Critical habitat for threatened and endangered species: How should the economic costs be evaluated?

Journal of Environmental Management 134 (2014) 127e135

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Critical habitat for threatened and endangered species: How should the economic costs be evaluated? Andrew J. Plantinga a, *, Ted L. Helvoigt b, Kirsten Walker c a

Bren School of Environmental Science and Management, University of California, 3424 Bren Hall, Santa Barbara, CA 93106-5131, USA Evergreen Economics, 1020 SW Taylor Street, Suite 680, Portland, OR 97205, USA c McDowell Group, 9360 Glacier Highway, Suite 201, Juneau, AK 99801, USA b

a r t i c l e i n f o

a b s t r a c t

Article history: Received 7 February 2013 Received in revised form 17 October 2013 Accepted 26 October 2013 Available online 29 January 2014

The designation of critical habitat is a feature of endangered species protection laws in many countries. Under the U.S. Endangered Species Act, economics cannot enter into decisions to list species as threatened or endangered, but can be considered when critical habitat is designated. Areas can be excluded from proposed critical habitat if the economic cost of including them is determined to exceed the benefits of inclusion, and exclusion would not result in extinction of the species. The economic analysis done to support critical habitat exclusions has been controversial, and the focus of much litigation. We evaluate a sample of these analyses, and discuss the exclusions that were made in each case. We discuss how the methodology used to measure economic costs of critical habitat has changed over time and provide a critique of these alternative methods. We find that the approach currently in use is sound from an economic perspective. Nevertheless, quantification of the costs of critical habitat faces numerous challenges, including great uncertainty about future events, questions about the appropriate scale for the analysis, and the need to account for complex market feedbacks and values of non-market goods. For the studies we reviewed, there was no evidence that the results of the economic analyses provided information that was useful for making decisions about exemptions from critical habitat designations. If economics is to play a meaningful role in determining endangered species protections, an alternative would be to allow listing decisions to be based on economic as well as biological factors, as is typical for species conservation laws in other countries. Ó 2013 Elsevier Ltd. All rights reserved.

Keywords: Endangered species act Critical habitat designation Economic analysis

1. Introduction This paper considers the economics of critical habitat designations (CHDs). CHDs are a common feature of species conservation laws in developed countries, including those in Australia, Canada, and the European Union. We focus on CHDs under the United States Endangered Species Act (ESA), which has been in effect for a relatively long time and is considered by some to be the most effective biodiversity protection law in the world (Harris et al., 2011). We evaluate a sample of economic analyses conducted for listed species under the ESA for which critical habitat has been established or proposed. The ESA was passed by the U.S. Congress in 1973 with the declared objectives of conserving the ecosystems upon which endangered and threatened plant and animal species depend and providing for the recovery of threatened and endangered species. It is administered jointly by the National Marine Fisheries Service

* Corresponding author. E-mail address: [email protected] (A.J. Plantinga). 0301-4797/$ e see front matter Ó 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.jenvman.2013.10.025

(NMFS), which is responsible for marine species, and the Fish and Wildlife Service (FWS), which is responsible for all other species. The Secretary of the Interior and the Secretary of Commerce (collectively referred to as “Secretary”) each has the authority to list a species as either endangered or threatened. Such a determination is to be made solely on the basis of the best scientific and commercial data available, but is not to incorporate economic considerations. Following listing, the Secretary is required to designate critical habitat for the species, defined as habitat that is essential for the conservation of the species. CHDs require Federal agencies to consult with the FWS or NMFS (hereafter, the “Services”) if they take actions affecting the designated areas.1 This includes actions taken directly by the Federal agency, as well as actions by private entities or state or local governments that take place on federal lands, require a Federal permit,

1 The consultation process is also activated when there are concerns that actions by any entity could jeopardize the existence of a listed species or result in an unpermitted take.

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or involve Federal funding. Actions that trigger a consultation often take place within the designated area, but can also occur outside the area if they have effects on the habitat (e.g., upstream water diversions and activities leading to climate change). The consultations, required under Section 7 of the ESA and, thus, referred to as Section 7 consultations, ensure that the proposed action does not result in destruction or adverse modification of habitat determined to be critical to the conservation of the species. Although economic considerations do not enter into listing decisions, they can affect the designation of critical habitat. Specifically, amendments to the ESA passed in 1978 allow the Secretary to exclude areas from the CHD if the economic benefit of doing so is sufficiently large and as long as the exclusion will not result in extinction of the species concerned. To inform the Secretary’s decision to exclude areas, analyses of the economic costs of a proposed CHD are performed. Currently, the Services measure these costs using the baseline approach, which involves comparing baseline conditions, defined as the “best assessment of the way the world would look absent the proposed action” (U.S. Office of Management and Budget, 2003), to economic conditions with the regulation in place. The difference between the baseline scenario (the “without the CHD” case) and the alternative scenario (the “with the CHD” case) identifies the incremental effects of the CHD. While the baseline approach is well-established and standard practice for economic evaluation of government regulations (U.S. Office of Management and Budget, 2003), its application to CHDs has been controversial. The practice of the Services has been to include protections provided by the listing of the species in the baseline (Doremus, 2011). These protections include, most importantly, the Section 7 requirement that Federal actions do not jeopardize the continued existence of the species and the prohibition under Section 9 on unpermitted “take” (the killing, harming, harassing, pursuing, or removing of the species from the wild). In order for the designation of critical habitat to have incremental economic effects, it must prevent otherwise economical activities, excluding those activities already prohibited by the jeopardy standard or take restrictions. In particular, an activity would need to adversely modify habitat but not jeopardize the continued existence of the species or result in a take. The current baseline approach contrasts with two methods applied by the Services in the past. Prior to 2001, the Services assumed that any adverse modification of habitat would jeopardize the existence of the species and, as such, critical habitat provided no additional protections beyond those promulgated by the listing. The economic costs of a CHD were necessarily limited to the administrative costs of considering critical habitat in Section 7 consultations. Under a 2001 Federal court ruling,2 the Services were required to adopt a radically different approach to measuring the effects of CHDs. Under this method, all economic costs of the CHD were to be evaluated, including those attributable co-extensively to other causes. Now, any action taken to comply with the ESA listing, including activities prohibited by the jeopardy and take provisions, could be considered a cost of the CHD. Whereas, before, practically everything was left out of the economic analyses, now, almost everything was to be included in them. In 2004, however, another Federal court ruling3 resulted in the abandonment of the coextensive approach and the adoption of the current baseline approach. The baseline approach is more balanced in that it recognizes the potential for CHDs to have costs beyond the

2 New Mexico Cattle Growers Assn v. United States Fish and Wildlife Service, 248 F.3d 1277 (10th Cir. 2001). 3 Gifford Pinchot Task Force v. U.S. Fish and Wildlife Service, 378 F.3d 1059 (9 Cir.), modified, 387 F.3d 968 (9 Cir. 2004).

administrative costs of Section 7 consultations, but stops well short of including all costs associated with the listing of the species. Our main purpose is to evaluate a sample of economic analyses of CHDs for species listed under the ESA. The paper has four supporting objectives. First, we explain the application of the baseline approach to CHDs, identifying the conditions under which a CHD can have incremental costs. Second, we compare and contrast economic studies of CHDs from the three phases of their evolution: the first phase when adverse modification and jeopardy were viewed as equivalent, the second phase when the full range of coextensive costs were considered, and the current phase involving the baseline approach. Our review sheds light on why current studies tend to find that CHDs have small economic costs. We also discuss the handful of analyses in the academic literature that evaluate economic effects of critical habitat. Third, for the CHDs considered under objective 2, we discuss the areas excluded by the Secretary from the final designation. Fourth, we critique the alternative approaches to measuring economic costs of CHDs, emphasizing the strengths and weaknesses of the different methods as well as the formidable challenges inherent in prospective costbenefit analysis. Although we focus on the U.S. ESA, our review provides general insights into the economics of CHDs, which are a common feature of species conservation laws in other countries. Canada’s Species at Risk Act (SARA), adopted in 2002, has many similarities to the ESA, including the listing of species, the designation of critical habitat, and the use of economic impact analysis. An important difference is that economics can affect the listing decision and is often cited as the reason for not listing species (Findlay et al., 2009). In addition, critical habitat has only been designated on federal lands, although SARA allows for designation of non-federal lands (Mooers et al., 2010). Australia’s Environment Protection and Biodiversity Conservation (EPBC) Act of 1999 recognizes listed threatened species and ecological communities as a matter of national environmental significance. Accordingly, any action that is likely to have a significant impact on these resources must be referred to the Environment Minister and undergo an environmental assessment and approval process. The EPBC Act provides for the development of a critical habitat register, however, this has been an underutilized feature of the legislation. Currently, there are only five areas designated and there have been no additions to the register since 2005.4 Finally, two European Union directives5 are aimed at creating a network of protected sites, referred to as NATURA 2000. The Directives provide a list of species and habitats that Member States, through national laws, must take measures to maintain or restore. Similar to the ESA, the species and habitat lists are based solely on ecological criteria, but Member States are required to consider economics and other social factors when pursing conservation measures such as the designation of sites.

2. The baseline approach to evaluating economic costs of CHDs Fig. 1 reproduces a flowchart that appears in many recent studies employing the baseline approach to measure the economic costs of CHDs (e.g., Industrial Economics 2009 (sea otter), 2010 (polar bear), 2011 (plover), Entrix 2009 (beluga)). The first

4 See http://www.environment.gov.au/cgi-bin/sprat/public/publicregisterof criticalhabitat.pl (accessed 25.07.2013). 5 The Habitats Directive and the Birds Directive (Council Directive 79/409/EEC).

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Not considered in economic analysis

NO

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1. Is project/activity within proposed critical habitat?

YES

YES

2. Is there a federal nexus?

3. Quantify baseline project modifications addressing jeopardy of the species

NO

NO

10. Is the project covered by existing conservation regulations?

YES 4. Will outcome of the consultation be different as the result of the CHD?

NO

9. Quantify baseline species conservation efforts

YES NO

5. Quantify incremental project modifications addressing adverse modification of critical habitat

8. Will the regulatory agency require additional measures following the CHD?

YES

7. Quantify incremental species conservation efforts

6. Quantify any indirect incremental effects

Baseline impacts

Incremental impacts

Fig. 1. The baseline approach to measure the economic costs of a CHD.

questions are whether the activity occurs within the CHD6 (box 1) and there is a Federal nexus (i.e., a connection to a Federal agency) (box 2). If the answers are yes, then the next step is to identify project modifications required to avoid jeopardizing the continued existence of the species (box 3). These modifications are included in the baseline costs. The next question is whether the CHD will affect the outcome of the consultation with the Services on the proposed activity (box 4). In particular, if project modifications are required to avoid the adverse modification of habitat, the costs of these modifications are included in the incremental effects of the CHDs. For example, consider a road-building project on federal land that is within the CHD for a particular species. If the species is present in the area and the project is expected to have direct negative effects on the species, project modifications would likely be required under the jeopardy standard and the associated costs would be included in the baseline.

6 While the typical case involves an activity within the physical boundary of the CHD, activities that occur outside the CHD but affect the habitat within it should be considered in the economic analysis.

On the other hand, suppose the species is not present, but the project would modify the land such that it would not function as habitat for conservation of the species. If the outcome of the consultation is that modifications to the project are needed to avoid destruction or adverse modification of habitat, the costs of these modifications could be considered incremental effects of the CHD (box 5). Absence of the species, however, does not necessarily mean that the required project modifications are incremental costs. Even if current surveys do not identify the species within the project footprint, the Services may assume presence based on the species’ history in that area (U.S. Fish and Wildlife Service, 2011). In this case, project modifications may be required under the jeopardy standard and, thus, be included as baseline impacts. Returning to box 4 in the flowchart, if the CHD does not affect the outcome of the consultation, then there is still the possibility that the CHD has indirect effects that constitute incremental costs. Even if no project modifications are required, consultations related to critical habitat may delay the start of a project, thereby increasing its cost. In addition, the possibility of project modifications can increase the uncertainty associated with projects within the CHD, potentially discouraging activities that would otherwise

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Table 1 Economic analyses of critical habitat designations for the Fish and Wildlife Service and the National Marine Fisheries Service. Species

ESA listing

Critical habitat designation

Status

Year listed

Agency

Year established

States affected

Year Econ analysis conducted

Conducted by

Polar Bear Beluga Whale Steller’s Eider Northern Sea Otter Northern Spotted Owl

Threatened Endangered Threatened Threatened Threatened

2008 2008 1997 2005 1990

USFWS NMFS USFWS USFSW USFWS

2011 2011 2001 2009 1992a

AK AK AK AK CA, OR, WA

Western Snowy Plover Southern Selkirk Mtns Pop of Woodland Caribou Sierra Nevada Bighorn Sheep Canada Lynx Bull Trout Spectacled Eider Hawaiian Monk Seal Killer Whale (Southern Resident DPS)

Threatened Endangered

1993 1983

USFWS USFWS

1999b Under consideration

CA, OR, WA ID, WA

2010 2009 2000 2009 2008 2012 2011 2012

(Final) (Draft) (Draft) (Final) (Draft) (Draft) (Draft) (Draft)

IE Entrix IE IE Entrix (2008) IE (2012) IE IE

Endangered Threatened Threatened Threatened Endangered Endangered

1999 2000 1998 1993 1976 2006

USFWS USFWS USFWS USFWS NMFS NMFS

2008 2006c 2004d 2001 1986e 2006

CA ID, MN, MT, WA, ME, WY ID, MT, NV, OR, WA AK HI WA

2008 2008 2005 2000 2011 2006

(Final) (Final) (Draft) (Draft) (Draft) (Final)

IE IE Entrix IE Econorthwest IE

a

Revised in 2008; proposed revision in 2012. Revised in 2005 and again in 2012 (effective July 19, 2012). c In 2006 CHD included units in MN, MT, WA; Units in ME, ID, WY were added in 2009. d In 2004 CHD was established for Columbia River and Klamath River populations of Bull Trout; Revised in 2005 to include additional rivers; Revised again in 2010 to include rivers in OR, WA, NV, ID, MT. e 1986 designation extended to 10 fathoms of water in northern Hawaiian Islands; in 1988 CHD extended to 20 fathoms. b

have taken place. There may also be a stigma effect transmitted to current or prospective projects within a CHD that lowers their market value. Finally, the CHD may alert other Federal agencies to the need to participate in future consultations. Project delays, effects of regulatory uncertainty and stigma, and the involvement of other Federal agencies can constitute indirect and incremental costs of the CHD. The proposed activity may not have a Federal nexus (box 2). This could include, for example, activities on private land within the CHD that do not require Federal permits or involve Federal funding or other Federal actions. Even so, the CHD may have incremental economic costs. The CHD can provide information to private entities about the potential presence of a species and this may cause them to take actions, such as the completion of a Habitat Conservation Plan, they would not otherwise have done. Any costs associated with these actions would be an indirect incremental impact of the CHD (box 6). Similarly, the CHD may provide new information to State and local government about the species, causing regulatory agencies to require additional conservation measures (box 8). Any associated costs would constitute incremental impacts of the CHD. Two categories of costs mentioned above e stigma effects and the informational role of CHDs e deserve further comment. By definition, stigma effects arise from the public’s misperception of the CHD’s effects. While these costs can be real, one could argue that they should not be attributed to the CHD since they are not a true effect of the CHD. On the other hand, these costs only occur when the designation of critical habitat is made (i.e., they are not costs that occur in the baseline scenario). The role of CHDs in providing information about potential impacts to species is a subtle matter. By signaling that a species is present, a CHD could result in additional consultations that then lead to restrictions on activities by Federal agencies. These restrictions could be required under the jeopardy and take provisions of the ESA. Under the baseline approach, their costs would be attributed to the CHD since, again, they only occur under the with the CHD scenario. Arguably, the economic cost in this case has more to do with the other provisions of the ESA than with the CHD.

3. Review of economic analyses of the costs of CHDs 3.1. Economic analyses for the FWS and NMFS We reviewed 14 economic cost analyses that were done to support CH exclusion decisions by the Services.7 We selected CHDs that were likely to have significant economic effects. In particular, our criteria were (1) the CHD covers a large area, (2) the CHD included areas where conflicts with future natural resource extraction were likely, and (3) a detailed economic analysis had been done for the CHD.8 We applied the second criterion because we wished to avoid areas where irreversible actions such as urbanization had already occurred. These criteria led us to select CHDs for 13 animal species with large ranges in the western U.S. (Table 1). Five of the CHDs are exclusively in Alaska, one each is exclusively in California, Hawaii, and Washington, while the others include portions of more than one western state.9 Of the 13 species considered, eight are mammals, four are birds, and one is a fish species. Three of the CHDs cover only marine habitat, six cover only terrestrial habitat (including inland waters), and four cover a mix of marine and terrestrial habitat. The CHD for the western snowy plover covers the smallest land area, at 44 square miles, while the CHD for the polar bear is the largest, at approximately 185,000 square miles. We acknowledge that our sample is not representative of the population of listed species or of areas designated as critical habitat. Many CHDs cover smaller areas than the ones we examine, and our sample of species does not include plants, which account for more than one-half of all listed species. Moreover, we primarily considered species in the western U.S., which may miss regional

7

Two of these economic analyses evaluated CHDs for the northern spotted owl. Note that the Services contract with Industrial Economics, a consulting firm based in Cambridge, Massachusetts, for all of the economic analyses of CHDs. In some cases, the studies will be done by other consulting firms under subcontract with Industrial Economics. 9 The CHD for the Canada lynx also includes areas in northern Maine and northern Minnesota. 8

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differences in the activities of the Services (see Owen, 2012). While our criteria for selecting CHDs are justified by our interest in finding large economic effects, some of our findings regarding economic analysis of CHDs may not apply generally. We discuss this issue further in Section 5. The results of the economic analyses are summarized in Table 2 (see the Online Supplementary Materials). Our sample includes 11 recent analyses that employ the baseline approach to measuring costs of the CHD illustrated in Fig. 1. One study, which evaluates the bull trout CHD, considers all co-extensive costs, while two studies, for the Steller’s eider and spectacled eider, are from the early period when the jeopardy and adverse modification standards were considered to be equivalent. Many of the studies employing the baseline method quantify only the costs of additional Section 7 consultations or the consideration of adverse habitat modification as part of Section 7 consultations that would have happened to evaluate jeopardy. For example, the analysis of the CHD for the Cook Inlet beluga whale estimates that over a 10-year period five formal consultations and 5e7 informal consultations will be needed to address oil and gas development activities. According to the beluga whale analysis, the cost of a formal consultation is $21,075, which includes the cost of a biological assessment as well as the opportunity cost of time for federal workers and third party participants.10 The total incremental annual cost of the beluga whale CHD is estimated at $23,572 to $71,977, consisting entirely of additional costs for considering critical habitat during Section 7 consultations. For the Steller’s eider and spectacled eider CHDs, the incremental cost of consultations is estimated to be zero because all of the lands within the CHDs are considered to be occupied and, therefore, all consultations are required by the jeopardy standard and included in baseline costs. A main purpose of the Section 7 consultations is to determine project modifications needed to avoid adverse modification of critical habitat. In many cases, the economic analyses identify potential project modifications but do not quantify the associated costs. For example, the Hawaiian monk seal study describes how projects of many different types may be affected by time and area constraints, limitations on the use of heavy equipment, and the need for increased education and monitoring activities. However, in all cases, it is determined that there is insufficient information available to quantify the economic costs. Similarly, many studies discuss how CHDs can have indirect costs related to stigma effects, project delays, and regulatory uncertainty, yet most studies do not attempt to quantify the associated costs, citing the great uncertainty about them. It is worth examining in greater detail the studies that do quantify costs beyond those related to Section 7 consultations. The polar bear CHD study includes an illustrative analysis of how the profitability of a representative North Slope oil field can be affected by increases in project costs and project delays. When there are no restrictions related to the CHD, the investment has a net present value (NPV) of $22.6 million and an internal rate of return (IRR) of 17.2%. When development and production costs increase by 1%, the project’s NPV and IRR fall to $18.8 million and 16.8%, respectively. Cost increases of 4.75% or delays after the fourth year of development (when wellhead revenues would otherwise be generated) make the project uneconomical. While the analysis illustrates how the profitability of an oil development project can be reduced, the cost increase and project delay scenarios are not specifically linked to the CHD. As stated in the report, “Significant uncertainty exists regarding whether any of the scenarios. would actually result from the designation of critical habitat for polar bears”. No attempt

10

All monetary figures are expressed in 2012 dollars.

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is made to quantify incremental effects on oil development throughout the entire area covered by the CHD. The Industrial Economics (2012) report of the northern spotted owl CHD considers potential effects on federal timber harvests. It finds that the CHD could affect harvesting on approximately 10% of Federal lands within the CHD. These lands were identified as having predominately younger forest stands and as unlikely to be occupied by spotted owls. Three harvesting scenarios were presented for these lands. First, there may be no changes in harvest relative to the baseline. Second, the requirements of the CHD could result in Federal agencies implementing ecological forest management practices that result in higher timber harvests. A 10% increase in harvest was assumed for this scenario. Third, agencies may restrict timber harvests to avoid adverse modification of the critical habitat, resulting in an assumed 20% reduction in harvests relative to the baseline. Under these scenarios, the incremental costs of the CHD are zero, positive, and negative. This study attempts to quantify project modifications over the entire area of the CHD, but is, as in the polar bear analysis, limited by uncertainty over the specific effects of the CHD on decisions by land managers. The final study that attempts to quantify costs associated with project modifications is the analysis of the killer whale CHD. This study estimates an annual cost as high as $23.7 million, which represents the loss of all revenues from commercial fisheries. However, the lower bound estimate of the cost is $0, acknowledging that the CHD may have no effect on fisheries. As in the other studies discussed above, there is great uncertainty about how the CHD will affect future human activities in the area. The analysis of the bull trout CHD is the only study in our sample that evaluates all co-extensive costs associated with conservation of the species. Relative to the other studies, it estimates large costs for the CHD e approximately $75 million per year. The reason for the difference is that the estimates of incremental costs include the costs of any activity that provides conservation benefits for the bull trout. In particular, project modifications to address the jeopardy standard and conservation activities that benefit other threatened and endangered species are all included as an incremental cost of the CHD. The largest single cost category concerns the implementation of stormwater control requirements for new residential, commercial, and industrial development in the Puget Sound region. These costs are quantified by projecting the acres of future development, estimating the percentage of this development that would be affected by stormwater control requirements, and determining the per-acre costs of project modifications. Development is assumed to increase at the rate given by state population forecasts. These rates are applied to the existing land base to obtain 20-year projections of developed land by type. Each acre of new development is then multiplied by a per-acre estimate of stormwater management costs to obtain a 20-year projection of costs. In present value terms, the economic cost is $474 million using a 3% discount rate. Modifications to hydroelectric dams in the Puget Sound region represent another important cost category. Dam operators were interviewed to determine the costs of fish passage improvements, habitat enhancement, fish screens, and research and monitoring. It was assumed that these investments would be required in the future by all operating hydroelectric dams within the area of the CHD and, thus, the cost estimates were applied to the dams where these changes had not yet been made. Assuming a 50-year horizon for capital investments, the present value costs are estimated at $124 million using a 3% discount rate. In both of these examples, the project modifications provide conservation benefits to the bull trout, but also to resident salmonid species. The costs of these modifications, however, are attributed entirely to the CHD for the bull trout. As noted, some of the

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modifications to hydroelectric dams are already in place. While these past investments are not ascribed to the bull trout CHD, they emphasize the point that future investments in hydroelectric dams are likely to be done, in part, to conserve other species and, perhaps in some cases, for reasons unrelated to the bull trout. These examples also make clear that no distinction is made between project modifications required by the jeopardy standard and modifications that are done solely as the result of the CHD.

3.2. Review of academic studies of CHDs There are a large number of studies published in academic journals that have examined the economic effects of the ESA. A number of studies estimate the costs of preserving land for the northern spotted owl. Using a partial equilibrium model of the forest sector, Montgomery et al. (1994) estimate the opportunity costs of preservation in terms of welfare loss in wood products markets. Waters et al. (1994) use a multiregional inputeoutput model to estimate effects of preservation on employment. Finally, Eichman et al. (2010) estimate an econometric model of simultaneous employment growth and net migration for the Pacific Northwest region, including county-level measures of federal land set aside for owl habitat. All of these studies find significant impacts on welfare and employment from owl conservation efforts. In contrast, Duffy-Deno (1997) finds no statistical relationship between county employment growth in western states and the number of ESA listed species per unit area. There are several economic studies in the academic literature that try to specifically measure effects of critical habitat. Zabel and Paterson (2006) examine whether the number of building permits issued for single-family homes in California is significantly related to proposed critical habitat. Econometric models are estimated with panel data at the scale of FIPS places.11 The evidence is mixed. In a random effects specification, building permits are negatively related to whether or not critical habitat is proposed within the FIPS place and the percentage of the FIPS place covered by critical habitat. However, these variables are not significantly different from zero in fixed effects and instrumental variables specifications, which are likely to better control for the endogeneity of the critical habitat variables. In a more detailed specification, the indicator variable for critical habitat first proposed in 2000 or 2001 has a negative and significant effect on building permits. In a second study of CHDs in California, Zabel and Paterson (2011) estimate a system of demand and supply equations for housing. An indicator variable for whether or not critical habitat was designated within the FIPS place is included in each equation. Evidence is found that CHDs reduce housing supply, consistent with some of the findings of the 2006 study. Weaker evidence is found for positive effects of CHDs on housing demand, which could be associated with open space amenities. The authors also estimate a hedonic price equation, which allows them to measure the overall effects of CHDs on equilibrium housing prices. In all their specifications, critical habitat has positive effects on housing prices. The disaggregated results suggest this effect is due mostly to restrictions on housing supply. Lastly, Margolies et al. (2006) find evidence that landowners sought to preempt restrictions on development within the CHD for the pygmy owl near Tucson. Using a matching estimator, they find that the proposal of the CHD led to higher rates of development for lands within the CHD compared to those outside. To corroborate this evidence, the authors show that undeveloped land values fell

11

FIPS stands for Federal Information Processing Standard.

by about 20% within the CHD (relative to outside) after the proposal was announced. The first group of studies measure general effects of the ESA, such as listings and associated conservation efforts, but do not specifically examine effects of critical habitat. It is possible, however, that critical habitat contributed to the impacts measured in these studies. The second group of studies tests the effects of critical habitat on housing and land markets and landowner development decisions. While these studies provide evidence of differences in economic activity within the critical habitat boundaries, they do not necessarily identify incremental effects of CHDs. None of the studies distinguish between areas within the CHD where activities are restricted by the jeopardy standard or take restrictions and areas where activities are curtailed to avoid adverse modification of habitat. Thus, the effects measured in these studies may not be due to the CHD per se, but rather to the presence of endangered species. 4. Critical habitat exclusions and project modifications The purpose of the economic analyses done for the Services is to identify potential areas to exclude from the final designation of critical habitat. For the CHDs we evaluated, the Secretary considered excluding a number of areas within the designation (see Table 3 in the Online Supplementary Materials), in many cases as a response to requests by government agencies, private parties, and others. In many instances, exclusions were granted because an existing conservation plan was in place in the area. For example, a number of areas within the bull trout CHD were granted exclusions because they were already covered by habitat conservation plans developed by the State of Washington, the City of Seattle, or forest products companies. Similarly, tribal lands were excluded in a number of instances because of existing partnerships between the tribes and FWS or NMFS. This was the reason for excluding the North Slope area for the two eider species. Exemptions for two areas within the proposed CHD for the lynx were denied because the respective management plans were determined to be inadequate to prevent adverse modification of habitat. Another common reason for granting exclusions was that the site was needed for national security reasons. For example, 18 military sites were excluded for the killer whale and one military site was excluded for the beluga whale. In several cases, requests by the military were denied for lack of compelling evidence that the benefits of exclusion outweighed the benefits of inclusion. Interestingly, for the 14 economic analyses we examined, no exclusions were granted on the grounds that the economic benefits were sufficiently large. Seven sheep grazing allotments on federal land were excluded from the CHD for the Sierra Nevada bighorn sheep, but the rationale was that these activities were unlikely to adversely modify habitat or jeopardize the species. The U.S. Bureau of Land Management requested that areas within the National Petroleum Reserve be excluded from the Polar Bear CHD because including them would raise the agency’s costs associated with oil and gas leases. The Secretary denied this request for areas with currently undeveloped leases because the Bureau’s Integrated Activity Plan lacked specificity and involved too many exceptions (existing manmade structures were, however, excluded from the final CHD). For the Cook Inlet beluga whale CHD, the Secretary was asked to exclude the electric cable field and overlying waters between the City of Anchorage and a power generating facility in Beluga, Alaska. The grounds for the request were that any delays in maintenance or repairs would impose significant economic costs and pose a threat to the reliability of the region’s electrical system. The Secretary denied the request, pointing out that the economic analysis

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examined power generation within the CHD and found that costs to address adverse modification would be co-extensive with costs to avoid jeopardy. The Secretary responded specifically to the possible need to suspended operations when a whale came near a work boat: In the specific example the commenter provides., consultation costs would be entirely attributable to ESA jeopardy considerations stemming from the listing, not critical habitat designation, because the hypothetical scenario involves the direct interaction between a whale and the work activity referenced (i.e., a potential “take”). This interaction is, in no way, influenced by the designation of critical habitat (Federal Register/Vol. 76, No. 69/Monday, April 11, 2011/Rules and Regulations, Pg. 20190). The Secretary also pointed out that absent a Federal nexus, the CHD would not impose additional restrictions on these activities. In particular, the Secretary stated that he was unaware of Federal permit requirements for the maintenance or repair of submarine cable or the operation of a barge. 5. Evaluation Critical habitat designations are controversial, often evoking strong reactions from the public, elected officials, and other groups. The CHD for the polar bear, first proposed in October 2009, is a case in point. The proposed CHD covered approximately 187,166 square miles of land and sea ice, an area larger than the state of California, and yet the economic analysis that accompanied the designation quantified a cost of only about $60,000 annually. Governor Sean Parnell of Alaska responded, “this additional layer of regulatory burden will not only slow job creation and economic growth here and for our nation but will also slow oil and gas exploration efforts” (Daly, 2010) and “these federal estimates severely understate the economic effects of the delays in oil and gas development that the designation would create” (Parnell, 2010). Lawsuits challenging the CHD were filed subsequently by the State of Alaska and a group representing Alaska Native corporations. In January 2013, the U.S. District Court for Alaska vacated the final rule designating critical habitat for the polar bear. As seen in the case of the polar bear, a common reaction to CHDs is, how could designating such a large area as critical habitat have negligible economic effects? This response assumes that the quantified cost of the CHD is the same as the full cost of the CHD. This is too narrow a reading of the recent economic studies employing the baseline approach. The reported cost estimates are only what the analysts were able to quantify given the readily available information and time constraints. All of the recent studies include lengthy discussions of additional costs that could possibly be incurred, but which are too speculative to quantify (see Table 2 in the Online Supplementary Materials). For example, these studies discuss the potential for project delays and costs stemming from regulatory uncertainty and stigma. Thus, the quantified estimates should not necessarily be interpreted as the full cost of the CHD or even as a lower bound on the costs. The Secretary is required to consider excluding areas from a proposed CHD and, for this, he needs information on the benefits of exclusion. From a methodological standpoint, the baseline approach is the correct framework to provide this information to the Secretary. This approach appropriately compares the “world with the CHD” to the “world without the CHD,” where the latter includes existing protections for the species afforded by other provisions of the ESA, as well as other state and federal environmental laws (e.g., the Marine Mammals Protection Act). The comparison of the baseline to the “with the CHD” alternative identifies the costs that can be avoided by

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excluding certain areas from the designation or, in other words, the benefits of exclusion. For example, the costs of Section 7 consultations on critical habitat are not incurred when the critical habitat is excluded. As others have noted (Sinden, 2004; Bernhardt, 2008), the economic analyses that considered the full range of co-extensive costs, including the bull trout study discussed above, were flawed in this respect. By definition, some of the co-extensive costs (e.g., expenditures on stormwater control) would have occurred absent the designation of critical habitat, which means the costs would still be borne were an area to be excluded from the designation. As such, the co-extensive analyses did not identify the benefits (i.e., costs avoided) of exclusion. Although the baseline approach correctly identifies the benefits of exclusion, it has an important limitation when conservation activities provide benefits to many species. Consider the case of the bull trout. Because the bull trout shares habitat with threatened salmonids, actions taken to avoid adverse modification of habitat for one species will provide conservation benefits for the others. To illustrate the problem this causes for the baseline approach, suppose that AB denotes the conservation actions associated with the bull trout CHD, AS denotes the conservation actions associated with the salmon CHD, and C(A) is a function measuring the costs of habitat conservation. When evaluating the CHD for the bull trout, AS would be included in the baseline and the incremental effect of AB would be C(AS þ AB)  C(AS). The corresponding measure for the salmon CHD would be C(AS þ AB)  C(AB). It is clear that the separate measures of the CHD costs need not sum to the total cost of the CHDs; i.e., C(AS þ AB)  C(AS) þ C(AS þ AB)  C(AB) is not, in general, equal to C(AS þ AB).12 This inconsistency arises because of the species-by-species evaluation of CHD costs. The ESA requires that species be considered individually, though some have argued for an ecosystem approach that would consider habitat conservation for multiple species (e.g., O’Connor, 2002). In fact, several CHDs recently proposed by the Services for Hawaiian species have a multi-species emphasis. Canada’s SARA explicitly allows for an ecosystem approach in developing recovery plans. In many of the studies we reviewed, the only quantified cost is for the additional time spent conducting Section 7 consultations. The purpose of the consultations is to determine if project modifications will be needed to avoid adverse modification of habitat, but in few cases do the analysts attempt to quantify the costs of any modifications. Such an analysis faces many challenges. First, the analysis is necessarily prospective and, thus, must confront uncertainty over future events that will occur decades in the future. Identifying which projects are likely to occur in a given area is a difficult task given how their evolution is so often shaped by idiosyncratic factors. In addition, the analyst would need to distinguish between the incremental effects on projects that would be due to the CHD as opposed to other provisions of the ESA, in addition to other state and federal environmental laws. An even greater challenge would be to identify projects that would never materialize because of the additional regulatory hurdles posed by the CHD. The problems posed by uncertainty may have been especially daunting for the sample of species that we examined. Identifying future projects and anticipating the modifications that will be required would likely be easier when the area covered by the CHD is small and when the species is relatively immobile. Second, there is the problem of choosing the appropriate scale for the analysis. For animals with large ranges, such as the Canada lynx and the polar bear, a project-scale analysis quickly becomes

12 In practice, the problem is even more complicated. How, for example, should one allocate a set of conservation actions that benefit many species to individual species?

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infeasible. The approach taken in many of the economic analyses is to divide the proposed critical habitat into units and provide separate economic evaluations for each. For example, in the polar bear study five units are evaluated, corresponding to three units of sea ice habitat and one each of denning habitat and barrier island habitat. In contrast, for the snowy plover analysis, 102 units are evaluated. Ideally, the units would correspond to areas that might be selected for exclusion. This was clearly not the case for the polar bear study, since the exclusion of all denning habitat, for example, would surely violate the requirement that exclusions not lead to extinction. The units in the snowy plover study are individual beaches, spits, and lagoons, which seem more likely to match the scale of excludable areas. Third, there is the possibility that the designation of critical habitat could have feedback effects through markets. For example, if federal timber harvests are curtailed as the result of CHDs for threatened and endangered species, how might this affect wood products prices? Wear and Murray (2004) found that timber sale reductions in the western U.S. during the late 1980s and early 1990s raised lumber prices by roughly 15%.13 Sunding et al. (2003) propose a comprehensive framework for analyzing the effects of CHDs, which includes price effects in addition to delay costs and other indirect effects. If market feedbacks such as these are present, each acre of land (or water) included in the CHD is likely to become increasingly costly. In principle, the Secretary would need to re-assess the market feedbacks for each inclusion and exclusion decision. Finally, the Secretary also needs to consider the benefits of including areas within the CHD, which may be even harder to assess than the benefits of excluding areas. The benefits of inclusion are related to the conservation of the species. How a given area of habitat will affect the population of a listed species is, needless to say, difficult to predict in advance. Moreover, if the benefits of inclusion are to be expressed in monetary terms, so that they are comparable to the benefits of exclusion (assuming these are quantified), then nonmarket valuation would need to be employed to estimate incremental values of species conservation. The use of techniques such as contingent valuation, which can provide estimates of existence values for species, remains highly controversial (Carson et al., 2001). Highly-detailed benefitecost analyses of CHDs could address many of these challenges, but at considerable cost. Studies that quantify a large number of the potential costs of CHDs would be expensive, and would require a significant increase in funding to the Services. The Services are already hard-pressed to meet their requirements related to CHDs. According to the FWS: We have been inundated with lawsuits for our failure to designate critical habitat, and we face a growing number of lawsuits challenging critical habitat determinations once they are made. These lawsuits have subjected the Service to an everincreasing series of court orders and court-approved settlement agreements, compliance with which now consumes nearly the entire listing program budget. This leaves the Service with little ability to prioritize its activities to direct scarce listing resources to the listing program actions with the most biologically urgent species conservation needs (Federal Register/Vol. 69, No. 242/ Friday, December 17, 2004/Proposed Rules). Currently, there are 619 animal species and 817 plant species listed as threatened or endangered in the U.S., however, critical habitat is currently designated for only 661 species.14

13 These authors did not consider timber harvest reductions occurring specifically as the result of CHDs. 14 See http://ecos.fws.gov/tess_public/CriticalHabitat.do?nmfs¼1 and http://ecos. fws.gov/tess_public/pub/boxScore.jsp.

Before allocating significant new resources to economic analyses of CHDs, or even maintaining current funding, there should at least be prima facie evidence that critical habitat affects decisions by public and private actors in economically important ways. According to Sinden (2004), “there is considerable evidence that . critical habitat designation does make a difference in the real world.” She supports this claim in two ways. First, she cites a study showing that species with CHDs are more likely to have an “improving population trend” than species without CHDs. Of course, critical habitat may aid in the recovery of species without having important economic consequences. Second, Sinden mentions the court’s decision in September 2001 to vacate the CHD for the cactus ferruginous pygmy owl. Following this decision, the Army Corps of Engineers and the U.S. Environmental Protection Agency terminated a number of Section 7 consultations, which allowed three housing development projects e two small and one large (1100 unit) project e to go forward (Davis, 2002). Of course, these projects may also have proceeded with the critical habitat in place. Houck (1993) provides additional examples in which CHDs appeared to be a central consideration in the court’s decision to block development projects. He concludes: “what the case law illustrates beyond question is that the ESA’s prohibition on modification of critical habitat is interpreted by courts as strong and unyielding.” While these examples provide some evidence that critical habitat has economic consequences, a comprehensive retrospective analysis would help to identify the scope and magnitude of the effects. The academic studies mentioned above take the right approach by analyzing historical data on development activities within and outside of critical habitat areas. However, as discussed, they do not carefully distinguish the effects of critical habitat from impacts of other provisions of the ESA, such as the jeopardy standard.15 Owen (2012) reviewed almost all (in total, 4047) of the biological opinions prepared by FWS and NMFS biologists from 2005 to 2009. These opinions are a key element of the consultation process, as they provide a determination of whether a proposed federal action will jeopardize a species, result in takes, or adversely modify habitat. Two important findings emerge from this review. First, jeopardy and adverse modification determinations are rare, found in only about 2% of the opinions issued during this time. Second, there were no cases in which a finding of adverse modification was not also accompanied by a jeopardy determination. Moreover, Owen examined a subset of the biological opinions more closely, and found that in almost all cases habitat modifications were determined to cause or contribute to takes. Owen’s study provides no direct evidence that critical habitat has resulted in project modifications independent of jeopardy and take restrictions. Of course, such a study cannot identify the way that projects may be altered in anticipation of an adverse modification finding or projects that were never undertaken to begin with. Aside from the question of whether critical habitat makes any difference, one should ask whether economic analyses of CHDs are a useful input to the designation process. For the CHDs that we reviewed, there did not appear to be a direct connection between the results of the economic analysis and decisions to exclude areas, though we had no way of knowing if decisions not to exclude areas had been informed by the economic studies. More in-depth analyses that address the challenges discussed above would likely provide better information on which to base exclusion decisions. Nevertheless, it is important to remember that the law gives the

15 Sunding et al. (2003) and Resource Dimensions (2010) provide alternative estimates of the economic costs of proposed CHDs, but have the same shortcoming as the academic studies.

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Secretary a great deal of discretion in deciding how to use the information from these studies (Bernhardt, 2008). The Secretary is required to consider economics when designating critical habitat, but is also free to consider “any other relevant impact.”16 In particular, the Secretary is allowed to determine the weight that economics is given in deciding how to designate critical habitat. Even if consideration of economic costs leads to the determination that the benefits of excluding certain areas outweigh the benefits of including them, the Secretary still has the discretion not to exclude any areas. Decisions not to exclude are not reviewable by the courts and need not even be explained by the Secretary. In contrast, decisions to exclude areas due to economic or other considerations must be explained, be supported by an administrative record, and are reviewable by the courts.

listing, similar to the co-extensive approach to cost-benefit analysis that was employed briefly prior to 2004.

6. Conclusions

References

The 1978 amendments to the ESA provided a way for economics to inform some decisions about endangered species protections. While economics cannot be considered during the listing process, it can enter into the decision to exclude areas from critical habitat. However, while the Secretary is required to consider the economic costs of a CHD, the U.S. Congress largely left it to the Secretary’s discretion to determine how to use this information. Thus, the extent to which economic considerations will influence endangered species protections in practice remains unclear. At least for the cases we reviewed, we did not find any indication that the economic analyses influenced subsequent decisions by the Secretary to exclude areas from the CHDs. Even were the Secretary inclined to give substantial weight to economic considerations, the way that economics is allowed to enter into decisions about species protections ensures that it will have a limited role. Under the law, the economic consequences of prohibiting activities that jeopardize the continued existence of the species or result in takes cannot be considered. Only activities that would adversely affect the habitat for the species can be the focus of economic analysis, provided that the habitat modifications do not jeopardize or take the species. In practice, many activities that would adversely modify habitat are also likely to jeopardize the species or result in takes. The baseline approach is consistent with these requirements, whereas the co-extensive approach incorrectly attributes economic costs to CHDs associated with avoiding the jeopardy and take provisions. In the economic analyses employing the baseline approach, the incremental effects of CHDs included consultation costs and indirect effects related to stigma, project delays, and regulatory uncertainty. Due to the difficulty of measuring these effects, only the labor employed in conducting additional Section 7 consultations is quantified in these analyses. In other countries, economics play a more prominent role in decisions related to endangered species protections. Canada’s SARA allows economic tradeoffs to be considered during the listing stage and European Union Member States are required to consider economic factors when designating NATURA 2000 sites. Based on the results of this study, we find that the economic analyses of CHDs are correctly done, but in practice appear to have little consequence due to the narrow scope for consideration of economics under the ESA. If economic analysis were to play a meaningful role in determining endangered species protections, as it does outside the U.S., an alternative would be to allow listing decisions to be based on economic as well as biological factors. In this case, economic impact analyses would evaluate all of the economic implications of a

16 This flexibility allows the Secretary to consider not just cost and benefit tradeoffs but also the social and cultural implications of an exclusion decision.

Acknowledgments We acknowledge helpful comments from Jennifer Baxter, Holly Doremus, Jim Calvin, and Robert Paterson. The authors alone are responsible for any remaining errors. Appendix A. Supplementary data Supplementary data related to this article can be found at http:// dx.doi.org/10.1016/j.jenvman.2013.10.025.

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