DRAFT VERSION
Groundwater Economics and Management: Valuation technicques
and hydroeconomic modeling
Policy Brief #2
Key role of economics in the implementation
of the Water Framework Directive (WFD) and
Groundwater Directive (GWD)
of the total economic value of the resource. As a
consequence, groundwater is often mis-managed
and increasingly under threat of pollution and depletion. Quantifying the economic value of groundwater resources is essential for a sound groundwater management. Value estimates can play a major
role in focusing policy-makers and public attention
on threatened undervalued resources. Value estimates are also critical in order to evaluate the level
of investment in groundwater development, protection, monitoring and management that can be
economically justified.
To meet the environmental objectives, the WFD
calls for the application of economic principles (e.g.
Polluter Pays), approaches (e.g. cost effectiveness
analysis) and instruments (e.g. water pricing). WFD
requires cost recovery of water services including
not only financial cost (capital, Operation-Maintenance-Remediation (OMR) and administrative
costs), but also environmental and resource costs.
Cost-effective combinations of measures should
be implemented to achieve good groundwater staThe total economic value of groundwater includes
tus. When disproportionate costs are identified,
not only use values (for example, extractive and in
time derogation or less stringent objectives are alsitu values), but also non-use values (for instance,
lowed.
bequest and existence values). There are a number
of techniques for assessing the value of both use
The Directives require the economic characterizaand non-use values.
tion of the water uses. The economic analysis shall
contain enough information to make the relevant Market-based valuation techniques
calculations necessary for taking into account the These techniques measure values through acprinciple of cost recovery of the costs of water ser- tual prices in market transactions. For example,
vices, including environmental and resource costs. groundwater supply in irrigation – there is a marThe economic characterization will be also used for ket value for this water, so it is possible to use stamaking judgments about the most cost-effective tistical techniques (econometric methods) to infer
combination of measures to be included in the pro- this. Unfortunately, there are many effects that are
gramme of measures. The analysis of key economic not reflected in market transactions (groundwater
drivers influencing pressures and water uses is es- quality improvements, impact on groundwater desential to project how these pressures might evolve pendent ecosystems, etc.)
in time.
What is the economic value of groundwater?
Water is often under-valued and under-priced.
Stakeholders and policy makers are often unaware
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Case 1: Production functions in Vosvozis,
Greece. Econometric approach.
Case 2 part 1: Production functions in Mancha Oriental, Spain. Agronomic simulation.
In the Vosvozis case (Greece), groundwater
level decline induces recharge from Vosvozis River and Ismarida Lake, diminishing thus
an important water source for the life of the
wetland ecosystem. Another threat due to
groundwater level decline is the intrusion of
seawater in the wetland area, causing a serious alteration in the initial character of this
protected ecosystem. Data from production
surveys to farmers in the Vosvozis area were
used to estimate the marginal value of groundwater in the aquifer (shadow price) through a
microeconomic approach (distance-function
approach). This value is central to the implementation of the EU WFD and GW Directive, because it allows the calculation of the
current level of cost recovery (as the difference between the current price charged for
groundwater and its marginal value) or the
marginal impacts of groundwater quality
changes due to potential policy measures.
This study offers the opportunity to reveal
individual farmer’s valuation of groundwater
and provide policy recommendations for water pricing that provides adequate incentives
for users to use groundwater resource efficiently considering groundwater dependent
ecosystems. Results show that groundwater
in our case study area is undervalued and
economic instruments should provide incentives to use it more efficiently by agricultural
sector incorporating the notion of total economic value and therefore groundwater’s indirect (ecosystem) value and non-use values
in water management.
In Mancha Oriental case study, irrigation is the
main water use by far (98%), the main crops being wheat, maize, alfalfa, onion and barley. Crop
yield (production functions) and nitrate leaching functions were estimated with a GIS-based
crop growth model integrating a bio-physical
EPIC model. The integration with the GIS tool
was necessary in order to simulate the spatial
and temporal dynamics of the major processes
of the soil-crop-atmosphere-management systems. The model uses six types of input data:
information on location (latitude, longitude and
slope), climate data, soil physical parameters,
land use data, plant parameters, and management data, such as irrigation and fertilizer application. The crop yield functions were used
to estimate crop the benefits, while the nitrate
leaching functions provided the nitrate input in
the groundwater system needed to assess the
resulting groundwater nitrate concentrations.
Both types of functions have been embedded
in the hydro-economic model described in box
5.
Non-market valuation techniques
These techniques are used where there is no price
available or where prices for groundwater goods
and services do not reflect the real value, but we
still need to estimate the value of the resource for
the purpose of decision-making. There are two
main groups of techniques: revealed and stated
preference methods. The first infers the values
from observed market transactions implicitly related to groundwater (for example, hedonic pricing
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to determine the economic value of groundwater
dependent ecosystems). The second estimates
willingness to pay for services from hypothetical
markets (for example, contingent valuation or
choice experiments).
Case 3: Nonmarket valuation (choice experiment) in the Rokua esker, Finland.
Rokua in Northern Finland is a groundwater
dependent ecosystem very sensitive to climate
change and natural variability. As such, the water level of most of the lakes is a function of
the level of the groundwater table of the esker
which is naturally recharged. Human activities
(mainly peatland drainage by forest industry)
are provoking decreased groundwater and lake
levels, inducing losses of ecosystem services
and recreation. There is high uncertainty on
the actual system dynamics, potential climate
change effect, and long-term impacts. Water
resources in Rokua provide a diverse array of
goods and services which can be translated into
direct (forestry, recreation, irrigation, energy
resources, etc.) and indirect (pollution abatement, soil erosion control, etc.) values, nonuse
values (biodiversity, cultural heritage, bequest,
existence). We have applied a choice experiment (CE) and contingent valuation method
regarding ground water quantity. General public’s elicited values highlight the importance of
water management policy which contributes to
the sustainability of groundwater dependent
ecosystems. Five attributes were considered
in the CE: water quantity, recreation (sum of all
values - direct and indirect - derived from recreational activities), land income, investment in
research, price. The results reveal that there is
a high willingness-to-pay for scientific research
(33-37€/household), showing the value of uncertainty reduction from improved scientific
information.
Some applications to groundwater valuation are
the assessment of the benefits of groundwater
quality improvements, or the full cost (environmental and resource costs) of groundwater deterioration or depletion. Examples of applications of
choice experiments to the valuation of groundwater resources within the GENESIS project are given in cases 3 and 4.
The application of these techniques is often expensive and time-consuming, and requires very specific
expertise. One alternative will be to infer the value
of groundwater by translating the results obtained
from other locations. Benefit transfer provides a
quick and cheap alternative to original valuation
studies, but we have to be cautious in their application because some conditions must be met in order
to provide reliable estimates.
GENESIS will provide a database of public access
with all relevant bibliographic information concerning studies that concern groundwater valuation (within deliverable 6.4).
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Case 4: Nonmarket valuation (choice experiment) in Zagreb, Croatia
undertaken within the context of this case
study point out to some interesting facts. First,
the general public accepts the need to sustain
or even improve water quality in the aquifer.
Second, the public accepts the measures that
are proposed. Third, the public is willing to pay
higher water rates for the implementation of
the proposed measures. These outcomes of
the study suggest that implementing the technical policies for improving the water status of
the aquifer is desirable.
The economic analysis of this case study aims
to characterize the value of improving water
quality and quantity in the Zagreb aquifer,
main source of potable water for the city of Zagreb. The three main polluters are urban uses
(aging sewage system), agriculture (pesticides
and nitrate), and industries (heavy metals). The
chosen approach for the economic analysis
is choice experiment in order to capture the
important non market benefits that can be
attributed to water quantity and quality. The
nonmarket valuation scenario describes the
following technical interventions: replacement
of the aging sewerage network to mitigate pollution from residential sources, monitoring
of pesticide and nitrate use in agriculture to
mitigate pollution from agricultural sources,
monitoring industrial wastewater treatment
activities to mitigate heavy metal contamination of water resources, replacing the distribution network to minimize water loss during
transfer. Our results indicate that significant
values can be attributed to the Zagreb population from improving water quality and quantity in the aquifer. The implementation of this
scenario in a way that achieves near zero pollution and prevents water service restrictions
is valued at 535.2 HRK (70.9 €/household).
In the case where industrial monitoring is not
implemented, the willingness to pay is 368.5
HRK (48.8 €/household). These values are significant when aggregated over Zagreb households and justify the implementation of measures for water quality improvement.
Two more case studies have been used to test
the approach. The first one, the Vosvozis case
(Greece), aimed to estimate nonmarket benefits from improving GW chemical (NO3/salinity) and quantitative (size of the lake) status.
The purpose of the other application, in Czestochowa (Poland), was to assess nonmarket
benefits from reducing NO3 pollution. The results illustrate the value attached to improving
water quality in the region.
Hydro-economic models and groundwater
management
The combination of economic concepts and indicators with the modelling of the groundwater systems provides results and insights more relevant
to management decisions and policies. Hydro-economic models can be used to assess economic impacts of certain policies or to simulate hydrologic
implications of the application of economic instruments.
The tools can be used to estimate the cost of certain policies and their effectiveness in meeting the
environmental objectives of the WFD. They can
also assist in the design of effective economic instruments for certain targets or objectives or to
meet certain requirements.
These results can be used in a Cost-Benefit
Analysis to access potential technical measures to mitigate water resources degradation
Economic instruments, where used appropriately,
can be effective tools for meeting some of the envi-
on economic efficiency grounds. The surveys
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ronmental objectives of the directive. Hydro-economic models can assist in the design and assessment of effective economic instruments.
control: fertilizer quotas and fertilizer price.
The cost of applying fertilizer standards was
estimated as the difference between the private net revenues from current applications
and the scenarios generated considering the
application of the standards. The cost of applying fertilizer standards was compared with
the cost of taxing nitrogen fertilizers in order
to reduce the fertilizer use to a level that the
nitrate concentration in groundwater was below the limit. The results show the required
reduction of fertilizer application in the different crop areas depending on its location with
regards to the control sites, crop types and
soil–plant conditions, groundwater flow and
transport processes, time horizon for meeting
the standards, and the cost of implementing
such a policy.
One alternative approach for hydro-economic
modelling for water resources management is the
use of Bayesian networks (BNs). BNs are increasingly being used to model environmental systems,
due to its advantages to incorporate and explicitly
represent uncertain information (the uncertainty
in the model inputs is propagated to the model
outputs), integrate data and knowledge from different sources, and handle missing or qualitative
data. The modular architecture facilitates iterative
model development, based on a relatively simple
causal graphical structure; the network can be built
without highly technical modelling skills and be understood by non-technical users and stakeholders.
This is a very valuable feature of BNs, particularly
in the context of natural resource management,
which benefits from interdisciplinary and participatory processes.
An integrated Bayesian network Decision Support System (DSS) has been also developed to
assess the impact of several policies for integrated groundwater management in Mancha
Oriental. In order to cover the different requirements of the EU Water Framework Directive, water quality, and economic, hydraulic,
legal and ecological issues are integrated. The
main advantage of the application of the BN
approach to this case is the great amount of
available information on the groundwater system behavior (including groundwater flow and
mass transport models, agronomic simulation,
hydroeconomic model, etc.) and especially,
on the impact of several water management
policies that have been recently implemented.
However, the approach is very flexible and can
be applied to deal with different groundwater
issues in other case studies in which less information is available or there is more uncertainty
on the impacts.
Case 5: Application of hydro-economic models to derive optimal fertilizer taxes in Mancha Oriental
A hydro-economic modelling framework has
been developed and applied to the Mancha
Oriental case study or exploring optimal management of groundwater nitrate pollution
from agriculture. An optimization model suggests the spatial and temporal fertilizer application rate that maximizes the net benefits
in agriculture constrained by the quality requirements in groundwater at specific control
sites. The analysis accounts for key underlying
biophysical processes linked to the dynamics
of nitrogen in the soil and the aquifer, as well
as the crop yield responses to water and fertilizer application. The approach allows to assess the tradeoffs between two alternative
economic instruments for diffuse pollution
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the layout will be altered.
GENESIS
Full title: Groundwater and Dependent Ecosystems:
New Scientific and Technological Basis for Assessing
Climate Change and Land-use Impacts on Groundwater.
Contract number: 226536
www.thegenesisproject.eu
Contact persons: Manuel Pulido-Velazquez, Universitat Politecnica de Valencia (Spain),
[email protected] (WP leader)
Phoebe Koundouri, Athens University of Business and Economics (Greece), pkoundouri@
aueb.gr
Johannes Sauer, Univ. of Kiel (Germany), [email protected]
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