MITIGATION OF FLOOD RISKS: THE ECONOMIC PROBLEM Thesis submitted for the degreeof Ph.D. In Environmental Economics and Environmental Management By Chiung-Ting Chang Environment Department University of York May 2005 Contents 1 Introduction: Flood Risk Management in the Context of Flood Economics 21 1.1 Tradeoffs in flood 21 risk management .......... 1.2 Development and averting behaviour in a flood-prone 23 area ................... ........ 1.3 Flood 28 risk externalities ......... ........ 1.4 Managing 29 public goods ......... ........ 1.5 Thesis 31 purposes ............. ........ 1.6 Thesis 32 outline .............. ........ Flooding, Environmental Health and the Econ- omy: Causes and Impacts of Flooding 35 2.1 Introduction 35 ....................... 2.2 Anthropogenic factors in flooding 36 ........... 2.2.1 Climate 37 change ................. 2.2.2 Land 40 use ..................... 3 CONTENTS 2.2.3 Mitigation 44 .................... 2.3 Estimation the flooding 49 of probability of ....... 2.3.1 Visualisation hydrological 50 of characteristics .. 2.3.2 General form flood 52 of river estimation ..... 2.3.3 Empirical 53 models ................ 2.3.4 Peak-over-threshold (POT) 54 .......... 2.3.5 Probable maximum flood and probable maxi- 54 mum precipitation ............... 2.3.6 Horton's infiltration theory 56 ........... 2.4 Impac ts of flooding on environmental health and the 57 economy ........................ 2.4.1 Flooding and health: Dilution v. s. dispersion 59 2.4.2 Flooding and the economy: Benefit and damage 61 2.4.3 Adaptation 66 ................... 2.4.4 Welfare 73 estimation of environmental goods .. 2.5 Decision-making 79 under uncertainty .......... 2.5.1 Definition the theory 80 of expected utility ... 2.5.2 Limitations the theory 82 of expected utility ... 2.5.3 Revisions the theory 86 of expected utility .... 2.6 Summary 88 ........................ Balancing Development and Protection in Flood Risk Management: A Static Model 89 3.1 Introduction 89 ....................... 3.2 Assumptions 91 ....................... 3.2.1 Economic 91 model ................ CONTENTS 5 3.2.2 Hydrological 96 model ........... .... 3.2.3 The integrated 98 model .......... .... 3.3 Model the 102 setup and analytical results .... .... 3.3.1 Conditions for the 103 equilibrium ..... .... 3.3.2 Income 107 and substitution effects .... .... 3.4 Discussion 108 and conclusion ........... .... Balancing Development and Protection in Flood Risk Management: Dynamic Models111 4.1 Introduction III ................. ...... 4.2 Model (1) 113 .................. ...... 4.2.1 Model 114 structure ........... ...... 4.2.2 Equilibrium 116 analysis ........ ...... 4.2.3 Example 117 ............... ...... 4.2.4 Policy implications 119 ......... ...... 4.3 Model (2) 123 .................. ...... 4.3.1 Model 123 structure ........... ...... 4.3.2 Equilibrium 125 analysis ........ ...... 4.3.3 The 127 stability of equilibria ..... ...... 4.3.4 Policy implications 130 ......... ...... 4.4 Conclusion 131 .................. ...... 5 Externalities of Flood Risk Management 133 5.1 Introduction 133 ....................... 5.2 Theoretical background 137 ................. 5.2.1 Equilibrium 138 ................... 6 CONTENTS 5.2.2 Non-cooperative 139 game and cooperative game . 5.2.3 Supermodular 140 game .............. 5.3 Reciprocal externalities in a catchment: Common pool142 5.3.1 Assumptions 142 ................... 5.3.2 Characteristics the 143 of game .......... 5.3.3 Equilibrium of the single dimensional strategy 146 5.3.4 Multi- dimensional strategy in a supermodular 152 game ....................... 5.4 Unidirectional externalities in a catchment: Upstream- downstream 155 ....................... 5.4.1 Assumptions 156 ................... 5.4.2 Equilibrium 157 ................... 5.4.3 Opportunities for 157 cooperation ......... 5.5 Discussion 158 ........................ 5.5.1 Policy implications of the game theoretical mod- 159 els ........................ 5.5.2 Limitations the theoretical 161 of game models .. 5.6 Conclusion 161 ........................ Decentralised Flood Risk Management Us- ing the Stakeholders' Committee and M-ade- able Flood Permits 163 6.1 Introduction 163 ....................... 6.2 Solving the 167 problems of commons ........... 6.2.1 Problems 167 of commons ............. 6.2.2 Solutions to the 168 problems of commons .... CONTENTS 7 6.3 Stakeholders' 172 committee ................ 6.3.1 Aims 172 of a stakeholders' committee ....... 6.3.2 Principles for designing a stakeholders' com- 174 mittee ...................... 6.3.3 Interested 175 parties ................ 6.4 Tradeable flood 180 permit ................. 6.4.1 Criteria of a successful tradeable permit system181 6.4.2 Conditions for converting hard to soft mitigation 184 6.4.3 Theoretical 186 models ............... 6.4.4 Types tradeable flood 192 of permits ....... 6.5 Conclusion 198 ........................ Feasibility of the Tradeable Flood Permit System 201 7.1 Introduction 201 ...................... 7.2 The flooding 202 problem of ............... 7.2.1 Flood 202 events .................. 7.2.2 Hydrological 204 characteristics ......... 7.2.3 Summary 217 ................... 7.3 Checking the prerequisites for implementation of a tradeable flood in the 218 permit system catchment .. 7.3.1 Heterogeneity the 218 within catchment ..... 7.3.2 Externalities in the 224 catchment ........ 7.4 Institutional setup for the tradeable flood permit sys- tem 242 ........................... CONTENTS 7.4.1 Comparisons among TraD, TFR, and TRiNe 244 permit systems ................. 7.4.2 Efficiency improvement by the tradeable flood 246 permit system .................. 7.4.3 Institutional 248 setup ............... 7.5 Conclusion 249 ........................ 8 Conclusion and Policy Recommendations 251 8.1 Thesis findings 252 ..................... 8.2 Further Research 255 .................... Appendices 257 A Deriving the phase diagram in Figure (4-1) 259 B Estimation Results of the '1ý-end in the Annual Max- imum of Monthly Runoff 261 C Estimation Results of the Trend in the Annual Max- imum of Daily Flow 267 D Estimation Results of the Trend in Rainfall Patterns271 List of Tables 2.1 Categories floods 36 of ................... 2.2 Impermeability (Newson, 1992) 43 of various surfaces . 2.3 Effects floods health the 58 of on and economy ..... 3.1 Probability flooding 96 and welfare with/without .... 3.2 Strategies for dealing with flood hazards and their benefit 102 cost and ..................... 5.1 Payoff matrix with respect to soft mitigation and de- 148 velopment ......................... 5.2 Payoff to hard 151 matrix with respect mitigation .... 5.3 Impacts 158 of upstream actions .............. 9 10 LIST OF TABLES 6.1 Statistics on hard mitigation in the catchment of the Yorkshire Ouse, the Swale, the Ure, and the Nidd. Data source: Environment Agency, courtesy to Ms. Diana Orr of the Environmental Agency at York in 2004. R: river; T: total number of mitigation works; U: unknown organisation; R: riparian owner; EA: En- vironment Agency; IDB: Internal Drainage Broad; LA: local authority; YW: Yorkshire Water; B: British Waterways; N: Newby Hall Estates; D: Danby Es- tates; NA: information 165 no available ........... 6.2 Characteristics of the two-tier decentralised manage- 166 ment ........................... 6.3 Pros and cons of implementing tradeable permits (adapted from Baumol Oates (1988)) 182 and ............ 6.4 Conditions for adopting the three types of tradeable 198 permit systems ..................... 7.1 Chronology of significant floods in the study catch- ment (1947-2005). See Subsection 7.2.3 for discus- sion. Data source: University of Dundee, Dartmouth Flood Observatory, Halcrow Group Limited (2001), Babtie Brown Root (2005), BBC 203 and and news. .. 7.2 Selected 206 gauging stations ................ 7.3 Prerequisites of adopting a tradeable flood permit 218 system .......................... LIST OF TABLES 11 7.4 Conditions for the mitigation works (hard mitigation) on the upstream and downstream areas of the Ouse, the Swale, the Ure and the Nidd. Courtesy to Ms. Dinan Orr of the Environment Agency at York (2004). 232 7.5 Correlation between listed variables and flow in the catchment of the Swale, the Ure, the Ouse, and the Nidd. *1 **, and *** denote the statical significance at 10% 5% and 1% levels respectively. C(S): Cat- terick on the Swale. T(S): Topcliffe on the Swale. MW(U): Middleham/Wensley on the Ure. WB(U): Westwick/Borough Bridge on the Ure. SC(O): Skel- ton/Cawood on the Ouse. SN(O): Skelton/Nether Poppleton on the Ouse. S(N): Skip Bridge on the Nidd. H(N): Hampsthwaite Bridge on the Nidd. Data Source: Environment Agency. Courtesy to Ms. Di- Orr the Environment Agency York 237 ana of at ...... 7.6 Sewage/waste water treatment works at or at the up- the 242 stream area of selected gauging stations ..... 7.7 The checklist of adopting the tradeable flood permit system in the Catchment of the Ouse, the Swale, the Ure, the Nidd 243 and .................... 12 LIST OF TABLES 7.8 The checklist of adopting the TraD, the TFR, and the TRiNe permit systems in the Catchment of the Ouse, the Swale, the Ure, and the Nidd. (H): Hard mitigation is essential; (E): Ecological externalities of hard mitigation are severe; (F): Flood risk externali- ties of hard mitigation are severe; (S): Soft mitigation is essential; (U): Uncertainty about the marginal cost hard 243 of mitigation .................... List of Figures Flood events in Taiwan (1958-2000). Data source: Ministry