NOTE

Brent Sohngen's draft case study appears courtesy of the Northeast-Midwest Institute and

the National Oceanic and Atmospheric Administration. The final case study will appear

in a guidebook on Great Lakes environmental benefits valuation which is being

developed by the Institute and NOAA and will be published in the winter of 1998-99.
1

SOIL EROSION IN THE MAUMEE RIVER BASIN: A CASE STUDY USING

MARKET METHODS TO VALUE ENVIRONMENTAL EXTERNALITIES

DRAFT: June 5, 1998

Brent Sohngen

Department of Agricultural Economics

The Ohio State University

2120 Fyffe Rd., Columbus, Ohio, 43210-1067

Phone: 614-688-4640; Fax: 614-292-0078

Email: sohngen.1@osu.edu

Jon Rausch

Department of Agricultural Economics

The Ohio State University

2120 Fyffe Rd., Columbus, Ohio, 43210-1067

Phone: 614-292-6421; Fax: 614-292-0078

Email: rausch.7@osu.edu
2

BACKGROUND

Although many environmental externalities result in non-market impacts to recreation

or ecosystems, externalities can also affect the value of goods and services traded in

markets. Industrial pollution, for example, may degrade building exteriors more quickly

than otherwise, therefore increasing maintenance costs. Because materials and labor are

purchased on the open market, we can value these impacts using material prices and

wages set in the marketplace. In this case study, we examine an example where the

externalities arising from soil erosion are measured using standard market techniques.

The case is the Maumee river basin in northwestern Ohio, where soil erosion from

upstream land use leads to damages in the harbor where the river drains into Lake Erie

(Figure 1). The Toledo harbor serves as a shipping port for many regional commodities,

including grain from Midwestern farms and coal from Ohio mines. The Maumee river

basin drains 4.2 million acres in northwestern Ohio, southern Michigan, and northeastern

Indiana. Approximately 75% of the land is used for farming, 5% for forests, and the

remaining land for urban and other uses. In the basin, 10.2 million tons of soil erodes

each year, or 2.39 tons per acre. Of this, about 1.3 million tons of sediment flows to the

Toledo harbor (USDA Soil Conservation Service, 1993).

Because the Toledo harbor is a federal navigation channel, the Army Corps of

Engineers spends an average of $2.2 million dollars each year dredging the harbor and the

approach channel in Lake Erie. The possibility that sediments are contaminated by toxic

chemicals leaching from local landfills causes the Army Corps of Engineers to confine

sediments dredged from the harbor itself in a disposal facility (see Figure 1).
3

Approximately one half of sediments dredged each year are confined. Although material

dredged from further out in Lake Erie currently is disposed with open lake dumping, the

Environmental Protection Agency has issued an order that all sediments eventually must

be confined.

The Army Corps of Engineers and the Natural Resource Conservation Service have

asked the question: would reducing soil erosion on agricultural land in the basin reduce

the costs of dredging sediments? They have undertaken a project that attempts to

establish conservation tillage across 75% of the corn and soybean fields in the basin.

Conservation tillage is a farming practice that reduces soil erosion by leaving a larger

proportion of the soil covered during winter and spring months. This is accomplished by

leaving 30% of the soil surface covered with crop residues (i.e. corn or soybean stalks).

The USDA Soil Conservation Service (1993) predicts that additional residue cover can

reduce the quantity of sediment dredged downstream by up to 15%.

In this case study, we describe how to estimate the benefits of reduced dredging costs

arising from lower soil erosion upstream. Although it is not done in this case study, these

savings, or benefits, should be compared to the costs of reducing soil erosion in order to

determine if a 15% reduction in dredging is economically efficient. While both market

(i.e. dredging) and environmental goods (i.e. water quality) are affected by sediment

deposition, this case study focuses on market impacts. Dredging is considered a market

impact because the Army Corps of Engineers must expend resources by hiring private

contractors to dredge the harbor. The benefits of reducing soil erosion are measured by

the decrease in dredging expenditures associated with a 15% reduction in sediments

entering the harbor.
4

Figure 1: The Maumee river basin and Toledo harbor.
5

There are other economic impacts of soil erosion. Market impacts include increased

water treatment costs and increased drainage ditch cleaning costs, while non-market

impacts include impaired fish spawning habitat or altered aquatic ecosystems.

Furthermore, the move to confine all dredged materials may require building additional

confinement space. Depending on where the facility is built, other non-market values

may be affected, such as loss of wetlands or recreation space. Given the low levels of

remaining coastal wetlands along Lake Erie shores, the impacts of sedimentation on these

resources in the Maumee Bay may be substantial. These other market and non market

impacts of soil erosion are important, but they are ignored here in order to focus our

attention on the techniques necessary to value dredging impacts. It is interesting to note

that the economic value of avoided dredging costs alone may be sufficient to justify the

costs of reducing soil erosion.

THE COST OF DREDGING

Several concepts of soil erosion and sedimentation must be defined initially. Soil

erosion is calculated as the quantity of soil that moves on the land during a given year.

On agricultural land, soil is dislodged as water moves over unprotected soil during

rainstorms. In the Maumee river basin total soil erosion is estimated to be 10.2 million

tons per year. Approximately 6.4 million tons arises from land where crops are produced.

Table 1 presents estimates of all sources of soil erosion in the basin.

 Only a portion of the 10.2 million tons of soil erosion actually enters streams,

however. Some soil moves only from the top of the field to the middle or edge of it. Of
6

all the soil that moves during rainstorms, only a portion will leave the field. Furthermore,

when soil enters the waterway, only part of it ends up in the Toledo harbor. Some will be

deposited in fields downstream (inducing net benefits for that farmer), at the bottom or

sides of the river, or in drainage ditches. The second panel of Table 1 presents estimates

of the sinks (areas where soil is deposited) for sediments.

Most soil erosion is deposited in the field where it arose; it just moves a small

distance before settling again. Some sediments are suspended well enough in water to be

carried offsite. Approximately 1.3 million tons per year on average make their way to the

harbor. The delivery ratio is calculated as the proportion of total soil erosion that ends up

in the Toledo harbor. In the Maumee river basin, this is calculated as (1.3/10.2), or

12.7%.

Table 1 shows (1) that only a portion of all soil erosion leaves the field; (2) that some

sediments are deposited in drainage ditches; and (3) that only a portion of the sediments

entering the harbor are deposited in the shipping channel (the rest end up elsewhere in the

Lake). The Army Corps of Engineers dredges only the quantity that ends up in the

shipping channel, 468,000 tons per year. Because dredging and storing costs are based on

the volume of sediment removed, we must translate this number into cubic yards. This is

accomplished by using estimates of the average density of soils in the basin. These

estimates suggest that each ton of sediment equals 1.82 cubic yards, so that 468,000 tons

of sediment equal 850,000 cubic yards.

There are three components of dredging costs, the costs of dredging material from the

lake bottom and putting it in a boat, the costs of transporting the material to a confined

disposal facility, and the costs of confining the material. The first two costs, dredging
7

and transportation, are annual costs related directly to the total quantity of sediments

dredged. Confining costs, however, are capital costs. As capital costs, they depend on

additional variables, such as interest rates, and they must be treated differently.

Table 1: Sources and sinks for soil erosion from the Maumee river basin.

Circa (1992)

Sources tons/year Percent

Agriculture 7,418,900 72%

Streambank 100,000 1%

Geologic (riverbed) 20,000 0%

Gully and Urban 2,761,100 27%

Total 10,300,000

Sinks

Fields or River Bank 8,515,128 83%

Drainage Ditches 484,872 5%

Ship Channel 468,000 5%

Lake 832,000 8%

Total 10,300,000

This data is from USDA Soil Conservation Service, 1993 except for drainage ditch estimates,

Which are from Forster and Abrahim, 1985.
8

Dredging and Transportation Costs

The annual costs of dredging and transporting material to a disposal point have both

variable and fixed components. Variable costs depend directly on the quantity of material

dredged and transported each year. They include expenditures such as fuel or labor used

to operate dredging machinery. Variable costs increase as more material is dredged and

transported to the disposal point. Fixed costs, on the other hand, are the capital costs

associated with owning and maintaining dredging equipment. They do not vary with the

quantity of sediments dredged each year. No matter how much sediment is dredged,

contractors must pay for the machinery to do the dredging. Total costs are the sum of

variable and fixed costs.

Dredging activity in the Toledo harbor area actually occurs in two different areas— the

River/Harbor area and the Lake. Dredging costs will differ in the two regions because it

generally takes more effort and time, and even different equipment, to extract sediments

in the River/Harbor area. Furthermore, these two areas are different distances from the

disposal area, so that different transportation costs will apply to each region. Separate

dredging and transportation cost functions can be estimated from historical Army Corps

dredging contracts (1978 to 1995) to determine specific cost functions for the two

regions:

(1) River/Harbor: Total Cost = 331,879 + 2.10*QR/H

(2) Lake: Total Cost = 215,815 + 1.78*QL
9

The first component of each equation is the fixed cost of a contract to remove

sediment. The second part is the variable cost. Variable costs are the cost per cubic yard

multiplied by the cubic yards, QR/H or QL. Due to differences in the type of machinery

that may be used for dredging, and differences in the channel that must be dredged, the

fixed and variable costs differ depending on where the sediments are dredged.

When the annual quantity of sediments dredged is 850,000 total cubic yards1, this

equation suggests that annual dredging and transportation costs in the Toledo harbor

amount to $2,188,534 per year. Under the sediment reduction plan, sediments are

reduced 15% in the harbor, and dredging costs decline to $1,942,408. While it is possible

that dredging may decline more in one particular region (i.e. River/Harbor or Lake), this

case study assumes a proportional reduction in each region. This points out an area of

uncertainty based on the underlying science. Reductions may not occur proportionally

each region, but this could only be determined with more thorough sediment

transportation modeling. Economic analysis with such uncertainty should contain

relevant discussions pertaining to such difficulties.

Confined Disposal Facility Costs

Confined disposal facilities are “landfills” that remove contaminated sediments from

the environment. Due to the presence of heavy metals in the Toledo harbor and Lake

Erie, sediments dredged in the harbor must be confined in this facility. Currently, the

 

1

399,500 cubic yards in the River/Harbor and 450,500 cubic yards in the Lake.
10

facility is located on the eastern shore of the entrance to the harbor (Figure 1). At

historical rates of storage (approximately 400,000 cubic yards per year), the existing

facility would last another 20 years. However, since it is likely that all sediments dredged

after 1997 must be stored in the facility, this will reduce the effective life of the facility to

just 9 years. As the existing facility fills, it is assumed that a new 20-year facility will be

built to replace it.

This study examines two costs associated with building a confinement facility. The

first involves the cost of renting land. Clearly, these costs will depend on the location of

the facility. For example, purchasing part of the lake floor to extend the current facility

would be costless for the Army Corps of Engineers; however purchasing additional

harbor front property would cost up $25,000 per acre near the existing facility.2 In this

case, we assume that a new facility will be built farther out into the lake next to the

existing one, using no new lake frontage. At the moment, there are few market uses of

the additional lake in this area, although there may be substantial non market uses.3

The second is the capital cost of building the facility. Construction costs for the

existing extension of the Toledo facility were $1 per cubic yard in 1994 and construction

costs for a recently constructed facility in Cleveland, Ohio were approximately $7 per

cubic yard (Personal communication with Weiner Cadet, US Army Corps of Engineers).

Current estimates of construction and construction management costs for a new facility in

 

2

 Real estate values were approximated in December of 1997.

3

 While there are not many other marketable uses of the lake and lake at this time, there may be substantial

non market uses, such as habitat for fish, recreation area, and the loss of aesthetic beauty. We recognize

these damages as important, but they are ignored here to focus the analysis on market damages. Techniques

for measuring these non market uses are described elsewhere in this book, and such estimates could be used

within the context of this study.
11

Toledo are nearly $10 per cubic yard.4 For this analysis, a cost of $7.5 per cubic yard is

used to accommodate recent expenditures and potential future increases. For 20 years of

capacity at existing dredging rates, this amounts to $95.6 million5.

Determining the Annual Cost of Confinement

This case study focuses on whether or not a 15% reduction in the quantity of

sediments dredged each year will reduce the size and cost of the new CDF. Reducing

sediment dredging will have two effects. First, it will reduce the size of any new facility.

Second it will extend the life of the existing facility. Given the size of the new capital

investment required for storing all sediments dredged, extending the life of the existing

facility by only 1 year can affect the interest cost of borrowing money.

Table 2 presents information for two scenarios— (1) No Sediment Reduction; and (II)

a 15% Sediment Reduction Plan. The first row indicates that the original facility will last

for 9 more years in under plan I, but 11 years under plan II. Row (2) presents the date of

construction for the new confinement facility; recall that reducing dredging by 15%

pushes construction back by 2 years. In addition to extending the life of the existing

CDF, construction costs for the new facility are reduced because the new CDF is smaller

(rows 3 and 4).

 

4

 These costs are notably higher for two reasons. First, the last site was cheaper because it was not difficult

to establish. Second, waste handling costs may be higher due to new environmental regulations.

5

 This number is calculated as follows: 850,000 cubic yards per year x 20 years x $7.50 per cubic yard x

0.75. This last multiplier (0.75) involves the assumption that volume of sediments will subside 25% over

the life of the facility as water evaporates or is drained from the sediments.
12

Row (5) introduces the concept of discounting. Discounting is important when the

costs and benefits of environmental programs occur at different times. Here, for example,

the Army Corps of Engineers must expend resources now to reduce soil erosion, but these

activities do not provide benefits until later when they defer the costs of installing a new

confinement facility. Without a sediment reduction plan, the new facility must be built in

the year 2006, but with sediment reduction, it can be built in 2008.

Although a large share of benefits under the sediment reduction plan arise because the

Army Corps of Engineers can build a smaller facility, additional benefits accrue because

the Army Corps of Engineers can put the building costs off for two more years. Putting

off large capital expenditures is some benefit because it allows the Army Corps of

Engineers to pursue alternative activities in the meantime.
13

Table 2: Comparison of CDF data for two strategies.

Plan I:

No Sediment Reduction

Plan II:

Sediment Reduction

1) Original Facility Life 9 years 11 years

2) New CDF Opens 2006 2008

3) New CDF Capacity 12.75 million cubic yards 10.86 million cubic yards

4) Total Cost of New CDF $95.6 million $81.5 million

5) PV of total cost $61.6 million $47.7 million

6) Annual Cost $4.1 million $3.1 million

Note: Because the calculations presented above involve several additional decimal places, you may obtain

slightly different results if you calculate these values on your own.
14

 Figure 2 shows the present value of building costs under the two alternatives. Under

plan I, future costs are $95.6 million and they occur in 2006; under plan II they are $81.5

million and they occur in year 2008. These values are discounted to 1997 to determine

the present value of future costs, $61.6 and $47.7 million under the two plans

respectively. Present values are calculated with the following formula:

(3) PV of Cost in Year (1997 + n) = Future Value*(1+r)-n,

Where r is the interest rate (in this case 5%), and n is the number of years into the future

when construction occurs. For example, under plan I, equation (4) is

(4) PV of Cost in 2008 = $95.6*(1.05)-9 = $61.6

The overall benefits of building a smaller facility and pushing that two years into the

future is $13.9 million ($61.6 - $47.7).

The values in row (5) of Table 2 are the present value of construction costs for

different size CDF’s. These costs, however, are not comparable to our estimates of

dredging and transportation costs because those are annual costs, and these are the costs

of a facility that can be used for multiple years. Discounting techniques can be used again

to determine a set of equal annual payments that just equal the present values shown in

row (5). These annual equal payments are shown in row (6). For a description of how to

obtain the values in row (6), please see the appendix to this chapter
15

Figure 2: Calculating present value of alternative future confinement (CDF) capital costs.

1997 1998 2006 2005

Present Values

$95.6

$81.5

$61.6

Future Values

Plan I:

Build CDF

Plan II:

Build CDF $47.7

Benefits: $13.9

...................................................... . 2008
16

Comparison of Costs

With costs for each underlying component expressed annually, we are prepared to

compare the costs of two alternatives (no sediment reduction and sediment reduction).

The benefits of the sediment reduction plan in terms of avoided downstream costs are the

difference between the total annual costs of the two proposals. The total costs for each

plan are shown in Table 3. Plan II, or the plan including a 15% reduction in sediment

dredging, benefits the Army Corps of Engineers $1.3 million dollars per year.

The benefits of each additional cubic yard of dredging avoided can be calculated as

reduction in total costs divided by the reduction in quantity dredged. This is $1.3 million

divided by 127,500 cubic yards, or $10.19 per cubic yard.6 These benefits can also be

translated into the benefits of a reduction in soil erosion on land upstream. To do this,

one must account for three factors: (1) the delivery ratio (13%); (2) the ratio of cubic

yards to tons of sediments (1.82 cubic yards per ton); and (3) the ratio of sediments

dredged to the total quantity of sediments that enters the Toledo Harbor (65%).

Accounting for these, soil erosion in the basin would have to be reduced by

approximately 1.5 million tons in order to avoid 127,500 cubic yards of dredging. The

benefits per ton of soil erosion in the basin could therefore be calculated as $1.3 million

divided by 1.5 million tons, which equals $0.87 per ton of soil erosion.

 

6

 It is important to note that the additional benefit of each additional cubic yard of dredging avoided is

constant for the first 15% of dredging avoided.
17

CONCLUSION

As noted in the text, these estimates capture only one impact of soil erosion. There

may be many other impacts, including recreational boating, sport and commercial fishing,

housing, aquatic life and ecosystem integrity, to name a few. While these would be

expected to increase the economic value of impacts, it may not be important to estimate

any or all of them. If the benefits calculated in this case study are favorable compared to

the costs of reducing sediments, it may be enough to justify efforts at lowering soil

erosion.

There are several uncertainties surrounding these estimates. First, weather is

uncertain from year to year, and actual costs may differ dramatically from these average

conditions. Second, some assumptions above are based on hydrological modeling that is

itself uncertain. Finally, the economic estimates themselves contain uncertainty. While

this case study does not attempt to provide estimates of the possible error, readers should

be aware that these errors may exist, and in studies they conduct or evaluate.
18

Table 3: Annual costs of dredging, transporting, and confining sediments in the Maumee

river basin, in millions (1995)

Plan I:

No Sediment Reduction

Plan II:

Sediment Reduction

Dredge and Transport Costs $2.2 $1.9

Confinement Facility

 Land Rent $0.0 $0.0

 Building $4.1 $3.1

TOTAL COSTS $6.3 $5.0
19

REFERENCES

Cadet, Weiner, US Army Corps of Engineers, 1776 Niagara Street, Buffalo, NY 14207.

Forster D. Lynn and Girmai Abrahim. 1985. Sediment deposits in drainage ditches: A

cropland externality. Journal of Soil and Water Conservation.

USDA Soil Conservation Service. 1993. Erosion and Sediment Dynamics of the

Maumee River Basin and Their Impact on Toledo Harbor.
20

APPENDIX: ANNUAL CAPITAL COSTS OF CONFINEMENT

Estimating the annual capital costs of confinement require us to determine the

annual costs of capital expenditures. This is important because the Army Corps of

Engineers must pay for the confinement facility in the year it is built, but they use it for

many years. Discounting allows us to spread the costs over many years, taking the time

value of money into account. The time value of money recognizes that the Army Corps

of Engineers would rather pay for the confinement facility each year, but they have to pay

for it in the year it is built.

Figure (A.1) describes this situation graphically for plan I in our example.

Although the confinement facility costs $95.6 million to build, this expense occurs in year

9. As shown above, we discount this value back to time period 1 to obtain current capital

costs of $61.6 million. Because the new facility has a 20 year life, the entire project lasts

29 years (9 years until the facility is built, and 20 years of useful life). We thus must

spread these capital costs over 29 years, as shown in Figure (A.1).

To spread capital costs over many years, we use a levelized cost factor. The

levelized cost factor is the same as that used to calculated periodic payments on a loan for

a house or an automobile. It is

(A.1) levelized cost factor =

(1 ) 1

(1 )

+ −

+

n

n

r

r r
21

where r is the interest rate for each period, and n is the number of periods. Under plan I, r

is 0.05 per year, and n is 29, and the levelized cost factor is 0.0661. The annual costs are

then calculated as

(A.2) Annual Cost = Present Value * levelized cost factor

This is ($61.4) x (0.0661), or $4.1 million per year.

Figure A.1: Timeline for plan I.

These same methods must be used to calculate the annual costs under plan II. In

this case, the costs are spread over 31 years because the Army Corps of Engineers can use

the existing facility for 2 more years with lower dredging quantities (Figure A.2). They

then build a 20 year facility that will last until 2026. With equations (A.1) and (A.2),

where r is 0.05 and n is 31, the levelized cost factor is 0.0641, and the annual costs are

$3.1 million.

1997

Present Value:

Annual Values:

1998 1999 2000 ...................................................... . 2026

$61.6

$4.1 $4.1 $4.1 ...................................................... . $4.1
22

Figure A.2: Timeline for plan II.

1997

Present Value:

Annual Values:

1998 1999 2000 ...................................................... . 2028

$47.7

$3.1 $3.1 $3.1 ...................................................... . $3.1