Exploring the use of water pricing as a policy tool to improve water resource use efficiency in the agricultural sector FAO, OECD and IWMI Session: “Drops for Crops”, 5 th World Water Forum, Istanbul, – 13.00, 17 March 2009 Kevin Parris Trade and Agriculture Directorate, OECD, Paris, France

Sau reservoir north of Barcelona, Spain Drought: Sau reservoir end 2007 Floods Variable precipitation

OECD 3 Global challenges for water resource management in agriculture Key drivers impacting water resource use by agriculture: Water projections by sector  Growing world population from current 7 billion to 9 billion by 2050  Increasing food demand from 2000 baseline requiring: 50% more food by 2030 double food production by 2050  Changing dietary habits towards more meat and dairy products  Expanding biofuel/bioenergy production from agri-forestry material  Increasing demand to meet environmental needs, e.g. wetlands World water withdrawal projections: 2000 to 2050

OECD 4 The outlook for water demand in China, India and South Asia, and OECD countries

OECD 5 IPCC (2007) assessment for global real agricultural prices under different warming scenarios

OECD 6 Limits and potential to improve water use productivity in agriculture Megalitres per hectare of irrigated land −50% −19%  Irrigated area not likely to increase very much over coming decades  Major new irrigation infrastructure development unlikely (e.g. financial and physical limits)  Potential for agriculture to use recycled and desalinated water marginal and costly  Hence, high priority to improve productivity of existing irrigation system, and raise the water productivity of rain-fed agricultural systems, but performance is variable −10% −12% +69% +7% −3% na % change to

OECD 7  Most OECD countries have embarked on water reforms programmes that seek to make greater use of water pricing and market based incentives  Significant variations in farm water charges within and across countries  Rates of cost recovery have been increasing for most countries  Full recovery of operation and maintenance costs is common, but rates of recovery for capital costs are poor  Where countries have increased water charges to farmers, available evidence indicates this has not led to reduced output  A few countries are recovering some environmental and resource costs in agriculture, but mainly use other policy instruments to address these issues  Groundwater policies usually involve licences and other regulatory instruments and rarely have water pricing been applied Using water pricing and market-based incentives to improve water use efficiency in agriculture

OECD 8 Summary of cost recovery rates for water services to agriculture in OECD countries  100% recovery of Operation and Maintenance (O&M) and Capital Costs (CC): Austria; Denmark; Finland; New Zealand; Sweden; United Kingdom  100% recovery of O&M Costs, but less than 100% recovery of CC: Australia, Canada, France, Japan, United States  Less than 100% recovery of O&M and CC: Greece; Hungary; Ireland; Italy; Mexico; Netherlands; Poland; Portugal; Spain; Switzerland; Turkey  Less than 100% recovery of O&M Costs, with CC fully supported: Korea  Recovery of other costs through water charges or water pricing: Opportunity costs, economic and environmental externality costs Australia (some environmental costs already recovered); United Kingdom (currently recovering share of environmental costs).

OECD 9 Recovery rates for Operation and Maintenance costs for irrigated areas in Mexico

OECD 10 Average Irrigation Operation and Maintenance Charges in Turkey Turkish Lira (TRY) and US Dollars (USD) per hectare irrigated

OECD 11  Incomplete understanding of the science of water resource and ecosystem linkages  Lack of physical networks between water delivery systems supplying agriculture, urban, industrial and other water users  Poorly defined property rights, including separating land from water entitlements  Problems of defining, securing and agreeing among stakeholders in a water basin allocation of water to sustain environmental and cultural values  Concern with the high transaction costs in creating water markets  Issues of equity and social concerns, that are perceived to be overlooked by the ‘economic’ focus of water markets  Frequently legal, administrative and institutional barriers to developing water markets Why do impediments to water market formation remain?

OECD 12 Increasing cost recovery rates for water services to agriculture are more likely to be effective as part of a broader long term policy package that should embrace the following:  Recognise the complexity and diversity of water resource management in agriculture  Reform institutional systems for water management in agriculture  Enhance agriculture’s resilience to climate change and variability impacts  Improve policy integration between agriculture, water, energy and environment policies  Address knowledge and information deficiencies to better guide water resource management Policy issues and options toward improving water resource management in agriculture

OECD 13 This presentation has drawn from four OECD publications: Visit the OECD stand and our websites: Contact:  Sustainable Management of Water Resources in Agriculture, 2009 forthcoming  Managing Water for All: An OECD perspective on pricing and financing, 2009 (launched at the World Water Forum this week)  Environmental Performance of OECD Agriculture since 1990, 2008  Water and Agriculture: Sustainability, Markets and Policies, 2006