Transcript agecon.nmsu.edu

Governor’s Conference on the Future of
Water in Kansas
October 30-31, 2012
The Economic Value of Water
Wednesday, Oct. 31
Hilton Garden Inn & Conference Center
Manhattan, Kansas
8:45 – 9:30 AM
Frank A. Ward
College of Agr, Consumer, and Environmental Sciences
New Mexico State University USA
Value of Water v Diamonds
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Road Map
• Background Issues
• Policy Debates
• A Definition: Economic Value of Water
• Approaches (how to value water)
• Results: Economic value of water
• The Future
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Background: Ongoing Challenge
• The need to develop flexible institutions to
increase water’s beneficial use in the face of
growing demands for scarce and variable
supplies is the most compelling issue for
economic development for people who live in
dry places.
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Background
• Information on water’s economic value enables
informed choices on water
–
–
–
–
–
development
conservation
allocation
purification
protection
• when growing demands for all uses occur with
– increased scarcity
– climate variability
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Background
• Conceptually correct and empirically accurate estimates
of the economic value of water are essential for rational
allocation of scarce water across
– locations
– uses
– quality levels
– quantity levels
– time periods
• Is economic rationality a good thing?
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Policy Debates: e.g., Ogallala Aquifer
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Policy Debates: Ogallala Aquifer
• Background: Growing population, fixed water
supplies, climate variability, declining aquifer
– What role for water conservation initiatives?
– Should new reservoirs be developed or existing ones be
repaired or dredged?
– What methods are available to reduce declining water
levels in the aquifer
(what works?)
– What are the best methods to reduce declining water
levels in the aquifer?
(what pays?)
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Policy Debates: Ogallala Aquifer
• Continued:
– Should water (gw or sw) marketing be encouraged?
– Spending to improve on-farm irrigation efficiency?
• ditch lining
• pipe leakage control
• water spreading
• tailwater recovery
• converting from surface to pivot or drip irrigation
• land leveling
– What role should pumping limits play?
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A Definition
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Drinking Water: Low v High quality
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Economic Value of Water Defined
• The economic value of water is defined as what a rational user of
a publicly or privately supplied water resource is willing to pay.
How large a check you’re willing to write.
– Assumes objective of economic efficiency (TB > TC)
– Typically measured by a (demand) schedule relating the quantity of
water used at each of a series of different prices.
– E.g., most use water for irrigating lawns or for low-valued crops only
if the price of water is suitably low.
– Water policy debates typically focus on proposed marginal changes
to existing supplies or qualities
– So economic values of the debated change provides important
information to resolve those debates.
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Policy Examples of Definition
• The economic value of an aquifer protection plan is
what the beneficiaries of that plan (current and future
generations) are willing to pay for better access to the
aquifer than they otherwise would have.
• The economic value of protecting a state’s water from
under- deliveries by an upstream state (or overuse by a
downstream state) is what the state’s water users are
willing to pay for the greater reliability of water supply.
• The economic value of protecting a region’s irrigated
agriculture is the gain in farm income and reduced food
prices that the protection produces.
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Which policies need value of water?
• Value of added water infrastructure
– building
– Restoring
• Value of changing water institutions
– Redrafting water laws
– Stream adjudications
(NM)
– Shortage sharing rules
(Afghan)
• Value of changing water regulations
– Groundwater pumping limits
– Requiring meters
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Economic Value of Water
• It’s the willingness to pay for making a change in
the status quo of water
– Changes in quantity
– Changes in quality
– Changes in timing
– Changes in location
• It’s about valuing changes in one of those four
dimensions of water use.
• Usually requires an economic model grounded in
a physical reality
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Economic Value of Irrigation Water in
July compared to March
• The willingness to pay for changing the timing of
an irrigation from March to July
• Can be used to value storage that allows the
timing to be changed
• Without storage, that changed timing value
water cannot be realized.
• So the value of new storage depends on the
value of altered timing that it allows.
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Economic value of diverting irrigation
water at a lower v higher point in
watershed (Afghanistan, Iraq)
• The willingness to pay for altering the diversion
point from the headwaters to the valley.
– Farm income gain can be high
– Gain in food security can be high
– Institutions may prevent the change
• So there’s an economic value in altering the
institutions
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Lowering the diversion point
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Economic value of drip irrigation:
changing from surface to drip irrigation
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Economic value of sewage treatment:
without v. with treatment
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Economic value of flood control:
flood damages reduced
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Why do we care about water’s
economic value
• Need to conduct benefit cost analysis for
water policies
• Why: Information on benefits and costs
can resolve long simmering policy debates.
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Economic Value of Irrigation:
Center Pivot Irrigation
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Economic Value of Irrigation: Saudi
Irrigation Fields
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Economic Value if Irrigated:
North Africa
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Economic value of water in irrigation: less
than cost of new reservoir storage developed
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Methods for Valuing
Irrigation Water
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Use Market Price
• Good news
– Accurate
– Cheap
• Bad news
– Actual markets hard to find
– Market price may be for wrong water
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Use Administered Price
• Definition
– Price set by a government agency
– E.g. $20-$40/a-f in EBID, NM
– Typically imposed to maintain affordability and
prevent price gouging during periods of shortages
• When is administered price is relevant
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Use Gain in Producer Net Income
• VMP water as an input that adds to
grower’s income
• VMP = (Price) * (Production from added
water applied to crops)
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What is the Economic
Value of Water?
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Which value?
• Public v. Private value
• Financial v. Economic value
• Global v. National v. Regional v. Local value
• Very short run v. short run v. long run value
• Total v. Average v. Marginal value
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Which Use?
• Economic values vary by use
– agriculture (usually lowest)
– Urban
• Drinking, cooking, washing, cleaning, flushing
• landscapes
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–
–
–
–
–
industry
environment
mining
recreation
flood control
hydropower
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Economic Value of Water:
One clear definition (Erin Ward)
• Dollar sign + number
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Marginal Value of Water in Irrigation, Rio Grande, USA,
2006, $/ac-ft (no gw access)
Supply
Drip Subsidy
Prices
base
0
+20%
Normal
base
100%
+20%
base
0
+ 20%
-50%
base
100%
+ 20%
Costs
$
Base
-20%
Base
-20%
Base
-20%
Base
-20%
Base
-20%
Base
-20%
Base
-20%
Base
-20%
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202
221
380
98
248
268
425
245
396
446
604
268
418
471
628
Summary
• Goal: Getting most beneficial use from water
• Economic value = the building block
• What should value numbers look like?
– Theoretically sound
– Empirically correct
• Guideposts
– Common denominators
– Accounting stance
– Marginals, totals, averages
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The Future
• Future Information on water’s economic value
will enable future informed choices on water
–
–
–
–
–
development
conservation
allocation
purification
protection
• when growing demands for all uses occur with
– population growth
– growing incomes
– climate variability
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References
• R.A. Young and S.L. Gray (1972), The economic value of
water: Concepts and empirical estimates, Unpublished
Report to the National Water Commission. CSU
• R.A. Young, Determining the Economic Value of Water:
Concepts and Methods (2005), Resources for the Future.
• F.A. Ward and Ari Michelsen (2002), “The Economic Value
of Water in Agriculture: Concepts and Policy Applications,”
Water Policy.
• J.M. Peterson, et al (2009), “Groundwater economics: An
object-oriented foundation for integrated studies of
irrigated agricultural systems,” Water Resources Research
• B. Golden, et al (2009) “Economic Impacts of Selected
Water Conservation Policies in the Ogallala Aquifer,” JARE.
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Thank You
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