Water Demand Modeling Emanuele Massetti FEEM and CMCC Prepared for the Capacity Building Programme on the Economics of Adaptation 2 nd Regional Training Workshop Agenda Bangkok, 30 September – 4 October 2013

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Water uses World Bank Data

Water and Climate Change

Water infrastructures dx.cooperhewitt.orgartandfoodofitaly.blogspot.com

Water infrastructures -

Why pricing water? More efficient allocation across alternative uses – Prices direct water where it is more valuable – Prices more efficient than other approaches Reduces water losses: – Demand: more efficient water uses – Supply: more efficient distribution of water Allows raising revenues for investments The following slides use material from Sheila M. Olmstead and Robert N. Stavins (2007), “Managing Water Demand Price vs. Non-Price Conservation Programs.” A Pioneer Institute Working Paper, No. 39, July This is an excellent and accessible introduction to water pricing.

Pricing of water (Theory) Buyers: – Willing to pay more for more units as scarcity increases – Downward sloping demand curve Sellers – Efficiency requires that water be sold at the long-run marginal cost – Willing to supply more as price increases – Upward sloping supply curve Equilibrium – Marginal benefit equal to marginal cost

Equilibrium in the market for water (Theory) $/unit units supply demand

Inefficient water pricing (Reality) Water is not typically traded in efficient markets Water not sold at the long-run marginal cost Water is priced too low – Excessive use of residential water – Relocation of industries and agriculture where water is not abundant – Inefficient use of water in industry and agriculture

Pricing methods Flat water fees (unmetered) – No incentive to save water – Easy to administer Volumetric rates (metered) – Increasing block prices – Decreasing block prices

Block tariffs IBP: – Affordability, right to water – If too cheap, low investment DBP: – Subsidy to high consumers – Possibly unsustainable patterns

Demand elasticity of water to price

Demand functions of water

Estimates in the literature SectorEstimates Residential demand-.33 / -.38 Industrial demand-.44 / -.97 ; -.15 / -.98; -.10 / Agriculture-.48 to Most studies based in developed countries.

Price elasticities from demand functions Demand curves for water in particular sectors A demand curve explains water consumption as a function of marginal prices and a set of other important variables that influence consumption. Urban residential water demand: – price, household income, family size, home and lot size, weather...

Price elasticities from demand functions Urban residential water demand: – price, household income, family size, home and lot size, weather... Industry and agriculture – Demand as a function of industrial processes, of crop choices and irrigation technology – In the long-run industrial process and agricultural technologies, including crops and land uses are endogenous

Survey methods in the absence of water markets Willingness to pay (WTP) is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good (or to avoid something undesired, such as pollution) A market transaction occurs when the price is equal or lower than the WTP WTP as upper-bound to the price Several survey methods have been developed to measure consumer willingness to pay. – Hypothetical – Actual