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Economic Impacts Of Climate Change At River Basin Scale: Insights From An Hydro-economic Model

Congress: 2015
Author(s): Felipe Vasquez Lavin (Concepción, Chile), Roberto Ponce Oliva

UNiversidad del Desarrollo1



Keyword(s): Sub-theme 17: Climate change, impacts and adaptation,
Abstract

Introduction: Water consumption has increased significantly in the last few decades due to population growth and economic development, generating a strong competition among different water users, including: ecosystem functions, economic sectors (agriculture, industry), and human consumption. It is expected that climate change will exacerbate this competition due to reductions in water supply and changes in both precipitation and temperature patterns (Bates et al., 2008). Hydro economic models have been widely used to analyze water related problems in several countries (Brouwer and Hofkes 2008, McKinney, et al. 1999, Lee and Howitt 1996, Pulido-Velazquez, et al. 2008, Heinz, et al. 2007). This extended use is based on its capability to deal with different water users within a spatially differentiated framework, accounting for most of the externalities associated to water consumption. Regarding the study areas, most of the studies have been conducted in developed countries (Europe and USA), but with few applications in developing countries (Cai et al. 2003; Maneta et al. 2009). In this paper we developed a hydro economic model at river basin scale aimed to account for the welfare changes due to climate change. Methods: Our approach has three steps. In the first one, the water supply is modeled using the SWAT model, which is calibrated and validate for the study area. On the other hand, climate change impacts are modeled as changes in both temperatures and precipitations, using a downscaled climate model. The interaction between the climate and hydrologic model will deliver the expected changes in both precipitations and river flow changes, that will shock the water supply used by the economic models. The second step is related to the demand module. The demand side considers two users: residential demand and agricultural demand. The residential demand is focused on the urban water demand, excluding the rural residential water demand. Thus, the residential water demand is modeled using a discrete/continue model that is estimated using econometric techniques. On the other hand, the agricultural water is modeled using a non-linear agricultural supply model that optimizes the farmer net income subject to land, water, and institutional constraints. Finally, the third step implies the integration of the demand and supply sides. This is done following an optimization approach in which both demands (residential and agricultural) are integrated into a single framework by linking them with the supply side. All the three components of the integrated framework are spatially differentiated. The objective of this optimization module is to maximize the basin welfare (farmers plus households) subject to water, land and institutional constraints. The model is applied to the Vergara River Basin in Chile. It has an extension of 4.260,5 km2, with 150.000 inhabitants, with a large proportion of indigenous population. At socioeconomic scale, the basin poverty rate is one of the largest in the country, problem that is exacerbated by a severe water shortage. The main economic activities include: agriculture, forestry, and energy. Discussion and Results: To the best of our knowledge, this is the first study analyzing welfare impacts of climate change using an hydro-economic model in Chile, it also increases the few studies conducted in developing countries in general, and in Latin America in particular. Specifically for Chile, the economic assessment of climate change impacts on the agricultural sector has been widely analyzed from different perspectives in recent years (Gonzalez and Velasco, 2008; Bárcena et al., 2009, ODEPA, 2010, Ponce et al. 2014). Most of the studies results suggest large changes in agricultural production, with the associated impacts on agricultural water demand. On the other hand, to the best of our knowledge, there aren't studies analyzing the residential water demand in Chile. According to the preliminary results, the expected changes in both temperature and precipitation will drive a 13% decrease in the water availability within the basin. This change in water availability will drive a complete reallocation of water within the agricultural sector, which will trigger changes in land allocation, with its associated changes in income. On the other hand, it's expected an increase in the residential water demand. At this stage of the project we don't have results about the expected changes in welfare at river basin scale. 1. Bates, B., Z. Kundzewicz, S. Wu, and J Palutikof. Climate Change and Water. Technical Paper, Intergovernmental Panel on Climate Change., Geneva: IPCC Secretariat, 2008. 2. Brouwer, R, and M Hofkes. "Integrated Hydro-Economic Modelling: Approaches, Key Issues, and Future Research Directions." Ecological Economics 66 (2008): 16-22. 3. Cai, X, D McKinney, and L Lasdon. "Integrated Hydrologic-Agronomic-Economic Model for River Basin Management ." Journal of Water Resources Planning and Management, , 2003: 4-17. 4. Gonzalez, J. "Estudios sobre Impacto, Vulnerabilidad y Adaptación al Cambio Climático en dos Zonas Agroclimaticas del Sector Silvoagropecuario de Chile." Instituto Nacional de Investigacion Agropecuaria, 2009. 5. Lee, D, and R Howitt. "Modeling Regional Agricultural Production and Salinity Control Alternatives for Water Quality Policy Analysis." American Journal of Agricultural Economics 78, no. 1 (1996): 41-53. 6. Maneta, M, et al. "Assessing Agriculture–Water Links at the Basin Scale: Hydrologic and Economic Models of the São Francisco River Basin, Brazil ." Water International, 2009: 88-103. 7. McKinney, D, X Cai, M,Ringler,C Rosegrant, and C Scott. "Modeling Water Resources Management at the Basin Level: Review and Future Directions." SWIM Paper n°6 (International Water Management Institute), 1999. 8. ODEPA. Estimación del impacto Socioeconómico del Cambio Climático en el Sector Silvoagropecuario de Chile. ODEPA, ODEPA, 2010. 9. Ponce, R. "Economic Modeling of Water Resources in Agriculture. Top down and Bottom up approaches. ." PhD Thesis, Department of Economics, Ca´Foscari University, Venice, 2013. ( http://hdl.handle.net/10579/2244) 10. Pulido-Velazquez, M, J Andreu, A Sahuquillo, and D Pulido-Velazquez. "Hydro-economic River Basin Modelling: The Application of a Holistic Surface–groundwater Model to Assess Opportunity Costs of Water Use in Spain." Ecological Economics 66 (2008): 51-65.

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