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CSIRO LAND and WATER CRC for Catchment Hydrology Socio-economic Analysis of Mature Water Markets CSIRO Land and Water Bogotá Nov 8 th -10 th Social solutions.

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Presentation on theme: "CSIRO LAND and WATER CRC for Catchment Hydrology Socio-economic Analysis of Mature Water Markets CSIRO Land and Water Bogotá Nov 8 th -10 th Social solutions."— Presentation transcript:

1 CSIRO LAND and WATER CRC for Catchment Hydrology Socio-economic Analysis of Mature Water Markets CSIRO Land and Water Bogotá Nov 8 th -10 th Social solutions for the management of social resources?? The effect of information and communication in closed water trading environments Dr. John Ward Seminario Internacional CONDESAN “Experiencias y Métodos de Manejo de Cuencas y su Contribución al Desarrollo Rural en los Andes” Bogotá – Colombia, 8 a 10 de noviembre del 2004

2 CSIRO LAND and WATER - Policy & Economic Research Unit Tasmania Queensland South Australia Western Australia NSW Victoria Murray Darling Basin

3 CSIRO LAND and WATER - Policy & Economic Research Unit Storage Land use Water Yield RiverRiver Wetlands Rainfall Ground water Base flow Surface Drainage GW Recharge Water Extraction Irrigation, urban & industrial use $ x x x Comprehensive water accounts x

4 CSIRO LAND and WATER - Policy & Economic Research Unit As a result of water extraction society pays a socialized environmental cost. For this simulation: mixed policy instruments –Market for water trading –Environmental levy – reflecting the socialized cost of water extraction. –Information and Community management – River Management Committees – management through information and communication. Experimental evaluation of alternative environmental flow management options

5 CSIRO LAND and WATER - Policy & Economic Research Unit Environmental Water Flows typify a Common Pool Resource Individual rationality – act opportunistically, maximising benefits free riding and socializing the cost. Group rationality - would reduce aggregate extraction and maximise group benefits

6 CSIRO LAND and WATER - Policy & Economic Research Unit Monthly extraction levels given rainfall

7 CSIRO LAND and WATER - Policy & Economic Research Unit Environmental levy = Benefits of environmental flows are symmetric and equally shared by all the community  any reduction in benefits (costs) are imposed equally Individual benefits of extracting and using water for irrigation are asymmetric and specific for farm characteristics. Farmers can earn income by growing a crop and trading water. Income from the game is proportional to a player’s skill in trade and farming according to their farm characteristics

8 CSIRO LAND and WATER - Policy & Economic Research Unit Experimental Design The impact of the provision of information, discussion forums and sanctions with trade Each session is comprised of 12 periods of monthly water decisions. Each period has 12 unique farms.

9 CSIRO LAND and WATER - Policy & Economic Research Unit Research Questions Given heterogeneous farms, how will the level of environmental flow, farm income and group accordance be influenced by:- The provision of aggregate information Discussion forums Disclosure of individual extraction information In a market environment where there is:- No trade in water entitlements. A closed call auction structure. An open call auction structure.

10 CSIRO LAND and WATER - Policy & Economic Research Unit Policy elements for the simulation: Market: Temporary monthly Allocation type: Fixed allocation of water Auction type: Closed or Open Call – pool price with leverage Pricing: Simple volumetric Environmental Levy: Annual aggregate Hydrological constraints to trade: None Within a closed catchment, comprising heterogeneous farms facing uncertain rainfall.

11 CSIRO LAND and WATER - Policy & Economic Research Unit Typical Farm Characteristics Water supply available 960 ML Historic usable rainfall to end of year 498 ML Estimated max water needs to end of year 1275 ML Estimated min water needs to end o f year 1020 ML Marginal value of water $97Traders income total $10 Players are provided with monthly updates on: Their water allocation and balance Crop type, monthly crop income and monthly water requirements Marginal value of water Median monthly rainfall (which can vary) Market outcomes (market price and volume traded if successful) Monthly aggregate extraction for all farms and the cost of the levy

12 CSIRO LAND and WATER - Policy & Economic Research Unit MonthHistoric Median Rainfall Maximum Water Usage Actual Rainfall Allocated Water Used Total Water Use Minimum Crop Water Requirements Qty sold Qty bought OCT NOV DEC JAN SEP000 A Typical Water Use Table

13 CSIRO LAND and WATER - Policy & Economic Research Unit Typical Farm Income Table Month Total water usage Monthly income from crop Crop Loss Equilibrium Price Cost of water bought Income from sale of water Total monthly income Trader’s Income OCT NOV DEC SEP

14 CSIRO LAND and WATER - Policy & Economic Research Unit Four Assessment Measures Accordance with environmental target. Aggregate traders’ income Ratio of traders’ income to environmental levy. Accordance with agreed levels of extraction

15 CSIRO LAND and WATER - Policy & Economic Research Unit No Information ($) Aggregate Information ($) Aggregate Information and discussion ($) Individual information and discussion ($) Average No Trade Closed Call d Open Call d Average 6.28 a 6.70 a 3.91 b 4.65 ab Environmental targets ($ levy) Notes: Information/communication treatment means with the same letter were not statistically different at  =0.05.Trade treatment means with the same letter were not statistically different at  =0.10

16 CSIRO LAND and WATER - Policy & Economic Research Unit Summary In these experiments the introduction of trade increased environmental damage. Disclosure of only the impact of aggregate extraction on riverine environments was found to be counter-productive to achieving environmental extraction targets in open call market experiments. This treatment resulted in the highest level of environmental damage.

17 CSIRO LAND and WATER - Policy & Economic Research Unit Environmental damage was minimised by providing aggregate environmental information with a forum for group discussion and agreement in a no trade experimental environment.

18 CSIRO LAND and WATER - Policy & Economic Research Unit No Informatio n ( $) Aggregate Information ($) Aggregate Information and discussion ($) Individual information and discussion ($) Average ($) No Trade a Closed Call ab Open Call b Average d de e e Aggregate Traders’ Income Notes: Treatment means with the same letter were not statistically different at  =0.05.

19 CSIRO LAND and WATER - Policy & Economic Research Unit Summary In these experiments average traders’ income increased with trade in all cases. Introducing aggregate extraction and environmental information increased average traders’ income in trade experiments compared to no trade experiments.

20 CSIRO LAND and WATER - Policy & Economic Research Unit Maximum average traders’ income was achieved by providing information on aggregate extraction, environmental targets and a forum for discussion in an open call market. Disclosure of individual information compared to aggregate information with discussion led to lower average traders’ income in all cases. Providing aggregate information and discussion produced higher average traders income compared to no information or aggregate information alone in all cases.

21 CSIRO LAND and WATER - Policy & Economic Research Unit Ratio of income and environmental levies

22 CSIRO LAND and WATER - Policy & Economic Research Unit Summary Providing aggregate information and a forum for discussion without trade maximised the return per unit of environmental damage. Compared to aggregate information and discussion, providing individual information produced lower returns per unit of environmental damage and was therefore counter productive in all cases.

23 CSIRO LAND and WATER - Policy & Economic Research Unit Accordance with group agreements Aggregate information and discussion Individual information and discussion No trade Closed Open Accordance measure=

24 CSIRO LAND and WATER - Policy & Economic Research Unit summary The highest level of level of accordance was observed in no trade experiments with individual information and discussion. The lowest level of level of accordance was observed in an open call environment with aggregate information and discussion.

25 CSIRO LAND and WATER - Policy & Economic Research Unit Key Conclusions 1.The provision of aggregate extraction information without a formalised forum for communication is not effective in promoting players’ coordinating their extractions to avoid environmental damage. 2.Disclosure of individual information is not effective in modifying people’s extractions to be more in accordance with environmental targets..

26 CSIRO LAND and WATER - Policy & Economic Research Unit 3.The environmental damage was minimised by providing aggregate extraction information and a forum for discussion without a trading environment. 4.Average traders’ income was maximised providing information on aggregate extraction, environmental targets and a forum for discussion in an open call market. 5.Providing aggregate information and a forum for discussion without trade maximised the return per unit of environmental damage

27 CSIRO LAND and WATER - Policy & Economic Research Unit No Provision of Environmental Information

28 CSIRO LAND and WATER - Policy & Economic Research Unit Environmental and Individual extraction Information and Group Discussion

29 CSIRO LAND and WATER - Policy & Economic Research Unit Mwater Experimental Water markets in Action For further information, contact Dr John Tisdell, Griffith University, Australia: Mwater is a methodological procedure and software platform for evaluating aggregate behavior of a market under controlled laboratory conditions. It yields a formal and replicable system for analyzing alternative market structures, without underlying assumptions concerning farmer behavior, before they are actually implemented.


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