Assessing the potential of economic instruments for managing drought risk at river basin scale

Abstract:

Economic instruments work as incentives to adapt individual decisions to collectively agreed goals. Different types of economic instruments have been applied to manage water resources, such as water-related taxes and charges (water pricing, environmental taxes, etc.), subsidies, markets or voluntary agreements. Hydroeconomic models (HEM) provide useful insight on optimal strategies for coping with droughts by simultaneously analysing engineering, hydrology and economics of water resources management. We use HEMs for evaluating the potential of economic instruments on managing drought risk at river basin scale, considering three criteria for assessing drought risk: reliability, resilience and vulnerability. HEMs allow to calculate water scarcity costs as the economic losses due to water deliveries below the target demands, which can be used as a vulnerability descriptor of drought risk.

Two generic hydroeconomic DSS tools, SIMGAMS and OPTIGAMS ( both programmed in GAMS) have been developed to evaluate water scarcity cost at river basin scale based on simulation and optimization approaches. The simulation tool SIMGAMS allocates water according to the system priorities and operating rules, and evaluate the scarcity costs using economic demand functions. The optimization tool allocates water resources for maximizing net benefits (minimizing total water scarcity plus operating cost of water use). SIMGAS allows to simulate incentive water pricing policies based on water availability in the system (scarcity pricing), while OPTIGAMS is used to simulate the effect of ideal water markets by economic optimization.

These tools have been applied to the Jucar river system (Spain), highly regulated and with high share of water use for crop irrigation (greater than 80%), where water scarcity, irregular hydrology and groundwater overdraft cause droughts to have significant economic, social and environmental consequences. An econometric model was first used to explain the variation of the production value of irrigated agriculture during droughts, assessing revenue responses to varying crop prices and water availability. Hydroeconomic approaches were then used to show the potential of economic instruments in setting incentives for a more efficient management of water resources systems.