EEP101_22 - Heterogeneity, incentives and sustainable water...

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Unformatted text preview: Heterogeneity, incentives and sustainable water use Karina Schoengold David Zilberman Renan Goetz 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 Heterogeneity and conflict Some countries (Canada) are water richOther (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 waterEnvironment and urban sector are expanding their demand 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. 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 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 India's food produced with depleted aquifers In 1973 3% of India's groundwater pumped below 10 meters in 1994 46%. More bad news Social Concerns Water born diseases kill 4-5 million annually 40 80 million people has been displaced 1950-99. Displacement International conflicts and water supply. 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 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 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 appropriation) rights (prior Water abundance + Financial resources availability+ Desire for growth lead to Public supply projects The emergence of water Institutions Water scarcity leads to water trading Privatization of supplies Environmental concerns lead to Water quality regulations + Environmental purchasing funds Equity concerns leads to regulated pricing+subsidies Financial crunch leads to 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 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 (Dixi Pyndick) to overcome political economy constraints (Rausser Zussman) and transition costs (Shah &Zilberman) to introduce change Economics based approach to water management reform leading to sustainability We will present incentives and policies to improve: Water project design Water pricing allocation and conveyance Micro level choices Water quality 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 solutionsbring the economists and biologists to the design process Consider future costs water logging cost and drainage 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 QuickTimef and a TIFF (Uncompressed) decompressor are needed to see this picture. 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. 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. 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 II. Environment 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 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 = + + + Price= Marginal extraction cost+ Marginal conveyance cost+ Marginal environmental cost+ Marginal storage cost 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 Pricing under small provider 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 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 peracre fees. Subsidies of +50% are common System like tiered pricing providing some subsidies but relying on social marginal cost will lead to optimality 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 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 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 D1=10-2X1 DEMAND LOCATION 1 D21=5-X21 DEM AND LOCATION 2 IN TERMS OF WATER AT SOURCE X21=2X2 MC OF WATER AT SOURCE =.25(X1+X21) Conveyance II S=X1+X21 P IS PRICE AT SOURCE P=10-2S FINDING AGGREGATE DEMAND FOR P=5 S=2.5 FOR P=0 S=7.5 AGRREGATE DEMADN IS P=7.5-S =.25*S HENCE S=6 P=1.5 S PRODUCTION AT LOCATION 1 IS 4 WATER PRICE 1.5 PRODUCION AT LOCATION 2 IS 2WATER PRICE IS 3 P=5-X21 NO CONVEYANCE LOSE S=X1+X21 P IS PRICE AT SOURCE AND LOCATION 2 P=10-S AGRREGATE DEMADN IS P=10-S =.25*S HENCE X1=X2=4 S=8 P=4 ( 10-2X1=10-2X2) S PRODUCTION AT LOCATION 1 IS 4 WATER PRICE 2 PRODUCION AT LOCATION 4 IS 2 WATER PRICE IS 2 COMPARISON 50% CONVEYANCE LOSS P1= 1.5 Q1=4 P2=3 Q2=2 NO CONVEYANCE LOSS P1=P2=2 Q1=Q2=4 BETTER CONVEYANCE INCREASES PRODUCTION BENFIT DOWNSTREAM PRODUCERS DAMAGES UPSTREAM PRODUCERS ( PAY MORE FOR WATER) 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 FROM PRIOR APPROPRIATION TO MARKET WATER SUPPLY PRICE AFTER TRADING DEAMND OF INITIAL WATER USERS GAIN FROM TRADING TOTAL DEMAND 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-.5*10=5 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 Reform :A transition to trading where water is Transition from queuing to market priced according to opportunity cost It require transaction and transition cost Gain from trade increase with scarcity Trading is desirable when gain > transaction cost Trading lead to conservation of water among sellers 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- QuickTimer and a QuickTimek and a Grapes in Chile decompressor TIFF (Uncompressed) TIFF (Uncompressed) decompres are needed to see this picture. are needed to Golf courses (high value farming)see this picture. Purchases for environmental purposes 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? Applied water Effective water Field Residue go to Third parties 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 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 Improve ground water management India increased pumping by 300% since 195186 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. 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 Reflection-reform will increase ag water prices Ag can survive with higher pricingbut it will have to changesReform requires Reliable information-facts not guesses Good economics Effective administrators Sophisticated legal understanding Excellent political skill&leadership Patience 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 Basic model Y=a+bE-cE2 E=qiX E =effective water qi=irrigation effectiveness technology i Profit(i)=Max p (a+b 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 <q <1 b c 6.25 1 p 100 w 100 k 50 profit0 451.56 483.59 512.09 525.17 543.52 560.47 581.15 604.34 625.00 643.52 660.20 672.41 675.32 profit1 475.17 499.32 521.07 531.15 540.76 554.34 571.05 586.35 600.40 613.35 625.32 633.72 639.06 q0 q1 x0 x1 y0 y1 0.50 0.60 4.25 3.82 8.77 9.07 0.54 0.64 4.07 3.66 8.91 9.16 0.58 0.68 3.90 3.51 9.02 9.22 0.60 0.70 3.82 3.44 9.07 9.26 0.63 0.72 3.70 3.38 9.14 9.28 0.66 0.75 3.59 3.28 9.19 9.32 0.70 0.79 3.44 3.15 9.26 9.37 0.75 0.83 3.28 3.04 9.32 9.40 0.80 0.87 3.13 2.93 9.38 9.44 0.85 0.91 2.98 2.83 9.42 9.46 0.90 0.95 2.85 2.74 9.46 9.49 0.94 0.98 2.76 2.67 9.48 9.51 0.95 1.00 2.74 2.63 9.49 9.52 techn ology 1.00 1.00 1.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 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 traditional sprinkler drip Irrigation efficiency Water/ drainage Yield (cotton) Fixed cost/yr 500 580 650 .6 .8 .9 4.0/1.6 3.2/.64 2.7/.27 1200 1325 1400 Labor intensive conservation technologies available to Poor farmers. More needed to be invented Policies to introduce conservation technologies QuickTimee and a TIFF (Uncompressed) decompressor are needed to see this picture. Real pricing accounting for environmental cost Technology subsidies Effective extension 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 Specifics cases Economics principle for policy reform are valuable, but their application is subject to objections QuickTimet and a TIFF (Uncompressed) decompressor are needed to see this picture. Case studies may illuminate factor affecting water policy 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. 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 California Water Trading institutions The water bankbought 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 Cal water institutions The electronic water Market in the central valley "Electronic matchmaking" of buyers and sellers Districts facilitates tradesgradually 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. 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 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. The dimensions of wetland services Local National Public Public Private Public Private Public Private Public Wildlife habitat Flood control Water purification Aesthetic value Recreation Existence Public Private Public Private Private Public International Public Public Private Public Private Private Public Public Private Public 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 Permitting:conditional approval of development activities Institutional setup to create ES Private parties may invest in excludable amenity creating ES (habitat to birds or fish,recreation area) NGO's 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 NGO's Take home messages Use Benefit cost to establish project Take the option to wait and learn It must not be uniform Trading appropriate when gain >transaction cost Make the price right Allow trading Polluter should pay-when feasible Beneficiates pay for environmental services Consistent Risk management-same value of life saved 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. Conclusions II Water development needs will 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 be determined by About sustainability 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 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 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 Need conservation & adaptation Sustainability requires peacepeople 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 Sustainability &climate change ...
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This document was uploaded on 02/04/2011.

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