“Assessing Costs and Benefits of Adaptation: Methods and Data” First Regional Training Workshop – Capacity Building Programme on the Economics of Adaptation Bangkok, Thailand 11 Mar - 14 Mar 2013 Brian H. Hurd, PhD, Professor Dept. of Agricultural Economics & Agricultural Business New Mexico State University nmsu.edu

Lec 5. Strategies for Developing Climate Change Scenarios and Modeling Data Hydrological data and modeling Economic data and water demand estimation Collaborate, work t0gether and other final thoughts

Hydrological Data and Modeling Water management agencies/authorities may have measured streamflows from various locations on the river Naturalized streamflows (native streamflow without reservoirs) is desirable, sometimes synthesized datasets are available Various hydrologic models are available from simplified water-balance models, such as WATBAL, to more sophisticated variable Variable Infiltration Capacity (VIC) Macroscale Hydrologic Models (

Economic Data and Water Demand Estimation Water demand studies are conducted in many places and regions, providing information on water prices, costs, and demand elasticities. In developing countries, water demand estimates maybe difficult to find, estimates may need to be made based on water use estimates and available water price information

Defining Prices, Benefits, Costs Willingness-to-pay is a monetary measure of the intensity of individual preferences (needs, wants, desires) Market goods Observed equilibrium market prices represent the willingness-to-pay at the margin of potential buyers and the willingness-to-accept of potential sellers for a good or service. Non-market goods Benefits are based on individual values in the form of willingness-to-pay (WTP) and their aggregation across all affected individuals Costs are the value of the opportunities forgone because of the commitment of resources to a project, or the willingness- to-pay to avoid detrimental effects (damages).

Identify Types of Water Values Long-run versus short-run At-site versus at-source (in situ) Per period (e.g., annual) versus capitalized Use, nonuse and Total Economic Values Units of water quantity measures Withdrawal – amount removed from source Delivery – amount delivered to place of use Depletion or consumptive use – amount evaporated or transpired into the atmosphere, incorporated into crops and products, removed from the local water environment.

Taxonomy of Water Valuation Methods Valuation MethodDescription of Method and Data SourcesUseful for Valuing Water as: Inductive Methods 1. Observations of Water Market Transactions Observed prices from transactions for short-term leases or permanent sales of rights to water. Actual at-source or at-site WTP manifested by transactions within or between agricultural, industrial, municipal, and environmental uses. 2. Econometric Estimation of Production and Cost Functions Primary or secondary data on industrial and agricultural inputs and outputs analyzed with statistical (usually regression) techniques. Producers' (agricultural or industrial) at-site valuations. 3. Econometric Estimation of Municipal Water Demand Functions Primary or secondary municipal data analyzed with statistical methods. At-site demands for municipal sector (including residential, commercial, and government) deliveries. 4. Travel Cost Method (TCM) Revealed preference approach using econometric analysis to infer the value of recreational site attributes from the varying expenditures incurred by consumers to travel to the site. Valuation of recreational services and derived at source valuations for changes in water supply. 5. Hedonic Property Value Method (HPM) Revealed preference approach using econometric analysis of data on real property transactions with varying availability of water supply or quality. At-source demands for changes in water quantity or quality revealed by transactors in residential or farm properties. 6. Defensive Behavior Method Revealed preference method using reductions in the costs of actions taken to mitigate or avoid incurring an external cost as a partial measure of the benefits of policies from reducing the externality. Valuation of reduced water pollution from biological or chemical contaminants. 7. Damage Cost Methods Maximum willingness to pay given as monetary value of damages avoided. Valuation of reduced water pollution or flood damages. 8. Contingent Valuation Method (CVM) Expressed preference method using statistical techniques for analyzing responses to survey questions asking for monetary valuation of proposed changes in environmental goods or services. At-source valuations of environmental (e.g. instream) water supplies. Also at-site valuations of changes in residential water supplies. From Young, 2005, pp , Table 2-1. Main Types of Nonmarket Water Valuation Methods, Their Characteristics, and Uses

Taxonomy of Water Valuation Methods From Young, 2005, pp , Table 2-1. Main Types of Nonmarket Water Valuation Methods, Their Characteristics, and Uses Valuation MethodDescription of Method and Data SourcesUseful for Valuing Water as: 9. Choice Modeling (CM) Expressed preference method using statistical techniques to infer WTP for goods or services from survey questions asking a sample of respondents to make choices among alternative proposed policies. At-source valuations of environmental (e.g. instream) water supplies. Also at-site valuations of changes in residential water supplies. 10.Benefit Transfer Benefits estimated for one or more sites or policy proposals employed to assign benefits or value to other sites or policy proposals. Adaptable in principle for any case: producers' or consumers' goods; and collective environmental goods including nonuse values. 11.Benefit Function Transfer / Meta-Analysis Statistical synthesis of the results of previously reported studies of the same phenomenon or relationship to distill generalizations. A potential basis for benefit transfer in all producers' and consumers' valuation contexts. Also valuable for assessing role of methodological assumptions in research results. Deductive Methods 12.Basic Residual Method Constructed models for deriving point estimate of net producers' income or rents attributable to water via budget or spreadsheet analysis. At-site or at-source estimates for offstream intermediate goods (agriculture, industry) for single- product case. 13.Change in Net Rents Constructed residual models for deriving interval estimate of net producers' income or rents attributable to increment of water via budget or spreadsheet analysis. At-site or at-source estimates for offstream intermediate goods (agriculture, industry) for multiple- product, multiple-technology cases. 14.Mathematical Programming Constructed residual models for deriving net producers' rents or marginal costs attributable to water via (usually) fixed price optimization models. At-site or at-source valuation of offstream intermediate goods (agriculture, industry) for multiple- product, multiple-technology cases. 15.Value-added Constructed models of net producers' income or rents attributable to water via value-added measure from input- output models. Seriously biased (overestimate) method that has been used mainly in offstream intermediate goods (agriculture and industry). 16.Computable General Equilibrium (CGE) Models Constructed models for deriving net producers' income or rents attributable to water via price endogenous optimization models. Recently adapted method used mainly for off stream intermediate goods (agriculture and industry). 17.Alternative CostRecently adapted method used mainly for off stream intermediate goods (agriculture and industry). At-site or at-source valuation of intermediate goods offstream (agriculture, industry) and instream (hydropower, transportation). Also for water as private and collective consumption good by households.

A Common Appoach for Estimating Use Values: Residual Analysis Methods Value of water is imputed by accounting for the values and payments to all other inputs and factors of production, the residual claimant Maximum willingness to pay is bounded by the amount or share of Total Revenues remaining after all other variable and fixed factors have been paid their fair price – either a market price or the price required to attract that factor into production

Valuing Water as a Residual Claim on Revenues (max WTP) Total Revenue = $16.5 million Total Non-water Costs and Payments = $14.1 Value of water = $ $14.1 = $2.4

Value of Water (Net Return to Water) With Production Function Y=Y(X M, X H, X K, X L, X W ) where: Y-output, M-materials, H-labor, L-land, K-capital, W-water If all inputs are paid according to their VMP, then the total product value is completely allocated as: Assuming competitive input markets and optimizing producer behavior (i.e., choose X j such that VMP Xj = Pj) then the ‘value of water’ is found by solving for the shadow price of water: The maximum willingness to pay for water is the RESIDUAL value remaining after all other factors (both fixed and variable) have been paid.

Other Deductive Approaches Input-Output Models Alternative Cost Method Benefit Transfer Estimated production functions Market analysis – observation of water markets, trades, leases, and water rights Hedonic property value method Inductive Approaches: Empirical and Statistical Methods

Merci’ Beaucoup! Grazie Thank You Gracias Brian H. Hurd, PhD Department of Agricultural Economics & Agricultural Business Gerald Thomas Hall Rm. 350 New Mexico State University Tel : (575) Web: