Governor’s Conference on the Future of Water in Kansas

October 30-31, 2012

The Economic Value of WaterWednesday, Oct. 31

Hilton Garden Inn & Conference CenterManhattan, Kansas

8:45 – 9:30 AM

Frank A. WardCollege 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

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.

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

– industry – environment – mining – recreation – flood control – hydropower

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Economic Value of Water:One clear definition (Erin Ward)

• Dollar sign + number

Marginal Value of Water in Irrigation, Rio Grande, USA, 2006, $/ac-ft (no gw access)

Supply Drip Subsidy Prices Costs $

Normal

0base

Base 52-20% 202

+20% Base 221-20% 380

100%base

Base 98-20% 248

+20%Base 268-20% 425

-50%

0base

Base 245-20% 396

+ 20%Base 446-20% 604

100%base

Base 268-20% 418

+ 20%Base 471-20% 628

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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