Water Economics and Policy

Biofuel mandates are being widely used by countries to achieve multiple objectives of energy security and climate change mitigation. The Renewable Fuel Standard (RFS) in the US specifies arbitrarily chosen volumetric targets for different types of biofuels in the US based on their greenhouse gas intensity only. Cellulosic biofuels from high yielding energy crops like miscanthus have the potential to co-generate multiple environmental impacts, including reducing nitrate runoff, being a sink for Greenhouse Gas (GHG) emissions and providing a given volume of biofuel with less diversion of land from food crop production than corn ethanol, but at a significantly higher cost. This paper quantifies the tradeoffs between profitability, food and fuel production, GHG emissions and nitrate runoff reduction with different types of biofuels in the Sangamon watershed in Illinois and analyzes the optimal mix of biofuels as well as the policies that should supplement the mandate to achieve multiple environmental outcomes. We find that a two-thirds share of cellulosic biofuel in the mandated level could reduce nitrate run-off by 20% while reducing GHG emissions by 88–100% but would reduce profits by 15–27% depending on whether a GHG policy or a Nitrate policy is used relative to the case where the mandate is met by corn ethanol alone. Additionally, the ratio of corn stover to miscanthus used to produce cellulosic biofuels is higher under a GHG policy compared to a Nitrate policy that achieves the same level of nitrate reduction. Our results show that the optimal mix of different types of biofuels and the policy to induce it depend on the environmental objectives and the tradeoffs that society is willing to make between low cost energy security, food production and various environmental benefits.

Climate change is expected to alter the supply and demand for water in the residential sector. Existing studies exploit the differences in climate across seasons mostly in North America and Europe, and identify changes in consumption levels attributed only to households' short-term responses. The results from models that simulate household consumption of water are sensitive to the parameters that govern the behavior of climate variables and household responses in the upcoming decades, and fail to consider short-term determinants of water consumption. The findings in the literature suggest an inexistent or small effect of climate on residential water demand. This paper studies the relationship between climate conditions and residential water consumption that corresponds to households' long-term adaptation to climate, while controlling for the effect of short-term determinants of water demand. I take advantage of the geographic variation in climate conditions across municipalities of Ecuador to identify the effect of temperature, precipitation and humidity on water demand. I adopt average prices and an IV technique to address the endogeneity problem between water prices and quantities that arise from the use of increasing-block water tariffs. I find a large and significant effect of temperature on residential water demand, whereas precipitation and humidity have a small effect. Temperature also has a stronger effect on water demand among low-income households.

Water planners are increasingly in need of raising more complete information on the hydrological and economic consequences of water management in order to take adequate decisions to secure water supply in the future. This paper combines a scenario-based modeling of future impacts on water availability at basin level with economic valuation to answer the following questions: Which is the most cost-effective adaptation strategy? Is adaptation bringing net benefits to society as opposed to no adaptation? How to select an efficient adaptation level, if any, when facing uncertainty on which future scenario will apply? The model integrates cost-effectiveness analysis of adaptation measures, monetary valuation of avoided scarcity impacts and hydrologic modeling. By testing a set of cost-effective strategies at basin level in several potential short-term drought scenarios, we identify the most efficient strategy that should be implemented by water planners. The model is applied to the Llobregat river, in north-east Spain.

In an earlier paper (Kirby et al. 2014a), we showed that climate change and a new policy which reallocates water to the environment will impact both the flow of water and the income derived from irrigation in the Murray–Darling Basin. Here, we extend the analysis to consider irrigator and environmental water management strategies to adapt to these new circumstances. Using an integrated hydrology-economics model, we examine a range of strategies and their impact on flows and the gross income of irrigation.

We show that the adaptation strategies provide a range of flow and economic outcomes in the Basin. Several strategies offer significant scope to enhance flows without large adverse impacts on the gross income of irrigation overall. Some environmental water management strategies enhance flows in the Murray part of the basin even under the drying influence of a projected median climate change. Irrigator strategies that include carryover of water in storage from one year to the next provide for lesser year to year variability in gross income and may be regarded as more advantageous in providing security against droughts. Flows and the gross income of low value irrigation industries strategies are sensitive to climate change, irrespective of adaptation strategy. Should a projected dry extreme climate change be realized, no strategy can prevent a large reduction in flows and also in gross income, particularly of low value irrigation industries. Nevertheless, environmental water management strategies mitigate the impact on flows, and in some cases may also help mitigate the impacts on gross income. High value irrigation industries are less affected (in terms of gross income, though net income will reduce because of rising water prices) by projected climate change, consistent with observation in the recent long term drought.

This study investigates the effect of electricity subsidies on economic and groundwater dynamics. The analysis follows from a dynamic, multisector and general equilibrium model in which both aquifer hydrology dynamics in the Punjab region of India and capital accumulation across India are endogenous. The model predicts Punjabi aquifer depletion which has distinct regional impacts and slight spillovers on the rest of the Indian economy. From the Punjab perspective, electricity subsidies encourage higher levels of groundwater extraction than one would observe in the absence of the subsidy. In turn, the higher levels of groundwater extraction increase agriculture's ability to compete for labor and other farm inputs. Even with the subsidy, however, as the economy transitions to the long run equilibrium, groundwater tables fall and more electricity is needed to supply the same amount of water used in the previous period. These forces slowly diminish agriculture's ability to compete for resources and the sector eventually loses resources to the rest of the economy and in turn, agricultural income falls over time. These dynamics are accentuated when the subsidy is removed, leading to a more rapid decline in Punjabi agricultural income.

Our empirical findings suggest eliminating the 'electricity for irrigation' subsidy leads to double gains: An environmental gain and an economic gain. The environmental gain is a slower rate of aquifer depletion over time relative to a subsidy world. Removing the subsidy discourages production of high water-intensive crops, thus slowing the rate of groundwater extraction. Although removing the subsidy increases agricultural production costs, it makes electricity less expensive for competing sectors, namely manufacturing, which in turn leads, over time, to increased electricity, capital and labor demand from manufacturing. This reallocation of resources to more productive sectors in the economy leads to an increase in Punjabi gross state domestic product, as compared to the case where electricity is subsidized. The empirical results suggest removing Punjabi electricity subsidies entails trade-offs between agricultural and manufacturing income and has implications for long term water use. Empirical results also suggest that correctly calculating the "stock" value of a natural resource requires macroeconomic data and hence, may be impossible to conduct in a partial equilibrium setting.

This paper is devoted to some important welfare economic issues related to natural disasters, in particular those connected with floods and storms. Our analysis of the social cost of a natural disaster is different from (most) existing analyses, in that we focus sharply on the welfare effects of a disaster. We derive a simple dynamic general equilibrium cost–benefit rule, which captures loss in production of private and public goods, as well as the value of (statistical) lives lost; it also clarifies the role played by changes in stocks and flows, respectively. Standard analysis of losses typically only includes damages to market-priced stocks and flows, thus our model paints a different picture of social cost. This difference is particularly striking for disaster that results in many deaths, but has relatively low (reported) costs. We take our model to the data by using EM-DAT, one of the several prominent databases in this literature, focusing on water-related disasters in the US.

The possibility of climate change and the effects it will have on global and regional hydrology opens up serious questions about how the affected sectors of the economy and the water-dependent environmental assets can best adapt to the new, harsher climatic conditions. One of the possible approaches toward securing environmental water flows is to hold water rights on behalf of the public, and manage those rights for environmental purposes. This type of policy has been in effect in the Murray-Darling Basin, Australia, where the Commonwealth Environmental Water Holder (CEWH) now has some 20% of all water rights in the basin. Thus far, the use of these water rights has been almost exclusively for environmental purposes, besides the calls for some of the allocations on these water rights to be sold to irrigators. This paper examines whether a change in policy that will allow a more flexible trading behavior of the CEWH so that it can be an active participant in the market for water allocations can help with adaptation to climate change from environmental management perspective, as well as from the perspective of irrigated agriculture industry. This objective is pursued by analyzing the effects of likely hydrological variations under climate change. Key parameters that are taken into account are expected water availability, and the variability in water availability. The discourse is framed within the concept of optimal allocation of water resources so as to maximize overall social benefit from water use. The results indicate that active participation of the CEWH in the water market leads to superior outcomes in terms of both greater overall social benefit, and greater quantity of water being available for environmental purposes under climate change. The key policy implication is that trading rules for CEWH should be relaxed, especially under the projected climate change scenarios.

The potentially-adverse impact of salinity on paved roads is well-established in the engineering literature. The problem seems destined to grow, as climate-related changes in sea level and riverine flows drive future increases in soil salinity. However, data scarcity has prevented systematic analysis for poor countries. This paper assesses the impact of soil salinity on road maintenance expenditures in the coastal region of Bangladesh. The assessment draws on new panel measures of salinity from 41 stations in coastal Bangladesh, and road maintenance expenditures, income, road network length and road surfaces from 20 coastal municipalities. In a model relating to maintenance expenditure for paved roads to soil salinity, municipal income and road network length, large and significant effects are found for salinity. The regression model is used to predict the effect of within-sample salinity variation on road maintenance expenditure share, holding municipal income and road length constant at sample mean values. Increasing salinity from its sample minimum to its sample maximum increases the predicted road maintenance expenditure share by 252%. The implied welfare impact may also be substantial, particularly for poor households, if diversion of expenditures to road maintenance reduces support for community sanitation, health and other infrastructure-related programs.