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The Role Of Water Pricing In Agricultural Water Demand: Two Dutch Case Studies

Congress: 2015
Author(s): Vincent Linderhof (The Hague, Netherlands), Rolf Michels, Nico Polman

Agricultural Economics Research Institute1



Keyword(s): Sub-theme 14: Valuing water: monetary and non-monetary dimensions,
Abstract

Introduction

Due to climate changes in time, the Netherlands face serious challenges with respect to achieving the objectives of water quality (Water Framework Directive) and water quantity (Delta programme) policies. As the periods of droughts will prolong, the water quality of surface waters has to improve, and the availability of freshwater for all users have to be secured in order to reach the policy objectives. The agricultural sector plays an important role in the achievements of the Dutch water policy objectives. On the one hand, the sector can contribute to improved water quality of ground and surface waters by lowering the impact of nutrients and pesticides pollution to water. On the other hand, the sector benefits from the availability of freshwater for irrigation at the right moments of the growing season of crops. The implementation of new water efficient technologies, such as controlled drainage systems or drip irrigation, is not common yet. Farmers have to be convinced with the advantages of the new technologies. The price for water is one of the crucial factors of implementing new technologies in agriculture. Higher prices are an incentive for more efficient use of water. Additionally, water pricing in agriculture will also have a positive impact on the implementation and distribution of water efficiency innovations in agriculture.

Research question

Before we can address the question how these water efficiency innovations in agriculture are implemented, and how they affect agricultural production, we first have to answer the question: "how do farmers respond to higher prices for water? Based on two cases, we test the efficiency and price elasticity of water pricing in agriculture in the Netherlands. The first case is based on fruit grower (apples and pears) in the Zuid-Beveland region in the province of Zeeland (The Netherlands), who have an agreement with the regional drinking water company Evides on the provision of water in time of droughts. The drinking water company exploits a fresh water pipe line especially for irrigation purposes by the fruit growers in the region. In 2014, fruit growers pay around Â0,60 per cubic meter of water supplied. Fruit growers in other parts of the Netherlands use surface or ground water for irrigation and pay a fixed price per year regardless the amount of water abstracted. The question then is do fruit growers in Zeeland use irrigation water more efficiently and do they investment more in water saving techniques such as drip irrigation than fruit growers in the other parts of the Netherlands? The second case study deals with the tap water use in agriculture and the recent discussion on a significant increase of the tap water levy/tax. In the Netherlands, tap water has a clear price per cubic meter which differs slightly across the drinking water companies. The current tap water price is around Â2,- per cubic meter. The tax increase proposed would increase the price by 20-30% for all tap water consumers. In agriculture, tap water is mainly used by grazing animal farming and intensive livestock farming. Based on a time series of tap water use for farmers and the tap water prices, we can estimate the price elasticity of tap water demand of farmers. Interestingly, ground water resources might become substitutes for agricultural tap water use as the Water Framework Directive objectives are reached.

Data/preliminary results

For both case studies, we will select a sample of fruit growers and farmers respectively from the Dutch Farm Accounting Data in the period 2010-2013. We will test the impact of prices of water in two case studies using econometric analyses. In the first case study, we will test whether open-air fruit farming in the Zuid-Beveland regio has significantly higher yields than similar farming in other Dutch areas due to the fact that they have a fresh water provision. Moreover, we will also test whether fruit growers in this area have a significantly higher implementation rate of water efficiency techniques, such as drop irrigation. In the second case study, we will determine the price elasticity of tap water demand for farmers due to the substantial increase of the tap water levies since January 2014. Farmers are likely to switch to alternatives such as ground or surface water demand. With the implementation of the WFD, both sources of water become more serious alternatives for the demand for tap water of farmers. We expect the price elasticity of tap water demand to be significant. We will distinguish between different types of farmers (grazing animal farmers, intensive livestock farmers, and arable farmers).

Conclusions

Depending on the results of the two case studies, we expect water pricing to be an incentive for water efficiency. In the case of fruit growers in the Zuid-Beveland region, the provision of water in cases of droughts is convenient and reduces the risks of yield loss. The number of fruit growers, or the surface of fruit grown did not change due to the agreement with the water company. However, the agreement contributes to efficient use of water. In the case of tap water taxes, farmers will look for alternative water sources such as ground water resources, or water reuse for instance. Water pricing is not an easy instrument as it cannot be imposed on all water uses. However, water pricing is parts of the water use spectrum in agriculture will enhance an efficient use of water, so that agriculture can coop and adopt to more climate extreme events.

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