Heterogeneity, incentives and sustainable water use

1
Heterogeneity, incentives and sustainable water
use

• Karina Schoengold
• David Zilberman
• Renan Goetz

2
Population trends and water

• Global world population have grown from
• 1Billion people in 1800 to
• 2.5 Billion in1950 to
• 6 Billion in 2000 to ?
• 11 Billion ? 17 Billion ? 6 Billion in 2100
• With population growth came
• Increase in water use per Capita

3
Heterogeneity and conflict

• Some countries (Canada) are water rich-
• Other (Jordan) are water poor
• -but even Canada has deserts
• Provides opportunity to trade
• Diversity of interest drought prevention vs.
  flood control
• Conflicts about irrigated agriculture
• In dry regions
• Agricultural may use up to 80 of water-
• Environment and urban sector are expanding their
  demand

4
Benefits of irrigation

• Irrigation allowed us to overcome population
  growth
• Irrigated land has increased from 50 mha
  (million hectares) in 1900 to 267 mha today.
• Between 1962 and 1996 the irrigated area in
  developing countries increased at 2 annually.
• The 17 irrigated land is producing 40 of
  global food
• The value of output of irrigated cropland is
  about 625/ha/year (95/ha/year for rain-fed
  cropland and 17.50/ha/year for rangelands).
• The high productivity of agriculture slowed
  expansion of deforestation.

5
Perception water supply crisis

• Water consumption in 2000 is 4-5 times as in 1950
• Most the obvious sources for diversion are
  used
• We will need more water to accommodate more
  people
• There is appreciation for environmental services
  of water

6
More bad news

• The capital costs of water projects have been
  underestimated. A recent study of 81 dams found
  that the average cost overrun was 56
• Environmental cost - lose of habitat
• Increase of water and land salinity
• Soil Salinity reduce productivity of 20 of
  irrigated land 1.5 million hectares of these
  lands are deserted annually
• Water logging Costs 11Billion annually
• Ground water depletion
• 8 of Indias food produced with depleted
  aquifers
• In 1973 3 of India's groundwater pumped below 10
  meters in 1994 46.

7
Social Concerns

• Water born diseases
• kill 4-5 million annually
• Displacement
• 40 80 million people has been displaced
  1950-99.
• International conflicts and water supply.

8
Sustainability and management

• .There is a perception of water supply crisis,but
  we have a water management crisis.
• Improved policies and incentives can address
  water supply and quality concern and lead to
  sustainability
• Sustainability- Environmental quality levels
  and natural resource resource stocks are above
  target levels

9
Causes Solutions of water situation

• Water institution respond to scarcity and
  political economy
• We will argue that changes in conditions requires
  institutional transition
• Economics is crucial in transition design,yet it
  has been under used
• Heterogeneity is essential feature of water
  system and should be integrated in analytical
  framework

10
Factor affecting the emergence of water
Institutions

• Water institutions are affected by
• Water Scarcity
• Government ability to tax and finance projects
• Policy objectives-growth vs. environmental
  quality
• Water abundance
• Financially weak government
• Desire for growth lead to Water rights (prior
  appropriation)
• Water abundance
• Financial resources availability
• Desire for growth lead to Public supply projects
  subsidies

11
The emergence of water Institutions

• Water scarcity leads to water trading
• Financial crunch leads to Privatization of
  supplies
• Environmental concerns lead to Water quality
  regulations Environmental purchasing funds
• Equity concerns leads to regulated
  pricingsubsidies

12
The Tricky Transitions

• Transition from water rights to water market
• Introduction of water quality regulations
• Introduction of new innovations is very
  challenging
• Economists and scientist can recommend but
• Politician have to deliver
• Understanding of policy process can lead to
  effective designs

13
Transitions are not alike

• Timing, History,Transaction cost , Political
  economy and preferences affect transitions
• Transition may be gradual-the transition towards
  water trading in most locations takes years
• Yet Crises trigger transitions
• Depletion of ground water leads to surface water
  projects
• San Fernando valley flood led to building dams
  upstream
• Long Draughts lead to migrations (American
  Indians), storage (Joseph and Pharaoh)
• Systems are rigid - a threshold have to be
  crossed (Dixit Pyndick) to overcome political
  economy constraints (Rausser Zussman) and
  transition costs (Shah Zilberman) to introduce
  change

14
Economics based approach to water management
reformleading to sustainability

• We will present incentives and policies to
  improve
• Water project design
• Water pricing allocation and conveyance
• Micro level choices
• Water quality

15
I.Improved water projects design

• Rely on social benefit cost analysis
• Consider projects with positive expected NPV
  resources should be valued by their societal
  value
• Capital subsides and under-costing the
  environment lead to oversized projects
• Learning is crucial-delay is worth while-invest
  when it is optimal not at first moment when NPV
  is positive
• Project design should include nonstructural
  solutions-bring the economists and biologists to
  the design process
• Consider future costs water logging cost and
  drainage

16
Benefit cost analysis and project design

• Water projects make fortunes and political
  careers-too importance to leave to economics.
  Some yield high returns most do not
• Budgetary constrains led to economic scrutiny in
  U.S.-projects require to pass benefit cost tests
• The application of benefits cost analysis reduced
  the number of new projects and reduced delivery
  of political pork
• Politicians and interest groups are working to
  exempt projects from benefit cost requirement

17
Despite formal requirement to use benefit cost
analysis- projects are not efficient Economics is
not used for projects design Under emphasis on
non structural solution Need more ex post studies
on return from projects.
18
Beyond benefit cost analysis

• Projects assessment should not only decide if to
  build or not but also when to do it,
• Adaptive learning (AL)Allow flexibility to
  resolve uncertainty about preferences or
  technologies-delayed decisions allow learning
• Care is especially important in cases of
  irreversibility
• Projects should be apart of a multi tool
  strategy.
• Incentives(water price) may be used to reduce
  project size or delay its start.
• For unique and new problems-Investment in
  appropriate RD may lead to projects

19
II.Improve water allocation and pricing

• The price of water is elusive
• The actual prices of water (whenever they exist)
  tend to be different from efficient pricing
• Both actual and efficient prices vary depending
  on
• Time (within season and between season)
• Location
• Quality
• Use
• Institutions

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Elements of the economics of water systems

• Benefits (Marginal benefitsdemand)
• Private cost extraction
• Conveyance cost
• Externality cost
• Future value of water inventory

22
MPCMCCMECMFC
P R I C E
MPCMCCMEC
A
MCMCC
B
MPC
M
N(subsidized
Quanitity
Optimal Vs subsidized water - water is over used
and under paid
23
Optimal pricing

• Price
• Marginal extraction cost
• Marginal conveyance cost
• Marginal environmental cost
• Marginal storage cost

24
Implication of optimal pricing in Ag

• Subsidies are not accidental, removal is painful
• Optimal pricing will reduce water use resulting
  in
• Adoption of conservation technologies
• Transfers to cities-lower prices in cities
• Reduction in acreage of low value crops
• More environmental benefits
• Less water projects constriction over time
• More stable systems

25
Pricing under small provider

• Provider ignores environmental costs and dynamic
  pricing-over-supplies
• Need for intervention to prevent over provision
• Extra water tax to account for environment
  storage
• Regulatory limit on amount consumed with tradable
  permits
• Buy back of water for environmental purposes

26
Current failures of water pricing

• Current pricing systems aimed at cost recovery
  not efficiency
• Recovery of operation and maintenance costs
  ranges from a low of 20-30 percent in India and
  Pakistan to a high of close to 75 percent in
  Madagascar
• The most common pricing systems are per-acre
  fees. Subsidies of 50 are common
• System like tiered pricing providing some
  subsidies but relying on social marginal cost
  will lead to optimality

27
Improved Conveyance water allocation

• Poor management of irrigation systems leads to
  conveyance losses of up to 50 percent
• Improved canal and varying price with distance
  will improve efficiency -require new institutions
• Canals are public goods. Private users tend to
  under investment in canal maintenance
• A water utility determines simultaneously optimal
  water pricing and investment in conveyance

28
Spatial impacts of optimal conveyance
Water use basic conveyance
Water use improved conveyance
Distance from source

• Optimal conveyance policy will
• increase utilized acreage and water use in
  agriculture
• Charge downstream farmer higher water prices
  which will lead to conservation
• Empirical simulation find that optimal conveyance
  loss to be negligible

29
Conveyance I
Suppose Marginal productivity of water per acre
is 10-2X Where X is water per acre We have 2
parcels of land locations 1 and 2 Water use at
destination X1 and X2 Initial conveyance lose in
location 2 is 50 pay for 2 units at source for
each unit consumed at 2 Each unit consumed at
location 2 requires 2 units at source D110-2X1
DEMAND LOCATION 1 D215-X21 DEM AND
LOCATION 2 IN TERMS OF WATER AT SOURCE
X212X2 MC OF WATER AT SOURCE .25(X1X21)
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Conveyance II
SX1X21 P IS PRICE AT SOURCE
P10-2S
FINDING AGGREGATE DEMAND FOR P5 S2.5 FOR P0
S7.5 AGRREGATE DEMADN IS P7.5-S .25S
HENCE S6 P1.5
P5-X21
S
PRODUCTION AT LOCATION 1 IS 4 WATER PRICE
1.5 PRODUCION AT LOCATION 2 IS 2WATER PRICE IS 3
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NO CONVEYANCE LOSE
SX1X21 P IS PRICE AT SOURCE AND LOCATION 2
P10-S
AGRREGATE DEMADN IS P10-S .25S HENCE
X1X24 S8 P4 ( 10-2X110-2X2)
S
PRODUCTION AT LOCATION 1 IS 4 WATER PRICE
2 PRODUCION AT LOCATION 4 IS 2 WATER PRICE IS 2
32
COMPARISON

• NO CONVEYANCE LOSS
• P1P22
• Q1Q24

• 50 CONVEYANCE LOSS
• P1 1.5 Q14
• P23 Q22

BETTER CONVEYANCE INCREASES PRODUCTION BENFIT
DOWNSTREAM PRODUCERS DAMAGES UPSTREAM PRODUCERS (
PAY MORE FOR WATER)
33
Water rights systems

• Water is allocated according to water right
  systems that are queuing system based on
  location or seniority
• Prior appropriation allocates water according to
• Use it or loss it
• First in use first in
• Water use permits operate as queuing systems as
  well
• Trading is restricted with other rights systems

34
FROM PRIOR APPROPRIATION TO MARKET
WATER SUPPLY
GAIN FROM TRADING
PRICE AFTER TRADING
TOTAL DEMAND
DEAMND OF INITIAL WATER USERS
35
TRANSITION FROM QUEUING TO MARKETS

• D1 INITIAL DEAMDN 10-X TOTAL WATER SUPPLY 10
  INITIAL SURPLUS 50
• D2 LATER DEMAND 10-.5X
• PRICE IS 5, WHERE 10-.5105
• SURPLUS IS 75
• IN CASE OF TRANSFERABLE RIGHTS
• SENIOT RIGHT OWNERS WILL SELL HALF THEIR WATER
  AND MAKE 25 THEIR SUPLUS 62.5
• JUNIOR RIGHTS WILL HAVE 12.5 IN SURPLUS
• IN CASE FO GOVERNMENT OWNERSHIP
• GOVERNEMENT WILL MAKE 50
• SENIOR AND JUNIOR RIGHTS WELFARE AT 12.5

36
Transition from queuing to market

• Reform A transition to trading where water is
  priced according to opportunity cost
• It require transaction and transition cost
• Gain from trade increase with scarcity
• Trading is desirable when gain gt transaction cost
• Trading lead to conservation of water among
  sellers

37
The gains/loses from trade

• Trading may be introduced in crisis
  situations-requires monitoring, expanded canal
  system
• Trading may be small but critical to adjust to
  shortages
• Trading may have negative third party effect-less
  runoff to environment groundwater replenishment
• Reform allows new entrants to markets-new crop-

• Grapes in Chile
• Golf courses (high value farming)
• Purchases for environmental purposes

38
water trading design issues

• Should permanent sales be allowed? Or should the
  trade be in rights (water rent) rights?
• Who will sell- the state or historical owners?
• What about Export outside the basin?
• Should the sales be of of effective or applied
  water?

Effective water
Applied water
Field
Residue go to Third parties
39
Emerging arrangements

• Transferable rights-annual sales of water is
  easy-permanents sales of rights is facing
  constraints
• annual upper bound on exported volume from a
  region
• Only 70-85 of applied water can be sold-to
  compensate third parties

40
Pricing and information

• Pricing is perfected with volumetric monitoring
• Pricing should change by time and sometimes by
  crop and location to reflect
• conveyance cost
• environmental side effects
• Without volumetric measurement-Per acre fees may
  vary by season / crop.
• Prices should reflect costs of side effects of
  water - use of greener/cleaner application
  technologies should be rewarded

41
Improve ground water management

• India increased pumping by 300 since 1951-86
• Farmers should pay user fee( to reflect future
  scarcity)-
• Fuel for irrigation should not be subsidized.
• Elimination of fuel subsidies and user fee will
  raise ground water pumping-leading to reduced
  acreage and conservation
• Tiered pricing may address equity issues
• Monitoring of pumping is needed-may need
  regional ground water authorities.

42
Conjunctive use of surface and ground water

• Precipitation is random-reliance on rainfall or
  surface water(river flow) lead to instability
• The marginal value of water varies across season-
  high at dry seasons
• Low at wet season
• Gain from storage
• Ground water can serve storage facility
• Water in ground has value that depends on
• Variability of supply
• Stock in ground

43
Reflection-reform will increase ag water
prices Ag can survive with higher pricing- but it
will have to changes- Reform requires Reliable
information-facts not guesses Good
economics Effective administrators Sophisticated
legal understanding Excellent political
skillleadership Patience
44
III.Conservation technologies

• Technologies that increase input use efficiency-
  the input actually consumed by crops
• Input use efficiency-depends on technology and
  specific situation
• The residue of unused input may be a source of
  environmental concern
• Residue Actual input (1 - input use
  efficiency)
• Smaller residue reduces environmental damages

45
Basic model

• YabE-cE2 E effective water
• EqiX qiirrigation effectiveness technology i
• Profit(i)Max p (ab qiX -c qiX qiX) -wX-Ki
• Ki-fixed cost technology i
• Xi(p b qi-w)/p c qi2
• Adoption occur at lower q if 0 ltq lt1

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Example-irrigation(hypothetical/ California)

• Increase yield, reduce water reduce drainage,
  costs more
• Low cost version (bucket drip, bamboo drip)
  exists
• Impact greater/adoption higher on lower quality
  lands-sandy soils steep hills

technology Irrigation efficiency Water/ drainage Yield (cotton) Fixed cost/yr
traditional .6 4.0/1.6 1200 500
sprinkler .8 3.2/.64 1325 580
drip .9 2.7/.27 1400 650
Labor intensive conservation technologies
available to Poor farmers. More needed to be
invented
48
Policies to introduce conservation technologies

• Real pricing accounting for environmental cost
• Technology subsidies
• Effective extension

49
Common Theme Research and learning

• We operate with much ignorance- need to learn and
  adapt
• Water policy requires constant leaning of both
  natural phenomena and human learning
• With GIS and new information tools we can improve
  policy design
• Crucial - is policy maker education and
  interdisciplinary dialogue

50
Specifics cases
Economics principle for policy reform are
valuable, but their application is subject to
objections

• Case studies may illuminate factor affecting
  water policy reform

51
Lessons of California Response to 1988-92 Draught

• Water storage matters. The storage facilities
  enabled California to survive the 3 early years
  of the drought with minimal impacts or changes,
  and the later years with mild effects.
• Multiple Responses to Reduced Water Supply.
• 1/3 from ground water pumping,
• 1/3 from conservation (adoption of drip etc),
• 1/3 from land fallow.

52
More lessons

• Conservation makes a difference.. After 1992,
• more than 50 of tree crops in the state used
  drip,
• sprinkler in cotton and alfalfa exceeded 40 in
  major areas.
• Trading was introduced through water bank

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California Water Trading institutions

• The water bank-bought water in north sold it in
  south
• Sustains perennial crops -allows their expansion
• provides water rights owners higher incomes.
• The operation of the bank is optional
• only during draught years.
• Options sold annually

54
Cal water institutions

• The electronic water Market in the central valley
• Electronic matchmaking of buyers and sellers
• Districts facilitates trades-gradually installs
  volumetric pressurized system
• Disclosure of prices is optional
• Purchasing fund for environmental water
• The value of water to fluctuate, may vary from
  5 to 200 / AF.

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VI. Incentive for water environmental quality

• Introduce fee for quality-when measurable
• Polluter pay principle -make pollution control
  worth while
• Zero pollution is frequently sub optimal-use
  tradable permits in emission-to reach target
• Information is crucial-effective policy requires
  monitoring and valuation of environment
• When actual emission is unobservable-tax
  according to activities.Organic pay less than
  chemical farming
• Minimize use of direct control-allow flexibility
• Use carrot - payments for environmental services

56
Categories of Environmental Services (ES)

• Pollution Prevention. Farmers may be paid to
  modify environmental damaging activities and
  engage in sustainable practices(farmers may have
  implicit historical rights to pollute that have
  to be bought).
• Conservation. of natural resources, life styles,
  ecosystems etc. Including forest resources and
  wetland, agricultural communities ( slow urban
  sprawl), traditional varieties and species, etc.
• Amenity creation-restoration and built up of
  natural resources Include clean up activities,
  planting of forests, restoration of wetlands etc.

57
The dimensions of wetland services
Local National International
Wildlife habitat Public Private Public Public
Flood control Public Private Public Private Public Private
Water purification Private Public Public Private
Aesthetic value Public Private Public Public
Recreation Private Private Private
Existence Public Public Public
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Mechanism to obtain ES

• Aggregate targets of ES with Tradable permits
• No reduction target led to wetlands banking in
  U.S.
• Kyoto targets may be attained by CO2
  Sequestration
• Purchasing Funds-raise public private funds to
  target buy assets or pay for ES
• Nature conservancy buys lands development right
• USCRP pays for farmland use modification for a
  period
• Utilities pay for carbon sequestration in Costa
  Rica Iowa
• Incentives-payments for ES, penalties for damages
• Direct controls
• Zoning restricting land use to certain
  activities
• Permittingconditional approval of development
  activities

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Institutional setup to create ES

• Private parties may invest in excludable amenity
  creating ES (habitat to birds or fish,recreation
  area)
• NGOs may finance and control specialized ES
• National Local governments may
• Pay directly for or subsidize private provision
  of amenity creating ES
• Establish legal framework to require generation
  of resource conserving or pollution preventing
  ES
• Global ES may be generated controlled by
• International agreements (Kyoto, Debt for nature)
• Voluntary agreements initiated by NGOs

60
Take home messages

• Use Benefit cost to establish project
• Take the option to wait and learn
• Make the price right
• It must not be uniform
• Allow trading
• Trading appropriate when gain gttransaction cost
• Polluter should pay-when feasible
• Beneficiates pay for environmental services
• Consistent Risk management-same value of life
  saved

61
Conclusions I

• Water resources management reform can increase
  economic and environmental benefits
• Irrigation crucial to food production-some
  systems are not sustainable because of over
  pumping
• There is much potential to increase water
  productivity through incentives
• A priority is to increase trading within regions
  and to improve maintenance-through institutional
  changes
• Irrigation technologies and improvement in
  varieties are another sources of improved water
  productivity in agriculture.

62
Conclusions II

• Water development needs will be determined by
  population growth
• Development proposals should be scrutinized by
  social-cost benefit tests
• Pollution pays will be used to reduce pollution
• Consumer pays should be used to control)
• Public pay for conservation and public good
  activities
• Monitoring and knowledge make policy effective
• Political will is crucial to utilize new
  knowledge

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About sustainability
64
THE PROBLEM

• LARGE SCALE POVERTY IN MANY DEVELOPING COUNTRY
• NEED TO UPGRADE AND IMPROVE STANDARD OF LIVING OF
  BILLIONS
• GROWING ENVIORONEMNTAL CONCERNS
• CLIMATE CHANGE
• LOSE OF BIODIVERSITY
• DEPLTED FISHERIES
• DEGRADED WATER REOURCES

65
Perceived Causes of environmental crisis

• POPULATION GROWTH- IT IS A CAUSE BUT ALSO A BY
  PRODUCT OF HUMAN SUCCESS IN CONTAINING DISEASE
  AND FEEDING OURSELVES
• OVER CONSUMPTION
• TECHNOLOGY AND MODERN SCIENCE
• REGULATION

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Basic point

• technology and science can serve for better or
  worse- it is the role of incentives policies and
  institutions to steer science and society to a
  greener future
• we have progressed- but we need to make the extra
  step to take advantage of our capacity

67
Sustainability climate change

• Need conservation adaptation
• Sustainability requires peace-
• people who are threatened and starved do not
  preserve -pay for preservation
• Sustainability requires global solutions
• We need creative incentives and take advantage of
  technology
• Sustainable water management is part of a
  sustainable future