Presentation on theme: "Valuation of Water Resources"— Presentation transcript:
1 Valuation of Water Resources Glenn-Marie LangeCenter for Economy, Environment and SocietyThe Earth Institute at Columbia University
2 Water Policy: Treat water as an economic good Dublin Principles and IWRM—approach recommended for MDGs2002 World Summit on Sustainable Development in Johannesburg2003 Third World Water Forum2006 World Water Development ReportHuman Development Report 2006Beyond scarcity: power, poverty and the global water crisis
3 What do we mean by ‘economic value?’ A commodity has an economic value when people are willing to pay for it, rather than go withoutWater is an essential commodity, so the value of a small/basic amount for survival is infinite—people would pay any price.This is not useful information for policymakers.But after basic needs are met, people buy water based on its price compared to other goods they might buy.Water’s value is the willingness to pay for waterIt is observed when people make a choice between different productsHow much will a household pay for drinking water?How much will a farmer pay for irrigation water?How much will a factory pay for clean water?
4 Why value water? Water as an Economic Good: After basic needs are met, water should be allocated to the highest value uses.Water value provides critical information for decisions aboutEfficient and equitable allocation of water among competing users, bothwithin the present generationbetween present and future generationEfficient and equitable infrastructure investment in the water sector (how much, where, when)Efficient degree of treatment of wastewaterDesign of economic instruments: water pricing, property rights, tradable water rights’ markets, taxes on water depletion and pollution, etc.
5 Water tariffs and water value SNA values water at price of transaction. Why can’t we just use this value?Because the price charged by water suppliers—if any—often unrelated to value of water, too lowWater price often does not even reflect full costs of water supply!Water is not supplied by competitive markets due to natural characteristicsNecessary for human survivalNatural monopolyCharacteristics of public goodProperty rights not always well defined for multiple use or sequential use‘Bulky’ commodity (very high transport costs relative to value inhibiting trade)
6 Water tariffs and water value Some markets for trading water rights are developingAustralia,California,Chilebut still uncommon, localPrice of tradable water rights does not yet provide a reliable indicator of value because markets too ‘thin’ (too few traders)So we must estimate or impute economic value of water
7 Can we apply economists’ techniques for valuing water to the Water Accounts? There are several concerns about using economists’ ‘non-market valuation’ techniquesAccuracy of water values and cost of valuationConsistency of value concepts with SNAAggregation: scaling up site-specific values
8 1. Accuracy of non-market valuation Data requirements are very high, so valuation is costlyValue is often uncertain, very sensitive to assumptionsResults are often presented as a range of values rather than a point estimate, a single valueValues are most reliable for water used as input toagriculture,hydroelectric powerother uses where water is a major component of production costs
9 2. Concepts of value Consistent with the SNA? In principle, SNA measures market values, or sometimes cost of productionWater valuation techniques were developed for Cost-Benefit Analysis of projects (not national economy):CBA often tries to measure of economic welfare (total economic value) not market priceProgramming models measure values in an optimizing economy which usually differs from actual economy
10 3. Aggregation and national water accounts Water values highly site-specific, dependent on local uses, as well as season, water quality and reliabilityValues are not amenable to ‘benefits transfer’—using an estimate from one case study for another areaLittle experience scaling up local values to the national level
11 Major Imputed Water Valuation Techniques 1. REVEALED PREFERENCE TECHNIQUES(based on observed market values)Residual valueMarginal contribution of water to output, measured by subtracting all other costs from revenueProduction function approachMarginal contribution measured as the change in output from a unit increase in water input in a given sectorOptimization models and programmingMarginal contribution measured as the change in sectoral output from reallocation of water across the entire economyHedonic pricingPrice differential paid for land with water resourcesOpportunity CostPrice differential for alternative (example: replacing hydroelectric power with coal-fired electricity)2. STATED PREFERENCE(based on surveys of willingness to pay)Contingent Valuation MethodSurvey of users, especially household water use and recreational services
12 Methods for Valuing Water’s Waste Assimilation Services Waste assimilation services can be valued in 2 waysPollution damages avoidedThis approach asks, ‘What would be the cost of damages ( to health, production activities) that would occur if we didn’t have this waste assimilation service?’Costs of preventing damageValue is measured as the costs of measures to prevent pollution: water treatment technologies, pollution abatement technologies, purchase of alternative goods (bottled water)
14 Residual Value (Value Marginal Product) The easiest & most commonly applied valuation technique where TVP = Total Value of the commodity Produced piqi = the opportunity costs of non-water inputs to production pw = value of water (its marginal product) qw = the cubic meters of water used in production Non-water inputs include: intermediate inputs, labor, capital costs, land
15 Challenges to Implementing Residual Value Technique Is the quantity of water measured accurately?Is labor cost accurate—how to value unpaid family labor?Value of land—minus water rightsCapital costsAre all capital costs accounted for accurately?What rate of return to capital should be used?Are there other inputs that have not been included?Do the prices of output & all inputs reflect true economic value, or are they distorted?
16 Example: Agricultural water use in Namibia (Stampriet area) Farm revenue & costs (in 1999 Namibia $)Data sourceGross farm income$ 601,543Output x market prices from surveyInputs of goods and services$ 242,620Inputs x prices from surveyValue-added, of which:$ 358,923Compensation of employees$ 71,964Wages paid + in-kind payments from surveyGross operating surplus, of which:$ 286,959Imputed value of farmers’ labour$ 48,000Imputed based on average salary of hired farm managerDepreciation$ 66,845Depreciation rates x Farmers’ estimated cost of capital in surveyCost of working capital$ 17,059Imputed as % of the value of fixed capitalCost of fixed capital including land, 3% -7%$75,739 to $176,724Based on farmers’ estimated cost of capital reported in surveyResidual value of water$79,316 to -$21,669Amount of water used (m3)154,869Farmers’ “best guess;” water is not meteredResidual value N$/m3$0.51 to -$0.14
17 Optimization models: Valuing multiple uses of water Residual value and related techniques are good to estimate the value of water in a single use, or several closely related usesTo estimate the value of all uses of water in an economy, then modeling is neededLinear programmingComputable General Equilibrium (CGE) modelingEconometric modelingBut these approaches are better used for evaluating changes in water allocation among users, rather than values in current allocation.
18 Water Asset ValuationAsset value = Net Present Value of all future benefits (value of water services), the case of 2 usesorWhen RR is constant for all uses in all years, this formula becomes:WhereV = Asset value of waterRR = value of water for 2 different usesin a given year, pw x qwr = discount rate
19 Water Asset Valuation New Zealand & Canada (under development): Water resources with a single use of water: hydropower onlyAnnual water service (hydropower) assumed constant in all future yearsValuation method used:New Zealand: Residual Valuation MethodRent = Net operating surplus – return on fixed capitalCanada: Opportunity Cost, difference between production cost of hydropower & cost of next alternative, thermal/coal powerRent = (CT – CH)QEH WhereCT = cost of production per unit of electricity for Thermal power plantsCH = cost of production per unit of electricity for hydropower plantsQEH = quantity of electricity produced by hydropower plantsAsset Value:
20 Hydropower & Geothermal Power Asset Value in New Zealand
21 Which Method is Better for Valuing Water for Hydropower? Residual value (New Zealand)Does the price charged for electricity reflect the market value of electricity, or is it regulated?If regulated, the electricity price will not reflect the value of water (rent) and Residual Value Method is not a good techniqueOpportunity cost (Canada)Based on difference in costs of production, so it is a good technique to estimate value of water even if electricity price is regulated
22 Can Water Asset Valuation be done in other countries? Yes, but….Data requirements are considerable:measure of water asset volume & flows over timemeasure of the annual values of all uses of water over timeWater assets in most countries serve multiple purposes:AgricultureLivestock wateringIrrigation of different cropsHydropower--Drinking water--Fisheries habitatSink for waste waterWill the combination of uses change in future?Will the economic value of each use change?
23 Approach Water Valuation Cautiously! Value consistent with SNA: include all values but indicate type of value and robustnessAccuracy/uncertainty: start with major uses that are easiest to value (agriculture) & indicate range of valuesAggregation: implement valuation at local/river basin levelAsset value: begin with water bodies with single or few uses that can be easily valued