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”, 5th World Water Forum, Istanbul, 08.30 – 13.00, 17 March 2009

Kevin ParrisTrade and Agriculture Directorate, OECD, Paris, France

Sau reservoir north of Barcelona, Spain

Drought: Sau reservoir end 2007

Floods

Variable precipitation

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Global challenges Global challenges for water resource management in agriculturefor 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

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

75

100

125

150

175

200

225

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Inde

x 200

0=10

0

OECD Total

Total water demand

Agricultural water demand

China Total

India & South Asia Total

OECD Agriculture

China AgricultureIndia & South Asia Agriculture

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

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Limits and potential to improve water use Limits and potential to improve water use productivity in agricultureproductivity 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 1990-92 to 2001-03

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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 Using water pricing and market-based incentives to improve water use efficiency in agricultureimprove water use efficiency in agriculture

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Summary of cost recovery rates for water services Summary of cost recovery rates for water services to agriculture in OECD countriesto 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).

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Recovery rates for Operation and Maintenance Recovery rates for Operation and Maintenance costs for irrigated areas in Mexicocosts for irrigated areas in Mexico

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Average Irrigation Operation and Maintenance Average Irrigation Operation and Maintenance Charges in TurkeyCharges in Turkey

0

20

40

60

80

100

120

1999 2000 2001 2002 2003 2004 2005 2006

TRY/ha, 2003=1 USD/ha

Turkish Lira (TRY) and US Dollars (USD) per hectare irrigated

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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 Why do impediments to water market formation remain? to water market formation remain?

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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 Policy issues and options toward improving water resource management in agricultureresource management in agriculture

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This presentation has drawn from four This presentation has drawn from four OECD publications:OECD publications:

www.oecd.org/tad/envwww.oecd.org/tad/envwww.oecd.org/waterwww.oecd.org/water

Kevin.Parris@oecd.org

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