Trading Stormwater Abatement Credits in Cincinnati’s Shepherd Creek

The problem of stormwater runoff management grows apace with continued urbanization, yet the management tools for this growing nonpoint-source problem have not fully kept pace. The rapid growth of stormwater utilities around the nation is an important step toward providing an effective institutional structure for stormwater management, but even within this relatively new structure, stormwater management will not be able to take advantage of cost-reducing technologies until this traditionally viewed nonpoint-source problem is converted into a point-source problem. The growing practice of lowering runoff fees charged to individual property owners who provide onsite abatement is an important step in this direction.

The question facing stormwater runoff managers is how to achieve runoff control in the most cost-effective and equitable manner, given that local budgets are always limited. In addition, asking constituents to pay for public services generally raises issues of fairness. As our understanding grows of the impact of runoff on water quality (toxics, nutrients, and combined sewer overflows) and flooding, the question of the management tools required to maintain flows within certain upper limits becomes more important. There are two basic management alternatives: (1) command and control and (2) fees or charges to fund structural investments. We propose a new twist on the latter. If parcel owners could trade responsibility by buying or selling credits for stormwater runoff control, much the way emissions allowances in the air-quality market are traded, the fees from the sale of credits could be used as an incentive to increase onsite best management practice (BMP) building and management, as well as fund more centralized investments for stormwater management and control.

Our research focuses on how to spread the responsibility of stormwater control over a watershed in a cost-effective and equitable fashion, particularly if there are environmental targets that must be met. Instead of relying exclusively on large-scale, centralized, and costly infrastructure to mitigate the effects of excess stormwater runoff, we propose a system of tradable credits that creates economic incentive for building small BMPs distributed throughout a watershed to control stormwater runoff in a cost-effective way that approximates water retention in an unaltered watershed.

We characterize the stormwater runoff problem as proliferation of impervious surface that allows stormwater to reach a stream faster and in greater quantities, causing higher peak flows that lead to stream degradation and habitat alteration. In older cities, these elevated peak flows have greatly exacerbated the combined sewer overflow (CSO) problem. Where impervious surface prevents rainfall from infiltrating the soil, less water is available for groundwater recharge, which can reduce stream base flow and aquifer recharge rates. Furthermore, depending on the extent of impervious surface in the watershed, nutrients and toxics that are scrubbed off roadways and parking lots and transported into waterways can cause very significant toxic loadings of the streams.

Our proposed system of tradable credits is similar to fee systems employed in some cities, such as Kansas City, MO, and Columbus, OH, that provide economic incentives to households and commercial property owners for taking measures to reduce their stormwater runoff by such means as disconnecting downspouts or installing BMPs. Tradable credit systems have some important advantages over fee-based systems, however. For instance, there is no need to make adjustments to fee levels that are eroded by inflation, and tradable credit systems are inherently flexible.

Tradable Credits

For a system of tradable credits to work, certain conditions must be met. (We use the term credit instead of permit to avoid any confusion with the National Pollutant Discharge Elimination System program.) First, there should be a targeted level of runoff reduction and detention, which in the watershed context would be based on desired stream parameters, such as volume and velocity of peak flows, or certain ecological indicators. For a credit trading mechanism to yield cost advantages, there must be variation in the cost of runoff detention/retention among properties. That is, there must be opportunities in cost reduction that large, centralized approaches miss because they are essentially end-of-pipe rather than source-reduction in nature. Second, for a tradable credit mechanism to work, it must be possible that responsibility for stormwater runoff detention can be shared among many parcel owners regardless of where they are within the trading area. (This assumption can be relaxed by allowing for trading ratios, but that is beyond the scope of this article.)

All these assumptions must be verified in practice, but if these assumptions hold, there will be cost advantages by allowing parcel owners for whom it is relatively inexpensive to construct BMPs to do so and to detain enough stormwater runoff for others in the trading area who find it relatively expensive to build BMPs. Those who detain stormwater runoff beyond their responsibility will be compensated by those parcel owners for whom BMP construction is too expensive. To put this theory into operation, we envision a watershed authority that would operate and oversee the market. This authority would resemble a stormwater utility but would have the additional capability to buy and sell stormwater runoff credits. For example, property owners who found the market credit price to be financially attractive could overdetain stormwater runoff on their property and sell excess credits. We assume an initial condition that holds all owners responsible for all excess runoff from their properties. We envision three common responses by a property owner to the institution of a stormwater runoff credit program: (1) build an onsite BMP, (2) buy credits instead of building an onsite BMP, or (3) build a bigger BMP than is necessary for the property and receive payment for it (sell credits to the stormwater authority). Graphically, the decision faced by a parcel owner in our model subwatershed is depicted in Figure 1. We take as a given that a market exists for credits and that the intersection of credit supply and credit demand will determine the equilibrium price of credits, given the available quantity. An individual parcel owner thus faces two exogenous factors: (1) the price of credits determined in the market and (2) the quantity of excess runoff that must be abated from his or her property, which is stipulated for individual parcels by the watershed authority from appropriate data on a parcel’s soil and hydrologic characteristics.

For a given level of abatement, a parcel owner has a choice of either installing a BMP or purchasing credits in the market. If the owner is responsible for abating excess runoff at level Q₁ as in Figure 1, it costs him less to build a BMP than it does to buy credits at credit price P_equil. If he is responsible for abating at level Q₂, it is less expensive for him to buy credits than to build a BMP. We can see that if it will cost the parcel owner more to build an onsite BMP than to buy a credit, he will buy the credit in lieu of abating. Conversely, if the BMP is cheaper, he will commit to onsite detention.

Our numerical example below illustrates the decisions made by parcel owners when faced with credits priced in a reasonable range.

Scenario Comparison

To demonstrate the cost-effectiveness of the tradable runoff credit system, we applied our analysis to the Shepherd Creek watershed, a sub-basin of Mill Creek in Cincinnati, OH. To illustrate the mechanism, we explored a range of credit prices that might exist in the watershed, and we compared the average cost of dispersed stormwater runoff detention/retention to the cost of the proposed centralized remedy to flood and CSO control in the watershed: a tunnel proposed by Cincinnati’s Metropolitan Sewer District and the Army Corps of Engineers in early 2000 costing $600 million to $800 million. (Current estimates of the price of the tunnel vary between The Cincinnati Post, July 18, 2000, and The Cincinnati Enquirer, August 12, 2001.) To generate cost estimates for our tradable runoff credit program, we used known hydrology for this area to delineate the boundary of the Shepherd Creek subwatershed. An ArcView geographic information system project was then created for the subwatershed, comprising thematic data such as soil type, land use, parcel boundaries, and impervious surface. Figure 2 shows a portion of the area in detail, illustrating the headwaters, parcels, different soils, and impervious surfaces.

The data on soil type are publicly available from Ohio Department of Natural Resources, and the land-use data and parcel map are from Cincinnati Area Geographic Information System (CAGIS). We also received data from CAGIS on magnitude of impervious surfaces on each parcel, including rooftops, driveways, and parking areas.

Shepherd Creek is a 500-ac. subwatershed located in the northeast corner of Cincinnati, comprising 453 parcels. We chose this study area because of the diversity of land use, topography, and soil types, and because it lies in the Mill Creek basin, an impaired warm-water habitat with well-documented stormwater-runoff-associated problems. Mount Airy Forest (a city park) is a protected area that occupies a large piece of the study area, while proposed and ongoing subdivision developments provide us with heterogeneous land use and the opportunity to research a dynamic system.

The impact of a rainfall event on the study area was determined using the Natural Resource Conservation Service’s Technical Release (TR-55) bulletin, Urban Hydrology for Small Watersheds, which provides a methodology to calculate stormwater runoff volume for a given event. The storm event we modeled was the two-year storm (1.23 in. for Hamilton County, OH). Our choice of the rainfall event was based on expert opinion on low-impact development design from such sources as Maryland’s Department of Natural Resources. Runoff for this rain event was calculated using the TR-55 methodology for each parcel in the watershed, taking into account the existing impervious surface. We denote this as the postdevelopment runoff. The runoff is then calculated again using the same rain event but modeled as though the impervious surface were completely absent. This result is identified as the predevelopment runoff. Excess stormwater runoff then is the difference between postdevelopment runoff and predevelopment runoff. We used a spreadsheet to model the property owners’ runoff responsibilities and responses and then connected these results via Structured Query Language back to ArcView for visualization. An ArcView representation of excess stormwater runoff in Shepherd Creek is shown in Figure 3.

The spreadsheet that contains the physical and hydrologic features of the parcels also contains economic information that allows us to compare the economic cost of building a BMP (i.e., real resource value) with the financial expenditure of buying sufficient credits for controlling stormwater runoff from each parcel.

Numerical Example

A variety of possible BMPs exist from which a property owner can choose for detaining/retaining stormwater and create a primary water treatment to differing extents. In this numerical exercise, the pertinent BMP cost functions were assigned as follows (BMP suitability is based primarily on Heaney et al. [1999] and Fuller et al. [1999]): Parcels with residential land use and HSG B are assumed to employ sand filters. The cost function is C_resB = 26.6Q^0.64, where Q is the quantity of stormwater runoff detained. Residential parcels with HSG C or D are assumed to use grassy swales, the relevant cost function of which is C_resC = 74.13Q/15. Commercial and industrial properties with HSG B are assumed to use infiltration basins or extended detention ponds, and the pertinent cost function is C_ComB = 15.3Q^0.69. Commercial and industrial properties with HSG C or D, it is assumed, use infiltration trenches with cost function C_ComC = 157Q^0.63.

Modification of these cost functions for site-specific application should be considered, and some types of BMPs will not be usable in all areas of the country. For now, however, we presume these are representative enough to usefully illustrate the gains from trading. It should also be noted that these cost functions do not account for opportunity costs of the land the BMP occupies, nor is maintenance considered. Even with these caveats, the following illustration is instructive.

Cost Comparisons

Our first scenario assumes a command-and-control approach that mandates a system of distributed BMPs (without any credit incentives), wherein each owner is responsible for all of the excess stormwater runoff from his property. This is a limiting case and typically represents an alternative control mechanism with the highest overall cost because it does not allow for the flexibility that a trading mechanism provides. Here we simply assign the appropriate BMP technology on a parcel-by-parcel basis and solve each landowner’s control cost function for cost. This command-and-control approach results in 122,775 ft.³ of stormwater runoff detention, at an average cost of $5.40/ft.³ This represents only onsite construction costs; agency transactions costs are excluded (surveying, soil testing, and so on), as are the values property owners place on their land in alternative uses, so this is an underestimate of the full cost. Trading would lower that cost, however. In comparison, the centralized infrastructural alternative of the tunnel is between $8.93 and $11.90/ft.³ depending on the total cost figure used. This incomplete calculation leaves a margin of at least $3.40/ft.³ for other costs before the dispersed approach becomes more expensive than the tunnel.

Cost With Trading

This simple market would function in a two-step sequential manner. In the first step, at the announced price of $5/ft.³ for illustration, those parcel owners who can detain all of their excess stormwater runoff will do so (recall that the analysis presented here is all or nothing; our current work will relax this restriction). Those who cannot detain all of the stormwater runoff for $5 or less will buy credits. Under the assumption that the BMP cost functions used here are sufficiently accurate, those who can control stormwater runoff at $5/ft.³ or less in the subwatershed analyzed here will detain a total of 99,954 ft.³ of stormwater runoff, which is 81% of the total excess stormwater runoff in this subwatershed. Solving the cost function for each parcel owner choosing to retain his excess stormwater runoff yields a cost per cubic foot of water detention, averaged across all parcels putting in BMPs, of $4.59. At higher prices, property owners will have a stronger incentive to install BMPs and more detention in this still all-or-nothing scenario. For example, if the price of credits were instead $8, 118,100 ft.³ of water is detained (96% of the total excess stormwater runoff) at a cost per cubic foot of dispersed storage of $4.97. If the price of credits were $2.50/ft.³, then no level of dispersed abatement is seen as cost-effective, and all parcel owners buy credits in lieu of building BMPs. In such a circumstance, the credit market essentially is a financial mechanism only, and it simply raises funds.

Recall that we presume a sequential market process here, in which the first step was identification of how much water could be cost-effectively retained in an all-or-nothing scenario. Presuming that the stormwater utility adopts a policy of managing the stormwater runoff problem at least cost, with the funds collected from those in the first stage who chose not to build BMPs but bought credits instead, the utility would then finance additional investments in dispersed detention and/or conveyance and storage. Since the BMP cost functions used in this analysis all exhibit decreasing costs (increasing returns), then it might be possible to finance additional dispersed detention on the sites of those already controlling 100% of their own stormwater runoff. Again, ignoring the opportunity costs of land taken out of other uses and using the BMP cost functions only, the utility could finance 20,432 ft.³ of additional dispersed detention, bringing the total at the $5/ft.³ credit price to 120,386 ft.³, which is nearly all of the excess stormwater runoff in the subwatershed.

Although we do not have complete cost information for a trading system or the opportunity costs at the parcel level of the value of portions of parcels in alternative uses, at credit prices near or somewhat below the current estimate (sure to grow) of the proposed centralized engineering solution (deep tunnel) of at least $8.93, it seems reasonable to conclude that credit trading can promote a significant amount of dispersed abatement. This preliminary analysis then strongly suggests that dispersed stormwater runoff might well be part of a comprehensive stormwater management strategy. Table 1 summarizes the results.

Our GIS map interface allows us to visualize buyers and sellers of detention capacity under different credit price scenarios. Figure 4 shows where in the watershed credits are bought under the assumption of a price of $5 as an example.

To show how the underlying calculations were done, we present the following example from the Excel spreadsheet used in the analysis. It shows a representative decision by two property owners in the subwatershed.

Institutional Aspects

The ability of a credit trading program to be cost-effective depends crucially on the cost of administration. There will be transaction costs associated with each trade that, if too large, will render the program too costly. We envision taking advantage of recent technological advances, especially the Internet, to help keep transaction costs down. A single staff person could oversee many trades. Perhaps this in conjunction with an optimally calculated suite of fines could make stormwater runoff trading relatively cheap.

There are also various legal and ethical aspects to the establishment of the program that need to be addressed. There might also be ecological limitations to the applicability of the trading scheme. For example, there might be a subwatershed that is home to an endangered species. In this case if excess stormwater runoff causes harm to the ecosystem, no level of stormwater runoff will be seen as acceptable, and an enforced command–and–control program is the only feasible solution.

Conclusions

In this study we outline an innovative approach to control excess stormwater runoff caused by impervious surfaces associated with development within a watershed. Because the cost of abating stormwater runoff differs by land use and soil type, the cost of stormwater runoff management can be reduced within the boundaries of a watershed by trading responsibility for stormwater runoff.

Our preliminary research strongly suggests that, in some cases, a tradable runoff credit system could lower the cost per cubic foot of detention in place of, or in concert with, a large-scale engineering solution for control of excess stormwater flow. It also suggests that the tradable runoff credits create incentives for the construction of dispersed BMPs, a stormwater runoff detention strategy that mimics natural detention in an undeveloped watershed.