LEI Wageningen UR1, Rijkswaterstaat2
In the Netherlands, due to climate change, droughts will occur more frequently in future. To anticipate this expected water shortage a national Delta programme of technical measures that should reduce effects of water shortages, has been developed. The research question of this paper is: How to develop and implement a resilient investment portfolio and an associated governance agreement on freshwater supply to allocate temporarily and regionally scarce freshwater resources. Optimal allocation of freshwater is important to ensure maximum well-being (also of the environment) and wealth.
The issue of efficient provision of freshwater is an economic governance issue. Water is not one private good, but instead a complex, multidimensional resource. Water can be considered a public good and a private good at the same time. Well-designed allocation regimes need to consider both public and private good characteristics of water resources. For the public goods some kind of additional coordination is necessary to establish an optimal allocation of water resources. The public or private good nature of water depends on how and where water is used. The public and private good characteristics can change over time and within the hydrologic cycle. A water market (where prices serve as coordination mechanism) will lead to a efficient allocation of water (if environment is accounted for). This is the first best strategy to reduce the effects of water shortage. The Netherlands do not want to consider water pricing as a policy measure, because it comes with transaction costs (e.g. monitoring) and water has also common good characteristics. Hence, a second best strategy for water pricing is elaborated in this paper.
The approach we propose consists of a sequential analysis of measures, iteratively evaluated in a Cost Benefit Analysis (CBA). We propose a water supply hierarchy, that is based upon the waste hierarchy, as a device to select efficient measures to reduce effects of drought with minimum negative (environmental) effects. The waste hierarchy is a methodology to include external effects easily in the decision making process, and is implemented by the EU. Waste disposal options with minimal external effects (e.g. recycling) appear high in the hierarchy and are preferred over with extensive external effects (landfill).
The water supply hierarchy for 'technical' measures to combat water shortage is: 1. Save water, 2. Substitute water for other inputs, 3. Reuse waste water, 4. Store water (local or regional) 5. Supply water from another location (from a regional reservoir or a stream),
Table 1. The elements and characteristics of the water supply hierarchy and examples of relevant measures
Application of the water supply hierarchy proposes an initial order to analyse technical measures to combat drought. Alike the waste hierarchy a specific cost benefit analysis can be applied to test whether the preferred order in a specific situation differs from the supply hierarchy, or to discriminate between two measures belonging to the same category. We test the water supply hierarchy applying the measures developed in the Dutch Deltaprogramme to reduce effect of future drought regionally.
Results and discussion
The order in which measures are taken into account affects the outcome. Measures are not independent. If the government implements first (public) measures to secure freshwater supply, farmers are likely to implements less measures themselves and this solution deviates from the social optimal behaviour. Due to feedback loops (economic and hydrological) the standard cost-effectiveness approach, in which measures are ranked according to their cost-effectiveness will not automatically lead to the efficient outcome. The water supply hierarchy prefers private measures over public ones. Water users (farmers, industry etcetera) can make costs-benefit trade-offs at low costs, and they have better knowledge of costs and benefits than public investors. Public or collective measures at the next higher spatial level are evaluated whether they can be implemented more efficiently than the measures at user (farmer) level. This approach is repeated at the next level to develop a set of cost efficient measures.
If the private benefits of the measure exceed the private costs, the user will implement the measure. If not, and combined private and social benefits are bigger than (social) costs, financial transfers like payments for ecosystem services are necessary to offer an attractive business proposal for the water user to make society better off. Water users should be triggered to apply measures according to the water supply hierarchy to reduce negative external effects.
Based on the set of technical measures compiled by the Dutch
deltaprogramme, we show that the order of measures taken into account matters and that the water supply hierarchy offers the optimal solution. Advantages of the developed water supply hierarchy and iterative costs benefit approach to freshwater allocation are (i) stimulates innovation (ii) facilitates sustainable development, because negative external effects are reduced (iii) stimulates resilient solutions because it provides water saving incentives at every level (iv) efficient allocation of public and private good characteristics of water due to interactive CBA (v) starting at the user prevents that large scale investments may be become obsolete in course of time due to changing conditions at user level.
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