Introduction to special section on Irrigation Water Pricing

Authors


[1] Population growth and rising living standards have led to a rapid increase in the demand for water. Since the quantity of renewable fresh water available for use in any particular location is on average constant and water conveyance is an expensive operation, water has become scarce in many parts of the world. Adding the prevalence of deteriorating water quality and the increased awareness for water-related environmental and social problems helps us to understand why water resource management has become a critical policy challenge.

[2] Worldwide irrigation water consumes the bulk of the available renewable fresh water resources (over 70%). Irrigated agriculture is practiced on about 18% of total cultivable land (267 million hectare in 1997, of which 75% are in developing countries) but produces 40% of agricultural output [Gleick, 2000; World Bank, 2001]. Although the rate of expansion of the irrigated area has been diminishing, it is expected to continue to expand during the next 3 to 4 decades at rate close to 1% [Gleick, 2000; Food and Agricultural Organization (FAO), 2000]. Consequently, the irrigation sector, which already consumes a large share of global water, will continue to increase its demand for water in the foreseeable future.

[3] Meeting food demand of a growing population at the existing structure of water use requires increasing water withdrawal. But the cost of water supply rises each time a new dam is built and concerns over the adverse environmental and social effects of large water projects are mounting. As a result prospects for increasing water supply are at best limited and in many regions nonexistent. The course of action left open, then, is to do more with the available water supplies, i.e., to increase the efficiency of water use. Achieving this goal requires taking account of the full cost of water, which beyond the engineering cost of water conveyance includes also the alternative cost associated with the different uses of water at present and in the future. It is essential then that water users consider the true cost of water when deciding on water demand and allocation between various activities. An obvious way to achieve this is to charge water users the ‘right’ price of water.

[4] Irrigation water pricing appears in many variations. Setting the price right induces water users of various sectors to utilize water efficiently by sending a signal of the value of the scarce resource. Yet, it is not at all clear what this ‘right’ price is and how pricing should be implemented. For example, should water prices account for the fixed (infrastructure) cost of water supply (the cost-recovery issue)? Should income distribution criteria be considered? How do existing water institutions affect the choice of pricing method and water rates? What are the implications of asymmetry of information between water pricing agencies and water users? What are the prospects for decentralized (market-based) pricing schemes? How should economy-wide and environmental considerations affect water prices? How should the well-being of future generations be reflected in current water prices? These are some of the questions that water policy makers face when they set to design water allocation schemes.

[5] Methods for pricing irrigation water range from per area, through output and input pricing, to various volumetric schemes [see Johansson et al., 2002]. It is evident that in order to induce efficient use of water some form of volumetric pricing is required. Yet worldwide volumetric pricing is the exception rather than the rule. In their investigation of over 12 million hectare of irrigated farms, Bos and Wolters [1990] found that in more than 60% of the cases water was charged on a per area basis and volumetric pricing was used in only 25% of the cases [see also Cornish and Perry, 2004]. The reason for the rareness of volumetric pricing lies in its high implementation costs. Volumetric pricing requires the ability to measure volume of water used, which is typically done by water meters; installing and maintaining water meters is an expensive operation that is doomed to fail without farmers' cooperation [Tsur and Dinar, 1997]. As a result, various methods to overcome the need to directly meter irrigation water by individual users have emerged, based on the time allocated for water withdrawal or for irrigation.

[6] The large number of pricing methods observed worldwide reflects variability in physical conditions (climate, soil properties, and water scarcity), in institutional setting, and in the criteria that underlie water allocation. The main criterion used in the allocation of any scarce resource is economic efficiency (loosely defined as the allocation that generates the largest economic surplus that can be obtained from the available quantity of the resource). The efficiency criterion deals with the aggregate size of economic surplus and pays no attention to how the surplus is to be distributed among water users. Since water pricing is often perceived as a policy intervention that negatively affects poor farmers and small holders, efficiency criteria alone may not always be sufficient to guide water-pricing policies. Empirical evidence, however, casts doubt on the effectiveness of water pricing as an instrument to dealing with income distribution within the farming sector [see Tsur and Dinar, 1997; Tsur et al., 2004, chap. 4].

[7] This special section grew out of the international conference Irrigation Water Policies: Micro and Macro Considerations held in Agadir (Morocco) in the summer of 2002 (http://lnweb18.worldbank.org/ESSD/ardext.nsf/18ByDocName/EventsAgadirConference2002). The papers were selected from papers presented in this conference and went through the usual WRR review process. They do not pertain to cover the entire range of issues associated with irrigation water pricing, rather to highlight some important considerations. Moreover, irrigation water pricing as such is but one aspect, albeit an important one, of water allocation policies. Other considerations, such as the role and potential of water markets [Olmstead et al., 1997; Easter et al., 1998], adoption and use of water-saving irrigation technologies [Caswell and Zilberman, 1985; Shah et al., 1995], conjunctive management of ground and surface water [Burt, 1964; Tsur and Graham-Tomasi, 1991; Tsur, 1997], water institutions and regulation [Ostrom, 1990; Easter and Tsur, 1995; Maria-Saleth and Dinar, 2000, 2004; Dinar and Mody, 2004; Dinar and Maria-Saleth, 2004], the political economy of water reforms [Dinar, 2000], and water management under uncertainty [Tsur and Zemel, 2004], are only briefly touched on here if at all.

[8] Nonetheless, the papers presented in this special section span a wide range of methodological and empirical issues regarding irrigation water pricing. Xabadia et al. [2004] investigate optimal pricing policies in the presence of production and environmental externalities associated with water logging. The production externality brings in spatial effects, as productivity is correlated with land quality that varies spatially. The environmental externality introduces temporal effects, as it is brought about through accumulation over time. The authors develop a methodology that combines the spatial and temporal aspects of heterogonous land quality and water scarcity within a unified framework and analyze implications vis-à-vis water pricing and irrigation technology adoption.

[9] Spatial externalities are ubiquitous in irrigation systems and reappear in all the papers of this special section. The externality may be confined to irrigators or it may extend to other parts of the economy. The papers address this problem in various ways. Mejías et al. [2004] investigate the second type of spatial externality by looking at farm-level effects of water policies vis-à-vis economy-wide objectives in the EU policy context. The authors investigate the consistency of water pricing under the European Water Directive guideline and the broader objectives of the European Common Agricultural Policy. Their empirical application to a self-managed irrigation district in southern Spain calls for better coordination between water pricing policies and economy-wide objectives.

[10] Bazzani et al. [2004] investigate water-pricing implications of contemporary EU regulations regarding environmental and cost recovery considerations. The authors find that both cost recovery and charging for water pollution can significantly impact water prices and the resulting farm income and employment. Economic, social, and environmental considerations thus have to be carefully evaluated in any water-pricing scheme. The paper adds a regulation flavor by incorporating a principal-agent framework to model the intricate relationship between irrigators and water regulators (district, region or state agencies). The use of mechanism design theory to study water-pricing policies has received little attention by water economists (see Smith and Tsur [1997] and Tsur [2000] on this issue) and the present paper contributes to this literature.

[11] Gómez-Limón and Riesgo [2004] apply multiattributes utility mathematical programming techniques to analyze effects on farmers' decisions of water pricing under various restrictions imposed by the European Water Directive, such as cost recovery. The authors find a high degree of heterogeneity between farmers that operate under similar agroclimatic and economic conditions, differences that can only be explained by farmer-specific attributes. This observation has direct implications regarding pricing irrigation water for heterogeneous groups of farmers.

[12] As mentioned above, the scope for supply management of water scarcity is already limited and will become more so in the future. The ultimate (and practically unlimited) source of water supply is seawater, but even optimistic projections of cost reduction in desalination technologies (the current minimal cost is close to half a dollar per cubic meter) render desalinated water too expensive for most irrigation purposes. As a result water policies will become ever more dependent on demand management instruments, of which water pricing is central. The papers included in this special section highlight several aspects of irrigation water pricing. The list of issues covered here is far from being exhaustive, but it brings to the table a number of pressing problems often encountered by water policy makers. There is still plenty of uncovered territory in this vein with research payoffs that touch upon the subsistence and livelihood of billions of human beings.

Acknowledgments

[13] The author gratefully acknowledges comments made by Ariel Dinar and Amos Zemel on an earlier draft.

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