Appendix D
Analysis of Nonstructural Flood Damage Reduction

A paper by Shabman et al. (1997) provides an illustration of the peculiar economic position of nonstructural flood mitigation. A parcel with structures is subject to flooding. The choice is whether to build a levee or purchase the property for evacuation. Here is their example (all monetary values in thousands) in simplified form:

Market value of land without flooding: L = $9

Market value of structure (not flooded): S = $2

Present value of expected flood damage to land: D = $3

Cost of levee: C = $2

Benefits of evacuated land: E = $4.5

Net benefits of levee (damages mitigated less cost of mitigation): DC = $1.

Net benefits of evacuation (benefits of evacuated land less cost of land and structure adjusted for expected damage): E − (L + SD) = -$3.5.

Evacuation looks unfavorable because it removes $8 in developed property value (after capitalizing in the expected damages) and returns only $4.5 in undeveloped benefits. The fundamental issue is that today’s assessment is the result of the past. Consider the following ways in which historical values might deviate from future values:

(1) The value of the land and structure is reflective of various types of policies such as access to local utilities and services, agricultural subsidies, and flood protection or compensation subsidies.

(a) Say that, without crop subsidies, the flood damages would be cut in half, to D’ = $1.5. In that case, D’ − C = -$0.5; the levee would not make sense either.



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Analytical Methods and Approaches for Water Resources Project Planning Appendix D Analysis of Nonstructural Flood Damage Reduction A paper by Shabman et al. (1997) provides an illustration of the peculiar economic position of nonstructural flood mitigation. A parcel with structures is subject to flooding. The choice is whether to build a levee or purchase the property for evacuation. Here is their example (all monetary values in thousands) in simplified form: Market value of land without flooding: L = $9 Market value of structure (not flooded): S = $2 Present value of expected flood damage to land: D = $3 Cost of levee: C = $2 Benefits of evacuated land: E = $4.5 Net benefits of levee (damages mitigated less cost of mitigation): D − C = $1. Net benefits of evacuation (benefits of evacuated land less cost of land and structure adjusted for expected damage): E − (L + S − D) = -$3.5. Evacuation looks unfavorable because it removes $8 in developed property value (after capitalizing in the expected damages) and returns only $4.5 in undeveloped benefits. The fundamental issue is that today’s assessment is the result of the past. Consider the following ways in which historical values might deviate from future values: (1) The value of the land and structure is reflective of various types of policies such as access to local utilities and services, agricultural subsidies, and flood protection or compensation subsidies. (a) Say that, without crop subsidies, the flood damages would be cut in half, to D’ = $1.5. In that case, D’ − C = -$0.5; the levee would not make sense either.

OCR for page 136
Analytical Methods and Approaches for Water Resources Project Planning (b) Without crop subsidies, the value of the land and structures might also decrease. Say the devaluation is to L’ = $5 and S’ = $1, respectively. Then, E − (L’ + S’ − D’) = $0. In other words, history and other policies matter. (2) Consider a case in which the floodplain land has not yet been cleared and a structure built. Say that clearing the land and building the structure would cost $6 (call it R), producing net returns L + S − D − R = $2 (i.e., assuming flooding remains). Meanwhile, doing so would eliminate $4.5 in benefits from the undeveloped land. In this case, the private market would leave the land undeveloped unless the flood protection project subsidizes its development The Corps’ methods are supposed to be future-oriented and to adjust for value distortions due to policies or other factors. This is often very difficult to do. Reference Shabman, L., A. Riley, and G. Stedge. 1997. Evaluation of floodplain permanent evacuation measures: An alternative approach for the U.S. Army Corps of Engineers. Report prepared for the U.S. Army Corps of Engineers. Fort Belvoir, VA: Institute for Water Resources.