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Eep101-23water - EEP 101/ECON 125 EEP Water Karina...

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Unformatted text preview: EEP 101/ECON 125 EEP Water Karina Schoengold Karina David Zilberman David Renan Goetz Population trends and water Population 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 Increase Dimensions of water Dimensions Source -surface vs. ground Strategic decision Supply expansion Demand management Quality control Allocation system -queuing vs. markets Consumptive Use Non consumptive use Environmental Hydro Recreational Agricultural-major use Industrial Municipal Dimesion of heterogeneity Dimesion Many Do Not Have Access to Water Many Region Percent of total population without access to water without in 1994 in Absolute number of people without without access to water to (in millions) 381 Africa Africa Latin America and the Caribbean Asia & the Pacific Asia Western Asia Western Total 20 54 20 97 627 12 26 10 1,115 California Leading Crops Heterogeneity of value Commodity 1988 Value ($000) Harvested Acreage (000 acres) Share of US Production (percent) Water Application Rate (AF per acre) Value from Water Applied ($ per AF) Rice Hay, alfalfa, other Beans, dry Cotton Sugar beets Wheat Walnuts Prunes, dried Almonds, shelled Processing tomatoes Grapes, all Oranges, all Potatoes Pistachios Broccoli Avocados Peaches, all Cauliflower Lemons Lettuce Fresh tomatoes Carrots Apples Strawberries TOTAL 197,583 817,614 104,473 1,026,633 178,080 164,860 190,962 113,925 600,075 385,669 1,356,250 458,446 143,673 104,340 265,954 205,200 177,880 161,514 171,436 632,424 264,075 247,366 117,750 388,998 9,457,649 420 1,680 150 1,337 212 519 174 77 407 226 654 172 47 44 101 75 54 48 49 160 38 51 23 18 7,745 18.5 6.8 15.0 18.3 21.4 2.4 100.0 100.0 99.9 88.4 91.6 26.0 4.8 100.0 90.9 86.1 58.7 79.2 82.3 73.0 25.0 65.1 6.9 73.9 7.8 4.8 3.5 3.4 3.6 1.2 2.8 3.2 3.0 3.2 3.3 3.2 3.6 2.8 2.8 2.8 3.2 2.8 2.8 2.6 4.0 2.6 2.5 2.9 60 102 199 229 235 263 396 462 493 534 636 843 851 853 940 980 1,023 1,202 1,252 1,517 1,761 1,874 2,048 7,621 20% of water produces 80% of value 120% 100% 80% 60% 40% 45¡ line 20% 0% 0% 20% Cumulative Value 40% 60% 80% 100% 120% Cumulative Water Use Comparison of Performance of Alternative Irrigation Technologies Technology Long furrow Short furrow Sprinkler Drip Irrigation efficiency 0.6 0.7 0.8 0.95 Fixed cost 500 517 548 633 Capital Costs of Irrigation Projects Vary Significantly Vary Heterogeneity and conflict Heterogeneity Some countries (Canada) are water richOther (Jordan) are water poor -but even Canada has deserts -but Diversity Provides opportunity to trade Diversity Diversity of interest- drought prevention vs. flood control Conflicts about irrigated agriculture In dry regions Agricultural may use up to 80% of In waterwater Environment and urban sector are expanding their Environment demand demand Benefits of irrigation Benefits Irrigation allowed us to overcome population Irrigation growth growth Irrigated land has increased from 50 mha (million Irrigated hectares) in 1900 to 267 mha today. Between 1962 and 1996 the irrigated area in developing countries increased at 2% annually. developing The 17% irrigated land is producing 40% of global The food food The value of output of irrigated cropland is about The $625/ha/year ($95/ha/year for rain-fed cropland and $17.50/ha/year for rangelands). $17.50/ha/year The high productivity of agriculture slowed The expansion of deforestation. expansion Perception water supply crisis crisis Water consumption in 2000 is 4-5 times Water as in 1950 as Most the “obvious” sources for Most diversion are used diversion We will need more water to We accommodate more people accommodate There is appreciation for environmental There services of water services The capital costs of water projects have been underestimated. A recent study of 81 dams found that the average cost overrun was 56% the Environmental cost - lose of habitat Increase of water and land salinity More bad news More Soil Salinity reduce productivity of 20% of Soil irrigated land 1.5 million hectares of these lands are deserted annually lands Water logging Costs 11Billion annually Ground water depletion Ground 8% of India’s food produced with depleted aquifers aquifers In 1973 3% of India's groundwater pumped below 10 In Social Concerns Concerns Water born diseases kill 4-5 million annually 40 – 80 million people has been displaced 1950-99. 40 Displacement International conflicts and water supply. International Sustainability and management management .There is a perception of water supply crisis,but .There we have a water management crisis. managemen Improved policies and incentives can address Improved policies water supply and quality concern and lead to sustainability sustainability Sustainability- Environmental quality levels and natural resource resource stocks are above target levels Causes & Solutions of water situation water Water institution respond to scarcity and Water political economy political We will argue that changes in conditions We requires institutional transition requires Economics is crucial in transition design,yet it Economics has been under used has Heterogeneity is essential feature of water Heterogeneity system and should be integrated in analytical framework framework Factor affecting the emergence of water Institutions of Water institutions are affected by Water Scarcity Government ability to tax and finance projects Policy objectives-growth vs. environmental quality Policy Water abundance + Financially weak government+ Desire for growth lead to Water Desire Water appropriation) appropriation rights (prior prior Water abundance + Financial resources availability+ Desire for growth lead to Public supply projects The emergence of water Institutions II Institutions Water scarcity Water leads to leads water trading water Privatization of supplies Environmental concerns lead to Water quality regulations + Environmental purchasing funds funds Equity concerns leads to regulated leads pricing+subsidies pricing+subsidies Financial crunch leads to leads The Tricky Transitions The Biggest challenge to economists to understand Biggest and design transitions and Introduce trading Environmental quality regulations Change water project design and finance Change mechanisms mechanisms Population and income growth-leading to scarcity Changing attitude about the environment Changes in governance and government finance New institutions (world bank) Causes of transitions Transitions are not alike Transitions Timing, History,Transaction cost , Political economy and preferences affect transitions Transition may be gradual-the transition towards water Transition 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 (Dixi Pyndick) to overcome political economy constraints Pyndick) (Rausser Zussman) and transition costs (Shah &Zilberman) to introduce change &Zilberman) Economics based approach to water management reform water We will present incentives and policies to We improve: improve: Water project design Water Water pricing allocation and conveyance Micro level choices Water quality I.Improved water projects design Rely on social benefit cost analysis Rely 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 oversized Learning is crucial-delay is worth while-invest when it is Learning -delay optimal not at first moment when NPV is positive optimal Project design should include nonstructural solutionsbring the economists and biologists to the design process Consider future costs water logging cost and drainage Benefit cost analysis and project design and Water projects make fortunes and political careers-”too Water importance to leave to economics”. Some yield high returns importance Budgetary constrains led to economic scrutiny in U.S.Principle&Guidelines constrained new construction P&G has problems P&G Economics used to select among projects not for design Under emphasis on non structural solutions Contingent valuation used only for benefits assessment Environmental projects are frequently exempted from P&G, as Environmental quantification of benefit is hard, leading to over investment. Cost per unit of amenity should be used to gauge value. Cost Need more ex post studies on return from projects. Need Beyond benefit cost analysis Beyond Projects assessment should not only decide to build or Projects (if B>C) but also when to do it, MAX B(t)-C(t). to Adaptive learning (AL):Allow flexibility to resolve Adaptive uncertainty about preferences or technologies uncertainty Arrow Fisher-AL& irreversibility leads to delay of Arrow irreversibility development Increasing return to scale &costly reversibility may lead to over-development and restoration Incentives(water price) may be used to reduce project size Incentives(water or delay its start. For unique and new problems-Investment in appropriate R&D may lead to smaller investment in project R&D Projects should be apart of a multi tool strategy. Projects Trade,desalinization and water projects water Chronically low food prices reflect tendency to Chronically agricultural oversupplyagricultural Real food prices should be used in Real evaluation Water use choices should consider gains from trade and “relative advantage” from Desalinization and reuse of reclaimed projects Desalinization can expand supply-and reduce value of new development development II.Improve water allocation and pricing and The price of water is elusive The actual prices of water (whenever they The exist) tend to be different from efficient pricing exist) Both actual and efficient prices vary depending Both on on Time (within season and between season) Location Quality Use Institutions Regional Allocation issues Regional Water pricing Fixed cost considerations Allocation over space Water right and trading Ground water pricing Conjunctive use of surface and ground water II. Envir onment Supplier 2 Supplier 1 Conveyance Supplier 3 Water Market I. Buyers Figure 1 presents a stylized water trading system. Elements of the economics of water systems of Benefits (Marginal benefits=demand) Private cost extraction Conveyance cost Externality cost Future value of water inventory P R I C E MPC+MCC+MEC +MFC MPC+MCC+MEC A MC+MCC B M MPC N(subsidized} Quanitity Optimal Vs subsidized water - water is over used and under paid Optimal pricing P = MPC + MCC + MEC + MFC Price= Price= Marginal extraction cost+ Marginal conveyance cost+ Marginal environmental cost+ Marginal storage cost Implication of optimal pricing in Ag pricing Subsidies are not accidental, removal is Subsidies painful painful Optimal pricing will reduce water use resulting in: Adoption of conservation technologies Transition 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 Pricing under small provider Pricing Provider ignores environmental costs and dynamic pricing-oversupplies 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 P = MPC + MCC The fixed cost challenge The When marginal cost of water are increasing When significantly the can cover fixed cost- and are efficient and workable efficient Price Profits Marginal cost Water Unfortunately marginal costs are low and Unfortunately marginal cost pricing can not cover fixed costs marginal Current failures of water systems Current Current pricing systems aimed at cost recovery Current not efficiency not Recovery of operation and maintenance costs Recovery ranges from a low of 20-30 percent in India and Pakistan to a high of close to 75 percent in Madagascar Madagascar The most common pricing systems are peracre fees. Subsidies of +50% are common acre Combinations aimed for efficiency and solvency efficiency Per acre cost + marginal costs Hook up cost +marginal costs (in municipalities) Per acre fee + tiered pricing (Deals with equity) The more applications of water are “allowed The “(the more trading is permitted): the more efficient the system is and the higher is the likelihood of solvency under marginal cost pricing marginal Ignoring distance: Uniform pricing Rent with price adjusted for conveyance lose Under use loss Rent with uniform pricing Over use loss Distance from source Uniform pricing leads to inefficiency-over use of water and over production of low value crop when water is expensive Basics of conveyance Water is allocated over space. Let βε α λοα χ τιον ινδχατορανδ ιτ ασσ εσ ι , υµ ι ϖα εσ φροµ 0 το Ι . Τ ηε λ τιον ο ισ τη σ υρχε οφτηε ωατερ. Ασ ωατερ ισ µοϖινγ σ µ ε λυ οχα εο ο αρελ τ ανδ τηε ιρρ γατιον λ ατ λ τιον οσ ι οσσ οχα χον ϖεψα χε ν ΧΙ ι ι ισ α φυν χτιον οφ ινϖε τµ εντ ιν σ .Τ ηε λ σ φ χτιον ισ ο σ υν λ ( ΧΙ ι ) . ι Τ ηε τοτα ωατε ρεαχ ιν γ λ τιον λ ρ η οχα Ζ ι ισ Ζ ι ανδ ιτ εθυατιον οφ µ οτιον ισ σ = Ζ ι − 1 (1 − λ ( ΧΙ ι )) − Ξ ι ωηερ ε Ξ ι ισ τη αµουντ οφω α ερ ε αχεδ ατ λοχτιον . ε τ ξτρ τ α ι ι Γ ι Α υνιτ οφωατερ εξτρ τεδ ατ λοχτιον οριγιν τεδ ιν αχ α α ρ φλχτινγ α τρ νσ εε α ιτιονφροµγροσ το ν τ. σ ε υνιτσ οφ ατ ρ ω ε, Ρι = (1 − λ(ΧΙ1 )(1 − λ (ΧΙ2 )(1 − λ (ΧΙ3 ).........(1 − λ(ΧΙι ) ισ τηε φραχτιον οφ ονε υνιτ 1 2 3 ι ωατερ ρελεασεδ ατ τηε σουρχε αρριϖινγ ατι λοχατιον . Γ ι = 1 / Ρι Π 0 Π. ι = τηε πριχε οφ ονε υνιτ οφ ωατερ ατ τηε σου ρχε = τηε πριχε οφ ονε υνιτ οφ ωατερ ατ λοχατιον ι ς = τηε πριχε οφ ωηεελινγ ονε υνιτ οφ ωατερ ονε υνιτ οφ δισ Τηε οπτιµαλ πριχε ιφ ωατερ ατ λοχατιον ρεφλεχτ τηε χονϖεψ ι µυστ σσεσ ανδ ωηεελινγ χοστ, ΠΓ ι + ς Π= 0 ι ∑1Γ ϕ−1 Ρ ϕ ϕ = ι Τηε οπτιµαλ βεηαϖιορ ισ οβταινεδ βψ µαξιµιζατιον οφ χονσ νδ προδυχερ συρπλυσεσ, γιϖεν τηε ωατερ φλοω εθυατιον.. ηεν ∆ −1 (Ξι ) ισ ινϖερσε δεµανδ ατ λοχατιον πριχε εθυατιον ιµπλιεσ ι ,τηε ωατερ αλλοχατιον οϖερ σπαχει) = ∆ ( Ξ0 )Γ ι + ς ∆ (Ξ −1 −1 ∑ Γ ϕ−1Ρ ϕ ϕ1 = ι Improved Conveyance & water allocation Improved Poor management of irrigation systems leads Poor to conveyance losses of up to 50 percent to One avenue to improve efficiency of water is One through improved canals but that may requires institutional reform institutional Canals are public goods. Private users tend to Canals under investment in canal maintenance under A water utility determines simultaneously water optimal water pricing and investment in conveyance conveyance Canals as public goods Canals Individuals close to the source who receive their Individuals water with basic conveyance has no incentive to improve canals improve Downstream users with insufficient water depend on Downstream conveyance activities of upstream users Individual will invest in improved conveyance as long Individual as the marginal benefits to their operations exceeds the marginal cost- they ignore producers down the line the Result - water use is inefficient shorter canals than optimal over-application of water upstream over-application Improve conveyance improve the well being of downstream Improve farmers who tend to be poorer farmers Optimal allocation in conveyance Optimal The socially optimal allocation will allocate resources The at a given location to the point where marginal cost of improved conveyance is equal to the marginal benefit improved of improved conveyance at the specific location and of the rest of the canal the MC (conveyance at i) =MB at I +sum of MB down the MC line line Establishing optimal allocation requires collective Establishing action. -a water user association invests in conveyance to maximize net social benefit of water use of Spatial impacts of optimal conveyance Spatial 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 Water rights systems Water Water is allocated according to water right systems Water that are queuing system based on location or seniority seniority Prior appropriation allocates water according to Use it or loss it First in use first in First Water use permits operate as queuing systems Water as well as Trading is restricted with other rights systems Reform :A transition to trading where water is Reform Transition from queuing to market market priced according to opportunity cost It require transaction and transition cost Gain from trade increase with scarcity Gain Trading is desirable when gain > transaction Trading cost cost Trading lead to conservation of water among Trading sellers sellers The gains/loses from trade The Trading may be introduced in crisis situations-requires Trading monitoring, expanded canal system monitoring, Trading may be small but critical to adjust to shortages Trading Trading may have negative third party effect-less Trading runoff to environment & groundwater replenishment runoff Reform allows new entrants to markets-new crop Grapes in Chile Golf courses (high value farming) Purchases for environmental purposes water trading design issues water Should permanent sales be allowed? Or should the Should trade be in rights (water rent) rights? trade Who will sell- the state or historical owners? What about Export outside the basin? Should the sales be of of effective or applied water? Applied water Effective water Field Residue go to Third parties Emerging arrangements Emerging Transferable rights-annual sales of water is -annual easy-permanents sales of rights is facing constraints constraints annual upper bound on exported volume annual from a region from Only 70-85% of applied water can be sold-to Only compensate third parties compensate Other trading design considerations considerations Compensation to third party Options to buy/sell-to allow the use of water Options in drought. in Frequency of delivery-having water when Frequency needed needed Exchange among right owners/ Sale Exchange by government by Active vs. passive trading vs. tiered pricing vs. Active trading-exchange between buyers with -exchange a coordinating clearing house Passive trading -all parties sell or buy from districts districts Tiered pricing- a minimum amount is sold at minimum low price-above it marginal cost pricing (one version) version) Tiered pricing is good for municipalities Passive trading fits for trade within districts Active market is good for trade between Active districts Markets and conservation Markets Transition to markets will lead to conservation if Transition farmers will have the incentive to adopt conservation and save water that will be sold conservation Conservation occurs if Value of water saved + change in yield> cost of conservation Sometimes markets will reduce conservationSometimes reduce as they will provide new source of water as making conservation expensive making Pricing and information Pricing Pricing is perfected with volumetric monitoring Pricing should change by time and sometimes Pricing by crop and location to reflect by conveyance cost environmental side effects Without volumetric measurement-Per acre fees Without may vary by season / crop. may Prices should reflect costs of side effects of Prices water - use of greener/cleaner application technologies should be rewarded technologies Improve ground water management management India increased pumping by 300% since 1951India 86 Farmers should pay user fee( to reflect future Farmers user to scarcity)sc...
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