Grantee Research Project Results
Final Report: Designing Incentives that Strengthen Local Capacity for Land Development with Open Space and Healthy Ecosystems: Environmental Impact Fees
EPA Grant Number: R828629Title: Designing Incentives that Strengthen Local Capacity for Land Development with Open Space and Healthy Ecosystems: Environmental Impact Fees
Investigators: Swallow, Stephen K.
Institution: University of Rhode Island
EPA Project Officer: Hahn, Intaek
Project Period: January 1, 2001 through February 1, 2003 (Extended to December 31, 2004)
Project Amount: $103,821
RFA: Market Mechanisms and Incentives for Environmental Management (2000) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The purpose of the research project was to develop a framework for using impact fees to cause land markets to recognize the value of open space and undeveloped lands. These open spaces are valued because they enhance the quality of life for communities near the fringe of urbanization. The objectives of this research project included evaluating:
- the impact fee concept as an incentive for land developers to compensate for losses of open space, rural amenities, and associated ecosystems;
- the obstacles to and advantages of an impact-fee incentive system in relation to alternative market or incentive-based approaches for local management of land use;
- and the role of financing of open space conservation in affecting municipal incentives for conservation and the performance of impact fees.
Summary/Accomplishments (Outputs/Outcomes):
Framework for Environmental Impact Fees
The first objective of this research project was to examine market mechanisms and incentives for ecosystem-integrated land use management. This study proposed environmental impact fees (EIFs) to elicit socially desired residential development in rural communities and attempted to develop an ecosystem-integrated economical framework to determine the optimal scheme of the EIFs and its welfare foundation as applied to local land use management. This research program constructed a spatially explicit land use model in combination with a land rent model to characterize the environmental externality of residential development and use this model to examine the spatial, dynamic, and welfare effects of imposing such a fee on the process of residential land development.
Research focused on developing a modeling framework to:
- understand the market competitive equilibrium of residential land development and identify the linkage between spatial equilibrium of community landscape and access-based environmental amenity and ecosystem quality;
- examine the economic dynamics of residential land development in relation to the spatial heterogeneity of environmental amenity or biological habitat;
- examine the spatial and dynamic effect of different schemes of EIFs on the market process of land development;
- identify welfare foundation and characteristics of EIFs;
- and determine the optimal scheme of EIFs and corresponding spatial configuration of community landscape, including residential land use and preserved open space.
Urban economists have long recognized the importance of undeveloped land in a community in providing critical habitats and recreational open space and maintaining local ecosystem health. The empirical literature indicates that new residential development strongly favors areas that have access to open space or that can provide good environmental quality. On the other hand, the decentralized decision process as well as its associated external effect of individual residential developments often leads to overdevelopment such that these developments could adversely affect local ecosystem integrity, even though environmental quality constitutes precisely the attraction for most existing residents and potential immigrants.
Based on the monocentric city model, we developed an economic model to understand the market competitive equilibrium of residential land development in relation to the heterogeneity of open space and the potential environmental impact of this market process. We found the market equilibrium process causes an outward-radiating development centered on permanent open space, such as wetland, pond, and preserved open space. Moreover, the spatial pattern of open space determines the spatial configuration of residential land development. Our equilibrium land demand model shows access to open space, among others factors, can dominate the spatial location equilibrium of residential development, and this characteristic would lead to the loss and fragmentation of critical habitats. Habitat fragmentation can interrupt the ecological processes involved in maintaining local ecosystem integrity, such as the processes inherent in maintaining a species population that is scattered among habitat patches across the landscape. Fragmentation may substantially impair the connections between habitat patches that allow the species to re-colonize patches where the subpopulation may be locally extinct.
This residential development model also reveals the spatial gradient of the residential bid price or land rental price. The land rental price depends spatially on the access-based environmental amenity and local ecosystem quality. The spatial pattern of open space determines the spatial distribution of open space access, which in turn determines the spatial distribution of land rental price. Our model indicates a price premium for land parcels with high access to open space relative to land parcels with low access to open space. The spatial gradient of land rental price determines the economic dynamics of residential land development. Specifically, given a land rental price, landowners maximize their land value by choosing the time for land conversion. Consequently, the spatial distribution of land rental price affects the spatial development process of land parcels. Other things being equal, land parcels with high environmental amenity will be developed earlier, followed by land parcels with low environmental amenity. All these above characteristics on spatial market equilibrium of land development are consistent with empirical findings, and our model provides a formal theoretical exposure and economic foundation.
Market competitive equilibrium could lead to ecosystem degradation. To maintain a socially desired ecosystem quality, we introduced an EIF into the residential development equilibrium model. We modeled the EIFs as a property tax with the rationale that high access to open space generates high property value but imposes high environmental impact on open space, and therefore residential land parcels with high property values should be assessed high EIFs. Surprisingly, the scheme of the EIFs generated by the relative difference of land rental price does not affect the equilibrium process of land development. To solicit socially desired equilibrium development, EIFs have to change spatially. We found the spatial distribution of EIFs could affect the spatial gradient of land rental price, and thus affect the equilibrium development process. If the spatial gradient of EIFs is sufficiently large, for example, the spatial gradient of land rental price would be negative, which means land parcels with high access to open space generate low land rent and would discourage the land development of nearby open space or critical habitats. Effective EIFs cannot be based solely on land value but must vary according to geographic location relative to open space amenities or critical habitat. Variation by location allows the EIF to discourage development from areas that would impact open space values to a large extent, thereby redirecting development to areas where the EIF is lower or zero and impacts on open space values are also lower or zero for a particular community.
Using Stated-Preference Valuation To Calculate Impact Fees
Our research also considered information from stated-preference or contingent valuation of land conservation as a foundation for EIFs. The EIF concept could be linked by stated-preference valuation to the value of lost open space as additional development alters a community's rural or ecological character. A community's plans for an open space greenway or ecological reserve might establish a public facility contributing to residents' quality of life. These features may be sufficient to pass judicial scrutiny under the U.S. Constitution's clauses concerning takings of private property for public value: stated-preference valuation, or the random utility framework on which it is based, may be viewed as satisfying ( 1) an essential nexus between an EIF and impacts of lost open space on the community and expenditures of EIF revenues for land conservation; ( 2) rough proportionality between true welfare measures of that loss, or the cost of replacing open space through conservation of remaining undeveloped lands with public access; and ( 3) equal treatment of landowners because the EIF attached to individual parcels would be calculated based on physical, ecological, or geographical features of the parcel.
Working papers reviewed contingent valuation (choice experiment) studies of land conservation in Rhode Island. The validity of contingent valuation (hypothetical bias) was considered based on results involving real monetary contributions for conservation easements on wooded lands. Hypothetical bias may be absent from marginal calculations. Alternative methods of developing impact fees exist using stated preference results. The obvious method derives from neoclassical willingness-to-pay. An alternative method involves inkind compensation where public access to conservation land plays a key role in compensating for the open space services lost from privately owned land. Working papers also illustrated implications of conservation biology, favoring spatial connections between conservation lands, as impact fee revenues might be expended over time, and establishing conservation connections among land parcels can provide additional inkind compensation for losses of open space.
Using Open Space Grants To Fund Local Conservation
The third major component of this research project involved a game-theoretic study evaluating the initial incentives created by a state or regional matching grants program for local community efforts to conserve open space. The study identified the incentives of municipal land trusts that operate under a municipal government authority, such as a town council, and considered the interaction of those incentives with the incentives of the municipal authority seeking a grant under a state or regional program for open space. Such open space funding programs may play a significant role in the disposition of EIF revenues. Disparate motivations of a municipal land trust in relation to an elected town council were incorporated in the model.
Results indicated that a matching grant program can create unintended incentives for municipalities to preserve land that may be somewhat inferior to the land that best fits the environmental objectives of the grant program. Although one decisionmaker may pursue land with higher active-use values and another may favor passive-use or biodiversity values, a matching grant program may motivate a physically conservative town council to delay conservation of available lands thereby raising the risk or likelihood that more willing landowners choose to develop their land rather than wait for a conservation deal with the municipality. Results encouraged reducing the degree to which a match from local sources is required under the grant program, reducing the time between grant application and funding decisions (including reducing the time between grant application opportunities), and substantially increasing the chance that a grant applicant will be successful.
Journal Articles:
No journal articles submitted with this report: View all 4 publications for this projectSupplemental Keywords:
community-based, sustainable development, Northeast, willingness-to-pay, open space, land use, environmental impact fees, decision making,, RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Ecosystem Protection/Environmental Exposure & Risk, Ecosystem/Assessment/Indicators, Ecosystem Protection, Economics, Ecology and Ecosystems, Urban and Regional Planning, Market mechanisms, environmental quality, financial mechanisms, mathematical model, urbanization, ecological exposure, healthy ecosystems, municipal incentives, sustainable development, incentives, decision making, land use planners, conservation, community based, land management practices, environmental impact fees, ecosystem health, ecological benefits, environmental economics, land management, land useProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.