Economic Dimensions of Integrated Water Resources Management Training of Trainers Integrated Water Resources Management.

Economic Dimensions of Integrated Water Resources Management

Training of Trainers

Integrated Water Resources Management

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Water is necessary for all human activities, and finite

Its allocation and management will therefore have impacts on: levels of growth patterns of growth and distributions of wealth

It is important that water resource professionals understand the economic (not just financial) implications of their policy decisions

Economics can help inform and implement better projects and policies

Why must we be subjected to a discussion of economics?

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Focus on four themes for discussion:

1. Water resources and the economy

2. The value of water

3. Economic tools for water resources management

4. Managing water resources across boundaries

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Water affects economies via:

basic needs environment productive input opportunities expectations

Theme 1. Water resources and the economy

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Incentives and efficiency – rates of growth

Inter-sectoral allocation - structure of the economy

Spatial allocation - patterns of growth

Water resource policies

Support or subvert economic development goals?

Support or subvert conservation and environmental sustainability?

Achieve equity goals?

Promote economic resilience or vulnerability to water shocks?

Water resource policies affect the economy via:

Theme 1. Water resources and the economy

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Water as an Economic Good “Water has an economic value in all its competing uses and should be recognized as an economic good.” (Dublin Principles)

Theme 2.The Value of Water

What does this mean? Water is a finite and valuable resource that must be allocated with

regard for efficiency as well as equity In different uses, water will have different values

What does this not mean? It does not change the fact that water is also a social and

environmental good Does not necessarily require full-cost pricing – just full cost mgmt

by government

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Opportunity Costs are the value of foregone opportunities for alternative water uses

Externalities occur when the actions of one water user affect the interests or well-being of another user, they are the consequences of the actions of specific water users on “external” parties Positive or negative Multi-directional

Diminishing marginal returns

Some important concepts:


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“User value” is the value that can be derived from a single, specific use of water

“Systems value” is the aggregate value that a unit of water can generate as it moves through the river system before it is consumed or lost.

Integrated water resource management shifts focus from user to system values, accounting for opportunity costs and internalizing externalities


Calculating water values from alternative perspectives

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Two-User System with Irrigation and Hydropower Potential

Water Source

Dam “A” $0.01/m3

Dam “B” $0.02/m3

Irrigation Area “C” returns $0.04/m3

Irrigation Area “D”returns $0.05/m3

5% evaporation

losses

10% evaporation

losses

Ocean


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Development Path 1: Upstream agriculture

Source

Dam “A” $0.01/m3

Dam “B” $0.02/m3



5% evaporation

losses

10% evaporation

losses

Ocean

•Abstract at “C”

•Provides irrigation upstream

•System Value: (1-0.05)*($0.04) =$0.038 /m3

•User Value: $0.04 /m3


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Development Path 2: Upstream power & downstream agriculture

Source

Dam “A” $0.01/m3

Dam “B” $0.02/m3



5% evaporation

losses

10% evaporation

losses

Ocean

•Abstract at “D”

•Provides power upstream at “A”

•Provides irrigation downstream at “D”

•System Value: [(1-.05)*$0.01/m3 ]+ [(1-.05)(1-0.1) ($.05/m3) ] = $0.061

•User Values: $0.01 /m3 & $0.05/m3


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Development Path 1 yields lower System Value ($0.038/m3), with all benefits accruing to upstream user.

Development Path 2 yields higher System Value ($0.061 /m3), with benefits to both users.

The downstream user will prefer Path 2, where he benefits. The upstream user will prefer Path 1, where system-wide benefits are

smaller, but upstream riparian reaps higher gains. Some form of mandate or benefit sharing/redistribution will be required to

motivate Development Path 2.

Results


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System values of water will be driven by the range of potential user values in the system

Some user values may be higher than system values (because they don’t recognize systems losses such as evaporation)

Economic optimization does not necessarily exclude low value uses of water Development paths that combine both consumptive and non-consumptive

uses of water will increase systems values Integrated management of a river system will virtually always enable greater

total productivity - but distributional issues may well arise

Lessons of alternative valuation exercise


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Theme 3.Economic tools for water resources management

Economic tools can be used to support and implement water resource management policies:

•To allocate

•To protect quality

•To conserve quantity

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Multi-purpose market-based tools:

– Pricing

– Licenses and permits

– Fees and fines

– Water Markets

………. institutions and participation are important non-market tools for

implementation


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Why is pricing so important?

Revenue sufficiency; revenues adequate to operate & maintain the system, & extend service new customers

Resource allocation; signal socially appropriate water resource allocation, ensuring that values to society outweigh their costs

Resource conservation; signal the value of water, encourage efficient use and conservation

Getting prices “right”: recognizing the incentives resulting from price structures, and ensuring they align with social objectives


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Types of water pricing

Bulk water pricing Sectoral and regional impacts Blend prices, inherent cross-subsidies

Retail tariff structures volumetric pricing 2-part tariffs drought schedules ceiling at 2-5% of income


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Pricing as a tool– Complex– Costly to administer, particularly volumetric pricing– Can easily be targeted to encourage specific behavioral changes– Can generate significant revenue– Can be socially complex


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Licenses and permits as tools– Simple instruments– Relatively low costs of administration– Often very challenging to monitor and enforce– Often ineffective in encouraging specific behavior– Generally do not generate significant revenue


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Fees and fines as tools– Simple– More costly to administer– Can easily be targeted to encourage specific behavioral changes– Challenging to monitor and enforce– Generally do not generate significant revenue


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Optimal management requires basin-wide IWRM cooperation Riparian relations within a broader regional context

History Catalyst for regional cooperation and integration

No clear legal framework for cooperation Political decisions Cooperation must benefit all parties Cooperation must be perceived as fair by all parties

Riparian Dynamics

Theme 4.Managing water resources across borders

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Sharing water – sharing benefits

Expanding the range of benefits

Expanding the sum of benefits Identifying & quantifying (user values) Optimizing (system values)

Sharing benefits (redistribution)

Economic dimensions of transboundary cooperation


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Optimal river development may give rise to an unacceptable distribution of benefits

Mechanisms for redistribution

Water sharing

Payments for water

Payments for benefits

Purchase agreements

Financing, ownership and operational arrangements

Bundling broader benefits

Sharing Benefits


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Summary

Water resources management policies have profound effects on economies

As water becomes increasingly scarce relative to demand, the economic impacts and equity implications of water resources management decisions will become more striking

Economic analysis is essential to inform water resource management policies

Economic tools can be highly effective in implementing water resources management

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Thank you.

Economic Dimensions of Integrated Water Resources Management Training of Trainers Integrated Water Resources Management.

Documents

alternative water

water shocks

unit of water

economic good water

water resource professionals

economic value

claudia sadoff

wbi washington