CSIRO LAND and WATER CRC for Catchment Hydrology Socio-economic Analysis of Mature Water Markets CSIRO Land and Water Bogotá Nov 8 th -10 th Social solutions.

CSIRO LAND and WATER

CRC for Catchment HydrologyCRC for Catchment HydrologySocio-economic Analysis of Mature Socio-economic Analysis of Mature

Water MarketsWater Markets

CSIRO Land and WaterBogotá Nov 8th-10th

Social solutions for the management of social resources??The effect of information and communication in closed water

trading environments

Dr. John WardDr. John Ward ([email protected]) www.clw.csiro.au/research/peru

Seminario Internacional CONDESAN “Experiencias y Métodos de Manejo de Cuencas y su Contribución al Desarrollo Rural en los Andes”

Bogotá – Colombia, 8 a 10 de noviembre del 2004

CSIRO LAND and WATER - Policy & Economic Research Unit

Tasmania

Queensland

South Australia

Western Australia

NSW

NSW

Victoria

Murray Darling Basin


StorageLand use Water Yield

River

Wetlands

Rainfall

Ground water

Base flow

Surface Drainage

GW Recharge

Water Extraction

Irri

gati

on

, u

rban

&

ind

ustr

ial u

se $

xx

x

Comprehensive water accountsComprehensive water accounts

x


• As a result of water extraction society pays a socialized environmental cost.

• For this simulation: mixed policy instruments – Market for water trading– Environmental levy –

reflecting the socialized cost of water extraction.– Information and Community management –

River Management Committees – management through information and communication.

Experimental evaluation of Experimental evaluation of alternative environmental flow alternative environmental flow

management optionsmanagement options


Environmental Water Flows typify a Environmental Water Flows typify a Common Pool ResourceCommon Pool Resource

• Individual rationality – act opportunistically, maximising benefits free riding and socializing the cost.

• Group rationality - would reduce aggregate extraction and maximise group benefits


Monthly extraction levels given rainfallMonthly extraction levels given rainfall

Historic Median Environmental Flows

576

842

547

749 762

197

69 85157 181

360

632

0

200

400

600

800

1000

1200

Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept

Month

Volu

me (M

L)


Environmental levy = 000,100

)(12

1

2

t

tt wNaturalfloionAggExtract

Benefits of environmental flows are symmetric and equally shared by all the community any reduction in benefits (costs) are imposed equally

•Individual benefits of extracting and using water for irrigation are asymmetric and specific for farm characteristics.•Farmers can earn income by growing a crop and trading water. •Income from the game is proportional to a player’s skill in trade and farming according to their farm characteristics


Experimental Design Experimental Design The impact of the provision of information, The impact of the provision of information, discussion forums and sanctions with tradediscussion forums and sanctions with trade

Treatments No information

Aggregate Information

Aggregate Information and Discussion

Aggregate Information, Discussion and Sanctions

No trade 2 sessions 2 sessions 2 sessions 2 sessions

Closed call 2 sessions 2 sessions 2 sessions 2 sessions

Open call 2 sessions 2 sessions 2 sessions 2 sessions

Each session is comprised of 12 periods of monthly water decisions. Each period has 12 unique farms.


Research QuestionsResearch Questions

Given heterogeneous farms, how will the level of environmental flow, farm income and group accordance be influenced by:-

• The provision of aggregate information• Discussion forums• Disclosure of individual extraction information

In a market environment where there is:-• No trade in water entitlements.• A closed call auction structure.• An open call auction structure.


Policy elements for the simulation:Policy elements for the simulation:

• Market: Temporary monthly• Allocation type: Fixed allocation of water• Auction type: Closed or Open Call – pool

price with leverage• Pricing: Simple volumetric• Environmental Levy: Annual aggregate• Hydrological constraints to trade: None

Within a closed catchment, comprising heterogeneous farms facing uncertain rainfall.


Typical Farm Characteristics

Water supply available 960 MLHistoric usable rainfall to end of year 498 ML

Estimated max water needs to end of year 1275 ML

Estimated min water needs to

end of year 1020 ML

Marginal value of water $97 Traders income total $10

Players are provided with monthly updates on:

•Their water allocation and balance •Crop type, monthly crop income and monthly water requirements•Marginal value of water•Median monthly rainfall (which can vary)•Market outcomes (market price and volume traded if successful)Monthly aggregate extraction for all farms and the cost of the levy


Month Historic Median Rainfall

Maximum Water Usage

Actual Rainfall

Allocated Water Used

Total Water Use

Minimum Crop Water

Requirements

Qty sold

Qty bought

OCT 52 214 49 148 197 171 200

NOV 36 198 38 158

DEC 48 186 149

JAN 46 169 135

. . . . . . . . .

. . . . . . . . .

SEP 0 0 0

A Typical Water Use Table


Typical Farm Income Table

MonthTotal water usage

Monthly income

from crop

Crop Loss

Equilibrium Price

Cost of

water bough

t

Income from

sale of water

Total monthly income

Trader’s Income

OCT 197 19109 0 60 12000 7109 7.12

NOV

DEC

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

SEP


Four Assessment MeasuresFour Assessment Measures

• Accordance with environmental target.

• Aggregate traders’ income• Ratio of traders’ income to

environmental levy.• Accordance with agreed levels of

extraction


No Information

($)

AggregateInformation

($)

Aggregate Information and discussion ($)

Individual information and

discussion ($)

Average

No Trade 5.48 5.03 2.71 3.30 4.13

Closed Call

7.62 6.28 4.52 6.20 6.16d

Open Call

5.75 8.80 4.51 4.44 5.88d

Average

6.28a 6.70a 3.91b 4.65ab

Environmental targets ($ levy)

Notes: Information/communication treatment means with the same letter were not statistically different at =0.05.Trade treatment means with the same letter were not statistically different at =0.10


SummarySummary

• In these experiments the introduction of trade increased environmental damage.

• Disclosure of only the impact of aggregate extraction on riverine environments was found to be counter-productive to achieving environmental extraction targets in open call market experiments. This treatment resulted in the highest level of environmental damage.


• Environmental damage was minimised by providing aggregate environmental information with a forum for group discussion and agreement in a no trade experimental environment.


No Informatio

n ($)


($)


and discussion ($)

Individual information and discussion

($)

Average ($)

No Trade 38.10 39.55 43.20 42.88 40.94a

Closed Call 40.71 44.26 44.28 46.17 43.85ab

Open Call 45.24 43.22 49.67 47.59 46.43b

Average 41.35d 42.34 de 45.72e 45.55e

Aggregate Traders’ Income

Notes: Treatment means with the same letter were not statistically different at =0.05.


SummarySummary

• In these experiments average traders’ income increased with trade in all cases.

• Introducing aggregate extraction and environmental information increased average traders’ income in trade experiments compared to no trade experiments.


• Maximum average traders’ income was achieved by providing information on aggregate extraction, environmental targets and a forum for discussion in an open call market.

• Disclosure of individual information compared to aggregate information with discussion led to lower average traders’ income in all cases.

• Providing aggregate information and discussion produced higher average traders income compared to no information or aggregate information alone in all cases.


Ratio of income and environmental levies

No Information

Aggregate

Information


and discussion

Individual information

and discussion

No Trade

6.96 7.87 15.92 13.00

Closed Call

5.34 7.05 6.35 7.01

Open Call

7.87 4.91 11.00 10.72


SummarySummary

• Providing aggregate information and a forum for discussion without trade maximised the return per unit of environmental damage.

• Compared to aggregate information and discussion, providing individual information produced lower returns per unit of environmental damage and was therefore counter productive in all cases.


Accordance with group agreementsAccordance with group agreements

Aggregate information

and discussion

Individual information

and discussion

No trade 0.0165 0.0241

Closed 0.0148 0.0100

Open 0.0057 0.0133

Accordance measure=

12

1

2)(

1

ttt aggExtractaggAgree


summarysummary

• The highest level of level of accordance was observed in no trade experiments with individual information and discussion.

• The lowest level of level of accordance was observed in an open call environment with aggregate information and discussion.


Key Conclusions

1. The provision of aggregate extraction information without a formalised forum for communication is not effective in promoting players’ coordinating their extractions to avoid environmental damage.

2. Disclosure of individual information is not effective in modifying people’s extractions to be more in accordance with environmental targets.

.


3. The environmental damage was minimised by providing aggregate extraction information and a forum for discussion without a trading environment.

4. Average traders’ income was maximised providing information on aggregate extraction, environmental targets and a forum for discussion in an open call market.

5. Providing aggregate information and a forum for discussion without trade maximised the return per unit of environmental damage


0

200

400

600

800

1000

1200

1400

Oct Nov Dec J an Feb Mar Apr May J un J ul Aug Sep

month

No trade

Natural flow

Open

Closed

No Provision of Environmental Information


0

200

400

600

800

1000

1200

1400

Oct Nov Dec J an Feb Mar Apr May J un J ul Aug Sep

Month

No trade

Natural flow

Open

Closed

Environmental and Individual extraction Information and Group Discussion


MwaterExperimental Water markets in Action

• For further information, contact Dr John Tisdell, Griffith University, Australia: [email protected]

• Mwater is a methodological procedure and software platform for evaluating aggregate behavior of a market under controlled laboratory conditions.

• It yields a formal and replicable system for analyzing alternative market structures, without underlying assumptions concerning farmer behavior, before they are actually implemented.

CSIRO LAND and WATER CRC for Catchment Hydrology Socio-economic Analysis of Mature Water Markets CSIRO Land and Water Bogotá Nov 8 th -10 th Social solutions.

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