The Pareto Principle holds that a project is in the public interest if and only if no party is harmed by it and some party is benefited. The Potential Pareto Principle modifies this to say that the project is in the public interest if only if it would be possible to arrange things such that no party would be harmed by it and some party would benefit – that is, if and only if the gainers could afford to compensate the losers and still come out ahead. It is immaterial, however, whether the compensation actually occurs: it is sufficient to validate the project that the compensation could occur. That is to say, it is sufficient that the Pareto principle could be satisfied, regardless of whether it actually is satisfied.
For economists, the Potential Pareto Criterion has the advantage that it abstracts from equity issues focusing solely on efficiency. This makes the analysis both simpler and (ostensibly) value-free, and therefore more “scientific.” However, it is an empirical
fact that most people in the real world find the ethical premise underlying the Potential Pareto Principle to be morally abhorrent. This is because most people would be inclined to focus on the actual welfare outcomes of a project, rather than potential outcomes that it is known will not be realized. Thus, it will seem perverse to most people to say that a project is in the public interest if (i) it will harm many people and benefit a few, (ii) the few who benefit could in principle afford to compensate the many who are harmed sufficiently to ensure that they suffer no loss, but (iii) they have no intention of doing so.
Nevertheless this is the ethical basis on which most conventional cost benefit analysis is conducted.
It should be noted, of course, that this is not how cost-benefit analysis needs to be conducted. The Potential Pareto Principle implies a particular form of a social welfare function which is not necessarily required by economic theory; other forms of social welfare function are certainly legitimate and, in fact, ethically more desirable.
If one now steps back and considers the legal doctrines that have been invoked in the case studies described above, it is clear that none them is likely to be satisfied by a narrow application of the Potential Pareto Criterion.
Two of the legal doctrines, those embodied in the Endangered Species Act and California Fish & Game Code 5937, impose an absolute obligation not to harm designated species beyond a certain limit regardless of the economic benefit from doing so. The parens patriae doctrine can function similarly, imposing an obligation on a public agency as a trustee for a public resource to afford a certain degree of protection to that resource regardless of the advantages to the agency of not doing so – that is the responsibility that trusteeship entails.
The Public Trust doctrine also involves an element of trusteeship but, as the Mono Lake case indicates, it does permit a degree of balancing rather than an absolute and unfettered exercise of trusteeship protection. The same is true in the application of NEPA: an agency is obliged to identify and consider the adverse environmental impacts of its action, but is not required to place an overwhelming weight on them in determining the preferred course of action. In both cases a balancing of benefits and costs is permitted – indeed, is called for. However, it is important to emphasize that the type of balancing is not the same as entailed by the Potential Pareto Principle. This is because the balancing called for by the law requires a consideration of the equities involved. The type of balancing invoked by the law is similar to what is known as an equitable apportionment, and for this it is necessary to consider explicitly the welfare outcomes for the different parties involved and to make an equitable apportionment among these parties. The allocation needs to be equitable and reasonable: it therefore cannot be distribution-blind.
The fundamental implication is that, when economic analysis, including non- market valuation, is used to make an assessment of a water project, (i) the environmental impacts need to be considered, and (ii) while these can be traded off against the water supply benefits, the trade-off needs to be performed in a distributionally-sensitive manner with due consideration to a balancing of the equities among the parties involved.
REFERENCES
Hanemann, W. Michael, “The Economic Conception of Water” in P. Rogers & R. Llamas (eds.) Water Crisis: Myth or Reality". Taylor & Francis (2006).
