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In this paper, we estimate the resource costs of agricultural water use and simulate the environmental and economic impacts of their recovery. To this end, we develop a socio-hydrology-inspired, dynamic, protocol-based modular approach that interconnects economic and hydrologic modeling via two-way feedback protocols. The hydrologic module is populated with the AQUATOOL model, the Decision Support System used in Spanish river basins; while the economic module is populated with an ensemble of four Mathematical Programming Models (MPMs) that capture human agency and responses. This allows us to sample uncertainty and provide a range for resource costs estimates and the environmental and economic impacts of their recovery, rather than a point estimate. Methods are illustrated with an application to the Órbigo Catchment, a sub-basin of the Douro River Basin in Spain. Our results suggest significant resource costs (a 34–62% increase in existing charges, depending on the model) with non-trivial impacts on income (2–27% reduction) and the environment (water savings range between 6% and 69%), while the impact on tax revenue is ambiguous yet potentially significant (between [Formula: see text]2.3 million EUR/year and 5 million EUR/year).

This chapter discusses major economic challenges and outlines key economic considerations in the design and implementation of water allocation reforms where agriculture is a major water use. It first examines key economic issues in water allocation reform, focusing on the challenges brought by the trade-offs between efficiency, social (distributive) justice, environmental sustainability and institutional reform, and the inherent uncertainties in managing these trade-offs, which are amplified by the complex nature of social-ecological systems. Based on this analysis, the chapter outlines a series of principles towards a water allocation reform that achieves sustainable, equitable and robust economic growth, and discusses the role of economic instruments in such reform. Finally, it identifies persistent research gaps towards delivering actionable science for informed water (re)allocations.

The economic literature has extensively researched water markets, finding that this instrument can deliver superior resource allocations under growing scarcity. However, these assessments typically ignore the information, bargaining, and enforcement costs that occur in trades, known as transaction costs, which can be particularly relevant in emerging markets such as those for water. This paper presents a multi-agent cellular automata model that couples a positive multi-attribute utility programming (PMAUP) model with an agent-based model (ABM) to elicit the information transaction costs of water trading under alternative market and climate scenarios. A first experiment evaluates an ideal water market with no transaction costs, which is then compared to alternative decentralized spot market setups representing different degrees of information availability that are modeled using the coupled PMAUP-ABM. The difference between the economic surplus under the ideal market and that achieved under alternative market setups with information constraints is used as a proxy value of information transaction costs. Methods are illustrated with an application to the Douro River Basin in central Spain. Results show that information transaction costs can reduce the economic surplus between 0.6% and 45% depending on the scenario.

[EN] Agricultural economics Water Programming Models (WPM) has found that irrigators in water scarce areas have a rather inelastic response to water prices, making water pricing cost-ineffective towards water saving. We hypothesize that the predicted water saving performance of pricing is significantly underestimated by issues of model structure, due to the exclusion of deficit irrigation from the set of decision variables available to agents in conventional WPM. To test our hypothesis, we develop a model that integrates a continuous crop-water production function into a positive multi-attribute WPM, which allows us to assess agents¿ adaptive responses to pricing through deficit irrigation. The model is illustrated with an application to the El Salobral-Los Llanos irrigated area in Spain. Our results show that incorporating deficit irrigation as an adaptation option makes the water demand curve significantly more elastic as compared to an alternative model setting where deficit irrigation is precluded. We conclude that ignoring deficit irrigation can lead to a significant underestimation of the cost-effectiveness of water pricing towards water saving., The research leading to these results has received funding from the Program for the Attraction of Scientific Talent through the Project SWAN (Sustainable Watersheds: Emerging Economic Instruments for Water and Food Security), from the Biodiversity Foundation of the Spanish Ministry for Ecological Transition through the Project ATACC (Adaptacion ¿ Transformativa al Cambio Clim¿ atico en el Regadío) and from Programa Operativo FEDER Andalucía 2014-2020 through the project SEKECO (Evaluacion de estrategias de adaptacion a la sequía bajo el actual escenario de cambio climatico) Ref 1263831-R. This work was additionally supported by the ADAPTAMED (Design and evaluation of adaptation strategies to climate and global change in Mediterranean basins with intensive use of water for irrigation) national research project funded by the Spanish Ministry of Science and Innovation (RTI2018-101483-B-I00) with European FEDER funds.

This paper compares the economic performance of a dam construction strategy versus a no dam construction (i.e., the statu quo) strategy under multiple scenarios and using a multimodel ensem...

In the immediate future, accessible runoff of fresh water is unlikely to increase more than the demand forecasted. It will have an impact on economic growth as it may reduce the per capita income of countries and create water conflicts. Such global threat creates a policy conundrum of how to meet basic needs and maximise the benefits from water resources. This chapter investigates different economic instruments in alleviating water-related risks and dealt with associated impacts.

Coase shows how costly resources are (re)allocated via costly institutions, and that transaction costs must therefore be positive. However, Coase did not elaborate on transitions between institutions which incur positive transaction costs that are characterized by numerous institutional complementarities, that is, feedback loops that inform the need for, and pathways toward, institutional change. Economic investigations of complementary modes of (re)allocation are rarely undertaken, let alone studies of transitions between modes. However, modes of (re)allocation that achieve similar results at less cost are generally viewed as having production-raising value. This paper measures the costs of transitioning drought management institutions in Italy toward informal, participatory, and consensus-based approaches during several recent drought events. The chosen model is Drought Steering Committees, which offer a substitute for current formal (less flexible) planning approaches, and where lower transaction costs that are associated with the transition are inferred. Our results highlight the relevance of empirical assessments of &lsquo, costly&rsquo, transitions based on a historical study of transaction costs, as well as supporting previous works that highlight the value of contextual analysis in economic studies, in order to identify the benefits of institutional investment.

This paper develops an iterative micro-macro-economic modeling framework to assess agricultural water management policies including feedbacks between local and economy-wide impacts. The main contribution of the paper is the introduction of a set of bidirectional protocols that work through land use and price changes to model the bilateral feedbacks between the micro and macro scales. The proposed framework is applied to the Castile and Leon Region in Spain, where we assess the performance of two alternative water conservation policies (charges and caps) and compare results to those obtained using a conventional stand-alone microeconomic model. We find that, as compared to the proposed modular framework, the assessment of water conservation policies using conventional stand-alone microeconomic models is expected to overestimate water conservation and underestimate economic performance. Overall, our results suggest that water conservation targets can be achieved with lower economic losses than those anticipated by conventional stand-alone microeconomic models.

AbstractGrowing population and water demand (e.g for irrigation, water supply) and the vagaries of climate, now aggravated due to climate change, intensify societal exposure to water extremes and the economic and environmental impact of floods and droughts in Mediterranean basins. The Douro River Basin Authority (DRBA) in central Spain is assessing whether to build a dam in the Cega Catchment (Spain) with the twofold objective of substituting irrigation withdrawals from overallocated aquifers with relatively more abundant surface water, and of mitigating flood damage in the middle and lower stretches of the Cega River -the only non-regulated river in the DRB. This paper assesses and compares the costs of two alternative adaptation strategies to growing scarcity and more frequent and intense water extremes, namely dam construction v. the statu quo strategy where no dam is built. To this end, a Positive Multi-Attribute Utility Programing (PMAUP) that mimics farmer´s behavior and responses is used to assess the impacts on agricultural employment and gross value added of selected strategies in the irrigation sector; while the hydrologic model River Analysis System (HEC-RAS) is used to simulate the economic impact of flood events considering standard return periods, based on the global flood depth-damage functions developed by Huizinga et al. (2017). Both models are used to run 900 simulations reproducing alternative socioeconomic and climatic/hydrologic scenarios. The result is a database representing multiple plausible futures, which is used to identify vulnerabilities of proposed adaptation strategies and potential tradeoffs between responses -notably those referring to the design and operation rules of the dam, and the potential impact of floods and droughts. This methodology and the resultant database are combined with experts’ knowledge through robust decision-making tools to identify the preferred (i.e. robust) adaptation policy.

Farming accounts for approximately 70 percent of freshwater withdrawals worldwide, and it often constitutes the lowest value use of freshwater. Where water is scarce, advanced irrigation te...

The transfer of successful water market governance between international settings is increasingly attractive to policy makers under globalization. This paper tests lesson-drawing approaches to water market governance transfers using data from Spain and the Murray-Darling Basin, Australia. Spain is the blueprint country for water market adoption in Europe, while Australia is often presented as a world leader in innovative water market arrangements. A preliminary comparative analysis framework linking water market governance principles to observed institutional arrangements and outcomes is provided. Finally, some key lessons, problems and policy transfer potential to stimulate and enhance Spanish water markets from lesson-drawing approaches are drawn, with an emphasis on adaptive capacity as an institutional performance metric. We find that Spain’s current water governance institutions and arrangements offer a solid platform for marketing reform, where some key adaptive capacity constraints are able to be addressed. The lessons drawn from this study highlight those areas of change which, while challenging, can be achieved in our view.

Despite major recent advances in socio-hydrology and hydroeconomics research, interdisciplinary methods and models for water policy assessment remain largely concealed to the academic arena. Most river basin authorities still base decision-making on inputs from hydrologic Decision Support Systems (DSS), and have limited information on the economic costs that water policies may impose on the economy. This paper presents a time-variant hierarchical framework that connects a hydrologic module and an economic module by means of two-way feedback protocols. The hydrologic module is designed to fit the AQUATOOL DSS, the hydrologic model used by Spanish river basin authorities to inform decision-making at a basin scale; while the economic module is populated with a Positive Multi-Attribute Mathematical Programming (PMAMP) model that represents the behavior and adaptive responses of irrigators. The proposed hierarchical framework is used to assess the economic repercussions of strengthening irrigation quotas so to achieve minimum environmental flows in the Douro River Basin (Spain) under climate change. Results show that reductions in agricultural water allocations to meet environmental flow requirements create nonlinear incremental profit and employment losses in irrigated agriculture that are on average low to moderate (between −4% and −12.9 % for profit, and between −4.6 % and −12 % for employment, depending on the scenario). During extreme droughts, the abrupt reductions in water availability and agricultural allocations can test farming systems past the breaking point and lead to catastrophic profit and employment losses (>80 %).

Most water conservation policies will target agriculture, the largest human consumptive use and that concentrating the marginal (i.e. least productive) uses of the resource. Adaptation to irrigation rationing policies at the micro level will have an impact on agricultural outputs and propagate to the rest of the economic sectors at a regional and supra-regional (macro) scale. As the economy transitions towards new equilibrium commodity prices, the relevant prices for agriculture will change and this will in turn affect irrigators’ decisions. This paper proposes an iterative coupling between a decentralized, non-parametric Positive Multi-Attribute Utility Programming representation of irrigators and a regionally-calibrated Computable General Equilibrium model to assess interlinkages (i.e. two-way feedbacks) between the micro- and macro-economy. Results from an application to irrigation water charges in the Murcia Region in Spain show that the coupled micro–macro model yields lower abatement costs as compared to the stand-alone micro model.

The accurate understanding of the human-modified water cycle calls for a detailed representation of human and water systems, including relevant non-linearities, and of the feedback responses between them. This paper couples a microeconomic Positive Multi-Attribute Utility Programming model with a Hydrologic Modeling System (HEC-HMS) with the objective of incorporating the behavior and adaptive responses of human agents into the representation of the human-modified water cycle. The coupling occurs in a sequential fashion using bidirectional protocols that represent the feedback responses between the microeconomic and hydrologic modules through common spatial elements and variables. The proposed model is illustrated with an application to agricultural water management in the Upper Tagus River Basin in Spain. The non-linear responses observed in the modeled human-water system suggest that strengthening the agricultural water allocation constraint can avert or delay drought negative environmental impacts with a less-than-proportional yet incremental impact on Gross Value Added and employment.

The Piedmont Region in NW Italy has recently deployed an ambitious and pioneering agricultural water pricing reform aimed at integrating and effectively enforcing EU's Water Framework Directive principles of cost recovery, polluter-pays and affordability. This paper develops a multi-model ensemble framework encompassing 5 mathematical programming models (2 Positive Mathematical Programming models, 2 Positive Multi-Attribute Utility Programming models and 1 Weighted Goal Programming model) that represent the observed behavior of socioeconomic agents to: 1) simulate the impacts of the Piedmontese water pricing reform on land use allocation and management, water conservation, profit and water tariff revenue; 2) sample modeling uncertainty through the ensemble spread; and 3) explore potential tipping points through use of scenario-discovery techniques. Our research suggests that the key challenge to the reform lies in the management of rice fields, an extensive (17% of the agricultural area), water-demanding and relatively low-added-value crop that nonetheless delivers significant ecosystem services (e.g. water retention) of historical and cultural relevance to the region. The ensemble experiment suggests that rice agriculture rapidly dwindles in the price range 0.012–0.074 EUR/m3 depending on the model. Before reaching this tipping point, agricultural water pricing can reduce withdrawals up to 1.7%–9.5%, while reducing profit between 4.9% and 5.6% and achieving a 57- to 65-fold increase in water tariff revenue.

Water markets are water management instruments that can support water reallocation from low to high value agricultural uses. However, unless explicit consideration is given to water uses not directly involved in the trading (e.g. environment), water markets may fail to promote sustainable growth. In inter-basin water markets, the reallocation of water withdrawal entitlements from the selling basin typically involves the reallocation of return flows (the surface and subsurface water that leaves the agricultural system following withdrawal of irrigation water) along with consumptive uses, which may impair environmental flows and affect water uses downstream in the selling basin. This paper couples, using a sequential modular approach, a Positive Multi-Attribute Utility Programming (PMAUP) tool that models the behavior of irrigators and the Soil and Water Assessment Tool (SWAT) eco-hydrologic model to: i) assess the economic and water reallocation potential of a return flow-neutral inter-basin water market; and ii) explore the trading-return flow tradeoffs that stem from relaxing the neutrality principle. Methods are applied to the case of agricultural water markets in the Tagus-Segura interconnected basins in Spain. Results show that enforcing a return flow-neutral water market can reduce returns from trade by up to EUR 1.63 per m3 of conserved streamflow.

With increasing costs inflicted by natural hazard perils, and amidst state budget cuts, concerns are mounting about the capacity of governments to design sustainable, equitable and affordable risk management schemes. The participation of the private sector along with the public one through public–private partnerships (PPPs) has gained importance as a means of providing catastrophic natural hazard insurance to address these seemingly conflicting objectives. In 2013 the European Commission launched a wide-ranging consultation about what EU action could be appropriate to improve the performance of insurance markets. Simultaneously, the EU legislator instigated major reforms in the legislation and regulations that pertain to how PPPs are designed or operate. This paper has a dual objective: first, we review and summarize the manifold legal background that influences the provision of insurance against natural catastrophes. Second, we examine how PPPs designed for sharing and transferring risk operate within the European regulatory constraints, illustrated using the example of the UK Flood Reinsurance Scheme (Flood RE) between the state and the Association of British Insurers.

In this chapter we examine how water governance and demand management arrangements can be linked to economic instruments, such as water markets, to address the broad range of water reallocation problems that exist in many global contexts. The utilization of economic instruments is context-specific throughout the world and can take many forms. This chapter therefore lists the pros and cons of some more common instruments. While successfully combining regulatory and economic instruments is far from straightforward, policy-makers can learn from growing evidence of successful partnerships between these two approaches. It may be costly both in terms of political support and transaction investments to strip away existing arrangements in favour of more flexible and better-suited institutions to manage scarce water resources. However, it would be expected that ignoring the problems, and hoping they will resolve themselves, would be more harmful to private and public welfare outcomes in the long run.

The large irrigation expansion of the last 50 years has increased pressure on water resources in EU Mediterranean basins. Water charging has been encouraged, since within the EU policy context it is believed that higher charges reduce water use. This paper presents a Revealed Preference Model that provides a clear intuition of the logic behind farmers' choices using standard economic analysis and implementing a multi-attribute utility function. The model is calibrated for the profitable Agricultural Districts (ADs) in the overexploited Segura River Basin (SRB) in southeastern Spain. Results show that water use is highly inelastic for charge increases below 0.5??/m3 (i.e. a water charge increase of 600%), and only starts showing a significant reduction for water charges above this threshold. However, water charging can still be used to promote the swap of overused and inexpensive conventional resources by underused and more expensive desalinated water. It is widely accepted that higher water prices reduce water demand.We develop a Revealed Preferences Model to assess farmers' response to higher prices.The model is calibrated for the highly productive and overexploited Segura RB, Spain.Higher prices reduce the gross margin, but water demand is found highly inelastic.Water prices per se may be ineffective to reduce water use.

Greening the economy is mostly about improving water governance and not only about putting the existing resource saving technical alternatives into practice. Focusing on the second and forgetting the first risks finishing with a highly efficient use of water services at the level of each individual user but with an unsustainable amount of water use for the entire economy. This might be happening already in many places with the modernization of irrigated agriculture, the world’s largest water user and the one offering the most promising water saving opportunities. In spite of high expectations, modern irrigation techniques seem not to be contributing to reduce water scarcity and increase drought resiliency. In fact, according to the little evidence available, in some areas they are resulting in higher water use. Building on basic economic principles this study aims to show the conditions under which this apparently paradoxical outcome, known as the Jevons’ Paradox, might appear. This basic model is expected to serve as guidance for assessing the actual outcomes of increasing irrigation efficiency and to discuss the changes in water governance that would be required for this to make a real contribution to sustainable water management.

Although the effectiveness of flushing floods in restoring basic environmental functions in highly engineered rivers has been extensively tested, the opportunity cost is still considered to represent an important limitation to putting these actions into practice. In this paper, we present a two-stage method for the assessment of the opportunity cost of the periodical release of flushing flows in the lower reaches of rivers with regimes that are basically controlled by a series of dams equipped with hydropower generation facilities. The methodology is applied to the Lower Ebro River in Spain. The results show that the cost of the reduced power generation resulting from the implementation of flushing floods is lower than the observed willingness to pay for river restoration programmes.

Traditionally, water policy has focused on coordinating the public effort required to fuel economic growth by supplying water services demanded as a result of the progress in the many areas of the economy. Under this supply-oriented paradigm, population growth and the improvement of living standards brought about by development have driven water demand up and the pressures over water resources have escalated. The failure to acknowledge the limited availability of water and to decouple economic development from water demand has resulted in a water dependent growth model that in many areas is currently threatened by increasing scarcity and more frequent and intense droughts. Consequently, there is an urgent need to use sparse water resources in a sustainable and efficient way. This demands a comprehensive assessment of water productivity dynamics as well as of the linkages among economic sectors in order to calculate the actual costs of eventual water reallocations to the environment and establish priorities in the design of strategic actions such as river basin or drought management plans. However, available studies only offer static analyses that are insufficient to attain the dual objective of reverting current water scarcity trends without impairing economic growth. This paper develops a methodology based on the Hypothetical Extraction Method to estimate inter-temporal indirect (i.e., including intersectoral linkages) water productivity values. The method is applied in the Spanish region of Castile and León for the period 2000-2006. The intensive use and the low water productivity found for agriculture confirms the intuition that this sector has to play a fundamental role in any water saving policy. However, the relevant linkages between agriculture and the rest of the economy, which acts as an indirect consumer of water for irrigation, may complicate the finding of a Pareto improvement in water allocation. Results also show increasing returns to scale in the manufacturing industry and the service sector, which may be regarded as an evidence of the existence of a Verdoorn’s Law for water.

Greening the economy is mostly about improving water governance and not only about putting the existing resource saving technical alternatives into practice. Focusing on the second and forgetting the first risks finishing with a highly efficient use of water services at the level of each individual user but with an unsustainable amount of water use for the entire economy. This might be happening already in many places with the modernization of irrigated agriculture, the world’s largest water user and the one offering the most promising water saving opportunities. In spite of high expectations, modern irrigation techniques seem not to be contributing to reduce water scarcity and increase drought resiliency. In fact, according to the little evidence available, in some areas they are resulting in higher water use. Building on basic economic principles this study aims to show the conditions under which this apparently paradoxical outcome, known as the Jevons’ Paradox, might appear. This basic model is expected to serve as guidance for assessing the actual outcomes of increasing irrigation efficiency and to discuss the changes in water governance that would be required for this to make a real contribution to sustainable water management.

Population and economic growth, coupled with rapid and extensive urban development, pushed to the limit the capacity of the upper and middle stretches of the Tagus River Basin to meet an increasing water demand, within the range of available resources and current water regulation infrastructures. In this context, voluntary agreements to transfer water use rights from agriculture to urban uses gained social support and political acceptance as an alternative to cope with the recurrent water supply deficit during dry periods. This was mainly because of their lower cost as compared to the best available alternatives already in place (efficiency improvements, use of strategic reserves, additional water works). Since the early 1990s pioneer voluntary agreements to formally transfer water between water utilities and irrigation districts sprung up for the first time in Spain. This chapter assesses two trades in the Madrid Region (including the capital city, Madrid’s metropolitan area and other towns). These trades can be arguably considered as ‘embryonic’ examples of formal water use right trades in Spain.

The construction of the Mequinenza and Ribarroja dams back in the 1960s modified the hydrology and changed the physical and environmental conditions of the Lower Ebro River in northeastern Spain. These conditions have stirred the uncontrolled proliferation of macrophytes, which have become a relevant concern in the area since 2000. Among other environmental and economic impacts, macrophytes threaten hydroelectric power infrastructures, increasing operating costs and reducing the productivity of power-generating plants. Macrophyte blooms thus became the catalyser for collaboration between the hydropower operator and the Ebro River Basin Authority, within a larger consortium with academic experts on floods and sediment flows, to deliver controlled water floods (flushing flows). The economic instrument assessed in this chapter consists of the voluntary acceptance, based upon public and private incentives, to deliver a set of pulses or artificial floods designed ad hoc for the partial restoration of the river regime in the Lower Ebro. Since 2003 and with the exception of 2004 and 2005 (dry years) and also 2008 and the spring of 2009 (natural floods), flushing flows have been regularly performed twice a year (at the end of spring and autumn) and have resulted in macrophyte removal rates as high as 95 % in areas close to the dam.

Although the effectiveness of flushing floods in restoring basic environmental functions in highly engineered rivers has been extensively tested, the opportunity cost is still considered to represent an important limitation to putting these actions into practice. In this paper, we present a two-stage method for the assessment of the opportunity cost of the periodical release of flushing flows in the lower reaches of rivers with regimes that are basically controlled by series of dams equipped with hydropower generation facilities. The methodology is applied to the Lower Ebro River in Spain. The results show that the cost of the reduced power generation resulting from the implementation of flushing floods is lower than the observed willingness to pay for river restoration programmes.