Water Economics and Policy

Sustainable water management is challenging because of the wide range of agents who need water and the different kinds of use, in a context of limited water availability. The availability of water for use, at a given point in time and space, depends on numerous physical and climatic variables, as well as upstream uses and downstream commitments. Therefore, any analysis of water use and management must inevitably be made in the context of such variability. This paper develops an integrated, multiregional, hydro-economic modeling framework to analyze the spatial and temporal dependencies between economic agents in the different regions and areas of a river basin. We combine hydro-economic modeling (partial economic equilibrium) and a multiregional input–output model (general equilibrium) to take advantage of both methodologies. Spatial variability is considered in the input–output models, but variability in both time and space is also considered by the hydro-economic model. Hydro-economic models are used to quantify direct impacts, but not indirect impacts in some specific sectors of the economy, while the input–output model reveals the relationships between all sectors and regions, and facilitates the assessment of total impacts (direct plus indirect) of a range of scenarios. While the methodology described in this paper is applicable to any river basin, the case study considered is the Ebro River Basin, in Spain. To show the potential of the modeling framework, two scenarios are simulated to assess the impacts on water use, value added, and jobs across scales. The results of these scenarios show that decreases in water availability have negative impacts on socio-economic variables (value added and employment). The trade-off between water availability and socio-economic variables depends on the temporal and spatial variability of the resource, and affects each location in the basin in a different way, demonstrating the importance of the methodology developed.

Climate variability is reflected in water affluence that directly impacts the availability and level of water in reservoirs. Economic instruments, such as tariffs, are increasingly being used to promote the rational use of water. This study offers a floating rate model for charging raw water as a function of the reservoir level. The model was designed in the Jaguaribe–Metropolitan System, a place characterized by water-use conflicts during water scarcity. The model was developed as a function of the unit payment capacity (UPC) and drought states of the hydrographic regions. We applied the free software R and PSO optimization package to define the optimal UPC fraction and evaluated the model sensitivity using a synthetic series generated with the Markov chain method. Consequently, we observed that comfortable, alert, and critical situation levels predominated in the sensitivity analysis, and the average collections paid for administration, operation, and maintenance (AO&M) costs. In some cases, a collection surplus that can be managed through a financial fund to finance the system in periods of critical shortage is generated.

The efficient and optimal management of water resources is of great importance due to the strong dependence of human life on water. Also, the availability and utilization of the existing water resources in regions with water shortages, such as the Middle East, impose high social, economic, and environmental costs. Therefore, water resource management policies should incorporate all aspects of supply, allocation, control, and monitoring of resources. This study provides a dynamic simulation model for water resource management in the Yazd province of Iran to examine the effect of different policies on the other variables and choose the most suitable policies over time. For this purpose, we used a system dynamics approach to propose an integrated water resources management model, considering a comprehensive view of different aspects. The proposed model included over 230 influential variables in water resources, along with economic, demographic, technological, agricultural, industrial, public policy-making, water demand-supply, and virtual water volume subsystems. After we validate the model, we define three scenarios (optimistic, baseline, and pessimistic) and four policy packages (i.e., business as usual, focusing on economic development, focusing on sustainable development based on ecological balance, and focusing on water conservation) in the time horizons of 10, 20, and 50 years. The simulation results indicated that we require a reform in the Yazd economic development strategies through policies such as changing the cropping pattern and reducing water-consuming industries. Moreover, water supply enhancement by raising the inter-basin transfer of water alone cannot be an effective solution for reducing the water shortage in Yazd province and may even worsen the water shortage in the long run. We conclude that the “Focus on Water Conservation” policy is the best solution to reduce water shortage. The results of the baseline scenario show that adopting the FWC policy changes the increasing trend of water shortage in the province and decreases them from more than 53 billion m³ in the “Business as Usual” policy to less than 20 billion m³ in the year 2040. As the FWC would decrease more than 10 billion m³ of the virtual water level imbalance compared to BAU policy and make more investments in water efficiency plans, it preserves the current resources of water in the long run.

This study develops a hydro-economic model for the coastal aquifer Mahdia Ksour Essef in Tunisia in order to analyze how external shocks (climate change, energy price increase) and management policies can affect groundwater sustainability during the coming decades. Twenty-one scenarios covering three management policies (free market, partial cooperation, and full cooperation policy) under various potential climate and economic changes are evaluated. The results of scenario simulations show the potential impact of energy soaring prices and climate change on the aquifer’s water table level, groundwater extractions, cropland areas, and farmers’ benefits under each policy option in the future. They also show that the best scenario to address the effects of climate change would need to take into account environmental externalities and efficient energy prices. The findings of this study are very important in the context of climate change and uncertain global energy markets and provide feasible alternatives to preserve the regional economy and aquifer sustainability.

Although the temporal transferability of input–output (IO) models has been examined before, no study has investigated the impacts of changing water availability conditions over time, e.g., due to climate change, on the predictive power of water-inclusive IO models. To address this gap, we investigate the performance of inter-regional supply-side input–output (ISIO) models that incorporate precipitation and water intake under varying climates over time in a transboundary water management context. Using the Saskatchewan River Basin in Western Canada as a case study, we develop four ISIO models based on available economic and hydrological data from years with different climatic conditions, i.e., two dry and two wet years. Accounting for price changes over these years, our findings indicate that the joint impact of changes in water availability and economic structural changes on economic output can be considerable. The results furthermore show that each model performs particularly well in predicting the economic output for similar climatic years. The models remain reliable in predicting economic outputs over several years as long as changes in water availability are within the range observed in the water-inclusive base year ISIO model.

Hydro-economic modeling (HEM) addresses research and policy questions from socioeconomic and biophysical perspectives under a broad range of water-related topics. Applications of HEM include economic evaluations of existing and new water projects, alternative water management actions or policies, risk assessments from hydro-climatic uncertainty (e.g., climate change), and the costs and benefits of mitigation and/or adaptation to such events. This paper reviews applications of HEM in five different categories: (1) climate change impacts and adaptation, (2) water–food–energy–ecosystems nexus management, (3) capability to link to other models, (4) innovative water management options, and (5) the ability to address and integrate uncertainty. We find that (i) the increasing complexity and heterogeneity of water resource management problems due to the growing demand and competition for water across economic sectors, (ii) limited availability and high costs of developing additional supplies, and (iii) emerging recognition and consideration of environmental water demands and value, have inspired new integrated hydro-economic problems and models to address issues of water–food–energy nexus sustainability, resilience, reliability through water (re)allocation based on the relative “value” of water uses. In the past decade, the field of HEM has improved the integration of ecosystem needs, but their representation is still insufficient and mostly ineffective. HEM studies address how to sustainably manage water resources, including groundwater which has become an area of particular interest in climate change adaptation. The current most used spatial and temporal resolutions (basin-scale and yearly time-step) are appropriate for planning but not for operational decisions and could be underestimating impacts from extreme events (e.g., flood risk) captured only by sub-monthly time scales. In addition, HEM primarily focuses on biophysical and economic indicators but often overlooks preferences and perspectives of stakeholders. Lastly, HEM has been widely used to analyze transboundary cooperation, showing benefits for increasing water security and economic development, particularly as climate change develops. We conclude that the field of HEM would benefit from developing more operational models and enhancing the integration of commonly neglected variables, such as social equity components, ecosystem requirements, and water quality.

Can artificial intelligence (AI) help enable a new pluralistic and multi-dimensional cost-benefit analysis (CBA) for complex human-natural systems? Yes, it can. This policy brief quickly summarizes the history of water economics and considers how environment and infrastructure planners and investors can exploit a new approach to address today’s climate, water scarcity and environmental inequity crises.