A Short History of Water Resources Research at Resources for the Future

The question of how to efficiently manage our nation’s water resources in terms of both quantity and quality has long been considered by economists and policymakers alike. Water resource management decisions impact each and every one of us daily, whether it is an urban water utility using prices or nudges to encourage its customers to conserve water or a local farmer making the decision to upgrade their irrigation systems. Scholars at Resources for the Future (RFF) have provided policymakers with rigorous economic analysis of water issues since the very inception of the organization in 1952. For proof of how long RFF has been active in this field, one need not look further than the first two issues of this magazine itself, both of which featured articles highlighting RFF research on water resources on the front cover.

More important than the sheer length of time RFF has been working on water issues, however, is the outsized impact that RFF’s water research has had on policy decisions. Over time, water researchers at RFF have consistently produced timely, relevant research designed to address the pressing water policy issues of the day, whether it be cost-benefit analysis of federal water projects, water quality modeling, or climate change impacts on water resources. We offer here a brief summary of key ideas from RFF work in water resources throughout the years.

The 1950s and 1960s

The Early Years of RFF Water Research: In the years following the Second World War, concerns about natural resource scarcity arose in the United States. RFF was founded in 1952 in order to “support the conservation, development, and use of natural resources.” In accordance with this mission, RFF’s five original research programs were organized around major groups of natural resources, including land, energy and minerals, and water resources. Edward Ackerman and Irving Fox were two of the earliest thought leaders in the RFF water resources program.

The most influential RFF publication of the period was 1958’s Multiple Purpose River Development (coauthored by John Krutilla and Otto Eckstein). Krutilla, one of the pioneers of the field of environmental and resource economics, applied insights from welfare economics to multiple proposed federal water projects throughout the United States, including dam development in the Hells Canyon Reach of the Snake River in Idaho and the Alabama-Coosa River System. Krutilla and Eckstein highlighted the need to account for all of the social costs and benefits of various uses of water in benefit-cost analyses, including flood control, irrigation, and recreation.

One of the main contributions of this book, however, was a critique of the way that the federal government discounts costs and benefits of proposed projects. Common practice at the time was to use a private market interest rate of 2 to 3 percent as a discount rate (that is, the rate at which we value benefits or costs that accrue in the future) in benefit-cost analyses for federal water projects. Krutilla and Eckstein argued discount rates should reflect the opportunity cost of federal financing—that is, the rate of return on consumption and investment decisions that the tax dollars would have generated in the absence of a water project—rather than market interest rates. Through multiple modeling exercises, the authors demonstrated that such a rate was somewhere between 5 and 6 percent, much higher than the commonly used estimates. This had important implications for future water project development, as a project whose benefits outweigh the costs at lower discount rates may not appear favorable when future benefits and costs are discounted at higher rates. The volume has stood the test of time as a balanced treatment that demonstrated that private enterprise cannot always be expected to adequately develop water resources to serve multiple public uses, while at the same time showing that existing discount rates used to justify government intervention in water projects were too low. Insights from Krutilla and Eckstein’s work were also instrumental in setting the stage for benefit-cost analysis reforms undertaken by the United States Water Resources Council during the Carter administration.

Other projects of the time tackling the economics of water demand and utilization in various industries were led by Charles Howe, Blair Bower, and Clifford Russell, which included early estimates of the price elasticity of residential water demand that are still valid today. Work by Nathaniel Wollman and Gilbert Bonem offers another example of policy-relevant water research, as they collaborated with the Senate Select Committee on National Water Resources to provide Congress with projections of future water supply and regional water requirements for 22 distinct regions of the United States.

No discussion of early RFF water research, or environmental economics in general, is complete without highlighting the important contributions of Allen V. Kneese. At RFF in the 1960s, Kneese developed the conceptual framework around the idea that more flexible forms of regulation such as water pollution fees (often referred to as “effluent” taxes) are more cost-effective than stricter forms of regulation that set predetermined limits or standards on regulated firms. To achieve a certain level of water quality in a particular water body, Kneese demonstrated that if regulators can determine the external costs to society of an additional unit of water pollution into that water body, the regulators should charge that amount to firms as a unit-tax on pollution. Firms will then decide for themselves how best to respond to the tax. Firms that can reduce their pollution cheaply will do so, and firms with larger compliance costs will either pay the tax or find ways to reduce their pollution to avoid the tax. If accurate information about firm-specific pollution and other factors (e.g., hydrological conditions) are available, regulators can design and implement a system of fees that can reduce water pollution to meet water quality standards at a lower cost than if they simply required all firms to reduce their pollution by a specified amount.

Kneese first mentioned effluent fees as a potential water quality policy instrument in a short 1962 treatise that laid out influential suggestions for future water research. The full range of Kneese’s contributions are captured in multiple books and articles during his career at RFF, including 1964’s The Economics of Regional Water Quality Management and 1968’s Managing Water Quality: Economics, Technology, and Institutions (coauthored with Blair Bower). Kneese’s ideas were later adapted and extended by other scholars into the idea of a tradable permits market for water quality, in which firms are issued a limited number of pollution permits that they can either use to pollute or trade to another firm. The idea of charging firms for the external damages caused by their pollution was widely unpopular at first, as industries opposed attempts to impose additional costs on their production processes, and environmentalists expressed moral reservations about a policy that they initially viewed as granting firms a “permit to pollute” so long as they paid the right price. However, thanks in part to Kneese’s early work in this space, the idea slowly entered the mainstream of US policy discussions. The underlying architecture of the sulfur-dioxide trading program adopted as part of the 1990 Clean Air Act Amendments was, at least in part, inspired by Kneese’s fundamental insight to charge firms for their share of the social costs of pollution.

The 1970s and 1980s

Water Quality and its Value: Over time, the national dialogue around water issues began to shift. Concerns over the extent of pollution in the nation’s water were salient in the public eye. The Cuyahoga River fire and other water incidents of the late 1960s led to public pressure that helped to pass the Clean Water Act in 1972. Concerns surrounding the quality of water itself were now more pressing to the public than the question of whether to build new, large-scale water projects. Following Kneese’s prior theoretical and applied work in regional water quality management in Germany’s Ruhr River Valley, RFF’s research began to tackle the economics of how best to apply these theories in a water quality modeling framework in various US contexts. One important RFF water study of the period was the water quality management models of the Lower Delaware River Valley developed by Clifford Russell and Walter Spofford, in which they developed an optimization model to inform policymakers on cost-effective ways to reach desired water quality goals in what was at the time a heavily polluted water body.

Separately, the RFF National Water Network model developed by Leonard Gianessi and Henry Peskin was used by the US EPA and USDA to assess the extent to which nonpoint agricultural pollution would need to be controlled in order to meet federal water quality objectives. Additionally, groundwater management models developed by Robert Young and drinking water quality studies led by Winston Harrington further contributed to the always pressing questions of how to provide both enough water to meet multiple demands for use, as well as ensuring that the water provided is safe and unlikely to cause adverse impacts to human health.

An influential methodological contribution developed at RFF during this period was the application of contingent valuation techniques (i.e., a survey-based valuation method that asks individuals to report their willingness to pay for nonmarket goods and services) to determine the public’s willingness to pay for water quality improvements. RFF-affiliated scholars, including Richard Carson, Robert Mitchell, and William Vaughan, published a series of papers and reports for EPA that used contingent valuation survey techniques to determine the recreation value that the public placed on fishable and swimmable waters. This includes the iconic RFF “water quality ladder,” which remains influential in water valuation research to this day and is an example of the direct impact and policy relevance of RFF’s research. The RFF water quality ladder translated a number of scientific water quality indicators into an intuitive ten-point scale that could be easily understood by the public. Survey respondents were asked how much they would be willing to pay to move up another point on the ladder in terms of water quality, allowing researchers to compare the estimates of public willingness-to-pay against the actual costs that would be necessary to achieve that water quality improvement.

The 1990s

Climate Change Enters the Conversation: RFF’s commitment to policy-relevant economic research on water resources research continued into the 1990s. By this time, the consensus from the scientific community was clear—climate change was real, and humans significantly contribute to the warming of the planet through greenhouse gas emissions. Climate change on a global scale has severe implications for water availability and quality. Kenneth Frederick led a robust research agenda at RFF in the 1990s that was one of the first to conceptualize and forecast the implications of global warming for the world’s water supply. In one case study, Frederick used methods adapted from the Second National Water Assessment to demonstrate that climate change could theoretically cause average stream flows to decline considerably from baseline levels in the Missouri and Upper Mississippi River basins by 2030 and to highlight the implications of this future water scarcity for both in-stream and agricultural users. Frederick’s research also took special care to document the inherent uncertainty surrounding estimates of future climate damages, further underscoring just how difficult it is for policymakers to prepare for a future in which climate change remains unabated.

Expanding the Portfolio: By the beginning of the twenty-first century, the United States had experienced several decades of water quality regulations, and enough time had passed to allow for retrospective analyses to assess how these instruments were working in practice. RFF researchers, including Len Shabman, reviewed the water quality trading programs in the United States established to help meet water quality standards. They concluded that proposed and operating trading programs are generally unable to help water bodies meet water quality standards on their own, especially in watersheds where the most common sources of pollution are from nonpoint agricultural sources. Paralleling earlier debates on merits of water pollution fees versus trading programs, RFF researchers considered whether water quality standards could be met more cost-effectively by implementing a system of water pollution taxes. In one case study, RFF’s Jim Boyd demonstrated that water pollution taxes, like water quality trading programs, are attractive in theory but limited in their effectiveness by political and institutional barriers. RFF studies like these illustrate the important role that economics has to play in the implementation of public policy: if programs are not designed carefully, then they may not work as efficiently or effectively as economic theory would predict.

RFF’s water research portfolio has expanded in recent years as climate change increases the probability of extreme weather events, especially in coastal regions. Scholars such as Carolyn Kousky, Margaret Walls, and Len Shabman have conducted public policy analyses of federal, state, and local programs to manage flood risk, evaluated the effectiveness of disaster aid for the post-flood recovery of households and communities, suggested innovative designs for flood insurance, and evaluated the impacts that flooding can have on human migration patterns. In one example, RFF researchers demonstrated that using geographic-information mapping to target specific areas for investments in “green” infrastructure like open spaces to absorb floodwaters (as opposed to “gray” infrastructure such as piped drainage systems) can produce significant flood damage reduction benefits at lower cost for a community. RFF research has also offered alternatives to the system of subsidies currently offered in federal flood insurance programs, such as a means-tested voucher program to help ensure that flood insurance is affordable to low-income citizens. This line of research is crucial as policymakers and planners search for ways to help communities adapt to the changing climate and become more resilient to flood damages and other climate-induced impacts.

Increased likelihood of drought is another risk associated with climate change. As drought conditions intensified throughout the early 2000s, drinking water utilities have faced pressure to either develop costly new sources of water or reduce demand among existing customers. Utilities thus have had to consider how to best send appropriate water conservation signals to customers. To tackle these issues, former and current RFF researchers, including Sheila Olmstead and Casey Wichman, have made important methodological and policy-oriented contributions to demand-side management (i.e., modifying consumer demand). Studies have analyzed the price elasticity of residential demand for water (and the statistical tools by which that parameter can be measured), whether prices or non-price policy instruments send stronger conservation signals to water consumers, and explored who bears the burden of conservation incentives.

Similarly, RFF Fellow Yusuke Kuwayama has modeled the benefits of implementing groundwater pricing and markets for agricultural users, providing economic insights to water managers across the country who continue to explore strategies to slow the depletion of aquifers. RFF researchers have also investigated the role of innovative wastewater treatment technologies in enhancing sustainability in coastal urban contexts through RFF’s participation in the EPA-funded Center for Reinventing Aging Infrastructure for Nutrient Management (RAINmgt). In other drought-related work, RFF researchers have documented the far-reaching impacts of drought-induced water scarcity, from declining agricultural crop yields to reductions in hydro-electricity generation that are often countered by increased electricity generation from fossil fuels.

Over the past decade, the boom in unconventional oil and gas production (colloquially termed “fracking”) has been hailed as one solution to lowering greenhouse gas emissions, as less carbon-intensive natural gas can serve as a substitute for coal in electricity production. However, these methods have the potential to adversely impact water quality in rural communities. Some RFF researchers have demonstrated empirically the water quality risks that arise from unconventional oil and gas production, and others have demonstrated how negative perceptions of groundwater quality impacts can depress property values of homes located near unconventional gas development sites. Their findings offer insight into both practical and policy approaches for protecting surface water quality as oil and gas production continues.

Looking to the Future

RFF has a rich history in water resource economics, and this tradition is reflected in RFF’s current water research projects as well. Current water research at RFF includes such topics as studying the distributional and efficiency impacts of urban water pricing, comprehensive socioeconomic modeling that incorporates ecological and economic insights, and leveraging Earth-observation data to improve water management. From droughts in California to water quality in Flint, water issues persist throughout the country. RFF’s forward-looking research on water stands ready to continue the RFF legacy of delivering timely economic research to inform the nation’s pressing water policy debates.