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Can we avoid overdevelopment of river floodplains by economic policies?: A case study of the Ouse catchment (Yorkshire) in the UK
Land Use Policy 27 (2010) 976–982
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Can we avoid overdevelopment of river floodplains by economic policies?: A case study of the Ouse catchment (Yorkshire) in the UK Koichiro Mori ∗ The University of York, Heslington, York, YO10 5DD, UK
a r t i c l e
i n f o
Article history: Received 26 September 2007 Received in revised form 6 October 2009 Accepted 6 January 2010 Keywords: River floodplain Overdevelopment Unidirectional spatial externality Ecosystem service Zonal economic policy
a b s t r a c t River floodplains are significant environmental resources in that they provide multiple ecosystem services. However, river floodplains are/tend to be overdeveloped because indirect-use values linked with ecosystem services are overlooked by private landowners. In a case study of the Ouse catchment, it turns out that river floodplains tend to be overdeveloped in upstream areas because of a unidirectional spatial externality. We set a simple model that considers both direct- and indirect-use values to analyse the social optimisation. The essential point is that we must consider two types of environmental externalities related to the ecosystem services of river floodplains to make decisions on floodplain development. First, the development of river floodplains has opportunity costs in terms of lost ecosystem services. Second, the development of floodplains increases flood risks to people downstream (imposes a unidirectional spatial external costs). Theoretically, we can easily deal with the problem by zonal economic policies: zonal taxes or subsidies (price policies) and zonal marketable permits or transferable development rights (quantity policies). On the practical side, however, there are so many problems. Then, such approaches are too complex to use. First of all, we have to specify real complicated economic and physical systems which show non-linearity, irreversibility, site-specific relationships, and inter-dependency between systems and sites. Secondly such policies should be ‘zonal’, which might impose substantial transaction costs. In order to apply them to real situations, we have to determine the appropriate number of zones, their sizes and geographical shapes, and then set appropriate rates or amounts of permits in each zone. Furthermore, the determination of zones is difficult because of the trade-off between the internalisation of externalities and implementation costs of policies, which are also related to political frictions and market failure. © 2010 Elsevier Ltd. All rights reserved.
1. Introduction Wetlands have recently disappeared at alarming rates through the developed and developing worlds although we have noticed the importance of wetlands as environmental or ecological goods and services (Mitsch and Gosselink, 2000a). Table 1 shows percentage loss of wetlands in various locations in the world. It is expected that we have lost around 50% or more of the original wetlands on the earth. River floodplains are among wetlands. Around 6 million people live in river floodplains in England and Wales, which cover some 10% of the land, and the rate of development on river floodplains has more than doubled for the past 50 years in some areas (Petts et al., 2002). It seems that we have overdeveloped river floodplains. The construction of roads and railways and commercial and
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domestic development are often done in river floodplains because it is relatively easier and cheaper to build there. In addition, natural river floodplains can be directly used as arable and grazing lands because they contain fertile and nutrient soil. Historically speaking, cities have been constructed in floodplains along rivers because of the accessibility to watercourses, the abstraction of fresh water, the drainage of waste water and so on. The development of floodplains has been frequently attracted because of such various direct-use values. However, we should notice the fact that the development brings about indirect costs that are difficult to recognize in our usual economic life. River floodplains are important in that they provide several ecosystem services. They are multi-functional resources (Dister et al., 1990; Turner, 1991; Barbier, 1994; Gren et al., 1995; Mitsch and Gosselink, 2000b). Natural river floodplains enhance biological productivity. They provide habitats for various species, which have both direct and indirect use values (Mitsch and Gosselink, 2000a). In addition, the mix of various species determines what kind of ecological function or services it supplies, and it gives
K. Mori / Land Use Policy 27 (2010) 976–982 Table 1 Loss of Wetlands in the World. Location NORTH AMERICA United States Canada Atlantic Tidal and salt mashes Lower Greate Lakes - St. Lawrence River Prairie potholes and sloughs Pacific coastal estuarine wetlands AUSTRALIA Australia Swan Coastal Plain Coastal New South Wales Victoria River Murray basin New Zealand Philippine mangrove swamps CHINA EUROPE
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2. Model for optimal floodplain management Percentage Loss
To begin with, let us show some stylised facts in order to make the presuppositions of the model clear.
53 65 71 71 80 > 50 75 75 33 35 > 90 67 60 > 90
Source: Mitsch and Gosselink (2000a), p.38.
ecosystem resilience (stability) at the same time (Holling et al., 1995). Hydrologically, natural river floodplains play an important role in mitigating floods because they can control water discharge volume (Dister et al., 1990; Gren et al., 1995). They also recharge ground water (Dister et al., 1990; Gren et al., 1995; Acharya, 2000; Acharya and Barbier, 2000). Furthermore, they improve water quality (Dister et al., 1990; Gren et al., 1995). They act as nutrient sinks for runoff from uplands but as nutrient transformers for upstream–downstream flow (Mitsch and Gosselink, 2000a). Which types of ecosystem services are provided depends on wetlands and river floodplains. There are trade-offs between indirect- and direct-use values of river floodplains, but many of the costs of floodplain development are not reflected on market prices. Private landowners of river floodplains have no incentive to take account of the public interests such as the values of ecosystem services that natural river floodplains provide. The development of river floodplains and the construction of banks and dykes confer private benefits, but often have a negative effect on the public interests. They mitigate the flood control function that natural river floodplains have, and increase flood risk in the urban areas downstream. This is a unidirectional spatial externality. Problems of externalities are attributable to the lack of well-defined property rights (Coase, 1960; Demsetz, 1967; Alchian and Demsetz, 1973; Bromley, 1991). Although the rights to river floodplains as lands are defined, rights to the ecosystem services are not. The lack of well-defined rights to those causes market failure, which brings about overdevelopment of river floodplains because voluntary contracts do not occur due to transaction costs. Under this situation, we need to correctly recognize such trade-offs and the problem of externalities, and to make relevant policies to attain the optimal management of river floodplains. This paper uses a theoretical model to conceptually identify the optimal management of river floodplains with the essential externalities taken account of. Based on the standard of the social optimisation, we attempt to carry out an empirical experiment in a case study of the Ouse catchment (Yorkshire) in the UK. The empirical experiment is confronted with some serious problems and limitations, but we still derive general economic and political implications. Probably, the discussions on problems and limitations may be meaningful. Thus, we briefly show the results from an empirical experiment, and discuss possible economic policies to avoid the overdevelopment of river floodplains. Then, we discuss problems and limitations on the approaches of an empirical experiment.
(1) Natural river floodplains provide multiple ecosystem services. They are adversely influenced by the development of river floodplains and/or the introduction of structural flood protection controls such as banks, dykes and floodwalls. (2) Flood mitigation service of natural river floodplains in upstream sites spills over into downstream sites. This is a unidirectional spatial externality. (3) Land use patterns outside floodplains have an impact on flood risk through a change in imperviousness of land, which is treated as an exogenous variable in this paper. (4) The total size of floodplains is normally defined by the 100-year floodplain (1% chance of flooding in a year).1,2 (5) How much we lose floodplains’ capacity of mitigating floods and other ecosystem functions depends on what type of natural floodplains we develop, such as grasslands, woodlands, tilled agricultural lands and so on. In the model, we simply dichotomise a control variable (floodplain development) between natural and developed river floodplains. In an empirical experiment as a case study, however, we consider 25 categories of land types, based on GIS data of land-uses. The problem for optimal floodplain management is to choose the values of control variables such as the amount of floodplain development (the area of developed floodplains) and the scale of flood protection controls (the area potentially protected by flood protection controls) in order to maximise social welfare. Social welfare is given by a social utility function of the aggregate net benefit. The problem can be expressed by mathematical forms and solved by mathematical optimisation techniques.3 In the main text of the paper, however, we would like to focus on essential points without mathematics. We can derive the two conditions for optimal floodplain management. The first condition implies that the marginal benefit of floodplain development must be equal to the sum of the marginal direct cost and the marginal external cost of floodplain development. It tells that we should consider two kinds of external costs due to floodplain development: (1) costs of lost ecosystem services, and (2) unidirectional spatial external costs of flood risks that floodplain development in upstream areas inflicts on the downstream areas. The second condition implies that the marginal benefit of flood protection controls should equal the sum of the marginal direct cost and the marginal external cost of flood protection controls. It tells that we should take account of unidirectional spatial external costs of flood risks that enhancement of flood protection level in upstream areas imposes on the downstream areas. The crucial point is that we must take two types of external costs into consideration such as the marginal cost of losing eco-
1 River floodplains are defined as low lands adjoining a channel, river, stream and watercourse that have been or may be inundated by flood water (Bedient and Huber, 2002). We, however, cannot detect where river floodplains are by this definition because the definition is ambiguous. We often use the 100-year flood for defining river floodplains. For example, the Environment Agency in the UK adopts this definition to supply maps of floodplains. 2 The size of floodplains is assumed constant in the model, although it might change over time in the long term due to climate change. Comparing between maps of historical floodplains and current floodplains in the Ouse catchment provided by the Environment Agency (UK), however, there is little difference between them. 3 Mathematical expressions and the procedures of solution are given in Supplementary data.
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Fig. 1. Map of the Ouse Catchment (UK). Source: this geographical map is created from GIS data of EDINA Digimap (OS Strategi and Land-Form Panorama [DEM]) by use of ArcGIS.
system services and the marginal external cost of flood risk. The conditions are simple but important. In reality, floodplains are often overdeveloped without considering these externalities. 3. Empirical experiment and policy discussion We carry out an empirical experiment as a case study of the Ouse catchment, based on the optimal conditions derived in the previous section. The Ouse catchment is located in Yorkshire in the UK, which is delineated by the River Ouse and tributaries. The River Ouse and tributaries are notorious for flood events, which might be related to changes in land-use including river floodplains. Fig. 1 shows the map of the Ouse catchment. The area is about 424,279 ha. The total area of river floodplains in the catchment is around 28,072 ha. The numbers on the map indicate zones (subbasins), which are defined by the location of hydrological gauging stations. We can freely define the zones, but we need hydrological data which we obtain from hydrological gauging stations in order to conduct an empirical analysis. In so doing, the zones (sub-basins) are determined by the location of gauging stations. We attempt to apply the model and the derived optimal conditions to the case of the Ouse catchment. Let us focus on floodplain development. Then, we use a reduced model including only one control variable such as floodplain development for the purpose of an empirical analysis because the relevant data related to flood protection controls are unfortunately unavailable on the level of the analysis in the model. The focal point is how we should use and develop river floodplains, although flood protection controls are related to the external flood risk. Furthermore, floodplain development in upstream zones has the same impact on downstream zones as the enlargement of flood protection controls in upstream zones. Therefore, we treat the scale of flood protection controls as an exogenous variable for an empirical analysis here, assuming
several levels of flood protection controls (some scenarios on flood protection controls), because the scale of flood protection controls influences on the expected cost function of flood risk. The calibration process is too complicated to show in this paper.4 We use various economic, physical, hydrological, flood damage and GIS data. As for techniques, we use econometrics, a benefit transfer method, a precipitation frequency analysis, and a hydrological model and its computer simulation. Table 2 indicates the overview of the calibration. Using the calibrated functions, we can calculate the optimal sizes of developed floodplains in the zones, based on the theoretical optimal condition. As we mentioned, we should note that we have to derive several conditions according to the assumptions of flood protection controls because they affect the choice of floodplain development thorough the expected cost function of flood risk. Then, let us set some scenarios (assumptions) about the scale of flood protection controls. We assume that flood protection controls can save people and their lands from the floods with (1) 2% exceedance probability (50 years return period), (2) 4% exceedance probability (25 years return period), and (3) 10% exceedance probability (10 years return period). Table 3 shows the results. First, as a result, how many zones out of 15 are currently overdeveloped depends on the assumption on the scale of flood protection controls. However, river floodplains in some zones are obviously overdeveloped. Second, more upstream zones are/tend to be overdeveloped because of the unidirectional spatial externality related to flood mitigation service. Third, flood protection controls are critical for the choice of land-uses. If the scale of them is relatively small like the third scenario, we can develop few floodplains. As the theoretical model tells us, we should find the optimal com-
4
The detailed processes are shown in Chapter 5 of Mori (2006).
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Table 2 Calibrated functions. Function
Functional forms
i x
i
= 14030.80048x for all i
Direct net benefit function of floodplain development
f
Benefit function of ecosystem services
B(LFi − xi ) =
i
0.55978(LFi − xi )e8.48302−0.168 ln(LF −x) for all i 2
C i (xi , xj ) = ˛(xi ) + ˇ
Expected cost function of total flood risk
xj
j
The function is calibrated in each zone based on different assumptions about flood protection controls. See Appendix B.
Data
Method
Housing market: land prices private sector, by region (Inland Revenue Valuation Office); and All items retail prices index (UK national statistics) Woodward and Wui (2001), Table 2; and Annual average of spot exchange rate (Bank of England)
Theoretical calculation of economic rent based on assumptions
GIS Data: EDINA Digimap (OS Strategi, Land-Form Panorama [DEM], OS Land-Form PROFILE and OS Land-Line.Plus), Land Cover Map of Great Britain 1990 (CEH), and Indicative Floodplain Map 2001 (Environment Agency); National River Flow Archive (CEH);
Hydrological simulation model on a software HEC-HMS (USACE);
Manning’s N (Bedient and Huber, 2002; Coon, 1998; and Thomas, 1986); Hydraulic geometry (Hey and Thorne, 1986); Precipitation data: Met Office - UK Land Surface Stations data (BADC); Elevation-Damage data (Penning-Rowsell et al., 2005a, 2005b); and Retail Price Index data (UK national statistics);
Base flow index calculation;
bination of floodplain development and flood protection controls based on the two optimal conditions. We discuss possible economic policies for the optimal use of river floodplains. Let us take up two types of economic policies as promising ones: taxes or subsidies (price policies) and marketable permits or transferable development rights (quantity policies). Price policies provide individual decision makers (private landowners) with an economic incentive to directly take account of external costs. The optimal tax (or subsidy) rates should be equal to the marginal external costs. The tax rates differ among zones because the marginal costs of external flood risk are different among zones. We should impose higher tax rates on zones upstream as compared with zones downstream because of the unidirectional spatial externality. In the empirical experiment, we calculate the optimal tax rates on developed floodplains in the first scenario under the assumption that flood protection controls deal with flood events with 2% exceedance probability. Table 4 shows the results.
Table 3 Optimal size of developed floodplains. Zone
27001 27002 27005 27007 27009 27034 27043 27053 27069 27071 27075 27083 27085 27089 27090 a
Protected against floods with exceedance probability 2%
4%
239 1,987 0 503 1,427 108 162 0 39 685 25 1,117 120 319 32
121 1,057 0 32 708 0 55 0 0 0 0 594 0 175 0
10% 47 456 0 0 263 0 0 0 0 0 0 280 0 82 0
Benefit transfer; and Econometrics
Unit: (ha) Currenta 99 217 14 155 308 51 28 8 102 306 64 106 60 35 67
The current conditions are based on the Land Cover Map of Great Britain, 1990.
Geographical information system (GIS) using a software ArcGIS;
Technique of hydraulic geometry; Precipitation frequency analysis; and Econometrics
Alternatively, we can attain the optimum by marketable permits or transferable development rights (quantity policies). Policy makers issue the optimal amount of marketable permits for developing floodplains that is exactly equivalent to the optimal size of developed floodplains. If the markets for marketable permits are competitive and individual decision makers (private landowners) attempt to minimise their costs by transacting the permits without cheating, the optimal state is accomplished at the least costs. Like price policies, it is obviously necessary to set different amounts of marketable permits among zones due to the different costs of the unidirectional spatial externality. Thus, we should set a smaller quantity of marketable permits in zones upstream. On the theoretical side, these economic policies are easy to be applied because we assume no transaction costs. Under no transaction costs, we are indifferent to the choice of policies as long as they fully consider social external costs (Coase, 1960, 1988). Certainly, the results of the theoretical model analysis and the empirical results are both clear. On the practical side, however, it is difficult to implement such economic policies. They inflict transaction costs such as implementation, administration and monitoring costs. In the presence of spatial externalities, policies should be Table 4 Optimal tax rate. Zone 27001 27002 27005 27007 27009 27034 27043 27053 27069 27071 27075 27083 27085 27089 27090 Unit: 1990 UK £ per hectare per year.
Tax rate 1,031 1,203 25,038 7,548 873 10,667 4,648 24,835 12,136 7,977 12,165 2,115 12,159 1,045 12,112
980
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zonal, but the difficulties lie in the fact that they are ‘zonal’. It is difficult to determine zones on which we should impose different rates or regulations (tax or subsidy rates or amounts of marketable permits). How many zones should we divide the relevant catchment into? How should we divide? Let us discuss a few difficulties in brief.5 First, zonal policies should be based on the relevant zonal data. We definitely need relevant economic, physical, meteorological and hydrological data in the zones that we delineated. However, such data are not so abundant that we can freely determine the zones. In particular, our decisions are often constrained by limited number of meteorological and hydrological gauging stations. There is no warranty that the division of the catchment is the best. We have to determine the zones from the holistic point of view ideally, and then we have to arrange the appropriate location of gauging stations in order to obtain relevant data to implement the policies. However, there is no concrete way of determining zones. In reality, it might depend on the implementation and administration costs of policies, the costs of obtaining relevant data, geographical conditions, characteristics of local weather, and so on. In this respect, Goetz and Zilberman (2000) propose zonal taxes, permits and standards in order to deal with a problem on a negative spatial externality related to phosphorus runoffs from agricultural lands. They also mention that such zonal policies with infinite many different locations might be very difficult to administer in practice. Considering these transaction costs, there is a possibility that it is better not to implement such economic policies. Second, to what extent should we consider external costs that are brought about by floodplain development? The purpose of economic policies is to take account of externalities, but the extent of considering the spatial externality depends on the number of zones. The externality related to flood mitigation service is spatially continuous from upstream to downstream. Such external effects exist even in the same zone. Therefore, the more zones we divide the catchment into, the more we consider external costs. However, the more zones, the more costly we implement such policies. Tietenberg (1974) mentions that the common rule in economics, ‘MB = MC (Marginal benefits must equal marginal costs.)’, is applicable to the determination of the number of zones.6 In addition, the more zones, the smaller the markets for permits become in the case of marketable permits. As markets become smaller, they become less competitive. If so, marketable permits cannot warrant that the optimal conditions are achieved at ‘the least cost’. The policies seem to be simple and effective conceptually, but we need more discussion and consideration on transaction costs for their application. Third, we are faced with political frictions among zones. Floodplains spread continuously and spatially. Private landowners are highly sensitive to the location of boundaries of zones because different rates or amounts of marketable permits are set in zones. In particular, private owners of floodplains are highly prone to resist such zonal economic policies if their lands are close to the boundaries of zones and a higher tax rate, a lower subsidy rate or a smaller amount of marketable permits is given in the zone. It is difficult to set zonal economic policies in reality from the political point of view due to serious political conflicts of stake holders among zones. Setting different tax rates according to locations would be politically infeasible at worst, but a zonal tax system is possible as a compromise (Tietenberg, 1974).
5 Mori (2009) discusses the difficulties of these economic policies in the dynamic context. 6 Tietenberg (1974) makes this comment in the context of air pollution, based on Baumol (1972).
4. Discussion: problems and limitations We discuss problems and limitations on both the theoretical model and the empirical experiment. Some problems and limitations are serious for considering the application of the economic policies. Thus, the discussion here will make some contributions. First, the function of the net benefit of development might be too simple to measure the real benefit. It is assumed to be a simple linear function, and then the marginal value remains constant even as we develop more floodplains. In addition, the marginal value is calibrated by the regional average value. The reason is that the calibration has been implemented under the serious limited data availability. However, it seems to be implausible that the marginal benefit is kept constant in terms of the area of floodplains that we develop. We basically consider that the marginal benefit will go up initially and go down beyond a threshold of development. Thus, the results of empirical ‘experiment’ are not necessarily trustworthy particularly for knowing to what extent we can develop floodplains in the Ouse catchment, although the experiment is still meaningful for understanding general characteristics of the system including economic policies. Second, the function of the benefit of ecosystem services except flood mitigation service is calibrated by a benefit transfer method. The accuracy of benefit transfer methods is often controversial. Rosenberger and Stanley (2006) raises three sources of errors: the measurement error, the generalization error and the publication selection bias. Bergstrom and Taylor (2006) mentions that the meta-analysis models for benefit transfer should satisfy core economic variable consistency, commodity consistency and welfare change measure consistency. The valuation of wetlands (floodplains) has been implemented in different contexts. The similarity of research sites might be often problematical. The river floodplains in the Ouse catchment do not necessarily provide all the general ecosystem services that are evaluated in the benefit transfer method. Furthermore, the types of land uses in natural river floodplains in the Ouse catchment are regionally different. Thus, the volume of ecosystem services are also regionally various in the catchment. We should evaluate the differences, but we cannot do so due to the limited data availability here. In this regard, however, we have distinguished the types of land uses based on Land Cover Map, and calculated the averages in individual sub-basins in terms of flood mitigation service. Third, some of functions in the model are assumed to have linear relationships due to difficulties on the specification of the functional forms and calibration. However, we would in general expect non-linear relationships both between physical causes and effects because of threshold effects and between physical effects and economic values. We should pay an attention to threshold effects of ecosystem resilience because ecological systems are non-linear and discontinuous (Perrings and Pearce, 1994). We are required to take this into consideration in order to capture real mechanism of systems more precisely. Fourth, the values of flood losses depend on land forms. In this respect, however, we distinguish 25 categories of land uses for evaluating the benefit of flood mitigation service in the Ouse catchment. The extent of the service depends on land uses especially in vegetation which determines the imperviousness (Manning’s N). Furthermore, we distinguish three categories such as agricultural lands (cultivated and fallow), developed urban areas and the others for measuring flood losses. Generally speaking, flood losses in agricultural lands and developed urban areas are larger than those in the other areas. However, we evaluate them by averaging them out in the sub-basins respectively. Moreover, strictly speaking, the size of flood losses depends on kinds of agricultural outputs and buildings. Thus, they are not completely precise.
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Fifth, the interactions between floodplain development and flood protection controls are not completely considered in the empirical experiment. We unfortunately cannot evaluate the optimal management of flood protection controls in the empirical experiment due to the unavailability of relevant data. Instead, we focus on the optimal management of floodplain management under a few assumed scenarios on flood protection against floods with 2%, 4% and 10% exceedance probability. For the purpose of evaluating the management of flood protection at the same time, we need complicated data and information on flood protection because there are various methods for flood protection. They also include the one that has a positive effect on both its own area and the downstream areas such as artificial washlands and reservoirs. They do not necessarily have a negative impact on the downstream areas in terms of flood risk. Then, it seems complex to treat them as a synthesized proxy in individual sub-basins. Furthermore, on the theoretical side, we assume an embankment as a representative method of flood protection, which implies the external costs inflicted on the downstream areas. In the model, the scale of flood protection can be concretely evaluated by the area potentially protected, as a proxy. The area potentially protected should be simply given by a function of height and length of flood averting behaviour such as flood walls, dykes, banks and so on. However, we are essentially short of the relevant data. In addition, we have to consider the direct benefits and costs of floodplain development and flood protection, and the external costs of them in order to make decisions on both of them at the same time. Certainly we can develop more floodplains in its own sub-basin if we enhance the scale of flood protection. We can develop more floodplains in the downstream areas if we forgo flood protection in the upstream areas. Theoretically, the optimal management must satisfy the two conditions at the same time. In this sense, we should have solved them in the empirical experiment under complex interactions. Sixth, we assume homogeneous relationships among locations. We assume the same functional forms on all the zones (sub-basins) with parameter values different. There is, however, a possibility that real systems are much more complex than we assumed. Even if we collect the detailed site-based data for the calibration, the same functional forms might be insufficient to give reliable relationships. It must be necessary to specify different functional forms based on individual areas (sub-basin) in some circumstances. Finally, the real river system and river floodplains are highly complicated. The model treats only major rivers including tributaries, although we measure the total area of floodplains in individual sub-basins respectively. However, the real river system has many small rivers, streams, brooks, creeks and waterways, around which floodplains are being formed. In addition, the river model in individual sub-basins is also much simpler than the real meandering rivers with the width changing over the courses. In this respect, we have to deeply discuss hydrological model, although we have calibrated the models by use of real meteorological and hydrological data.7 All things considered, the requirements for the modelling and the application of economic policies (both price and quantity policies) for optimal floodplain management are enormous. Therefore, we have to think up a new idea on polices for optimal floodplain management. 5. Conclusion River floodplains are multi-functional resources. They offer direct and indirect use values. They provide various ecosystem
7
Mori (2006) discusses this respect.
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services. However, the way they are used generates environmental externalities. Our economic system does not have the way of recognizing and evaluating the indirect-use values of many of the ecosystem services affected by decisions to develop river floodplains in various ways. This type of problem is common among many environmental problems. Without the appropriate policy interventions, the current condition of many floodplains will continue to deteriorate. In this respect, we discuss the optimal management of river floodplains. We develop a theoretical model that considers ecosystem services which natural river floodplains provide. The essential point is that we must consider two types of environmental externalities related to the ecosystem services of river floodplains. First, the development of river floodplains has opportunity costs in terms of lost ecosystem services. Second, the development of floodplains increases flood risks to people downstream (a unidirectional spatial externality). Basically, river floodplains tend to be overdeveloped without appropriate policies because private landowners have no incentive to take the external costs into consideration. In a case study of the Ouse catchment, it turns out that river floodplains are/tend to be overdeveloped. In particular, river floodplains upstream are more overdeveloped because of the unidirectional spatial externality. However, we should note some limitations and problems on the empirical experiment, although the calibration is carried out under serious limited data availability. The limitations and problems lie in: specification of functional forms; the use of a benefit transfer method; the non-simultaneous evaluation of the interactions between floodplain development and flood protection. Thus, the results of the empirical experiment are not necessarily accurate in the context of the Ouse catchment, although we can still consider general characteristics of the system. In addition, all limitations and problems considered, it is too difficult to implement economic policies because the requirements are enormous. We need relevant policies in order to avoid the problem of overdevelopment. In this paper, we focus on zonal economic policies such as zonal taxes, subsidies and marketable permits. Theoretically, the policies are quite simple. Using price policies (taxes and subsidies), we set tax or subsidy rates equal to external costs in each zone. In the case of quantity policy (marketable permits), we set the optimal amounts of marketable permits in each zone, based on the optimal conditions. Of course, we should consider that the resultant allocations of price and quantity polices are different under uncertainty on the marginal benefits or costs (Weitzman, 1974; Baumol and Oates, 1988). On the practical side, however, the policies are difficult in that they are ‘zonal’. In order to apply them into real situations, we have to determine the appropriate number of zones and their sizes and geographical shapes, and then set appropriate rates or amounts of permits in each zone. However, there is no concrete rule and way of determining the zones. The determination of zones is difficult in terms of the trade-off between the internalisation of externalities and implementation costs of policies, which is also related to political frictions and market failure. We need to recognise the difficulties in applying zonal economic policies to real problems. That is, such zonal polices are confronted with serious transaction costs in reality. Further research is required to create alternative effective policies. Zonal policies are among effective policies to deal with problems of spatial environmental externalities, but it might be sometimes better not to implement such polices under expensive transaction costs.
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Acknowledgements The author would like to give many thanks to English Nature (Currently, Nature England, Peterborough, UK) for their partial financial support. In addition, the author would like to appreciate several critical but helpful comments from anonymous reviewers. Appendix A. Supplementary data Appendices associated with this article can be found, in the online version, at doi:10.1016/j.landusepol.2010.01.001. References Acharya, G., 2000. Approaches to valuing the hidden hydrological services of wetland ecosystems. Ecological Economics 35, 63–74. Acharya, G., Barbier, E.B., 2000. Valuing groundwater recharge through agricultural production in the Hadejia-Nguru Wetlands in Northern Nigeria. Agricultural Economics 22, 247–259. Alchian, A.A., Demsetz, H., 1973. The property right paradigm. Journal of Economic History 33 (1), 16–27. Barbier, E.B., 1994. Valuing environmental functions: tropical wetlands. Land Economics 70 (2), 155–173. Baumol, W.J., 1972. On taxation and the control of externalities. American Economic Review 62 (3), 307–321. Baumol, W.J., Oates, W.E., 1988. The theory of environmental policy, Second ed. Cambridge University Press, Cambridge. Bedient, P.B., Huber, W.C., 2002. Hydrology and floodplain analysis, third ed. Prentice Hall, Upper Saddle River. Bergstrom, J.C., Taylor, L.O., 2006. Using meta-analysis for benefits transfer: theory and practice. Ecological Economics 60, 351–360. Bromley, D.W., 1991. Environment and economy: property rights and public policy. Blackwell, Oxford. Coase, R.H., 1960. The problem of social cost. Journal of Law and Economics 3, 1– 44. Coase, R.H., 1988. Firm, market, and law. University of Chicago Press, Chicago. Coon, W.F. 1998. Estimation of Roughness Coefficients for Natural Stream Channels with Vegetated Banks. U.S. Geological Survey Water-supply Paper 2441 (WSP2441), Washington. Demsetz, H., 1967. Toward a theory of property rights. American Economic Review 57 (2), 347–359.
Dister, E., Gomer, D., Obrdlik, P., Petermann, P., Schneider, E., 1990. Water management and ecological perspectives of the upper Rhine’s floodplains. Regulated Rivers: Research & Management 5, 1–15. Goetz, R.U., Zilberman, D., 2000. The dynamics of spatial pollution: the case of phosphorus runoff from agricultural land. Journal of Economic Dynamics & Control 24, 143–163. Gren, I.-M., Groth, K.-H., Sylvén, M., 1995. Economic values of Danube floodplains. Journal of Environmental Management 45, 333–345. Hey, R.D., Thorne, C.R., 1986. Stable channels with mobile gravel beds. Journal of Hydraulic Engineering 112, 671–689. Holling, C.S., Schindler, D.W., Walker, B.W., Roughgarden, J., 1995. Biodiversity in the functioning of ecosystems: an ecological synthesis. In: Perrings, C., Mäler, K.G., Folke, C., Holling, C.S., Jansson, B.O. (Eds.), Biodiversity loss: economic and ecological issues. Cambridge University Press, Cambridge, pp. 44–83. Mitsch, W.J., Gosselink, J.G., 2000a. Wetlands, 3rd ed. John Wiley & Sons, New York. Mitsch, W.J., Gosselink, J.G., 2000b. The value of wetlands: importance of scale and landscape setting. Ecological Economics 35, 25–33. Mori, K., 2006. Modelling Hydrological, Ecological and Economic Interactions in River Floodplains: A Case Study of the Ouse Catchment (North Yorkshire, England). PhD Thesis. The University of York.(UK). Mori, K., 2009. Can market-based policies accomplish the optimal floodplain management?: a gap between static and dynamic models. Journal of Environmental Management 90, 1191–1194. Penning-Rowsell, E., Johnson, C., Tunstall, S., Tapsell, S., Morris, J., Chatterton, J., Green, C., 2005a. The benefits of flood and coastal risk management: a manual of assessment techniques. Middlesex University Press, London. Penning-Rowsell, E., Johnson, C., Tunstall, S., Tapsell, S., Morris, J., Chatterton, J., Green, C., 2005b. The benefits of flood and coastal risk management: a handbook of assessment techniques. Middlesex University Press, London. Perrings, C., Pearce, D.W., 1994. Threshold effects and incentives for the conservation of biodiversity. Environmental and Resource Economics 4 (1), 13–28. Petts, G., Heathcote, J., Martin, D. (Eds.), 2002. Urban rivers: our inheritance and future. IWA and Environment Agency, London. Rosenberger, R.S., Stanley, T.D., 2006. Measurement, generalization, and publication: sources of error in benefit transfers and their management. Ecological Economics 60, 372–378. Thomas, L.E., 1986. ENG - Hydrology - Time of Concentration. Hydrology Technical Note, No. N4. United States Department of Agriculture, Soil Conservation Service. Tietenberg, T.H., 1974. On taxation and the control of externalities: comment. American Economic Review 64 (3), 462–466. Turner, K., 1991. Economics and wetland management. Ambio 20 (2), 59–63. Weitzman, M.L., 1974. Prices vs. quantities. Review of Economic Studies 41 (4), 477–491. Woodward, R.T., Wui, Y.-S., 2001. The economic value of wetland services: a metaanalysis. Ecological Economics 37, 257–270.
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Can we avoid overdevelopment of river floodplains by economic policies?: A case study of the Ouse catchment (Yorkshire) in the UK Koichiro Mori ∗ The University of York, Heslington, York, YO10 5DD, UK
a r t i c l e
i n f o
Article history: Received 26 September 2007 Received in revised form 6 October 2009 Accepted 6 January 2010 Keywords: River floodplain Overdevelopment Unidirectional spatial externality Ecosystem service Zonal economic policy
a b s t r a c t River floodplains are significant environmental resources in that they provide multiple ecosystem services. However, river floodplains are/tend to be overdeveloped because indirect-use values linked with ecosystem services are overlooked by private landowners. In a case study of the Ouse catchment, it turns out that river floodplains tend to be overdeveloped in upstream areas because of a unidirectional spatial externality. We set a simple model that considers both direct- and indirect-use values to analyse the social optimisation. The essential point is that we must consider two types of environmental externalities related to the ecosystem services of river floodplains to make decisions on floodplain development. First, the development of river floodplains has opportunity costs in terms of lost ecosystem services. Second, the development of floodplains increases flood risks to people downstream (imposes a unidirectional spatial external costs). Theoretically, we can easily deal with the problem by zonal economic policies: zonal taxes or subsidies (price policies) and zonal marketable permits or transferable development rights (quantity policies). On the practical side, however, there are so many problems. Then, such approaches are too complex to use. First of all, we have to specify real complicated economic and physical systems which show non-linearity, irreversibility, site-specific relationships, and inter-dependency between systems and sites. Secondly such policies should be ‘zonal’, which might impose substantial transaction costs. In order to apply them to real situations, we have to determine the appropriate number of zones, their sizes and geographical shapes, and then set appropriate rates or amounts of permits in each zone. Furthermore, the determination of zones is difficult because of the trade-off between the internalisation of externalities and implementation costs of policies, which are also related to political frictions and market failure. © 2010 Elsevier Ltd. All rights reserved.
1. Introduction Wetlands have recently disappeared at alarming rates through the developed and developing worlds although we have noticed the importance of wetlands as environmental or ecological goods and services (Mitsch and Gosselink, 2000a). Table 1 shows percentage loss of wetlands in various locations in the world. It is expected that we have lost around 50% or more of the original wetlands on the earth. River floodplains are among wetlands. Around 6 million people live in river floodplains in England and Wales, which cover some 10% of the land, and the rate of development on river floodplains has more than doubled for the past 50 years in some areas (Petts et al., 2002). It seems that we have overdeveloped river floodplains. The construction of roads and railways and commercial and
∗ Institute of Industrial Science, University of Tokyo, 4-6-1-Bw701 Komaba, Meguro-ku, 153-8505, Tokyo, Japan. Tel.: +81 3 5452 6442; fax: +81 3 5452 6444. E-mail addresses: [email protected], [email protected]. 0264-8377/$ – see front matter © 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.landusepol.2010.01.001
domestic development are often done in river floodplains because it is relatively easier and cheaper to build there. In addition, natural river floodplains can be directly used as arable and grazing lands because they contain fertile and nutrient soil. Historically speaking, cities have been constructed in floodplains along rivers because of the accessibility to watercourses, the abstraction of fresh water, the drainage of waste water and so on. The development of floodplains has been frequently attracted because of such various direct-use values. However, we should notice the fact that the development brings about indirect costs that are difficult to recognize in our usual economic life. River floodplains are important in that they provide several ecosystem services. They are multi-functional resources (Dister et al., 1990; Turner, 1991; Barbier, 1994; Gren et al., 1995; Mitsch and Gosselink, 2000b). Natural river floodplains enhance biological productivity. They provide habitats for various species, which have both direct and indirect use values (Mitsch and Gosselink, 2000a). In addition, the mix of various species determines what kind of ecological function or services it supplies, and it gives
K. Mori / Land Use Policy 27 (2010) 976–982 Table 1 Loss of Wetlands in the World. Location NORTH AMERICA United States Canada Atlantic Tidal and salt mashes Lower Greate Lakes - St. Lawrence River Prairie potholes and sloughs Pacific coastal estuarine wetlands AUSTRALIA Australia Swan Coastal Plain Coastal New South Wales Victoria River Murray basin New Zealand Philippine mangrove swamps CHINA EUROPE
977
2. Model for optimal floodplain management Percentage Loss
To begin with, let us show some stylised facts in order to make the presuppositions of the model clear.
53 65 71 71 80 > 50 75 75 33 35 > 90 67 60 > 90
Source: Mitsch and Gosselink (2000a), p.38.
ecosystem resilience (stability) at the same time (Holling et al., 1995). Hydrologically, natural river floodplains play an important role in mitigating floods because they can control water discharge volume (Dister et al., 1990; Gren et al., 1995). They also recharge ground water (Dister et al., 1990; Gren et al., 1995; Acharya, 2000; Acharya and Barbier, 2000). Furthermore, they improve water quality (Dister et al., 1990; Gren et al., 1995). They act as nutrient sinks for runoff from uplands but as nutrient transformers for upstream–downstream flow (Mitsch and Gosselink, 2000a). Which types of ecosystem services are provided depends on wetlands and river floodplains. There are trade-offs between indirect- and direct-use values of river floodplains, but many of the costs of floodplain development are not reflected on market prices. Private landowners of river floodplains have no incentive to take account of the public interests such as the values of ecosystem services that natural river floodplains provide. The development of river floodplains and the construction of banks and dykes confer private benefits, but often have a negative effect on the public interests. They mitigate the flood control function that natural river floodplains have, and increase flood risk in the urban areas downstream. This is a unidirectional spatial externality. Problems of externalities are attributable to the lack of well-defined property rights (Coase, 1960; Demsetz, 1967; Alchian and Demsetz, 1973; Bromley, 1991). Although the rights to river floodplains as lands are defined, rights to the ecosystem services are not. The lack of well-defined rights to those causes market failure, which brings about overdevelopment of river floodplains because voluntary contracts do not occur due to transaction costs. Under this situation, we need to correctly recognize such trade-offs and the problem of externalities, and to make relevant policies to attain the optimal management of river floodplains. This paper uses a theoretical model to conceptually identify the optimal management of river floodplains with the essential externalities taken account of. Based on the standard of the social optimisation, we attempt to carry out an empirical experiment in a case study of the Ouse catchment (Yorkshire) in the UK. The empirical experiment is confronted with some serious problems and limitations, but we still derive general economic and political implications. Probably, the discussions on problems and limitations may be meaningful. Thus, we briefly show the results from an empirical experiment, and discuss possible economic policies to avoid the overdevelopment of river floodplains. Then, we discuss problems and limitations on the approaches of an empirical experiment.
(1) Natural river floodplains provide multiple ecosystem services. They are adversely influenced by the development of river floodplains and/or the introduction of structural flood protection controls such as banks, dykes and floodwalls. (2) Flood mitigation service of natural river floodplains in upstream sites spills over into downstream sites. This is a unidirectional spatial externality. (3) Land use patterns outside floodplains have an impact on flood risk through a change in imperviousness of land, which is treated as an exogenous variable in this paper. (4) The total size of floodplains is normally defined by the 100-year floodplain (1% chance of flooding in a year).1,2 (5) How much we lose floodplains’ capacity of mitigating floods and other ecosystem functions depends on what type of natural floodplains we develop, such as grasslands, woodlands, tilled agricultural lands and so on. In the model, we simply dichotomise a control variable (floodplain development) between natural and developed river floodplains. In an empirical experiment as a case study, however, we consider 25 categories of land types, based on GIS data of land-uses. The problem for optimal floodplain management is to choose the values of control variables such as the amount of floodplain development (the area of developed floodplains) and the scale of flood protection controls (the area potentially protected by flood protection controls) in order to maximise social welfare. Social welfare is given by a social utility function of the aggregate net benefit. The problem can be expressed by mathematical forms and solved by mathematical optimisation techniques.3 In the main text of the paper, however, we would like to focus on essential points without mathematics. We can derive the two conditions for optimal floodplain management. The first condition implies that the marginal benefit of floodplain development must be equal to the sum of the marginal direct cost and the marginal external cost of floodplain development. It tells that we should consider two kinds of external costs due to floodplain development: (1) costs of lost ecosystem services, and (2) unidirectional spatial external costs of flood risks that floodplain development in upstream areas inflicts on the downstream areas. The second condition implies that the marginal benefit of flood protection controls should equal the sum of the marginal direct cost and the marginal external cost of flood protection controls. It tells that we should take account of unidirectional spatial external costs of flood risks that enhancement of flood protection level in upstream areas imposes on the downstream areas. The crucial point is that we must take two types of external costs into consideration such as the marginal cost of losing eco-
1 River floodplains are defined as low lands adjoining a channel, river, stream and watercourse that have been or may be inundated by flood water (Bedient and Huber, 2002). We, however, cannot detect where river floodplains are by this definition because the definition is ambiguous. We often use the 100-year flood for defining river floodplains. For example, the Environment Agency in the UK adopts this definition to supply maps of floodplains. 2 The size of floodplains is assumed constant in the model, although it might change over time in the long term due to climate change. Comparing between maps of historical floodplains and current floodplains in the Ouse catchment provided by the Environment Agency (UK), however, there is little difference between them. 3 Mathematical expressions and the procedures of solution are given in Supplementary data.
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Fig. 1. Map of the Ouse Catchment (UK). Source: this geographical map is created from GIS data of EDINA Digimap (OS Strategi and Land-Form Panorama [DEM]) by use of ArcGIS.
system services and the marginal external cost of flood risk. The conditions are simple but important. In reality, floodplains are often overdeveloped without considering these externalities. 3. Empirical experiment and policy discussion We carry out an empirical experiment as a case study of the Ouse catchment, based on the optimal conditions derived in the previous section. The Ouse catchment is located in Yorkshire in the UK, which is delineated by the River Ouse and tributaries. The River Ouse and tributaries are notorious for flood events, which might be related to changes in land-use including river floodplains. Fig. 1 shows the map of the Ouse catchment. The area is about 424,279 ha. The total area of river floodplains in the catchment is around 28,072 ha. The numbers on the map indicate zones (subbasins), which are defined by the location of hydrological gauging stations. We can freely define the zones, but we need hydrological data which we obtain from hydrological gauging stations in order to conduct an empirical analysis. In so doing, the zones (sub-basins) are determined by the location of gauging stations. We attempt to apply the model and the derived optimal conditions to the case of the Ouse catchment. Let us focus on floodplain development. Then, we use a reduced model including only one control variable such as floodplain development for the purpose of an empirical analysis because the relevant data related to flood protection controls are unfortunately unavailable on the level of the analysis in the model. The focal point is how we should use and develop river floodplains, although flood protection controls are related to the external flood risk. Furthermore, floodplain development in upstream zones has the same impact on downstream zones as the enlargement of flood protection controls in upstream zones. Therefore, we treat the scale of flood protection controls as an exogenous variable for an empirical analysis here, assuming
several levels of flood protection controls (some scenarios on flood protection controls), because the scale of flood protection controls influences on the expected cost function of flood risk. The calibration process is too complicated to show in this paper.4 We use various economic, physical, hydrological, flood damage and GIS data. As for techniques, we use econometrics, a benefit transfer method, a precipitation frequency analysis, and a hydrological model and its computer simulation. Table 2 indicates the overview of the calibration. Using the calibrated functions, we can calculate the optimal sizes of developed floodplains in the zones, based on the theoretical optimal condition. As we mentioned, we should note that we have to derive several conditions according to the assumptions of flood protection controls because they affect the choice of floodplain development thorough the expected cost function of flood risk. Then, let us set some scenarios (assumptions) about the scale of flood protection controls. We assume that flood protection controls can save people and their lands from the floods with (1) 2% exceedance probability (50 years return period), (2) 4% exceedance probability (25 years return period), and (3) 10% exceedance probability (10 years return period). Table 3 shows the results. First, as a result, how many zones out of 15 are currently overdeveloped depends on the assumption on the scale of flood protection controls. However, river floodplains in some zones are obviously overdeveloped. Second, more upstream zones are/tend to be overdeveloped because of the unidirectional spatial externality related to flood mitigation service. Third, flood protection controls are critical for the choice of land-uses. If the scale of them is relatively small like the third scenario, we can develop few floodplains. As the theoretical model tells us, we should find the optimal com-
4
The detailed processes are shown in Chapter 5 of Mori (2006).
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Table 2 Calibrated functions. Function
Functional forms
i x
i
= 14030.80048x for all i
Direct net benefit function of floodplain development
f
Benefit function of ecosystem services
B(LFi − xi ) =
i
0.55978(LFi − xi )e8.48302−0.168 ln(LF −x) for all i 2
C i (xi , xj ) = ˛(xi ) + ˇ
Expected cost function of total flood risk
xj
j
The function is calibrated in each zone based on different assumptions about flood protection controls. See Appendix B.
Data
Method
Housing market: land prices private sector, by region (Inland Revenue Valuation Office); and All items retail prices index (UK national statistics) Woodward and Wui (2001), Table 2; and Annual average of spot exchange rate (Bank of England)
Theoretical calculation of economic rent based on assumptions
GIS Data: EDINA Digimap (OS Strategi, Land-Form Panorama [DEM], OS Land-Form PROFILE and OS Land-Line.Plus), Land Cover Map of Great Britain 1990 (CEH), and Indicative Floodplain Map 2001 (Environment Agency); National River Flow Archive (CEH);
Hydrological simulation model on a software HEC-HMS (USACE);
Manning’s N (Bedient and Huber, 2002; Coon, 1998; and Thomas, 1986); Hydraulic geometry (Hey and Thorne, 1986); Precipitation data: Met Office - UK Land Surface Stations data (BADC); Elevation-Damage data (Penning-Rowsell et al., 2005a, 2005b); and Retail Price Index data (UK national statistics);
Base flow index calculation;
bination of floodplain development and flood protection controls based on the two optimal conditions. We discuss possible economic policies for the optimal use of river floodplains. Let us take up two types of economic policies as promising ones: taxes or subsidies (price policies) and marketable permits or transferable development rights (quantity policies). Price policies provide individual decision makers (private landowners) with an economic incentive to directly take account of external costs. The optimal tax (or subsidy) rates should be equal to the marginal external costs. The tax rates differ among zones because the marginal costs of external flood risk are different among zones. We should impose higher tax rates on zones upstream as compared with zones downstream because of the unidirectional spatial externality. In the empirical experiment, we calculate the optimal tax rates on developed floodplains in the first scenario under the assumption that flood protection controls deal with flood events with 2% exceedance probability. Table 4 shows the results.
Table 3 Optimal size of developed floodplains. Zone
27001 27002 27005 27007 27009 27034 27043 27053 27069 27071 27075 27083 27085 27089 27090 a
Protected against floods with exceedance probability 2%
4%
239 1,987 0 503 1,427 108 162 0 39 685 25 1,117 120 319 32
121 1,057 0 32 708 0 55 0 0 0 0 594 0 175 0
10% 47 456 0 0 263 0 0 0 0 0 0 280 0 82 0
Benefit transfer; and Econometrics
Unit: (ha) Currenta 99 217 14 155 308 51 28 8 102 306 64 106 60 35 67
The current conditions are based on the Land Cover Map of Great Britain, 1990.
Geographical information system (GIS) using a software ArcGIS;
Technique of hydraulic geometry; Precipitation frequency analysis; and Econometrics
Alternatively, we can attain the optimum by marketable permits or transferable development rights (quantity policies). Policy makers issue the optimal amount of marketable permits for developing floodplains that is exactly equivalent to the optimal size of developed floodplains. If the markets for marketable permits are competitive and individual decision makers (private landowners) attempt to minimise their costs by transacting the permits without cheating, the optimal state is accomplished at the least costs. Like price policies, it is obviously necessary to set different amounts of marketable permits among zones due to the different costs of the unidirectional spatial externality. Thus, we should set a smaller quantity of marketable permits in zones upstream. On the theoretical side, these economic policies are easy to be applied because we assume no transaction costs. Under no transaction costs, we are indifferent to the choice of policies as long as they fully consider social external costs (Coase, 1960, 1988). Certainly, the results of the theoretical model analysis and the empirical results are both clear. On the practical side, however, it is difficult to implement such economic policies. They inflict transaction costs such as implementation, administration and monitoring costs. In the presence of spatial externalities, policies should be Table 4 Optimal tax rate. Zone 27001 27002 27005 27007 27009 27034 27043 27053 27069 27071 27075 27083 27085 27089 27090 Unit: 1990 UK £ per hectare per year.
Tax rate 1,031 1,203 25,038 7,548 873 10,667 4,648 24,835 12,136 7,977 12,165 2,115 12,159 1,045 12,112
980
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zonal, but the difficulties lie in the fact that they are ‘zonal’. It is difficult to determine zones on which we should impose different rates or regulations (tax or subsidy rates or amounts of marketable permits). How many zones should we divide the relevant catchment into? How should we divide? Let us discuss a few difficulties in brief.5 First, zonal policies should be based on the relevant zonal data. We definitely need relevant economic, physical, meteorological and hydrological data in the zones that we delineated. However, such data are not so abundant that we can freely determine the zones. In particular, our decisions are often constrained by limited number of meteorological and hydrological gauging stations. There is no warranty that the division of the catchment is the best. We have to determine the zones from the holistic point of view ideally, and then we have to arrange the appropriate location of gauging stations in order to obtain relevant data to implement the policies. However, there is no concrete way of determining zones. In reality, it might depend on the implementation and administration costs of policies, the costs of obtaining relevant data, geographical conditions, characteristics of local weather, and so on. In this respect, Goetz and Zilberman (2000) propose zonal taxes, permits and standards in order to deal with a problem on a negative spatial externality related to phosphorus runoffs from agricultural lands. They also mention that such zonal policies with infinite many different locations might be very difficult to administer in practice. Considering these transaction costs, there is a possibility that it is better not to implement such economic policies. Second, to what extent should we consider external costs that are brought about by floodplain development? The purpose of economic policies is to take account of externalities, but the extent of considering the spatial externality depends on the number of zones. The externality related to flood mitigation service is spatially continuous from upstream to downstream. Such external effects exist even in the same zone. Therefore, the more zones we divide the catchment into, the more we consider external costs. However, the more zones, the more costly we implement such policies. Tietenberg (1974) mentions that the common rule in economics, ‘MB = MC (Marginal benefits must equal marginal costs.)’, is applicable to the determination of the number of zones.6 In addition, the more zones, the smaller the markets for permits become in the case of marketable permits. As markets become smaller, they become less competitive. If so, marketable permits cannot warrant that the optimal conditions are achieved at ‘the least cost’. The policies seem to be simple and effective conceptually, but we need more discussion and consideration on transaction costs for their application. Third, we are faced with political frictions among zones. Floodplains spread continuously and spatially. Private landowners are highly sensitive to the location of boundaries of zones because different rates or amounts of marketable permits are set in zones. In particular, private owners of floodplains are highly prone to resist such zonal economic policies if their lands are close to the boundaries of zones and a higher tax rate, a lower subsidy rate or a smaller amount of marketable permits is given in the zone. It is difficult to set zonal economic policies in reality from the political point of view due to serious political conflicts of stake holders among zones. Setting different tax rates according to locations would be politically infeasible at worst, but a zonal tax system is possible as a compromise (Tietenberg, 1974).
5 Mori (2009) discusses the difficulties of these economic policies in the dynamic context. 6 Tietenberg (1974) makes this comment in the context of air pollution, based on Baumol (1972).
4. Discussion: problems and limitations We discuss problems and limitations on both the theoretical model and the empirical experiment. Some problems and limitations are serious for considering the application of the economic policies. Thus, the discussion here will make some contributions. First, the function of the net benefit of development might be too simple to measure the real benefit. It is assumed to be a simple linear function, and then the marginal value remains constant even as we develop more floodplains. In addition, the marginal value is calibrated by the regional average value. The reason is that the calibration has been implemented under the serious limited data availability. However, it seems to be implausible that the marginal benefit is kept constant in terms of the area of floodplains that we develop. We basically consider that the marginal benefit will go up initially and go down beyond a threshold of development. Thus, the results of empirical ‘experiment’ are not necessarily trustworthy particularly for knowing to what extent we can develop floodplains in the Ouse catchment, although the experiment is still meaningful for understanding general characteristics of the system including economic policies. Second, the function of the benefit of ecosystem services except flood mitigation service is calibrated by a benefit transfer method. The accuracy of benefit transfer methods is often controversial. Rosenberger and Stanley (2006) raises three sources of errors: the measurement error, the generalization error and the publication selection bias. Bergstrom and Taylor (2006) mentions that the meta-analysis models for benefit transfer should satisfy core economic variable consistency, commodity consistency and welfare change measure consistency. The valuation of wetlands (floodplains) has been implemented in different contexts. The similarity of research sites might be often problematical. The river floodplains in the Ouse catchment do not necessarily provide all the general ecosystem services that are evaluated in the benefit transfer method. Furthermore, the types of land uses in natural river floodplains in the Ouse catchment are regionally different. Thus, the volume of ecosystem services are also regionally various in the catchment. We should evaluate the differences, but we cannot do so due to the limited data availability here. In this regard, however, we have distinguished the types of land uses based on Land Cover Map, and calculated the averages in individual sub-basins in terms of flood mitigation service. Third, some of functions in the model are assumed to have linear relationships due to difficulties on the specification of the functional forms and calibration. However, we would in general expect non-linear relationships both between physical causes and effects because of threshold effects and between physical effects and economic values. We should pay an attention to threshold effects of ecosystem resilience because ecological systems are non-linear and discontinuous (Perrings and Pearce, 1994). We are required to take this into consideration in order to capture real mechanism of systems more precisely. Fourth, the values of flood losses depend on land forms. In this respect, however, we distinguish 25 categories of land uses for evaluating the benefit of flood mitigation service in the Ouse catchment. The extent of the service depends on land uses especially in vegetation which determines the imperviousness (Manning’s N). Furthermore, we distinguish three categories such as agricultural lands (cultivated and fallow), developed urban areas and the others for measuring flood losses. Generally speaking, flood losses in agricultural lands and developed urban areas are larger than those in the other areas. However, we evaluate them by averaging them out in the sub-basins respectively. Moreover, strictly speaking, the size of flood losses depends on kinds of agricultural outputs and buildings. Thus, they are not completely precise.
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Fifth, the interactions between floodplain development and flood protection controls are not completely considered in the empirical experiment. We unfortunately cannot evaluate the optimal management of flood protection controls in the empirical experiment due to the unavailability of relevant data. Instead, we focus on the optimal management of floodplain management under a few assumed scenarios on flood protection against floods with 2%, 4% and 10% exceedance probability. For the purpose of evaluating the management of flood protection at the same time, we need complicated data and information on flood protection because there are various methods for flood protection. They also include the one that has a positive effect on both its own area and the downstream areas such as artificial washlands and reservoirs. They do not necessarily have a negative impact on the downstream areas in terms of flood risk. Then, it seems complex to treat them as a synthesized proxy in individual sub-basins. Furthermore, on the theoretical side, we assume an embankment as a representative method of flood protection, which implies the external costs inflicted on the downstream areas. In the model, the scale of flood protection can be concretely evaluated by the area potentially protected, as a proxy. The area potentially protected should be simply given by a function of height and length of flood averting behaviour such as flood walls, dykes, banks and so on. However, we are essentially short of the relevant data. In addition, we have to consider the direct benefits and costs of floodplain development and flood protection, and the external costs of them in order to make decisions on both of them at the same time. Certainly we can develop more floodplains in its own sub-basin if we enhance the scale of flood protection. We can develop more floodplains in the downstream areas if we forgo flood protection in the upstream areas. Theoretically, the optimal management must satisfy the two conditions at the same time. In this sense, we should have solved them in the empirical experiment under complex interactions. Sixth, we assume homogeneous relationships among locations. We assume the same functional forms on all the zones (sub-basins) with parameter values different. There is, however, a possibility that real systems are much more complex than we assumed. Even if we collect the detailed site-based data for the calibration, the same functional forms might be insufficient to give reliable relationships. It must be necessary to specify different functional forms based on individual areas (sub-basin) in some circumstances. Finally, the real river system and river floodplains are highly complicated. The model treats only major rivers including tributaries, although we measure the total area of floodplains in individual sub-basins respectively. However, the real river system has many small rivers, streams, brooks, creeks and waterways, around which floodplains are being formed. In addition, the river model in individual sub-basins is also much simpler than the real meandering rivers with the width changing over the courses. In this respect, we have to deeply discuss hydrological model, although we have calibrated the models by use of real meteorological and hydrological data.7 All things considered, the requirements for the modelling and the application of economic policies (both price and quantity policies) for optimal floodplain management are enormous. Therefore, we have to think up a new idea on polices for optimal floodplain management. 5. Conclusion River floodplains are multi-functional resources. They offer direct and indirect use values. They provide various ecosystem
7
Mori (2006) discusses this respect.
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services. However, the way they are used generates environmental externalities. Our economic system does not have the way of recognizing and evaluating the indirect-use values of many of the ecosystem services affected by decisions to develop river floodplains in various ways. This type of problem is common among many environmental problems. Without the appropriate policy interventions, the current condition of many floodplains will continue to deteriorate. In this respect, we discuss the optimal management of river floodplains. We develop a theoretical model that considers ecosystem services which natural river floodplains provide. The essential point is that we must consider two types of environmental externalities related to the ecosystem services of river floodplains. First, the development of river floodplains has opportunity costs in terms of lost ecosystem services. Second, the development of floodplains increases flood risks to people downstream (a unidirectional spatial externality). Basically, river floodplains tend to be overdeveloped without appropriate policies because private landowners have no incentive to take the external costs into consideration. In a case study of the Ouse catchment, it turns out that river floodplains are/tend to be overdeveloped. In particular, river floodplains upstream are more overdeveloped because of the unidirectional spatial externality. However, we should note some limitations and problems on the empirical experiment, although the calibration is carried out under serious limited data availability. The limitations and problems lie in: specification of functional forms; the use of a benefit transfer method; the non-simultaneous evaluation of the interactions between floodplain development and flood protection. Thus, the results of the empirical experiment are not necessarily accurate in the context of the Ouse catchment, although we can still consider general characteristics of the system. In addition, all limitations and problems considered, it is too difficult to implement economic policies because the requirements are enormous. We need relevant policies in order to avoid the problem of overdevelopment. In this paper, we focus on zonal economic policies such as zonal taxes, subsidies and marketable permits. Theoretically, the policies are quite simple. Using price policies (taxes and subsidies), we set tax or subsidy rates equal to external costs in each zone. In the case of quantity policy (marketable permits), we set the optimal amounts of marketable permits in each zone, based on the optimal conditions. Of course, we should consider that the resultant allocations of price and quantity polices are different under uncertainty on the marginal benefits or costs (Weitzman, 1974; Baumol and Oates, 1988). On the practical side, however, the policies are difficult in that they are ‘zonal’. In order to apply them into real situations, we have to determine the appropriate number of zones and their sizes and geographical shapes, and then set appropriate rates or amounts of permits in each zone. However, there is no concrete rule and way of determining the zones. The determination of zones is difficult in terms of the trade-off between the internalisation of externalities and implementation costs of policies, which is also related to political frictions and market failure. We need to recognise the difficulties in applying zonal economic policies to real problems. That is, such zonal polices are confronted with serious transaction costs in reality. Further research is required to create alternative effective policies. Zonal policies are among effective policies to deal with problems of spatial environmental externalities, but it might be sometimes better not to implement such polices under expensive transaction costs.
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