Transcript Document

Environmental Economics
The Agrofood Chain, Unit S2M18
Alban THOMAS
[email protected]
1
Course outline
3 – Resource use and pollution, key instruments for public policy
3.1 – Natural resources as production inputs or « not-so-basic »
commodities
3.2 – Valuating amenities from natural resources and the
environment
3.3 – A typology of pollutions and environmental damages
4 – Environmental and economic policies – Applications to agriculture and
agrofood chain
4.1 – The need for regulating pollution and water use
4.2 – Welfare and abatement cost, a production-side approach
4.3 – Evaluating and regulating agrofood industrial emissions
4.4 – Regulating irrigation and emissions from agriculture
2
3 – Resource use and pollution, key instruments for public policy
Purpose:
The link between human activity and the environment
Definition of environmental values
Typology of environmental damages
Introduction to Cost-Benefit Analysis (CBA)
Which policy instruments for which damages ?
Keywords:
Point and Nonpoint source pollution
Environmental valuation
Cost-Benefit Analysis
Pigovian tax
3
3.1 – Natural resources as production inputs or
« not-so-basic » commodities
«Anthropic » (man-oriented) vision : natural resources are used for
production and consumption activities
 The environment is considered a « service supplier » or a « good supplier »
 Environmental damage is defined as a lack of services from the
environment
First step: define environmental goods and services supplied to
producers, consumers,…
4
Environmental goods and services can either be
Directly supplied (depend on location):
- air quality
- landscape beauty
Note. Lack of such services are unavoidable damages:
- acid rain, contaminated soils
Supplied through production activities:
- productive eco-systems: agriculture, fishery
- production inputs: agro-food industry, tourism
Supplied through consumption activities:
- food quality
- recreational activities (natural parks, etc.)
5
Value types of environmental services:
A/ Use values (related to economic activities, incurred damages)
- direct use (consumption of a natural resource)
- indirect use (environmental service, e.g., recreative fishing)
B/ Nonuse values (passive values)
- are not used but would be considered a loss if they disappeared
- existence value (Bengali tiger)
- legacy value (legacy to future generations)
C/ Option value
- for future use (consumer himself or future generations)
- may be purely hypothetical (a new drug discovery from
a remote environment)
6
TOTAL ECONOMIC VALUE (TEV)
Use values
Direct
values
(goods)
Forestry firm,
Agriculture,
Fishery
…
Indirect
values
(services)
Recreational
activities, soil
stabilisation…
Non-use values
Option
values
Value that may
appear ultimately
(pharmaceutical
use,…)
Existence
value
Knowing that
the Pyrénées
Brown Bear
will survival
(while never
seeing him)
Legacy
value
Knowing that
«something»
will remain
available for
future
generations
7
3.1.1 Value of environmental goods for production activities
Producer: maximise profit under several constraints
- economic constraints (input and output prices)
- technical constraints (technology)
- environmental constraints (state of the environment)
Principle of valuation:
Environmental constraint is a constraint like others
 differences in environmental conditions indicate differences in profit
 value of an environmental good:
measured by its effect on firm’s profit
8
Example : agrofood production unit involving
water input, own private well (W)
quality requirements for W
other inputs (X): assumed fixed
Quality of water input W is random
Assume bad quality of W occurs with some positive probability π
Possible substitute for W: Z, with non-random quality
9
Profit   p  Q W ( )  rWW ( )
if   
(1   )
 p  Q( Z )  rZ Z
if   
( )
Output price
Technology
Quality requirement
Input prices
Expected profit: E     p  Q( Z )  rZ Z

 (1   ) p  Q W ( )  rWW ( ) 
Value of environmental condition: change in expected profit / change in proba.
dE 
 p  Q  Z   Q W ( )   rZ Z  rWW 
d
10
General framework:
Technology F ( X , Z ) , where X : vector of production inputs
Z : vector of environmental variables
Comparative statics
d    dX



0 
dZ
Z X dZ
dX
 

/
dZ
Z X
Important: a change in environmental conditions (quality of inputs, …)
is affecting production conditions
 Change in production cost
 Change in output supply / output price ? Depending on market structure
11
For production activities, the value of environmental services can be
inferred from (observed) production behaviour
Changes in expenditure (production cost) are due to the need to substitute
other inputs for changes in environmental conditions (quality)
Hence, even if changes in environmental conditions are unobserved, the
indirect value of environmental quality can be inferred because
firm output is marketed
Examples:
- agricultural crop losses from ozone
- change in production practices due to global warming
12
Initial state ( X 0 , Z0 ), final state
( X 1, Z1 )
Define profit i  p  Qi  TC (Qi ) i  0,1
where Qi  Q( X i , Zi ) and TC : Total Cost
AC (Q )  TC (Q ) / Q
TC (Q )
Marginal cost : MC (Q ) 
Q
Average cost :
max ( X , Z , p)  X *  X ( Z , p)
X
and Q*  Q  X * , Z   Q  Z , p

 *  ( X * , Z , p)
Assume perfectly competitive market: firms are price takers
13
Euros
MC
AC
p
AC q( p)
Total profit (p > AC)
Operational Profit (p > MC)
q( p )
Average and marginal production costs
Q
14
Euros
MC( Z0 )
MC( Z1 )
AC( Z 0 )
p
AC( Z1 )
AC (Q0 , p)
Initial surplus
AC(Q1, p)
Change in surplus
Q( Z 0 , p )
Impact of a change in Z
Q( Z1, p)
Q
15
3.1.2. Application: biodiversity, a useful input
Broadly defined as total variability of life on earth
Important for future industrial use (medicine, agrofood industry, etc.)
But:
- All species are not equally valued
- A species is more valued when it is less substitutable
- It is easier to promote conservation of a species if its expected value
is higher
How to build a decision rule for selecting species to conserve ?
16
Weitzman (1998): Consider the problem of ranking N programmes
Each programme i, i=1, 2, …, N, is devoted to conservation of species i
Let
U i : utility for society of preserving i ;
Di : diversity measure (distance with respect to other species) ;
Ci : programme cost ;
Pi : survival probability change due to programme
Then the rank of programme i is:
Ri  U i  Di  
Pi
, i  1, 2,
Ci
,N
Empirical issue: estimation of components in formula above
17
3.1.3 Value of environmental goods for consumption activities
Need to define equivalent of profit for consumer
Program for a consumer: maximise utility under
- economic constraints (price of goods, income)
- environmental constraints
Revelation of preferences: how to infer values that consumers set on
environmental and natural resources ?
Important: environmental goods (and services) are non-market goods
No observable demand, no consumer surplus, no price
18
Case of use-values: relationship between non-market and market demands
Relationship between
market and non-market
good
Substitution
Complementarity
Neutrality
Value of
environmental
good
Demand for
market
good



↑
↓
=
Case of non-use values: direct approach for direct revelation
Important: values can be defined for
- amenities (positive effects)
- damages (negative effects)
19
3.2 – Valuating amenities from natural resources and the environment
3.2.1. Theoretical framework
u( x, q) : utility of household/individual
x  ( x1, , xm )' : vector of private goods
q  (q1, , qn )' : vector of public goods
Distinction between private and public goods:
the individual controls the quantities (x)
vector q is exogenous
Example: xi is quantity of tap water consumed
qi is quality of the water
Prices: vector p  ( p1, , pm ) (market prices or not)
20
Individual is assumed to maximise utility subject to income y
Indirect utility function V ( p, q, y ) given by
V ( p, q, y )  max u( x, q) p  x  y
x
Minimum expenditure function m( p, q, u) is defined by
m( p, q, u )  min  p  x u( x, q)  u
x
Hicksian demand function :
m( p, q, u )
xiu ( p, q, u ) 
(utility-constant demand)
pi
Marshallian demand function :
V ( p, q, y ) / pi
xi ( p, q, y )  
(depends only on p and y )
V ( p, q, y ) / y
21
Assume u( x, q) is increasing and concave in q
then
m( p, q, u ) is decreasing and convex in q
V ( p, q, y ) is increasing and concave in q
Purpose: to measure the increment in income that makes the consumer
indifferent to an exogenous change
This change can be a
- a price change
- a quality change
- a change in some public good
For pure public goods (e.g., existence value), only indirect utility and
expenditure functions are relevant
22
3.2.2 Willingness To Pay and Willingness To Accept
Willingness to pay (WTP): the maximum amount of income the individual
will pay in exchange for an improvement in circumstances
Or
The maximum amount he will pay to avoid a decline in circumstances
Willingness to accept (WTA): the minimum amount of income the individual
will accept in exchange for a decline in circumstances
Or
The minimum amount he will accept to forego an improvement
in circumstances
Equivalent definitions: compensating variation and equivalent variation
23
Relationship between WTP, WTA and variations
Equivalent vs. compensating variations differ according to the
comparison between initial vs. final well-being:
Equivalent variation
Utility increases
Utility decreases
WTA
WTP
Compensating variation
WTP
WTA
Formal definition of WTP for a public good:
amount of income that compensates or is equivalent to an increase in
public good q
V ( p, q* , y  WTP)  V ( p, q, y ) for q*  q
and V / qi  0.
24
Equivalently, WTP  m( p, q, u )  m( p, q* , u )
when u  V ( p, q, y ) and y  m( p, q, u )
WTP:
amount of income that leaves the individual indifferent between
income y and public good q (initial state)
and
income y – WTP and public good q* (final state)
WTP for a price change :
m( p, q, u)  m( p* , q, u) when u  V ( p, q, y )
WTA:
change in income that makes the individual indifferent between
income y + WTA and public good q (initial state)
and
income y and public good q* (final state)
WTA  m( p, q, u* )  m( p, q* , u* ) when u*  V ( p, q* , y )
25
Also, WTA is defined by V ( p, q, y  WTA)  V ( p, q* , y)
Important: WTP and WTA are useful measures for computing
environmental values for amenities (positive effects)
or negative effects on the environment (damage)
3.2.3 The Contingent Valuation Method (CVM)
Very popular method for estimating values for non-market goods
Produces its own data, is applicable to any situation (fictious markets)
26
Stages in a CVM exercise:
a) Set up the hypothetical market for environmental service or good
Inform respondents about the project:
- reason for needed payment
- bid vehicle (local tax, etc.)
- who will pay ultimately
- how environmental service will be restored/created
b) Obtain bids (proposed values)
Questionnaire, face-to-face interview, mailing, etc.
Ask people for their WTP
Different ways to obtain individual bids:
- bidding game: higher and higher amounts suggested
until maximum WTP is reached
- closed-ended referendum: single payment suggested
and response is YES/NO
- Payment card: range of values is presented, one chosen
- Open-ended question: « How much are you willing to… »
27
c) Estimate mean WTP (and/or WTA)
- Average or median values computed from sample
depending on choice to treat outliers
- What to do with « protest bids » ?
- What to do with « zero responses »
in the case of open-ended questions ?
d) Estimate bid curves
Investigate the determinants of WTP/WTA
Useful for aggregating results and predictions
Estimating the relationship between WTP and individual characteristics
e) Aggregate the data
Convert bids or average bids to population total value figure
Requires adequate definition of relevant population
28
3.2.4 The Hedonic Pricing Method
Typically used on house price data
Tries to find a relationship between level of environmental service and
price of a marketed good (a house)
Lancaster-Rosen approach: characterstics theory of value
Any commodity can be described by a vector of characteristics, Z
Let Bi ( Z ) : bid for an increase in characteristic i
In market equilibrium, marginal bid
Bi ( Z )
is equal to implicit price of Zi
Zi
(equal to marginal cost of Zi for consumer)
29
Hedonic equation for house h in neighbourhood i and environment k :
Phik  F  S h , N i , Z k 
Environmental variables
House characteristics
Neighbourhood characteristics
Implicit price for characteristic i :
F  Sh , N i , Z k 
Phik

dZ k
dZ k
Rent differential: value of a marginal change in Z
Consumer behaviour: equate marginal value for Z and its marginal cost
30
Rent differential
Marginal value B
Marginal value A
Marginal cost
QB
QA
Environmental service
Individual equilibrium in housing market
31
Example: a CVM application for recreational services
Site: South Platte River, Colorado, USA
Survey: interview in person, N=95
Question: « If the South Platte River Restoration Fund was on the ballot
in the next election, and it cost your household $__
each month in a higher water bill, would you vote in
favor or against ? »
Possible values: $ 1, 2, 3, 4, 8, 10, 12, 20, 30, 40 50, 100
32
Descriptive statistics
Variable
Description
Mean
(N=95)
t
Increment to water bill
$ 14.78
HHINC
Household income in 1997
$ 54,175
UNLIMWAT
1 if farmers entitled to unlimited water ?
0.45
ENVIRON
1 if member of conservation group
0.19
WATERBILL
Average water bill
$ 35.80
URBAN
1 if lives in large city
0.75
33
Specification of utility function:
If choice=0 : V0   y   0 X   0
If choice=1 : V1   ( y  t )   1 X  1
Income
Individual
characteristics
Random term
 1 ( 0 ) : marginal effect of variable X when project is (not) implemented
Individual prefers "Accept" (V1 ) to "Refuse" (V0 ) if utility is higher:
V0  V1

 y   0 X   0   ( y  t )   1 X  1
Prob[ACCEPT] = Prob[ V1  V0 ]
 Prob  0  1  (  1   0 ) X   t 
34
Estimation of the model:
0  1UNLIMWAT   2 ENVIRON  3WATERBILL 
Prob  yes   F 

  4URBAN   t


Explanatory variables for choice:
( UNLIMWAT , ENVIRON , WATERBILL , URBAN , t )
Parameters to estimate:
(  0 , 1 ,  2 ,  3 , 4 ,  )
Individual indifferent between "Accept" (V1 ) and "Refuse" (V0 ) :
V1 ( y,WTP, X )  V0 ( y,0, X )

 y   0 X   0   ( y  WTP)   1 X  1
 WTP 
1
1
 1   0  X   1   0 


35
Parameter estimates
Parameter
Estimate
Std. error
 /
Payment (increase
to bill)
0.14
(0.03)
0 / 
Intercept
2.44
(1.48)
1 / 
UNLIMWAT
-1.47
(0.74)
2 / 
ENVIRON
3.37
(1.18)
WATERBILL
-0.06
(0.03)
URBAN
1.82
(0.71)
3 / 
4 / 
Notes. Logistic distribution, with standard deviation σ.
Standard errors of parameter estimates are in parentheses.
36
3.2.5 The Cost-Benefit Analysis (CBA)
What is a Cost-Benefit Analysis:
A tool for public policy assessment (for public policy-makers)
Can also be used by a private decision-maker (a firm)
Purpose: help in decision making when a (long-run) project is considered
Especially used in the presence of risk or uncertainty
Decide for or against a project by considering all possible outcomes
Combination of scientific knowledge and society’s preferences over
outcomes (in monetary units)
37
Example of needed components in the case of a project for
reducing an environmental damage:
- Probability of an environmental damage occuring
- Nature and range of environmental damages
- Cost of the public programme (e.g., for avoiding/restoring the
environment, avoiding a risk)
- Probability of success for the public programme
Notes.
- Some events can have negative effects for some agents (damages)
and positive effects for others.
- Somes outcomes can benefit the environment and not society,
and vice versa
38
Basic steps
1- Choice of agents to include in the analysis (costs and benefits for whom ?)
2- Choice of a set of possible policy instruments/options
3- Inventory of all potential impacts of policy options and the associated
indicators to measure them
4- Quantitative prediction of project’s impacts
5- Give an economic value to all impacts
6- Discount future costs and benefits
7- Sum up discounted values of costs and benefits
8- Conduct a sensitivity analysis (confidence intervals) of predictions above
9- Recommend the policy option with the largest net social gains
39
Important things to remember with CBA
A/ General principles
Rule: accept every decision that leads to benefits higher than cost.
With CBA, a decision is always evaluated with respect to
an alternative decision:
It may status quo, or postponing the decision at a later time
The alternative decision also has consequences, which need to be evaluated
All costs and benefits are to be compared, which implies that they
be converted to monetary units (in general)
This implies that health and environmental considerations, but also
mortality can receive monetary values
40
All assumptions and specifications must be justified, and the CBA
must be evaluated first by (multi-disciplinary) experts
The computation of costs and benefits for a given situation can depend
on the objective (private or public decision maker)
B/ The CBA and the citizen
Question: is the CBA technocratic or democratic ?
It is by construction citizen-oriented, because information on
preferences are collected directly from citizens (or by observing
their choices).
Problem: what if citizens behave irrationally or citizen risk perceptions
are too emotionally-driven ?
41
Benefits to a project are collected to evaluate society’s preferences corresponding
to different outcomes
by different methods:
- Revealed Preferences (observing real-life choices)
- Stated Preferences (CVM, etc.)
C/ Main criticisms addressed to the CBA
Ethical perspective: give a monetary value to some goods or components
of life, culture, etc.
But in practice, one does not evaluate the value of life (Value of Statistical
Life), but the trade-off between income and a reduction of a
mortality risk.
42
A fugure often quoted: The Value of a Statistical Life is about 5 million $
in OECD countries.
But this means in reality that
- both income and a reduction in mortality rate are valuable to people
- The WTP for a reduction of 1 / 1million in mortality risk is 5$
What about differentiated treatment of individuals ? Possible discrepancy
between efficiency and equity, a policy option could be preferred
for reasons other than efficiency
A CBA should detail policy impacts for all categories of individuals,
if heterogeneous effects.
Difficult to adequately represent society’s preferences in terms of social
justice for example.
43
D/ The use of ACB in practice
Mostly in the US, Great-Britain and some Scandinavian countries
Almost no applications in France
CBA is recommended by most international organisms (World Health Org.,
UN Environmental Programme, etc.)
In the US: used for over 25 years in regulatory decisions on the environment,
consumer and food safety, health and safety regulations, etc.
Executive orders 12044, 12291 and 12866, Presidents Reagan 1981
and Clinton 1993)
Either by law and/or for projects with expected impacts > 10 million $
44
US federal administrations using recommendations based on CBA:
USEPA (Environmental Protection Agency)
USDEA (Drug Enforcement Agency, US Department of Justice)
Differences between regulatory prevention levels in the US and Europe:
Regulation is stronger (prevention level is higher)
In the US:
In Europe:
-Alcohol
- Tobacco
- Pollution
- Food
- Energy
- Transportation
- Medicines
- Work and building works
45
Carefulness when using CBA
CBA has a normative feature: how to determine a socially efficient system
for dealing with environmental protection, risk, etc.
Different from the positive question: « How to organise the system such that
economic agents make decisions that closely look like this efficient
decision ?»
CBA does not deal with positive aspects such as the relevant tax system to
adopt, responsibility rules to establish, social and political acceptability
or a policy decision, etc.
« Couldn’t we decide for a less efficient policy option, but one that can more
easily be implemented ? » Need for a unified framework (efficiency
and implementation aspects).
46
The need for discounting values, and its consequences
Policy option with cost M today,
annual gains for society: g in d years from now.
Net discounted benefit: use of a discount factor   1
(the value of 1 Euro next year compared to 1 Euro today)
Value today of gain g in d years :  d g ,
in d  1 years :  d 1g , etc.
Sum of discounted gains arising from period d :
d
DG ( g )   g    g 
g
(1   )
i d
i 0
(because   1)

g

i
d
i
47
Comparison between DG d ( g ) and cost M :
Project should be accepted if
d
(1   )
M
M  DG ( g ) 

g
d
Cost-benefit ratio
Examples for selected values of  and d
  0.99
  0.95
  0.90
d=1
99
19
9
d=10
90.4
11.9
3.4
d=20
81.7
7.1
1.2
48
Example of a Cost-Benefit Analysis: Cardiff Bay Barrage
49
Background
Estuarine area dividing South Wales from South-West England
- One of the world’s greatest tidal range: up to 14 m.
- Cardiff harbour inacessible at low tide for up to 14 hours a day.
- Environmental services of the Bay: winter site for about 6000
wildfowl and waders, and resident birds (total 88,000)
Project
Development plan for a barrage across Cardiff Bay
Conversion of the Bay from a tidal saltwater area to a freshwater lake
(2 km2, 13 km. of waterfront)
50
Advantages:
The project will eliminate the effect of the tide, hence:
- new recreational developments (leisure boats)
- development projects for Cardiff’s waterfront
But there are downsides:
- feeding grounds (inter-tidal mud flats) would be flooded.
- loss of natural flushing process,
hence accumulation of pollutants in the freshwater
lagoon.
Cost: around 220 million £
51
MORGLAWDD
Mae'r harbwr yng Nghaerdydd yn profi'r un o'r amrediadau llanw mwyaf yn y byd: hyd at 14m.
Golyga hyn, pan fo'r llanw ar y trai, ei bod yn amhosibl cyrraedd ato am nyd at 14 awr o'r dydd.
Bydd morglawdd yn cael gwared o effaith y llanw, a fu'n rhwystr i ddatblygaid, gan ymryddhau
potensial adnodd mwyaf y brif ddinas ai glannau.
52
Before (low tide)
After (any tide)
53
CBA conducted by the Cardiff Bay Development Corporation (CBDC)
Three options:
- status quo
- barrage
- mini-barrage (proposed by environmental groups)
Notes.
- The project would use public funds (UK taxpayers, not just local people)
- benefits for whom ? If all UK is relevant population, housing and
commercial projects are displaced investments from elsewhere.
- New road link (project independent from barrage)
Hence, different ways of presenting figures in the CBA proposed by the CBDC
54
First CBA: computed by CBDC
- Discount rate: 8 percent per annum
- benefits of new road are incorporated
- no environmental damages included
- benefits for Cardiff area only (housing and commercial development
projects are not substitutes to others, i.e.,no displacement
in development benefits)
- rather high growth rates for property values
This yields a NPV (Net Present Value) of 301 million £ for the barrage
and -166 millions £ for the status quo.
Second CBA: computed by accounting for environmentalist criticisms
- benefits of new road are omitted
- no environmental damages included (to simplify)
- allowing for 50 % displacement in development benefits
- assume lower growth rates for property values
This yields an adjusted NPV
55
CBA of Cardiff Bay Barrage (in £ million)
Alternative Project Options
Barrage
Mini-barrage
No Barrage
Barrage
121.55
28.38
0
Shadow project
4
4
0
Site preparation
147.25
90.29
86.36
Access costs
152.80
143.44
140.65
Landscaping
95.89
53.29
18.22
Others
25
25
25
Total cost
433
267
203
Land value
490
120
26
Property
appreciation
244
62
11
Total benefits
734
182
37
NPV
301
-85
-166
NPV Adjusted
-206
-139
-100
Costs
Benefits
56
3.3 – A typology of pollutions and environmental damages
Previous definition:
An environmental damage can be considered a lost opportunity
to supply (a reduction in) environmental service
Pollution: caused by a human activity, reversible effect in general
Damage: much more general, can be irreversible
Pollution is often considered voluntary: a side-effect of an economic activity
It can also be unvoluntary: industrial accident, etc.
Important: a pollution is a necessary condition for a damage to occur
NOT a sufficient condition
57
Why?
1,000 t
Production
Firm, plant
100 mg / liter
0.2 (20 %)
Emissions
Self-abatement physical potential
Environment
80 mg / liter
Damage
It is damage, not pollution, that should be prevented or controlled
58
Relationship between pollution and damage:
- self-abatement potential of the local environment
- lag (period of time) between emissions and damage
- Hence, difference between potential damage and actual pollution
Examples of damages
To human beings:
health effects (cancer, various diseases)
loss of environmental services
(landscape, air and water colour, etc.)
loss of natural species (plants, animals)
To the environment:
loss of biodiversity
reproduction ability of natural species
decrease in self-abatement capability
59
First distinction: point and nonpoint source pollution
Point source pollution
Industrial emissions are identified
Nonpoint source pollution
Agricultural emissions are not identified
60
In general, if there are multiple polluters (firms, farmers, etc.)
and
emissions are not measured, a point source becomes a nonpoint source pollution
Some examples
- Point source pollution
Measured industrial Chemical Oxygen Demand (COD)
Use of a single pesticide by a single farmer (Atrazine)
Noise or smell of a single production plant
- Nonpoint source pollution
Motor vehicle emissions (Volatile Organic Compounds, nitrogen oxydes)
Nitrate contamination of groundwater from agriculture
Greenhouse gases (GHG) from coal-fired power plants
61
Important difference because:
- Point source pollution can be traced to the firm, plant, production activity
- Hence no problem in the proof of the damage (liability of producer)
- A policy instrument can be used more efficiently, because pollution is
observed for each producer
On the other hand:
- Nonpoint source pollution does not allow to identify individual polluters
- Hence, problem of proof (may be a juridiciary issue)
- If individual emissions are not observed, what policy instruments to use ?
62
4 . Environmental and economic policies - Applications to agriculture
and agrofood chain
4.1 – The need for regulating pollution and water use
We first start with the case of industrial water pollution:
- One of the first application case of environmental policy instruments
- Experience in developed countries over 40 years (France)
- Regulation in developing countries has started to emerge
63
- Why quantify pollution ?
To assess damage to society
To make necessary corrections to pollution level, if needed
- Why the need for evaluating the relationship
between production and pollution ?
To design adequate environmental policy
for modifying producers’ behaviour
Implicitly: there exists a socially optimal level of pollution
Different from the optimal pollution level from producers’ point of view
This implies that relationship between pollution and damage
need be established (scientific evidence)
64
-What can public policy makers (government) do ?
Find an efficient and feasible way of controlling pollution
Available instruments:
- Tax on emissions
- Ban or quota on some production inputs
- Subsidy for abatement activity
- Subsidy for investment in clean technology
- Set up a market for pollution permits
- Contract with firms
65
4.2 – Welfare and abatement cost, a production-side approach
Consider first a social planner maximising social welfare W
W  pq  c(q, a)  De(q, a),
Firm’s profit
Damage
where
q: output supply
c: production cost
a: abatement level
First-order
conditions
p: unit output price
e: emission level
D: damage function
W
c( q, a )
dD e
 p

  0,
q
q
de q
W
c( q, a )
dD e
 


 0
a
a
de a
66
 p
c( q, a )
dD e


q
de q
(damage should be added to
conventional cost)
c( q, a )
dD e
 

a
de a
(rule for optimal abatement level)
Marginal damage + prod. cost
Marginal damage
Production cost
p
Private optimum
q
q*
q0
67
Solution: optimal levels of output and abatement (q*,a*)
from a social point of view
Socially optimal emission level is e(q*,a*)
Since D increasing in e, and e increasing in q :
q *  q0
Interpretation:
- producer should internalise damage
- abatement activity should be such that
marginal abatement cost = marginal gain of damage
reduction due to abatement
68
Consider then a firm faced with a tax on emissions, T
max Profit :
pq  c(q, a)  T e(q, a)
c
e

p


T


q
q
Necessary conditions 
 c   T  e
a
 a
Hence, the condition for (social) optimality of solutions is that
T  D 
D  e( q, a )
e
Pigovian tax
(unit tax on emissions = marginal damage)
69
Implementation in practice:
This means the following items are required:
- Knowledge of functions D(.) and e(q,a)
- Observability of emission level e and abatement a
→ Point source pollution framework
Extension of the framework to an actual population of N firms :
- This means a polluter-specific tax level, Ti , i=1,2,..,N
- Is it feasible (legally, etc.) ?
- Will it be acceptable to firms ?
Note: The Pigovian tax is an optimal tax
It is a special case of the ‘‘Polluter-Pays Principle’’
70
Numerical example
Single firm with the following cost function
and emission function
c(q, a)  A q a 
e(q, a)  B (q  a) ,
aq
A,  ,   0
Cost is increasing in output and in abatement

Cost is convex in output and in abatement
 ,   1
Firm program is max p q  Aq a   T B( q  a )
System of equations to be solved:
 p  A q 1a   TB  0,

  1
  A q a  TB  0
71
 1 
 p  A q a  TB
 
  1
A

q
a
 TB

1/ 
 1 1
 q  TB  A a


p  TB  A q 1a   a  




1/ 
 TB 


A



a (1  ) / 
1/ 
p  TB  1 
q 
A 

1
 p  TB   TB 1     1
 a  
 
 
 A   A  
 p  TB 
 q  

A



1 

1
   1
 TB  
 A  

 
72
c(q, a)  Aq2  Caq
Simpler specification:
Firm program becomes

A 2
a2 
max p q  q  Caq  T B  q  
2
2

 p  Aq  TB  aC  0
 
 Cq  TB a  0


 a 

q 

C  p  TB 
,
2
ATB  C
TB  p  TB 
ATB  C 2
73
Other possible instruments to control for industrial water pollution
(than an emission tax):
- investment subsidy in ‘‘clean technologies’’
- investment subsidy and technical assistance in abatement activity
- a direct tax on production inputs or on output
- a direct ban on some emissions
Difference here between abatement technologies:
- ‘‘end-of-pipe abatement’’ (production unaffected)
- clean technology (modifies production process)
Direct tax on production inputs or on output:
- Used when emissions costly to monitor or to observe accurately
- Can be inaccurate or unfair
(difference between actual and estimated pollution)
74
Ban on some emissions:
- Rarely used
- Replaced in practice by emission standard
(maximum concentration level)
In some cases (France), combination of policy instruments:
1/ Firm’s establishment is allowed by public authority
2/ Environmental emission standards are imposed
3/ Tax on effluent emissions
4/ Subsidy policy of abatement activity
This means that
- Firms with too toxic pollutants are not allowed to produce
- Compliance with emission standards implies that firms
may need to limit production
- Firms will have a strategy on abatement activity as well
75
4.3 The French water policy and agrofood industrial effluent emissions
French water policy: dates back from the 1960s
Important dates:
1964: first French Water Act, creation of the 6 Water Agencies
1966: first emission tax systems implemented
early 1990s: significant increases in emission taxe levels
1992: second French Water Act
2000: European Water framework Directive
A major actor in the French water policy: The Water Agencies
- One for each of the 6 main river basins
- Hydrological (not administrative) boundaries for Water Agency action
76
Water Agencies:
Autonomous environmental authorities, with administrative supervision
of the Ministry of the Environment
Goal: financial participation to water disposal and pollution reduction operations
Agencies also participate to common-interest operations:
dams, water transfers, groundwater recharge, limitation of coastal
water pollution
Financial instruments: emission tax, subsidies, loans with/without interest
5-year working plans (…, 1992-1996, 1997-2001, 2002-2006)
Within each 5-year working plan, budget must be balanced
77
The 6 Water Agencies are:
- Adour-Garonne (Southwest, 115,000 km2)
- Artois-Picardie (Northeast, 19,562 km2)
- Loire-Bretagne (Brittany and Central France, 155,000 km2)
- Rhin-Meuse (East, 31,500 km2)
- Rhône-Méditerranée-Corse (Southeast and Corsica, 130,000 km2)
- Seine-Normandie (North and Paris area, 100,000 km2)
Note: no Water Agencies for overseas territories (French West Indies, South
Pacific, etc.
A dual charge scheme:
- On water use
- On effluent emissions
For 3 categories of users: industry, residential users, agriculture
78
Revenues from Water Charges Collected by Water Agencies,
VII Working Plan 1997 – 2001 (in million French Francs)
Residential
Industry
Agriculture
Total
Water
pollution
charge
Use charge
Total
User Share
35,614
6,361
41,975
83.7%
5,437
1,910
7,347
14.7%
554
269
823
1.6%
41,605
8,540
50,145
100%
79
Subsidies by Type of Operation (in million French Francs)
VI
Working
Plan
% of
total
subsidies
VII
Working
Plan
% of
total
subsidies
POLLUTION
Treatment plants in
communities
Sewage network
Industrial pollution control
Waste disposal
Technical Assistance
Water treatment premium
Operational costs subsidy
Agricultural pollution control
Others
10,864
11,392
5,949
1,159
370
4,730
614
550
42
25
27
14
3
1
11
1
1
0
12,915
13,424
6,048
1,178
631
7,980
2,189
2,682
169
23
24
11
2
1
14
4
5
0
19
18
2
2
71
69
257
388
302
Total
35,652
83
47,216
83
32
RESOURCE AVAILABILITY
Waterworks
Irrigation
Groundwater
River basin recovery
Drinkable water
Resource management
815
161
726
711
4,469
393
2
0
2
2
10
1
1,114
25
643
1,548
5,520
892
2
0
1
3
10
2
37
-84
-11
118
24
127
Total
7,275
17
9,742
17
34
42,927
100
56,958
100
33
Grand total
Percent
change
80
Mission: financial participation to investment in public (common interest)
or private equipments and facilities,
for emission control and improvement of resource sharing.
No direct initiative on private investments, but financial aid is crucial
Necessary funds: taxes collected from water users in river basin:
- Emission tax (water pollution)
- Water extraction and consumption taxes.
Funds are then redistributed in the form of direct subsidies or loans
Incentive role in reducing fixed costs and later, emission charges.
81
The Water Agency tax scheme
Multi-year framework of the Working Plan:
Tax receipts must balance expenditures
→ Consequence: total amount of tax receipts determined
according to expected expenses
The category of users to be taxed and the unit tax rates must be approved by
the Water Agency Executive Board
Unit rates can be modulated geographically
(coastal zones, wetlands, vulnerable areas)
Taxes are collected from each individual plant, with a minimum
perception threshold
82
Two types of emission tax schemes:
based on actual versus estimated emissions
Actual emissions: daily measured emissions (large plants)
or average emission rate defined as:
“daily average emission level of month with highest activity
Estimated emissions: from yearly firm’s activity report by the manager
An input-output table production - emissions is used, based on average
emission rates of industries.
Emissions are defined as a number of units per day (kg/day),
not as a concentration (kg/day/litre).
83
Tax is then computed by applying a unit emission tax rate on a list of
pollutants:
- Biological Oxygen Demand (BOD),
- Suspended Solids (SS),
- Nitrogen (N),
- Phosphorus (P),
- Inhibitory Matters (IM)
If firm claims to be over-taxed or Water Agency believes reported
or estimated emissions are below actual ones, plant inspection may be required
Industrial plants equipped with an abatement plant:
Emission charge is reduced in proportion of reduced (avoided) pollution
Abatement rate: as above, either measured or estimated
84
Example of input-output table (Production - Emissions)
Product
Unit
SS (gr.)
BOD (gr.)
IM
(Equitox)
N (gr.)
P (gr.)
Beer
Litre
400
170
-
20
5
Wine
100
Litres
5
30
-
1
0.1
Refined
Sugar
Kg
1.5
3.2
-
0.25
0.01
Emmental
cheese
Litre
0.5
2.4
-
0.2
0.1
Kraft paper
Kg
10
40
0.21
0.4
0.17
Viscose
Kg
28
35
2.5
0.8
-
Fur
Skin
270
360
3
20
2.5
Steel
Ton
420
260
-
-
-
Coke
Ton
200
2000
30
1100
1
Printed
Circuit
Board
Ton of
copper
-
-
18,000
-
-
85
Effluent emission and use charges, VI Working Plan
Water Agency
Suspended
Solids
BOD
Nitrogen
Phosphorus
Water use
Adour-Garonne
158.30
254.96
226.27
106.76
[0.12 ; 0.18]
Artois-Picardie
126.00
252.00
143.00
675.00
[0.10 ; 0.31]
Loire-Bretagne
92.11
141.70
173.00
272.54
[0.16 ; 0.36]
Rhin-Meuse
103.19
206.37
141,59
235.53
[0.15 ; 0.30]
Rhône-Méd.-Corse
80.00
240.00
120
300.00
[0.05 ; 0.30]
Seine-Normandie
113.93
249.69
213.69
NA
[0.09 ; 0.26]
In French Francs per kilo-day for Suspended Solids, BOD, Nitrogen and Phosphorus,
in French Francs per cubic meter for water use.
86
In parallel with the action of Water Agencies:
The DRIRE (Direction Régionale de l'Industrie, la Recherche et la Technologie)
- Designs emission standards for industrial plants, in terms of
maximum concentration of effluent emissions,
by type of pollutant (March 3, 1993 decree)
- Delivers emission (in general once-and-for-all) permits to industrialists
(« sites classés »).
Emission standards are in practice modulated depending on localization.
Firms’ compliance with standards can be controlled (« Water Police »)
If an industrialist does not comply with a standard, the DRIRE imposes
a 3-year rehabilitation plan (« mise en conformité »).
Since 1992, plants subject to emission permits must be equiped with
permanent measurement devices.
87
Economic Analysis of Water Agency regulation
Ideal ( ?) domain for application of environmental regulation theory:
- point source pollution
- economic instruments : « market-based » and « non-market-based »
asymmetric information between Water Agency and the industrial firm
(abatement effort, technology, abatement cost,...)
Problems:
- are economic instruments used by Water Agencies compatible with
regulatory instruments described by the theory?
- are those instruments adequately chosen and are not redundant?
- how to evaluate damages due to emissions?
88
Instruments used by Water Agencies:
Basic instrument: emission tax
Pigovian Tax if equal to consumer marginal damage from pollution
Problems in practice when considering a Pigovian tax:
- Necessary to know precisely the social damage function,
to compute marginal damage and use it in designing the optimal tax
rate
- Necessary to know the social damage due to pollution,
for each geographical unit
- Uniform versus personalized tax?
- Consistency with government anti-inflation (or employment) policies ?
89
Other (complementary) economic instrument: contracts
(abatement subsidy, between Water Agency and the firm)
Justification of contract-based policy by an imperfect pollution tax system?
Type of contracts (specifying capital stock of abatement) motivated by
simplicity and low control cost?
Asymmetric information on:
- Technology
- Abatement effort
- Future activity
Strategic behaviour, e.g., if inverse relationship between gross pollution level
and abatement rate.
Firms can ask for large capital stock of abatement, claiming future activity
(output) will increase
90
Incentive effect of emission tax
Does the level of the unit emission tax modify the behaviour of the
polluting firm ?
Emission tax can have an impact on
- The production level (specially in case of no abatement)
- The net emission level(after abatement), given level of gross emission
- The abatement rate, given level of gross emission.
Let B : gross emission level (before abatement)
N : net emission level (after abatement)
 : abatement rate,
 : unit emission tax
=
BN
B
91
How to construct a simple model for abatement rate ?
Assume abatement cost is
c( B, )  A B  
Firm's profit is   pq  C ( q)   N  c( B,  )
Because N  B(1   ),
  pq  C (q)   B(1   )  c( B, )  pq  C (q)   B   B  c( B,  )
Assumption here: production cost is separable from abatement cost
Hence, strategy of the firm in two steps:
1/ Decide on optimal production level, q
2/ Given q (and B), decide on optimal level of δ
92
c( B,  )
0

  B  A B   1  0
max    B 

1/(  1)
  B  
   
B 
 A

1
 log  
log  B   log( A )   log( B ) 
 1
1
 log  
log( )  log( A )  (1   )log( B)
 1
If abatement cost is convex in abatement rate δ, β>1
and abatement rate is increasing in tax rate
If abatement cost is convex in gross emission B, α>1
and abatement rate is decreasing in gross emission level
(provided β>1 )
93
Estimated abatement rate equations
log( )  a  b log( B )  c log( )
with a  
log( A )
1 
1
, b
, c
 1
 1
 1
c 1
b
c
a
 
,   1  , and A 
exp  
c
c
c 1
c
Nitrogen
log() = - 0.0269 log (B) + 0.0896 log ()
Suspended Solids
log() = 0.0630 log (B) + 0.2134 log ()
DBO
log() = 0.1443 log (B) + 0.1179 log ()
Data source: French agrofood industries, 1992-1998, all Water Agencies
94
Another application: 320 French plants
in the Adour-Garonne and Seine-Normandie river basins
Variable
Mean
Std.
Deviation
Minimum
Maximum
B
3278.1
9962.1
4.00
112286
δ
0.5793
0.3023
0.0024
0.9960
τ
225.4
63.2
91.0097
561.06
Source: Lavergne and Thomas, J. Empirical Econ., 2005
B : BOD (Biological Oxygen Demand) emission level, in kg. / day
δ : BOD abatement rate (in percent)
τ : BOD emission tax (in French Francs)
95
Estimated equation
log( ) 
0.0143 log( B )  0.5699 log( )
+ 0.0933 Food and drinks
+ 0.1634 Dairy and milk products
+ 0.0233 Chemicals
- 0.4629 Iron and steel
- 0.6553 Paper and wood
+ 0.0422 Textile
   0.9750
and
  2.7547
Less efficient industries: ‘‘iron and steel’’ and ‘‘paper and wood’’
Most efficient industries: ‘‘Dairy and milk products’’ and ‘‘food and drinks’’
96
4.4 An example: the Brazilian water policy
Federal Water law: January 1997
River basin chosen as basic administrative unit: decentralisation principle
following the French experience
Brazil is a federal state, each state designs its own water policy, in
compliance with the 1997 federal law
Pioneer implementation of the new policy framework: in the
Paraíba do Sul river basin
Southeast region of Brazil, across states of Minas Gerais (20,700 km2),
Rio de Janeiro (20,900 km2) and São Paulo (13,900 km2)
5 million inhabitants, 8 500 industrial plants, and 10 percent of country’s GDP
97
Main problem in river basin: water pollution due to industrial and domestic
effluents
Rapid demographic growth of basin’s urban areas not accompanied by
adequate planning and sanitation measures
Lack of sanitation infrastructure, indiscriminate occupation of riverbanks
About 69 percent of households connected to municipal sewage network
but only 12 percent of collected domestic wastewater treated
before release in water bodies
Estimated domestic BOD discharge in river basin: 240 tons / day
Estimated industrial BOD ’’ ’’ ’’ ’’ : 40 tons / day
98
1996-1997:
2000 :
2002 :
Creation of the Paraiba do Sul River Basin Committee
(CEIVAP)
Negotiations about water charge methodology, according to
participation principle
Creation of the river basin Water Agency
The following principles were adopted during negotiation about water charges:
- Simplicity (conceptual and operational): water charges based on
directly measurable parameters, for clear understanding
by users
- Acceptability by all users, facilitated by participatory approach in the
CEIVAP
- Signaling: water charges are expected to act as signals about economic
value of water resources, and importance of sustainable use
- Minimisation of economic impacts, in terms of cost increases
99
Therefore, tradeoff between incentive nature of water charge
and economic impacts (signaling vs. acceptability)
Hence, charges are set at very low levels during initial implementation period
(2003-2006).
Industry and residential users:
Water withdrawal charge: R$ 0.008 / m3
Water net consumption charge:
R$ 0.02 / m3
Effluent emission charge:
up to R$ 0.02 / m3
Agriculture:
Water withdrawal charge: R$ 0.0002 / m3
Total charges defined to be < 0.5 percent of rice and sugar production
production costs
Note: 1 R$ (Real) is about 0.38 Euros
100
How reactive is industrial water demand to water price ?
Industry
Water demand
elasticity
Food and beverage
-0,82
Clothing
-0,31
Wood, rubber and plastics
-0,40
Pulp and paper
-0,76
Chemicals
-0,71
Non-metal minerals
-0,22
Iron and steel
-0,48
Mechanical industry
-0,31
Transport equipment
-0,51
Others
-0,33
101
Simulation of the impact of water charge changes
ΔPW = 10 %
ΔPW = 20 % ΔPW = 30 % ΔPW = 40 %
ΔPW = 50 %
ΔXW
- 3,23 %
- 6, 38 %
- 9,40 %
-12, 28 %
-14,99 %
ΔC
0,05 %
0,11 %
0,16 %
0,21 %
0,26 %
ΔPW : percent change in water charge
ΔXW : percent change in water demand
ΔC : Percent change in production cost
102
Simulation of the impact of changes in water charge (ΔPW) and production levels (ΔY)
ΔY
0%
5%
10 %
15 %
20 %
ΔPW
0%
-
ΔW= 3.39 %
ΔW= 6.66 %
ΔW=9.81 %
ΔW=12.86
%
10 %
ΔW= -3.23 %
ΔW= -0.12 %
ΔW= 2.86 %
ΔW=5.74 %
ΔW=8.53 %
20 %
ΔW= -6.38 %
ΔW= -3.52 %
ΔW= -0.77 %
ΔW=1.89 %
ΔW=4.46 %
30 %
ΔW= -9.40 %
ΔW= -6.75 %
ΔW= -4.20 %
ΔW=-1.73 %
ΔW=0.65 %
40 %
ΔW= -12.28 %
ΔW= -9.80 %
ΔW= -7.42 %
ΔW=-5.12 %
ΔW=-2.89 %
50 %
ΔW= -14.99 %
ΔW= -12.68 %
ΔW= -10.44 %
ΔW=-8.28 %
ΔW=-6.19 %
103
4.4 Regulating irrigation and emissions from agriculture
Some basic figures on water use in Europe
Water Exploitation Index (WEI):
average water extraction / average water resources
Water stress if WEI > 20%
WEI for Europe : 353 km3/year / 3500 km3/an (10%)
Selected figures by country
Ireland
France
Germany
Portugal
Belgium
Spain
2%
8%
10 %
15 %
20 %
32 %
(18 % including energy sector
(25 %
(17 %
(45 %
(36 %
)
)
)
)
)
104
Water use by major European zone (Eurostat, 2003)
70
60
50
Energy
Industry
Agriculture
40
30
20
10
ue
st
-O
Eu
ro
pe
C
en
tre
lE
ur
op
e
t
C
en
tra
hw
es
N
ot
So
ut
hw
es
t
0
105
► Other key figures, for France
Average precipitation: + 440 billion m3/year
- Evaporation : 270 billion m3/year
- Outflow in rivers and streams : 170 billion m3/year
=0
Water withdrawal and use, mainland France (billion m3)
25
20
15
Withdrawals
Net consumption
10
5
0
Energy
Drinking
water
Irrigation
Industry
106
4.4.1. Water for irrigation
Worldwide: 18 % of arable (cultivated) land is irrigated (267 million hectare,
World Bank, 2001)
but contribute for 40 % of total agricultural production
In France: about 1.6 million ha irrigated in 2000 (out of 2.6 potential irrigated)
50 % for maize (corn, grain and seeds)
18 % for horticulture, vineyards, fruit trees
10 % for oilseed.
Between 1988 and 2000: 50 % of the increase in irrigated land has been due
to maize only
107
Regional statistics for irrigation, 2002
Region
Irrigation
(million
m3)
Irrigated land
(1000 ha)
Share
of Share of
maize in
horticulture,
irrigated
vineyards,
land (%)
fruit trees in
irrigated
land (%)
Poitou-Charentes
234.66
169.02
79
3
PACA
616.86
114.95
6
33
Aquitaine
408.96
278.69
74
17
Midi-Pyrénées
361.96
269.26
70
8
LanguedocRoussillon
238.76
64.76
8
44
Source : French Agricultural Census, 2000.
108
Water withdrawal for irrigation in France:
5.6 billion m3 each year (12 percent of total),
of which 88 percent from surface water
Net consumption: 43 percent of the total
Irrigated areas have increased threefold from 1970 and 1995
(1.6 million hectare out of total agricultural land of 30 million hectare).
Input-Output process in the water cycle:
In
Rainfall
Run-off (lessivage)
Infiltration
Leaching (percolation)
Out
Pumping
Evaporation
Transpiration
Output to surface waters
109
Problem 1: Over-use of surface water for irrigation
- Minimum river flow for survival of downstream species
not guaranteed
- Biodiversity and economic losses
- Increase in pollutant concentration
Problem 2: Over-use of ground water
- Increased cost of pumping
- Subsidence (affaissement de terrain)
- Decrease in surface water flow, and lake water level
- Decrease in groundwater recharge potential
110
Technical Solutions
1/ Management of Available Volumes
- Desalinization (costly, energy-intensive)
- Dams and reservoirs (technical constraints due to evaporation,
difficulty to find new sites)
- Re-cycling :
Drinking-direct: « toilet-to-tap » ;
Non drinking- direct: Parallel network of wastewater ;
Drinking and non-drinking-indirect: groundwater recharge
by injection.
2/ More efficient irrigation
Sprinkler and low-flow rather than gravitation or flooding.
3/ Water-saving seeds
Agronomic research
111
Economic solutions
Irrigation water pricing
► Demand for irrigation water
Consider n producers, each growing m crops
For each crop, a production function associating water input to crop yield
Let q j : water input for crop j ;
w : water price per m 3 ;
p j : output price of crop j
Production function of crop j :
Profit of producer i, i  1,2,
f j (q j )
m
, n :  i    p j f j ( q j )  wq j  ,
j 1
112
Maximisation of profit with respect to qj :
pj 
 f j (q j )
q j
 p j  f j q j ( w)   w
w
1

 qj  f j   ,
p 
 j
j  1,2,
, m.
Inverse of derivative of production function
Water demand from producer i (across all crops) :
w
qi ( w)   f ij   , i  1,2,
 pj 
j 1
 
m
1
, n,
n
Total water demand from all producers : q( w)   qi ( w).
i 1
113
Demand-side management of irrigation: through water pricing
→ Performance of pricing policy depends on water demand elasticity
Elasticity of water demand with respect to price:
qi ( w)
w
 log qi ( w)


w
qi ( w)
 log w
Efficient water pricing: maximisation of total surplus
(farmers plus water producers)
For a water price w :
Users (farmers) :
Demand q( w) such that f   q  w    p,
Surplus is pf  q( w)  wq( w)
114
Water supplier :
Operation profit is : wq(w)  VC  q(w)
where VC (.) : Variable Cost of producing water
Total profit of water supplier : wq( w)  TC  q( w)
TC : Total Cost = VC  FC
Fixed Cost
Operation worthwhile in the short run if operation profit > 0
But fixed costs have to be covered in the longer run
Total Surplus is : V ( w)  V  q  w  
 pf  q  w    wq( w)  wq( w)  VC  q  w 
 pf  q  w    VC  q  w 
115
Maximise surplus with respect to water price w
dV ( w)
dq
 0   pf  q( w)  MC  q( w) 
0
dw
dw
 MC  q( w)  pf  q( w) (  w)
 w*  MC  q( w* ) 
► Only efficient pricing: MC pricing
Average Cost (AC) pricing : inefficient,
- It increases producer’s surplus, but decreases farmers surplus
- Fixed production costs can be covered by AC pricing
116
Marginal or Average Cost pricing
MC
Euros/m3
AC
A
w AC
B
C
w MC
D
E
Derived Demand
q(wAC )
q(wMC )
m3
Total Surplus under MC pricing : A + B + C + D + E
Total Surplus under AC pricing : A + B + D
117
Available pricing methods
-
Volumetric : direct measure (water meter)
-
Input/output : water paid in proportion to production or input (tax)
-
Area : payment according to irrigated area
-
Block pricing : volumetric method with consumption thresholds
-
Two-part tariff : fixed charge + constant marginal price
-
Formal or informal water markets…
- NB 1 : Two-part tariff is often used when MC < AC
- NB 2 : Area payment may depend on irrigation method, season, etc.
and sometimes also on non-irrigated area (if important investments)
118
Why is (efficient) MC pricing not more widely used in practice?
► Implementation costs (metering, etc.)
Evidence by Bos and Wolters (1990 ) :
out of 12.2 million irrigated hectares in the world
- 60 % concerned by area pricing
- 25 % concerned by volumetric method
Tsur and Dinar (1997) : area pricing can be preferable if one integrates
implementation costs
► Tariff proportional to output / input :
Imperfect information on production technology
► The method to choose depends mostly on local
implementation costs (regional heterogeneity)
119
Comparison of the different pricing methods
Tariff
Implementation
Potential
efficiency
Efficiency
horizon
Demand
control
Volumetric
(uniform rate)
Complicated
First-best
Short run
Easy
Output/Input
Less complicated Second-best
Short run
Fairly easy
Area
Easy
None
-
Through crop
restrictions
Two-part
Fairly
complicated
First-best
Long run
Fairly easy
Water
markets
Difficult
First-best
Short and long
run
Depends on
market’s type
120
To conclude on irrigation: water price should act as a signal on resource’s value
Efficiency principle : water should be paid at a price equal to marginal cost of
provision
Efficient pricing :
- A fixed fee for covering indirect costs (not related to
consumed volumes)
- A volumetric price allowing to cover operation costs
(Increasing) Block pricing : Users with higher consumption (revenue ?) pay
more in proportion (per cubic meter)
Problem of observing consumption : all users should be paying for the
volumes actually consumed
121
4.4.2. Nitrogen and other inputs
Fertilizer used in agriculture:
- Chemical (industrial) and Organic (animal) sources
- Chemical fertilizer: mostly a combination of Nitrogen (N), Phosphorus (P)
and Potash (K).
France: 2nd world user of fertilizer (3.6 million ton nitrogen in 1995,
37 % of animal origin)
63 percent of mainland in excess nitrogen areas (more than 170 kg N/ha)
Agriculture: Main nitrogen (65 %) and phosphorus (20 %) emission
source
Intensive cattling (élevage): 50 % of hog and poultry production,
and 40 % of beef production concentrated on 6 - 8 %
of territory
122
Pesticide: France 3rd world user (95 000 tons)
Nitrogen loss due to leaching and/or run-off: 25 percent
(6.10 – 12.20 Euros / hectare)
Problem 3: Impact on the environment and health risk
Nitrates in rain and irrigation water carried into surface water (run-off)
and groundwater (leaching):
- Eutrophisation of surface water (proliferation of algae,
reduction of oxygen contained in water)
- Human health: nitrates convert into carcinogenic nitrosamines.
Reduction of blood-carying capacity by haemoglobin.
123
Other inputs:
- Accumulation of heavy metals from animal feed
- Pesticides in food and water: allergic reactions, may affect nervous system,
kidney and liver functions
- Antibiotic residues
Technical solutions
- Better management of manure stocking and spreading
- Use intermediary crops to trap nitrogen (legumes)
- Better production risk management (hedging behaviour and self-insurance
against crop yield uncertainty).
124
125