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Brussels, 19 March 2009

Environmental & economic impact of water pricing and quotas in the

agriculture sector

What do we learn from practical case studies?

Thomas Dworak

Ecologic Institute- Vienna

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ACTeonInnovation, policy, environment

The context

• Increasing concerns in Europe about drought events and water scarcity

• Article 9 WFD• Communication by the Commission on Water Scarcity

and Droughts adopted in July 2007

Getting the price right, shift land use planning to reduce the imbalance between supply and demand….

• However, questions remains in particular:• Effectiveness of these two policy scenarios• Expected socio-economic and environmental impacts

Brussels, 19 March 2009

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Investigating these issues as follow-up to the communication• To address the issues of

• potential socio-economic and environmental impacts of..• water demand management options in particular (1) application

of quotas and (2) water pricing

• The focus of the analysis• Five case studies (Cyprus, Tisza Danube interstice,

South-East England, Guadalquivir, Boutonne) • Main focus on agriculture

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Presenting selected results of the study to answer....• Q.1 – Which target for water abstraction? • Q.2 – Which water price increase? • Q.3 – Economic impacts for abstractors of reduction in

abstraction? • Q.4 – Which impact on land use & cropping pattern? • Q.5 – Order of magnitude of costs avoided? • Q.6 – Additional benefits? • Q.7 – Main sources of uncertainties?

Brussels, 19 March 2009

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ACTeonInnovation, policy, environment

Q.1 – which reduction in abstraction for ecological improvements?

• It depends… on local characteristics!• Selected results:

• Boutonne: -80% in water abstraction leads to the restablishment of ecological flows

• Guadalquivir: a limited reduction (5%) is sufficient to reach minimum flows – but is this good water status?

• In Cyprus: regional differences ranging from 0% to 75% for restauring groundwater balance

• Tisza: Almost no impact as climate change is the main driver (up to 4m lower GW levels)

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Q.2 – Which increase in water price?

• Significant increases in water prices required to reach sufficient reduction in water abstraction…

• ..as today’s irrigation prices are very low in many areas!

Current price for water in the

agricultural sectorReduction 1 Reduction 2 Reduction 3

Boutonne river basin ~0.2 €/m³.50%

0.45 €/m³.

80%

0.525 €/m³

Guadalquivir river basin ~0.03 €/m³-0.09€/m3

36%

0.06€/m³--0.35€/m³-

50%

0.07€/m³--0.33€/m³-

No irrigation

0.034€/m3-0.72€/m3

Cyprus ~0.17 €/m³.

50%

0,5 €/m3 groundwater

0,83€/m3 surface water

Danube/Tisza interstice 0,08 €/m3

50%

0,23 €/m3

75%

0,266€/m3

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Q.3 – Economic impacts for the farmers?

• Expected… clearly yes!• In practice, it depends…

• type of agricultural products • farming systems• availability of alternatives• compensation in place

• economic losses resulting from a given reduction in water abstraction are higher for the water pricing scenario as compared to the equivalent quota scenario. financial flows out of the farm sector that result from water prices

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Q.3 – Economic impacts for the farmers?

Selected results on quotas:• Boutonne: 80% reduction of water consumption in the summer

reduction in farm gross margin of 2.68 M€ per year or 7,8% of the actual total gross margin.

• In Cyprus: 50% reduction of groundwater and surface water abstractions 12% reduction in gross margin.30% reduction 4%.

• Guadalquivir: 50% reduction in irrigation abstraction reduction of GVA by 28%.

• Danube-Tisza interstize: 25% reduction in water abstraction loss of total gross margin for the agricultural sector of 1,2 M€ per year (-0,85%). 50% reduction 3,2 M€ (-2,27%).

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Q.3 – Economic impacts for the farmers?

Selected results on pricing:• Cyprus: water price (tax) 1 €/m3 (50% reduction) drop in farm

gross margin of around 83 M€ (-14%), but 56 M€ is recovered by the government

• Boutonne: water pricing 0.525 €/m3 (80% reduction) drop in total farm gross margin of 20.1% or 6.89 M€ per year.

• Fuente Palmera: 0,31€/m3 (50% reduction in irrigation water abstraction) reduction in farmer’s net margin by 60%.

• Tisza Danube Interstize: 0,233 €/m3 (50% reduction) 4,82% decrease in total farm gross margin (reduction by 6.9 M€/year)

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Q.4 – Which impact on land use & cropping pattern?

• Quotas/increases in water price lead to reduction in: • irrigated areas• areas under crops with high water requirements and low

profitability (in €/m3)

• Selected results• Cyprus: critus replaced by vegetables and potatoes• Spain: cultivation of maize (low value crop) abandoned and

water concentrated on higher value crops , then reduction in profitable crops (cotton)

• Boutonne: shift to (irrigated) winter crops and rainfed agri.• Tisza: irrigated area for potatoes and maize is expected to

decrease

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Q.5 – Order of magnitude of costs avoided?

• Selected results• Guadalquivir: avoiding alternative water supply (storage,

desalination…) at annual cost of 56 M€• Boutonne: avoiding the building of water storage for total

investment costs of 36 Mۥ Cyprus: avoiding increase in capacity of desalination plants

and building new plants (e.g. extension of Dhekelia Plant from 40 000 to 60 000 m3/day by 2009 at € 0.78/m3 => ~ 5 M€/an)

• Hungary: re-examining the Danube-Tisza canal at total investment costs of 2 B€…

• Thus, significant financial resources saved that can be re-mobilised for supporting agriculture?

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Q.6 – Additional benefits?

• Wide range of additional benefits• Direct: ecology, water-related tourism, fishing,

shellfish production, industrial activity• Indirect: related economic sectors (e.g. in the

Charente area, more than 20 000 jobs related to shellfish production with around 10% being accounted for as depending of the Boutonne river water)

• But also additional costs – for example, loss in poplar production in the Boutonne river basin

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Q.7 – Main sources of uncertainties?

• Increases in prices of agricultural products• The growing importance of « local markets »• Climate change• The combined control & enforcement of both surface

water and groundwater abstraction• Farmers irrational behaviour• Accounting for differences in certainty in water supply• …

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In conclusion (1)

• Changes in water pricing or quotas can lead to significant reduction in water abstraction

• This leads to economic losses for the irrigation sector – but more limited in relative terms than the reduction in water abstraction

• It saves financial resources that can be mobilised to support re-structuring the agriculture sector

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ACTeonInnovation, policy, environment

In conclusion (2)

• Providing a signal is not the only objective of water pricing – cost-recovery, financial sustainability of irrigation infrastructure

• Additional work is required to find best solutions for implementation of quotas or pricing policies

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ACTeonInnovation, policy, environment

Thank you for listening!

Thomas Dworak

Ecologic Institute - Vienna,

Auhofstrasse 4/7, AT-1130 Vienna

thomas.dworak@ecologic.eu, www.ecologic.euBrussels, 19 March 2009