Risk Assessment and Water Management

Transcription

1 Risk Assessment and Water Management Jan Jaap Bouma a,b, Delphine François b a Erasmus Centre for Sustainable Development and Management (ESM), Erasmus University Rotterdam (EUR), P.O. Box 1738, 3000 DR Rotterdam, The Netherlands, bouma@fsw.eur.nl b Centre for Environmental Economics and Environmental Management (CEEM), Ghent University (RUG), Hoveniersberg 24, B-9000 Ghent, Belgium, delphine.francois@rug.ac.be Abstract: In order to implement water management in a sustainable way, the related decisionmaking processes have to take the ecological and socio-economic consequences into account. In the Netherlands, policy makers struggle with the question how they can deal with risks associated with flooding. Flood prevention is one of the pillars of water management that aims at reducing the likelihood of flooding and hence its dramatic socio-economic consequences. This paper presents some results of a research project sponsored by the Dutch Ministry of Water management in order to develop a Risk Assessment Approach that assists decision-makers in dealing with the risk of flooding. The article shows that dealing with risk in decision-making related to water management has two distinct dimensions. The first dimension is the incorporation of risk in the process of valuation of the socio-economic effects. The second dimension is the incorporation of the valued socio-economic effects into the decision-making process. Looking at the second dimension explores the different ways in which the outcomes of valuation processes can be taken into account. The article shows that different attitudes towards risk determine to a large extent how the valued effects are assessed. This element has been widely discussed in literature. However, the results are innovative in a way that they also show that risk attitudes interfere with the outcome of the valuation process. The article concludes by presenting a Risk Assessment Approach that acknowledges the different dimensions of risk and the different kinds of socio-economic impacts of flooding and that can be used to assist decision-makers in dealing with the risk of flooding. Keywords: risk assessment; water management; cost-benefit analysis; flooding; valuation 1. INTRODUCTION Flood management is a broad spectrum of water resource activities aimed at reducing potential harmful impact of floods on people, environment and economy of the region (Simonovic [1999]). Economic analysis plays an important role in formulating plans for reducing flood damages, however imputing monetary values to environmental and social effects of floods is not an unambiguous task. When a Cost-Benefit Analysis (CBA) is performed, the economic valuation is a corner stone in the decision making process. This paper gives an overview of different valuation techniques and examines the applicability of these methods in the context of flooding. In a next step, the article explores how the concept of risk can interfere with valuation techniques and more broadly how the concept of risk is embedded in decision-making. An integrated approach to deal with risk will be presented. 2. VALUATION OF THE EFFECTS OF FLOODING Within the extensive valuation literature, the valuation of effects of flooding events is well documented. This section highlights some features concerning the practical use of valuation

2 techniques when imputing a monetary value to flooding effects. For a general overview of valuation techniques we refer to, amongst others, Turner et al. [1994]. More specific literature concerning the valuation of environmental functions in the context of coastal and water resources can be found in Turner et al. [2001]. Market Analysis Market prices can be used in many ways when valuing the effects of flooding. Examples are the calculation of the loss of output due to flooding for companies and the agricultural sector. The use of this method is restricted to the estimation of usevalues. Non-use values have to be measured differently. Restoration Costs This technique looks at the cost of restoring a damaged asset and uses this cost as a measure of the benefit of restoration (Turner et al. [1994]). Restoration costs can be increased to include the expenses for dismantling the damaged components before the restoration of the new ones (Oliveri and Santoro [2000]). Hedonic Price Method Using the Hedonic Price Method, one can estimate the implicit price land market traders are willing to pay for a marginal reduction in the level of flood risk. Traders seem to be willing to pay lower prices for property that is likely to be flooded. Travel Cost Method When one wants to investigate if the benefits of a flood control project outweigh its costs, the recreational value of a site that would be lost due to flooding, appears as one of the benefits of the flood control project. This value can be calculated by means of the Travel Cost Method. Contingent Valuation Method In the context of flooding, one could ask people for their willingness to pay (WTP) for a project that mitigates the risk of flooding at a certain location. Aggregation results in an amount that represents the loss of human wellbeing at that location. It reflects the loss in use and non-use values caused by flooding. Asking individuals how much compensation they need to accept a higher flood risk can analogously be considered as an estimate of the total damage due to flooding. Damage Costs Avoided One of the applications of this method is to calculate the property damages avoided. Damage can be defined as the amount of property value, which is lost because of a flood event (Oliveri and Santoro [2000]). Procedurally, the analyst using property damages avoided computes the repair costs to a specific property with and without a flood risk reduction project for a given flood event. Defensive/Averting Expenditures (including Relocation Costs) A vast amount of measures can be categorised as averting expenditures. Examples are the construction of storage reservoirs, waterproofing of the lower floors of buildings, flood warning systems, the restoration of wetlands, The cost to governments of giving households a premium to move to less flood-prone areas is an example of relocation costs. Replacement/Substitute Costs Oliveri and Santoro [2000] define the replacement value as the total cost for replacing the structure with another or like utility, having the same size and use as the existing one. 3. DEALING WITH RISKS IN DECISION MAKING PROCESSES When dealing with flooding, the concept of risk is one of the central issues. Risk is often defined as the probability of occurrence of an event multiplied by the consequences of that event. Risk = Probability x Effect (1) Dealing with risk in decision-making has two distinct dimensions. The first dimension is the incorporation of risk in the process of valuation of the socio-economic effects. Methods to attach a monetary value to the effects of flooding were described in the previous section. It is however important to note that previous research has shown that the results of the use of valuation techniques can depend on the probability of occurrence of an event. The second dimension is the incorporation of the valued socio-economic effects into the decision making process. A Risk Assessment Approach is developed that takes both dimensions into account. 3.1 The influence of the probability of occurrence on the use of valuation techniques Very small probabilities of occurrence reduce the appropriateness of several valuation techniques.

3 Land market traders appear unable to incorporate flood potential without some major flood to anchor their perceptions. Hedonic estimates are sensitive to the market traders recent experience with a natural hazard. Hedonic estimates are either very large or zero depending on the timing of the study vis-à-vis the latest flood (Shabman and Stephenson [1996]). Bartosova et al. [1999] show that when using the Hedonic Price Method, the detrimental effect of flood risk is eliminated after the expected flood risk falls to once every years. In line with the findings of Shabman and Stephenson [1996], they provide evidence suggesting that flooding events heighten sensitivity to such risks. In the project Risk Based Urban Watershed Management Integration of Water Quality and Flood Control Objectives 1, a hypothesis was advanced that the willingness to pay parameter (used in Contingent Valuation Studies) could be correlated with the risk of flooding. The study confirmed the hypothesis that a household s WTP for the maintenance of current levels of flood risk is positively related to flood risks as proxied by the household s distance from the river (Daun et al. [2000]). It can be concluded that the choice of valuation techniques determines to some extent the weight given to uncertain flooding effects. The results of some techniques (such as Replacement/Substitute costs) are unaffected by the probabilities itself. Other techniques (like the Hedonic Price Method) are highly affected by the probabilities. Not only does the probability of occurrence have an impact on the result of valuation studies, the fact that governments and individuals are aware of the probability of occurrence of an event is a prerequisite for the use of some valuation techniques. Using Averting Expenditures to measure the possible effects of flooding implies that individuals and/or the governments have taken measures to reduce the effects of such an event. This will only be the case if one is aware of the risk of flooding, and if the probability of flooding is assumed to be large enough to make averting expenditures worthwhile. With respect to the Contingent Valuation Method, a consideration made by Daun et al. [2000] is that in watersheds were residents did not believe that the creek was flooding and was a problem in their community, they had a hard time to provide WTP amounts. 1 Institute for Urban Environmental Risk Management, Marquette University, Milwaukee 3.2 A Risk Assessment Approach The application of a valuation technique is only one issue that determines the way flooding risks are dealt with. Other characteristics of a decisionmaking process need to be taken into account. The Risk Assessment Approach we present consists of the interpretation of the following six dimensions: inventarisation of the effects to be monetarised (I) selection and use of valuation methods (II) use of discount rate (III) acknowledgement of non-monetary values (IV) presence of limiting conditions (V) risk attitude of decision-makers (VI) When weighing up the costs and benefits of flood protection, the result will strongly depend on the effects that are taken into account (I). The choice between a social or private cost-benefit concept will be largely determined by the social responsibility valuators take. The choice of effects to be monetarised will also be influenced by their risk attitude. Those decision-makers that follow a strong sustainability approach (Turner, [1994]) and the precautionary principle want to fully understand the effects of flood management. Those who follow a less sustainable approach may only be interested in those effects that have direct financial consequences (effects reflected in market prices). As discussed above, risk, and the perception of risk, can influence the outcomes of techniques that allow imputing a value on the possible consequences of flooding (II). The outcome of the use of a valuation technique is often used to calculate present values in the context of Cost-Benefit Analyses (III). This implies that weights are attached to effects of flooding in the future. Defining the appropriate discount rate is not straightforward and no firm conclusions can be drawn on which rate is to be used. Economic theory does not impose a certain rate on the decision-maker. It is the opinion of the decision-maker himself within his institutional context that determines the rate. The extent to which non-monetary effects are taken into account in decision-making will also have its implications on how society deals with the risk of flooding (IV).

4 Limiting conditions (V) can have an effect on both probabilities and effects. An example of limiting conditions is the use of safe minimum standards that put limits to the probabilities and/or possible effects of flooding. The existence of evacuation schemes directly interferes with the set of possible effects. The attitude towards handling uncertainties regarding the outcome of each step in the process of valuation (VI) (starting with the identification and selection of effects up to the application of valuation methods) may strongly steer if and how the valuation takes place. Expected utility theory reflects the aversion towards effects by adjusting their monetary value. Consequently, the more risk adverse society is, the higher the risk variable as defined in (1) will be in the case of costs. 4. THE RISK ASSESSMENT APPROACH AND THE DELTA COMMISSION Clearly different approaches can be followed by decision-makers. The Dutch government established the Delta Commission in 1953 to obtain expert advice on the desired level of protection against sea flooding. Different approaches to assess the socio-economic consequences were considered. Table 1 illustrates two key approaches. 2 Tinbergen Van Dantzig Inventarisation of the effects to be monetarised limited set of values limited set, but adjusted by means of a subjective factor Selection and use of valuation methods market price averting and defensive expenditures; replacement and restoration costs (insurance premium) net present value of effects Use of discount rate net present value of insurance premiums Acknowledgement of non-monetary values subjective assessment valuation is based on a by decision-maker; subjective factor (>1) decision- maker takes to add to monetary non-monetary effects values 2 for a more detailed description, see the research report Water Management and Risk Assessment, ESM, forthcoming into account Presence of limiting conditions limiting conditions are embedded in the presented alternatives limiting conditions are embedded in the presented alternatives; regulations; insurance approach Table 1: Two approaches towards risk in water management 5. CONCLUSION Assessing the risk of flooding is based on a number of assumptions. A Risk Assessment Approach is presented that identifies key issues where assumptions need to be made. Clearly, the pathway that is followed to assess flood control measures already embeds to some extent the preferences a society has regarding the impacts of flooding. 6. REFERENCES Bartosova, A., Clark, D.E., Novotny, V. and Taylor, K.S., Using GIS to evaluate the effects of flood risk on residential property values, Proc. Environmental Problem Solving with Geographical Information Systems: A National Conference, U.S. EPA, Cincinnati, Ohio, September 22-24, Daun, M.C., Clark, D., Flood risk and contingent valuation willingness to pay studies: a methodological review and applied analysis, Technical Report No. 6, Risk Based Urban Watershed Management Integration of Water Quality and Flood Control Objectives, 85 pp., Oliveri, E. and Santoro, M., Estimation of urban structural flood damages: the case study of Palermo, Urban Water, 2, , Shabman, L. and Stephenson, K., Searching for the correct benefit estimate: empirical evidence for an alternative perspective, Land Economics, 72(4), , Simonovic, S.P., Social criteria for evaluation of flood control measures: Winnipeg case study, Urban Water, 1, , Turner, R.K., Pearce, D. and Bateman, I.J., Environmental Economics, An elementary introduction, Harverster Wheatsheaf, 328 pp., New York, 1994.

5 Turner, R.K., Bateman, I.J. and Adger W.N. (eds.), Economics of Coastal and Water Resources: Valuing Environmental Functions, Kluwer Academic Publishers, 43 pp., Dordrecht, 2001.