Driving Resilience in the Great Lakes

Establishing a baseline requires analysts to identify what would occur if the planned project were not implemented. In some cases, impacts will continue into the future if no action is taken to address the identified problem. However, baseline conditions may also reflect a future in which an alternative project is implemented. For example, for a stormwater manager who is planning to implement a green infrastructure project to reduce the risk and costs associated with localized flooding, the baseline scenario may include costs associated with more traditional (e.g., “gray” infrastructure) flood control options, such as upgrading portions of existing drainage networks to accommodate larger storm events.

Different types of green infrastructure and other nature-based practices result in different types and levels of benefits, as does the scale of implementation. Additional factors, such as study area population, climate, and other community characteristics also affect the types and level of benefits provided. Basic information on the project site and surrounding area, as well as project design and engineering, is necessary for estimating costs and identifying and quantifying key benefits.

For a green infrastructure project, information needed at this stage might include the number, size, general location, and types of green infrastructure practices that will be implemented, the project’s stormwater capture design capacity, and total annual average runoff captured. Information on additional site amenities (e.g., recreational amenities) and characteristics of the overall project area and surrounding population also help to characterize the benefits of a project.

This includes costs and benefits beyond those faced by the utility or municipality alone. In other words, all benefits and costs should be counted, regardless of to whom they may accrue, or where they might be realized.

When compiling costs, it is important to think about the overall lifespan of the project, including initial design and construction costs and maintenance and replacement costs over time. When identifying benefits, it is important to think about financial benefits that accrue directly to the utility or municipality, as well as environmental and social outcomes that benefit the broader community. Financial benefits to a utility may include costs associated with an alternative project that is avoided compared to the baseline. Environmental benefits of green infrastructure and nature-based projects may include expanded and/or higher quality habitat, improved water quality, and/or carbon reduction. Social benefits may include enhanced recreational opportunities, flood risk reduction, public health improvements associated with better air quality and reduced urban temperatures, green job creation, and/or neighborhood beautification.

Once all costs and benefits are identified, they can be evaluated to determine which must be qualitatively described (e.g., because quantification is not feasible), and which can and should be quantified. It may be useful to exclude benefits that have a large degree of uncertainty associated with them, are small and somewhat insignificant (i.e., they may not be worth quantifying), or that are politically or culturally sensitive.

Physical outcomes associated with the benefits of green infrastructure or resilience projects may include, for example, miles or acres of beach erosion prevented, reduction in water pollutants achieved, pounds of air pollutants avoided or the number of recreational user outings enabled by enhanced natural amenities or water quality. These metrics serve as the initial step in the valuation process; it is therefore important to match the quantity units of measurement to whatever metric is available for the corresponding dollar values. In some cases, these outcomes may resonate better with stakeholders compared to monetary values.

Once the physical benefits have been estimated, a per unit dollar value often can be assigned to the benefit or cost to reach a total value (quantity times per unit value). Monetary values can be estimated by applying the economic valuation methods described previously. While many can be valued using original studies, many benefits can also generally be estimated using benefits transfer techniques. For both physical outcomes and monetized benefits, ranges may be used (rather than a single point estimate) to better represent variability or uncertainty in the estimates.

Benefits and costs may be described qualitatively, in part, by using a simple scale indicating the likely impact on net project benefits. For example, impacts can be qualitatively ranked on a 5-point scale, ranging from -2 to +2, to reflect unquantified relative outcomes that span from very negative to very positive (e.g., a “-1” may signify an outcome with moderate unquantified costs, and a “+2” may represent a high unquantified benefit). These rankings should be evaluated relative to the magnitude of monetized benefits.

More complex or sophisticated rankings or methods, such as multi-criteria decision analysis, can also be applied (but may not be necessary). Break-even analysis is another tool that can be used to cast qualitative benefits in context.

On the cost side, these may have large upfront capital costs that are expended in the earlier years, depending on the implementation schedule; in some cases, these costs may be spread over an amortization period. Benefits typically accrue over the life of project, and in the case of some benefit categories, continue to grow over time as vegetation becomes established and continues to grow. As with costs, benefits will also vary based on the planned implementation schedule (e.g., as project elements or phases come online).

Values that occur in different time periods need to be adjusted to comparable “present values”. There are two interrelated factors to consider when comparing values from different times – inflation and the “time value of money.” When inflation is included in projecting values over time, the values are said to be in “nominal” terms. Many financial analyses are conducted in nominal dollars. However, for economic analyses, benefits and costs are normally not entered in nominal dollars. The use of “real” dollars (i.e., where no inflation rate is applied) makes analyses easier and keeps inflation-related projections from clouding the analysis.

The “time value of money” captures a social preference for a dollar today over an inflation-adjusted dollar available in the future. The annual rate at which present values are preferred to deferred values is known as the discount rate (which is like an interest rate). The Water Resources Planning Act of 1965 and the Water Resources Development Act of 1974 require an annual determination of a discount rate for Federal water resources planning.

To compare streams of value over time from different projects, the stream of values for each project is discounted to “present value” using the discount rate. If both benefits and costs are involved, the present value of the costs is subtracted from the present value of the benefits to get the net present value of the project.

Uncertainties associated with estimated benefits and costs should be explicitly documented. The impact that these may have on the outcome of the analysis (e.g., in terms of their likelihood of increasing or decreasing net benefits, or an uncertain direction of change in net benefits) should be noted.

When it is possible with available data, ranges should be developed for an estimate by stating the upper and lower bounds. When bounding of an estimate is not possible, one can at least characterize uncertainty qualitatively by describing the sources of uncertainty and stating whether an estimate developed is likely to over- or under-estimate the true value.

In many cases it can be useful to explore the impact of uncertainties or key assumptions through sensitivity analysis. Sensitivity analysis involves systematically changing the value of a key input to see how it affects the outcome of the analysis. The change in results associated with the change in inputs can illuminate how important the impact of uncertainty in a particular variable is to the outcome. Sensitivity analysis is often performed by varying a particular input by equal amounts greater to and less than the current value.

Benefits included in the analysis can depend on the baseline established for the project. For example, if the baseline reflects a “do-nothing” scenario, and a project will address a localized or coastal flooding problem, then the flood damages avoided by the project can be counted as a benefit. However, if the baseline includes an alternative (e.g., gray infrastructure) project that addresses the same flooding problem (and to the same extent), the benefits of the green infrastructure or nature-based project can include either 1) the avoided costs of the alternative gray infrastructure project, OR 2) the flood damages avoided by the project. Including both would be double counting. This is because the flooding problem would be addressed under both alternatives. The two alternatives can either be compared directly (e.g., by comparing flood risk reduction and other benefits of each alternative to their costs) or the avoided costs associated with the baseline project can be counted as a benefit of the green infrastructure or nature-based solution being evaluated.

The economic value of other benefits associated with nature-based solutions are generally additive, meaning they can be added together to generate a total value. However, some of the benefit categories are interconnected (and to some extent may overlap) and must be carefully evaluated to avoid double counting. One example relates to the enhanced aesthetic value that green infrastructure and other nature-based projects provide; this is often measured based on the increase in property values for properties located within a certain distance of the project. The increase in property values reflects a WTP to live near the project and the amenities it provides, such as neighborhood beautification/enhanced aesthetics. However, it may also reflect a WTP to live near the recreational amenities the project provides; thus, adding recreational benefits to the increase in property values would be double counting. As a rule of thumb for high level benefit cost analysis, consider including 50% of a project’s property value benefits when adding total benefits that might overlap with this estimate.