1. Governor’s Conference on the Future of Water in Kansas October 30-31, 2012 The Economic Value of Water Wednesday, Oct. 31 Hilton Garden Inn & Conference Center Manhattan, Kansas 8:45 – 9:30 AM Frank A. Ward College of Agr, Consumer, and Environmental Sciences New Mexico State University USA

2. Value of Water v Diamonds 2

3. 3 Road Map Background Issues Policy Debates A Definition: Economic Value of Water Approaches (how to value water) Results: Economic value of water The Future

4. 4 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.

5. 5 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

6. 6 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?

7. 7 Policy Debates: e.g., Ogallala Aquifer

8. 8 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?)

9. 9 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?

10. 10 A Definition

11. Drinking Water: Low v High quality 11

12. 12 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.

13. 13 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.

14. 14 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

15. 15 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

16. 16 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.

17. 17 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

18. 18 Lowering the diversion point

19. 19 Economic value of drip irrigation: changing from surface to drip irrigation

20. 20 Economic value of sewage treatment: without v. with treatment

21. 21 Economic value of flood control: flood damages reduced

22. 22 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.

23. Economic Value of Irrigation: Center Pivot Irrigation 23

24. Economic Value of Irrigation: Saudi Irrigation Fields 24

25. Economic Value if Irrigated: North Africa 25

26. Economic value of water in irrigation: less than cost of new reservoir storage developed 26

27. 27 Methods for Valuing Irrigation Water

28. 28 Use Market Price Good news –Accurate –Cheap Bad news –Actual markets hard to find –Market price may be for wrong water

29. 29 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

30. 30 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)

31. 31 What is the Economic Value of Water?

32. 32 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

33. 33 Which Use? Economic values vary by use –agriculture (usually lowest) –Urban Drinking, cooking, washing, cleaning, flushing landscapes –industry –environment –mining –recreation –flood control –hydropower

34. 34 Economic Value of Water: One clear definition (Erin Ward) Dollar sign + number

35. Marginal Value of Water in Irrigation, Rio Grande, USA, 2006, $/ac-ft (no gw access) SupplyDrip SubsidyPricesCosts$ Normal 0 base Base 52 -20% 202 +20% Base 221 -20% 380 100% base Base 98 -20% 248 +20% Base 268 -20% 425 -50% 0 base Base 245 -20% 396 + 20% Base 446 -20% 604 100% base Base 268 -20% 418 + 20% Base 471 -20% 628

36. 36 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

37. 37 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

38. 38 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.

39. 39 Thank You