Water planning in a changing climate: Joint application of cost utility analysis and modern portfolio theory

High nutrient loads are a widespread problem for many rivers and river catchments and cause damage to various ecological assets. Negative effects can be mitigated by changes in land management such as land use changes and/or implementation of intervention measures such as – amongst others – the construction of artificial wetlands and water treatment plants. Usually budget constraints limit the number of measures that can be implemented by catchment management authorities which creates an optimisation problem, namely maximising the total water quality benefits subject to a budget constraint. Here we present a case study from the Ellen Brook catchment in Perth, Western Australia, which suffers from serious waterway health problems. We evaluate a variety of suggested intervention measures and determine the benefits they return. Cost utility analysis (CUA) and subsequent combinatorial optimisation are employed to determine a portfolio of intervention sites that returns the maximum aggregated benefit subject to a budget constraint. Shortcomings in this approach are identified when future uncertainties are to be accounted for and we perform a comparative study using modern portfolio theory (MPT). It is demonstrated how MPT and CUA can be jointly used to consistently account for triple bottom line aspects and aspects of future uncertainties such as uncertainties in future climate variability.