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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:
Theme 2.The Value of Water
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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
Theme 2.The Value of Water
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
Theme 2.The Value of Water
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Development Path 1: Upstream agriculture
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
•Abstract at “C”
•Provides irrigation upstream
•System Value: (1-0.05)*($0.04) =$0.038 /m3
•User Value: $0.04 /m3
Theme 2.The Value of Water
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Development Path 2: Upstream power & downstream agriculture
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
•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
Theme 2.The Value of Water
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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
Theme 2.The Value of Water
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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
Theme 2.The Value of Water
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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
Theme 3.Economic tools for water resources management
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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
Theme 3.Economic tools for water resources management
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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
Theme 3.Economic tools for water resources management
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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
Theme 3.Economic tools for water resources management
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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
Theme 3.Economic tools for water resources management
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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
Theme 3.Economic tools for water resources management
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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
Theme 4.Managing water resources across borders
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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
Theme 4.Managing water resources across borders
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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.