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Environmental EconomicsThe Agrofood Chain, Unit S2M18

Alban THOMAS

thomas@toulouse.inra.fr

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Course outline

3 – Resource use and pollution, key instruments for public policy

3.1 – Natural resources as production inputs or « not-so-basic » commodities

3.2 – Valuating amenities from natural resources and the environment

3.3 – A typology of pollutions and environmental damages

4 – Environmental and economic policies – Applications to agriculture and agrofood chain

4.1 – The need for regulating pollution and water use

4.2 – Welfare and abatement cost, a production-side approach

4.3 – Evaluating and regulating agrofood industrial emissions

4.4 – Regulating irrigation and emissions from agriculture

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3 – Resource use and pollution, key instruments for public policy

Purpose: The link between human activity and the environmentDefinition of environmental valuesTypology of environmental damagesIntroduction to Cost-Benefit Analysis (CBA)Which policy instruments for which damages ?

Keywords: Point and Nonpoint source pollutionEnvironmental valuation Cost-Benefit Analysis Pigovian tax

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3.1 – Natural resources as production inputs or « not-so-basic » commodities

«Anthropic » (man-oriented) vision : natural resources are used for production and consumption activities

The environment is considered a « service supplier » or a « good supplier »

Environmental damage is defined as a lack of services from the environment

First step: define environmental goods and services supplied to producers, consumers,…

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Environmental goods and services can either be

Directly supplied (depend on location): - air quality- landscape beauty

Supplied through production activities:- productive eco-systems: agriculture, fishery- production inputs: agro-food industry, tourism

Supplied through consumption activities:- food quality- recreational activities (natural parks, etc.)

Note. Lack of such services are unavoidable damages:- acid rain, contaminated soils

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Value types of environmental services:

A/ Use values (related to economic activities, incurred damages)- direct use (consumption of a natural resource)- indirect use (environmental service, e.g., recreative fishing)

B/ Nonuse values (passive values)- are not used but would be considered a loss if they disappeared- existence value (Bengali tiger)- legacy value (legacy to future generations)

C/ Option value- for future use (consumer himself or future generations)- may be purely hypothetical (a new drug discovery from

a remote environment)

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TOTAL ECONOMIC VALUE (TEV)

Use values Non-use values

Direct values

(goods)

Indirect values

(services)

Option values

Existence value

Legacy value

Forestry firm,Agriculture,

Fishery…

Value that may appear ultimately

(pharmaceutical use,…)

Recreational activities, soil stabilisation…

Knowing that «something» will remain

available for future

generations

Knowing that the Pyrénées Brown Bear will survival (while never seeing him)

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3.1.1 Value of environmental goods for production activities

Producer: maximise profit under several constraints- economic constraints (input and output prices)- technical constraints (technology)- environmental constraints (state of the environment)

Environmental constraint is a constraint like others differences in environmental conditions indicate differences in profit

value of an environmental good: measured by its effect on firm’s profit

Principle of valuation:

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Example : agrofood production unit involving water input, own private well (W)quality requirements for Wother inputs (X): assumed fixed

Quality of water input W is randomAssume bad quality of W occurs with some positive probability π

Possible substitute for W: Z, with non-random quality

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Profit ( ) ( ) if (1 )

( ) if ( )W

Z

p Q W r W

p Q Z r Z

Quality requirementInput pricesTechnologyOutput price

Expected profit: ( )

(1 ) ( ) ( )

Z

W

E p Q Z r Z

p Q W r W

Value of environmental condition: change in expected profit / change in proba.

( ) Z W

dEp Q Z Q W r Z r W

d

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General framework:

Technology ( , ) , where : vector of production inputs

: vector of environmental variables

F X Z X

Z

Comparative statics

0 /d dX dX

dZ Z X dZ dZ Z X

Important: a change in environmental conditions (quality of inputs, …)is affecting production conditions

Change in production cost Change in output supply / output price ? Depending on market structure

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For production activities, the value of environmental services can beinferred from (observed) production behaviour

Changes in expenditure (production cost) are due to the need to substituteother inputs for changes in environmental conditions (quality)

Hence, even if changes in environmental conditions are unobserved, theindirect value of environmental quality can be inferred becausefirm output is marketed

Examples:- agricultural crop losses from ozone- change in production practices due to global warming

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0 0 1 1Initial state ( , ), final state ( , )

Define profit ( ) 0,1

where ( , ) and : Total Costi i i

i i i

X Z X Z

p Q TC Q i

Q Q X Z TC

Average cost : ( ) ( ) /

( )Marginal cost : ( )

AC Q TC Q Q

TC QMC Q

Q

*

* * * *

max ( , , ) ( , )

and , , ( , , )

XX Z p X X Z p

Q Q X Z Q Z p X Z p

Assume perfectly competitive market: firms are price takers

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Euros

Q( )q p

MC

ACp

( )AC q p

Total profit (p > AC)

Operational Profit (p > MC)

Average and marginal production costs

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Euros

Q0( , )Q Z p

0( )MC Z

p

Impact of a change in Z

1( )MC Z

1( , )Q Z p

1( )AC Z

0( )AC Z

0( , )AC Q p

1( , )AC Q p

Change in surplus

Initial surplus

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3.1.2. Application: biodiversity, a useful input

Broadly defined as total variability of life on earth

Important for future industrial use (medicine, agrofood industry, etc.)

But:

- A species is more valued when it is less substitutable

- It is easier to promote conservation of a species if its expected valueis higher

- All species are not equally valued

How to build a decision rule for selecting species to conserve ?

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Weitzman (1998): Consider the problem of ranking N programmes

Each programme i, i=1, 2, …, N, is devoted to conservation of species i

Let

: utility for society of preserving ;

: diversity measure (distance with respect to other species) ;

: programme cost ;

: survival probability change due to programme

i

i

i

i

U i

D

C

P

Then the rank of programme is:

, 1, 2, ,ii i i

i

i

PR U D i N

C

Empirical issue: estimation of components in formula above

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3.1.3 Value of environmental goods for consumption activities

Need to define equivalent of profit for consumer

Program for a consumer: maximise utility under- economic constraints (price of goods, income)- environmental constraints

Revelation of preferences: how to infer values that consumers set on

environmental and natural resources ?

Important: environmental goods (and services) are non-market goods

No observable demand, no consumer surplus, no price

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Case of use-values: relationship between non-market and market demands

Relationship between Value of Demand formarket and non-market environmental marketgood good good

Substitution ↑Complementarity ↓Neutrality =

Case of non-use values: direct approach for direct revelation

Important: values can be defined for - amenities (positive effects)- damages (negative effects)

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3.2.1. Theoretical framework

1

1

( , ) : utility of household/individual

( , , ) ' : vector of private goods

( , , ) ' : vector of public goodsm

n

u x q

x x x

q q q

Distinction between private and public goods:the individual controls the quantities (x)vector q is exogenous

Example: is quantity of tap water consumed

is quality of the wateri

i

x

q

1Prices: vector ( , , ) (market prices or not)mp p p

3.2 – Valuating amenities from natural resources and the environment

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Individual is assumed to maximise utility subject to income y

Indirect utility function ( , , ) given by

( , , ) max ( , )x

V p q y

V p q y u x q p x y

Minimum expenditure function ( , , ) is defined by

( , , ) min ( , )x

m p q u

m p q u p x u x q u

Hicksian demand function :

( , , )( , , ) (utility-constant demand)u

ii

m p q ux p q u

p

Marshallian demand function :

( , , ) /( , , ) (depends only on and )

( , , ) /i

i

V p q y px p q y p y

V p q y y

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Assume ( , ) is increasing and concave in

then

( , , ) is decreasing and convex in

( , , ) is increasing and concave in

u x q q

m p q u q

V p q y q

Purpose: to measure the increment in income that makes the consumerindifferent to an exogenous change

This change can be a- a price change- a quality change- a change in some public good

For pure public goods (e.g., existence value), only indirect utility andexpenditure functions are relevant

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Willingness to pay (WTP): the maximum amount of income the individualwill pay in exchange for an improvement in circumstances

OrThe maximum amount he will pay to avoid a decline in circumstances

Willingness to accept (WTA): the minimum amount of income the individualwill accept in exchange for a decline in circumstances

OrThe minimum amount he will accept to forego an improvement

in circumstances

Equivalent definitions: compensating variation and equivalent variation

3.2.2 Willingness To Pay and Willingness To Accept

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Relationship between WTP, WTA and variations

Equivalent variation Compensating variation

Utility increases WTA WTPUtility decreases WTP WTA

Equivalent vs. compensating variations differ according to thecomparison between initial vs. final well-being:

Formal definition of WTP for a public good: amount of income that compensates or is equivalent to an increase in public good q

* *( , , ) ( , , ) for

and / 0.i

V p q y WTP V p q y q q

V q

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*Equivalently, ( , , ) ( , , )

when ( , , ) and ( , , )

WTP m p q u m p q u

u V p q y y m p q u

WTP: amount of income that leaves the individual indifferent betweenincome y and public good q (initial state)

and income y – WTP and public good q* (final state)

*

for a price change :

( , , ) ( , , ) when ( , , )

WTP

m p q u m p q u u V p q y

WTA: change in income that makes the individual indifferent betweenincome y + WTA and public good q (initial state)

and income y and public good q* (final state)

* * * * *( , , ) ( , , ) when ( , , )WTA m p q u m p q u u V p q y

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*Also, is defined by ( , , ) ( , , )WTA V p q y WTA V p q y

Important: WTP and WTA are useful measures for computingenvironmental values for amenities (positive effects)or negative effects on the environment (damage)

3.2.3 The Contingent Valuation Method (CVM)

Very popular method for estimating values for non-market goods

Produces its own data, is applicable to any situation (fictious markets)

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Stages in a CVM exercise:

a) Set up the hypothetical market for environmental service or goodInform respondents about the project:

- reason for needed payment- bid vehicle (local tax, etc.)- who will pay ultimately- how environmental service will be restored/created

b) Obtain bids (proposed values)Questionnaire, face-to-face interview, mailing, etc.Ask people for their WTPDifferent ways to obtain individual bids:

- bidding game: higher and higher amounts suggested until maximum WTP is reached- closed-ended referendum: single payment suggested and response is YES/NO- Payment card: range of values is presented, one chosen- Open-ended question: « How much are you willing to… »

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c) Estimate mean WTP (and/or WTA)- Average or median values computed from sample

depending on choice to treat outliers- What to do with « protest bids » ?- What to do with « zero responses »

in the case of open-ended questions ?

d) Estimate bid curvesInvestigate the determinants of WTP/WTAUseful for aggregating results and predictionsEstimating the relationship between WTP and individual characteristics

e) Aggregate the dataConvert bids or average bids to population total value figureRequires adequate definition of relevant population

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3.2.4 The Hedonic Pricing Method

Typically used on house price data

Tries to find a relationship between level of environmental service andprice of a marketed good (a house)

Lancaster-Rosen approach: characterstics theory of valueAny commodity can be described by a vector of characteristics, Z

Let ( ) : bid for an increase in characteristic iB Z i

( )In market equilibrium, marginal bid is equal to implicit price of

(equal to marginal cost of for consumer)

ii

i

i

B ZZ

Z

Z

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Hedonic equation for house in neighbourhood and environment :

, ,hik h i k

h i k

P F S N Z

House characteristics

Neighbourhood characteristics

Environmental variables

Implicit price for characteristic :

, ,h i khik

k k

i

F S N ZP

dZ dZ

Consumer behaviour: equate marginal value for Z and its marginal cost

Rent differential: value of a marginal change in Z

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Individual equilibrium in housing market

Marginal cost

Environmental service

Rent differential

Marginal value A

Marginal value B

AQBQ

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Example: a CVM application for recreational services

Site: South Platte River, Colorado, USA

Survey: interview in person, N=95

Question: « If the South Platte River Restoration Fund was on the ballotin the next election, and it cost your household $__each month in a higher water bill, would you vote infavor or against ? »

Possible values: $ 1, 2, 3, 4, 8, 10, 12, 20, 30, 40 50, 100

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Descriptive statistics

Variable Description Mean (N=95)

t Increment to water bill $ 14.78

HHINC Household income in 1997 $ 54,175

UNLIMWAT 1 if farmers entitled to unlimited water ? 0.45

ENVIRON 1 if member of conservation group 0.19

WATERBILL Average water bill $ 35.80

URBAN 1 if lives in large city 0.75

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0 0 0

1 1 1

Specification of utility function:

If choice=0 :

If choice=1 : ( )

V y X

V y t X

Income Individualcharacteristics

Random term

1 0

0 1 0 0 1 1

Individual prefers "Accept" ( ) to "Refuse" ( ) if utility is higher:

( )

V V

V V y X y t X

1 0

0 1 1 0

Prob[ACCEPT] = Prob[ ]

Prob ( )

V V

X t

1 0( ) : marginal effect of variable when project is (not) implementedX

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0 1 2 3 4

Explanatory variables for choice:

( , , , , )

Parameters to estimate:

( , , , , , )

UNLIMWAT ENVIRON WATERBILL URBAN t

0 1 2 3

4

Estimation of the model:

ProbUNLIMWAT ENVIRON WATERBILL

yes FURBAN t

1 0 1 0

1 1WTP X

1 0

1 0

0 0 1 1

Individual indifferent between "Accept" ( ) and "Refuse" ( ) :

( , , ) ( ,0, )

( )

V V

V y WTP X V y X

y X y WTP X

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Parameter estimates

Parameter Estimate Std. error

Payment (increase to bill)

0.14

(0.03)

Intercept 2.44

(1.48)

UNLIMWAT -1.47

(0.74)

ENVIRON 3.37

(1.18)

WATERBILL -0.06

(0.03)

URBAN 1.82

(0.71)

/

0 /

1 /

2 /

3 /

4 /

Notes. Logistic distribution, with standard deviation σ. Standard errors of parameter estimates are in parentheses.

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3.2.5 The Cost-Benefit Analysis (CBA)

What is a Cost-Benefit Analysis:

A tool for public policy assessment (for public policy-makers)

Can also be used by a private decision-maker (a firm)

Purpose: help in decision making when a (long-run) project is considered

Especially used in the presence of risk or uncertainty

Decide for or against a project by considering all possible outcomes

Combination of scientific knowledge and society’s preferences overoutcomes (in monetary units)

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Example of needed components in the case of a project forreducing an environmental damage:

- Probability of an environmental damage occuring

- Nature and range of environmental damages

- Cost of the public programme (e.g., for avoiding/restoring the environment, avoiding a risk)

- Probability of success for the public programme

Notes. - Some events can have negative effects for some agents (damages)and positive effects for others.

- Somes outcomes can benefit the environment and not society, and vice versa

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Basic steps

1- Choice of agents to include in the analysis (costs and benefits for whom ?)

2- Choice of a set of possible policy instruments/options

3- Inventory of all potential impacts of policy options and the associated indicators to measure them

4- Quantitative prediction of project’s impacts

5- Give an economic value to all impacts

6- Discount future costs and benefits

7- Sum up discounted values of costs and benefits

8- Conduct a sensitivity analysis (confidence intervals) of predictions above

9- Recommend the policy option with the largest net social gains

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Important things to remember with CBA

A/ General principles

Rule: accept every decision that leads to benefits higher than cost.

With CBA, a decision is always evaluated with respect toan alternative decision:

It may status quo, or postponing the decision at a later time

The alternative decision also has consequences, which need to be evaluated

All costs and benefits are to be compared, which implies that theybe converted to monetary units (in general)

This implies that health and environmental considerations, but alsomortality can receive monetary values

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All assumptions and specifications must be justified, and the CBAmust be evaluated first by (multi-disciplinary) experts

The computation of costs and benefits for a given situation can dependon the objective (private or public decision maker)

B/ The CBA and the citizen

Question: is the CBA technocratic or democratic ?It is by construction citizen-oriented, because information onpreferences are collected directly from citizens (or by observingtheir choices).

Problem: what if citizens behave irrationally or citizen risk perceptionsare too emotionally-driven ?

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Benefits to a project are collected to evaluate society’s preferences correspondingto different outcomes

by different methods:- Revealed Preferences (observing real-life choices)- Stated Preferences (CVM, etc.)

C/ Main criticisms addressed to the CBA

Ethical perspective: give a monetary value to some goods or componentsof life, culture, etc.

But in practice, one does not evaluate the value of life (Value of StatisticalLife), but the trade-off between income and a reduction of a mortality risk.

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A fugure often quoted: The Value of a Statistical Life is about 5 million $in OECD countries.

But this means in reality that

- both income and a reduction in mortality rate are valuable to people- The WTP for a reduction of 1 / 1million in mortality risk is 5$

What about differentiated treatment of individuals ? Possible discrepancy between efficiency and equity, a policy option could be preferredfor reasons other than efficiency

A CBA should detail policy impacts for all categories of individuals,if heterogeneous effects.

Difficult to adequately represent society’s preferences in terms of socialjustice for example.

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D/ The use of ACB in practice

Mostly in the US, Great-Britain and some Scandinavian countriesAlmost no applications in France

CBA is recommended by most international organisms (World Health Org.,UN Environmental Programme, etc.)

In the US: used for over 25 years in regulatory decisions on the environment,consumer and food safety, health and safety regulations, etc.

Executive orders 12044, 12291 and 12866, Presidents Reagan 1981and Clinton 1993)

Either by law and/or for projects with expected impacts > 10 million $

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US federal administrations using recommendations based on CBA:

USEPA (Environmental Protection Agency)USDEA (Drug Enforcement Agency, US Department of Justice)

Differences between regulatory prevention levels in the US and Europe:

Regulation is stronger (prevention level is higher)

In the US:

-Alcohol- Tobacco- Pollution- Food

In Europe:

- Energy- Transportation- Medicines- Work and building works

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Carefulness when using CBA

CBA has a normative feature: how to determine a socially efficient systemfor dealing with environmental protection, risk, etc.

Different from the positive question: « How to organise the system such thateconomic agents make decisions that closely look like this efficientdecision ?»

CBA does not deal with positive aspects such as the relevant tax system toadopt, responsibility rules to establish, social and political acceptabilityor a policy decision, etc.

« Couldn’t we decide for a less efficient policy option, but one that can moreeasily be implemented ? » Need for a unified framework (efficiencyand implementation aspects).

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The need for discounting values, and its consequences

Policy option with cost today,

annual gains for society: in years from now.

M

g d

Net discounted benefit: use of a discount factor 1

(the value of 1 Euro next year compared to 1 Euro today)

1

Value today of gain in years : ,

in 1 years : , .

d

d

g d g

d g etc

0

Sum of discounted gains arising from period :

( )(1 )

(because 1)

dg i d i

i d i

d

DG g g g g

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Comparison between ( ) and cost :

Project should be accepted if

( )(1 )

d

dd

DG g M

MM DG g

g

d=1 99 19 9

d=10 90.4 11.9 3.4

d=20 81.7 7.1 1.2

0.99 0.95 0.90

Examples for selected values of and d

Cost-benefit ratio

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Example of a Cost-Benefit Analysis: Cardiff Bay Barrage

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Background

Estuarine area dividing South Wales from South-West England

- One of the world’s greatest tidal range: up to 14 m.

- Cardiff harbour inacessible at low tide for up to 14 hours a day.

- Environmental services of the Bay: winter site for about 6000wildfowl and waders, and resident birds (total 88,000)

Project

Development plan for a barrage across Cardiff Bay

Conversion of the Bay from a tidal saltwater area to a freshwater lake

(2 km2, 13 km. of waterfront)

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Advantages:

The project will eliminate the effect of the tide, hence:

- new recreational developments (leisure boats)

- development projects for Cardiff’s waterfront

But there are downsides:

- feeding grounds (inter-tidal mud flats) would be flooded.

- loss of natural flushing process, hence accumulation of pollutants in the freshwater

lagoon.

Cost: around 220 million £

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MORGLAWDD

Mae'r harbwr yng Nghaerdydd yn profi'r un o'r amrediadau llanw mwyaf yn y byd: hyd at 14m.   Golyga hyn, pan fo'r llanw ar y trai, ei bod yn amhosibl cyrraedd ato am nyd at 14 awr o'r dydd.  Bydd morglawdd yn cael gwared o effaith y llanw, a fu'n rhwystr i ddatblygaid, gan ymryddhau potensial adnodd mwyaf y brif ddinas ai glannau.

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Before (low tide) After (any tide)

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CBA conducted by the Cardiff Bay Development Corporation (CBDC)

Three options:- status quo- barrage- mini-barrage (proposed by environmental groups)

Notes. - The project would use public funds (UK taxpayers, not just local people)

- benefits for whom ? If all UK is relevant population, housing and commercial projects are displaced investments from elsewhere.

- New road link (project independent from barrage)

Hence, different ways of presenting figures in the CBA proposed by the CBDC

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First CBA: computed by CBDC

- Discount rate: 8 percent per annum- benefits of new road are incorporated- no environmental damages included- benefits for Cardiff area only (housing and commercial development

projects are not substitutes to others, i.e.,no displacementin development benefits)

- rather high growth rates for property values

This yields a NPV (Net Present Value) of 301 million £ for the barrageand -166 millions £ for the status quo.

Second CBA: computed by accounting for environmentalist criticisms

- benefits of new road are omitted- no environmental damages included (to simplify)- allowing for 50 % displacement in development benefits- assume lower growth rates for property values

This yields an adjusted NPV

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Alternative Project Options

Barrage Mini-barrage No Barrage

Costs

Barrage 121.55 28.38 0

Shadow project 4 4 0

Site preparation 147.25 90.29 86.36

Access costs 152.80 143.44 140.65

Landscaping 95.89 53.29 18.22

Others 25 25 25

Total cost 433 267 203

Benefits

Land value 490 120 26

Property appreciation

244 62 11

Total benefits 734 182 37

NPV 301 -85 -166

NPV Adjusted -206 -139 -100

CBA of Cardiff Bay Barrage (in £ million)

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3.3 – A typology of pollutions and environmental damages

Previous definition: An environmental damage can be considered a lost opportunityto supply (a reduction in) environmental service

Pollution: caused by a human activity, reversible effect in generalDamage: much more general, can be irreversible

Pollution is often considered voluntary: a side-effect of an economic activity

It can also be unvoluntary: industrial accident, etc.

Important: a pollution is a necessary condition for a damage to occurNOT a sufficient condition

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Why?

Production

Emissions

Damage

Firm, plant

Environment

Self-abatement physical potential

1,000 t

100 mg / liter

0.2 (20 %)

80 mg / liter

It is damage, not pollution, that should be prevented or controlled

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Relationship between pollution and damage:

- self-abatement potential of the local environment- lag (period of time) between emissions and damage

- Hence, difference between potential damage and actual pollution

Examples of damages

To human beings: health effects (cancer, various diseases)loss of environmental services

(landscape, air and water colour, etc.)loss of natural species (plants, animals)

To the environment: loss of biodiversityreproduction ability of natural speciesdecrease in self-abatement capability

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Point source pollution Nonpoint source pollution

Industrial emissions are identified Agricultural emissions are not identified

First distinction: point and nonpoint source pollution

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Some examples

In general, if there are multiple polluters (firms, farmers, etc.) and

emissions are not measured, a point source becomes a nonpoint source pollution

- Point source pollution

Measured industrial Chemical Oxygen Demand (COD)Use of a single pesticide by a single farmer (Atrazine)Noise or smell of a single production plant

- Nonpoint source pollution

Motor vehicle emissions (Volatile Organic Compounds, nitrogen oxydes)Nitrate contamination of groundwater from agricultureGreenhouse gases (GHG) from coal-fired power plants

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Important difference because:

- Point source pollution can be traced to the firm, plant, production activity

- Hence no problem in the proof of the damage (liability of producer)

- A policy instrument can be used more efficiently, because pollution isobserved for each producer

On the other hand:

- Nonpoint source pollution does not allow to identify individual polluters

- Hence, problem of proof (may be a juridiciary issue)

- If individual emissions are not observed, what policy instruments to use ?

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4 . Environmental and economic policies - Applications to agriculture and agrofood chain

4.1 – The need for regulating pollution and water use

We first start with the case of industrial water pollution:

- One of the first application case of environmental policy instruments- Experience in developed countries over 40 years (France)

- Regulation in developing countries has started to emerge

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- Why quantify pollution ?

To assess damage to societyTo make necessary corrections to pollution level, if needed

- Why the need for evaluating the relationship between production and pollution ?

To design adequate environmental policy for modifying producers’ behaviour

Implicitly: there exists a socially optimal level of pollution

Different from the optimal pollution level from producers’ point of view

This implies that relationship between pollution and damage need be established (scientific evidence)

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-What can public policy makers (government) do ?

Find an efficient and feasible way of controlling pollution

Available instruments:

- Tax on emissions

- Ban or quota on some production inputs

- Subsidy for abatement activity

- Subsidy for investment in clean technology

- Set up a market for pollution permits

- Contract with firms

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whereq: output supply p: unit output pricec: production cost e: emission levela: abatement level D: damage function

Consider first a social planner maximising social welfare W

( , ) ( , ) ,W pq c q a D e q a

Firm’s profit Damage

( , )0,

( , )0

W c q a dD ep

q q de q

W c q a dD e

a a de a

First-orderconditions

4.2 – Welfare and abatement cost, a production-side approach

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( , ) (damage should be added to

conventional cost)

( , )

c q a dD ep

q de q

c q a dD e

a de a

(rule for optimal abatement level)

p

q0q

Production cost

Marginal damage + prod. cost

*q

Marginal damage

Private optimum

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Solution: optimal levels of output and abatement (q*,a*) from a social point of view

Interpretation: - producer should internalise damage

- abatement activity should be such that

marginal abatement cost = marginal gain of damage reduction due to abatement

Socially optimal emission level is e(q*,a*)

Since D increasing in e, and e increasing in q : 0*q q

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Consider then a firm faced with a tax on emissions, T

max Profit : ( , ) ( , )pq c q a T e q a

Necessary conditions

c ep T

q q

c eT

a a

Hence, the condition for (social) optimality of solutions is that

( , )D e q aT D

e

(unit tax on emissions = marginal damage)

Pigovian tax

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Implementation in practice:

This means the following items are required:

Extension of the framework to an actual population of N firms :- This means a polluter-specific tax level, Ti , i=1,2,..,N- Is it feasible (legally, etc.) ?- Will it be acceptable to firms ?

→ Point source pollution framework

Note: The Pigovian tax is an optimal taxIt is a special case of the ‘‘Polluter-Pays Principle’’

- Knowledge of functions D(.) and e(q,a)- Observability of emission level e and abatement a

71

Numerical example

Single firm with the following cost function ( , )c q a A q a

( , ) ( ) ,e q a B q a a q and emission function

Cost is increasing in output and in abatement , , 0A

Cost is convex in output and in abatement , 1

1

1

Firm program is max ( )

System of equations to be solved:

0,

0

p q Aq a T B q a

p A q a TB

A q a TB

72

1/1 1/11 (1 ) /

1

p A q a TB TBq TB A a a

AA q a TB

1/

1 1

11 1

p TBp TB A q a a q

A

p TB TBa

A A

1

1 1p TB TBq

A A

73

Simpler specification:2( , )c q a Aq Caq

22

2

2

Firm program becomes max2 2

,0

0

A ap q q Caq T B q

C p TBap Aq TB aC ATB C

Cq TB a TB p TBq

ATB C

74

Other possible instruments to control for industrial water pollution(than an emission tax):

Difference here between abatement technologies:- ‘‘end-of-pipe abatement’’ (production unaffected)- clean technology (modifies production process)

Direct tax on production inputs or on output:- Used when emissions costly to monitor or to observe accurately- Can be inaccurate or unfair (difference between actual and estimated pollution)

- investment subsidy in ‘‘clean technologies’’- investment subsidy and technical assistance in abatement activity- a direct tax on production inputs or on output- a direct ban on some emissions

75

Ban on some emissions: - Rarely used- Replaced in practice by emission standard

(maximum concentration level)

In some cases (France), combination of policy instruments:

This means that- Firms with too toxic pollutants are not allowed to produce- Compliance with emission standards implies that firms

may need to limit production- Firms will have a strategy on abatement activity as well

1/ Firm’s establishment is allowed by public authority2/ Environmental emission standards are imposed3/ Tax on effluent emissions4/ Subsidy policy of abatement activity

76

4.3 The French water policy and agrofood industrial effluent emissions

French water policy: dates back from the 1960s

Important dates:1964: first French Water Act, creation of the 6 Water Agencies1966: first emission tax systems implementedearly 1990s: significant increases in emission taxe levels1992: second French Water Act2000: European Water framework Directive

A major actor in the French water policy: The Water Agencies

- One for each of the 6 main river basins- Hydrological (not administrative) boundaries for Water Agency action

77

Water Agencies:

Autonomous environmental authorities, with administrative supervision of the Ministry of the Environment

Within each 5-year working plan, budget must be balanced

Financial instruments: emission tax, subsidies, loans with/without interest

5-year working plans (…, 1992-1996, 1997-2001, 2002-2006)

Agencies also participate to common-interest operations: dams, water transfers, groundwater recharge, limitation of coastal water pollution

Goal: financial participation to water disposal and pollution reduction operations

78

The 6 Water Agencies are:

Note: no Water Agencies for overseas territories (French West Indies, SouthPacific, etc.

A dual charge scheme:- On water use - On effluent emissions

- Adour-Garonne (Southwest, 115,000 km2) - Artois-Picardie (Northeast, 19,562 km2)- Loire-Bretagne (Brittany and Central France, 155,000 km2)- Rhin-Meuse (East, 31,500 km2)- Rhône-Méditerranée-Corse (Southeast and Corsica, 130,000 km2)- Seine-Normandie (North and Paris area, 100,000 km2)

For 3 categories of users: industry, residential users, agriculture

79

Water pollution

charge Use charge Total User Share

Residential

Industry

Agriculture

35,614

5,437

554

6,361

1,910

269

41,975

7,347

823

83.7%

14.7%

1.6%

Total 41,605 8,540 50,145 100%

Revenues from Water Charges Collected by Water Agencies, VII Working Plan 1997 – 2001 (in million French Francs)

80

VI Working

Plan

% of total

subsidies

VII Working

Plan

% of total

subsidiesPercentchange

POLLUTIONTreatment plants in communitiesSewage networkIndustrial pollution controlWaste disposalTechnical AssistanceWater treatment premiumOperational costs subsidyAgricultural pollution controlOthers

10,86411,3925,9491,159

3704,730

614550

42

25271431

11110

12,91513,4246,0481,178

6317,9802,1892,682

169

23241121

14450

191822

7169

257388302

Total 35,652 83 47,216 83 32

RESOURCE AVAILABILITYWaterworksIrrigationGroundwaterRiver basin recoveryDrinkable waterResource management

815161726711

4,469393

2022

101

1,11425

6431,5485,520

892

2013

102

37-84-11118

24127

Total 7,275 17 9,742 17 34

Grand total 42,927 100 56,958 100 33

Subsidies by Type of Operation (in million French Francs)

81

Mission: financial participation to investment in public (common interest) or private equipments and facilities, for emission control and improvement of resource sharing.

Funds are then redistributed in the form of direct subsidies or loans

Necessary funds: taxes collected from water users in river basin:- Emission tax (water pollution)- Water extraction and consumption taxes.

No direct initiative on private investments, but financial aid is crucial

Incentive role in reducing fixed costs and later, emission charges.

82

The Water Agency tax scheme

Multi-year framework of the Working Plan:

Taxes are collected from each individual plant, with a minimum perception threshold

Unit rates can be modulated geographically (coastal zones, wetlands, vulnerable areas)

The category of users to be taxed and the unit tax rates must be approved by the Water Agency Executive Board

Tax receipts must balance expenditures→ Consequence: total amount of tax receipts determined

according to expected expenses

83

Two types of emission tax schemes: based on actual versus estimated emissions

Emissions are defined as a number of units per day (kg/day), not as a concentration (kg/day/litre).

An input-output table production - emissions is used, based on average emission rates of industries.

Estimated emissions: from yearly firm’s activity report by the manager

Actual emissions: daily measured emissions (large plants) or average emission rate defined as:

“daily average emission level of month with highest activity

84

Tax is then computed by applying a unit emission tax rate on a list of pollutants:

- Biological Oxygen Demand (BOD), - Suspended Solids (SS), - Nitrogen (N), - Phosphorus (P),- Inhibitory Matters (IM)

Industrial plants equipped with an abatement plant:

Emission charge is reduced in proportion of reduced (avoided) pollution

Abatement rate: as above, either measured or estimated

If firm claims to be over-taxed or Water Agency believes reported or estimated emissions are below actual ones, plant inspection may be required

85

Product Unit SS (gr.) BOD (gr.) IM (Equitox)

N (gr.) P (gr.)

Beer Litre 400 170 - 20 5

Wine 100 Litres

5 30 - 1 0.1

Refined Sugar

Kg 1.5 3.2 - 0.25 0.01

Emmental cheese

Litre 0.5 2.4 - 0.2 0.1

Kraft paper Kg 10 40 0.21 0.4 0.17

Viscose Kg 28 35 2.5 0.8 -

Fur Skin 270 360 3 20 2.5

Steel Ton 420 260 - - -

Coke Ton 200 2000 30 1100 1

Printed Circuit Board

Ton of copper

- - 18,000 - -

Example of input-output table (Production - Emissions)

86

Water Agency Suspended Solids

BOD Nitrogen Phosphorus Water use

Adour-Garonne 158.30 254.96 226.27 106.76 [0.12 ; 0.18]

Artois-Picardie 126.00 252.00 143.00 675.00 [0.10 ; 0.31]

Loire-Bretagne 92.11 141.70 173.00 272.54 [0.16 ; 0.36]

Rhin-Meuse 103.19 206.37 141,59 235.53 [0.15 ; 0.30]

Rhône-Méd.-Corse 80.00 240.00 120 300.00 [0.05 ; 0.30]

Seine-Normandie 113.93 249.69 213.69 NA [0.09 ; 0.26]

Effluent emission and use charges, VI Working Plan

In French Francs per kilo-day for Suspended Solids, BOD, Nitrogen and Phosphorus, in French Francs per cubic meter for water use.

87

In parallel with the action of Water Agencies: The DRIRE (Direction Régionale de l'Industrie, la Recherche et la Technologie)

Since 1992, plants subject to emission permits must be equiped with permanent measurement devices.

If an industrialist does not comply with a standard, the DRIRE imposes a 3-year rehabilitation plan (« mise en conformité »).

Emission standards are in practice modulated depending on localization.Firms’ compliance with standards can be controlled (« Water Police »)

- Designs emission standards for industrial plants, in terms of maximum concentration of effluent emissions, by type of pollutant (March 3, 1993 decree)

- Delivers emission (in general once-and-for-all) permits to industrialists (« sites classés »).

88

Economic Analysis of Water Agency regulation Ideal ( ?) domain for application of environmental regulation theory:

Problems:- are economic instruments used by Water Agencies compatible with

regulatory instruments described by the theory?

- are those instruments adequately chosen and are not redundant?

- how to evaluate damages due to emissions?

- point source pollution- economic instruments : « market-based » and « non-market-based » asymmetric information between Water Agency and the industrial firm

(abatement effort, technology, abatement cost,...)

89

Instruments used by Water Agencies:

Problems in practice when considering a Pigovian tax:

Basic instrument: emission tax

Pigovian Tax if equal to consumer marginal damage from pollution

- Necessary to know precisely the social damage function, to compute marginal damage and use it in designing the optimal tax rate

- Necessary to know the social damage due to pollution, for each geographical unit

- Uniform versus personalized tax?

- Consistency with government anti-inflation (or employment) policies ?

90

Other (complementary) economic instrument: contracts(abatement subsidy, between Water Agency and the firm)

Firms can ask for large capital stock of abatement, claiming future activity (output) will increase

Strategic behaviour, e.g., if inverse relationship between gross pollution level and abatement rate.

Asymmetric information on:- Technology- Abatement effort- Future activity

Type of contracts (specifying capital stock of abatement) motivated by simplicity and low control cost?

Justification of contract-based policy by an imperfect pollution tax system?

91

Incentive effect of emission tax

Let : gross emission level (before abatement)

: net emission level (after abatement)

: abatement rate, =

: unit emission tax

B

N

B N

B

Emission tax can have an impact on

- The production level (specially in case of no abatement)- The net emission level(after abatement), given level of gross emission- The abatement rate, given level of gross emission.

Does the level of the unit emission tax modify the behaviour of thepolluting firm ?

92

How to construct a simple model for abatement rate ?

Assume abatement cost is ( , )c B A B

Firm's profit is ( ) ( , )

Because (1 ),

( ) (1 ) ( , ) ( ) ( , )

pq C q N c B

N B

pq C q B c B pq C q B B c B

Assumption here: production cost is separable from abatement cost

Hence, strategy of the firm in two steps:1/ Decide on optimal production level, q2/ Given q (and B), decide on optimal level of δ

93

1

1/( 1)

( , )max 0

0

1log log log( ) log( )

1

1log log( ) log( ) (1 )log( )

1

c BB

B A B

BB

A

B A B

A B

If abatement cost is convex in abatement rate δ, β>1 and abatement rate is increasing in tax rate

If abatement cost is convex in gross emission B, α>1 and abatement rate is decreasing in gross emission level(provided β>1 )

94

Nitrogenlog() = - 0.0269 log (B) + 0.0896 log ()

Suspended Solidslog() = 0.0630 log (B) + 0.2134 log ()

DBOlog() = 0.1443 log (B) + 0.1179 log ()

Data source: French agrofood industries, 1992-1998, all Water Agencies

Estimated abatement rate equations

log( ) log( ) log( )

log( ) 1 1with , ,

1 1 1

1, 1 , and exp

1

a b B c

Aa b c

c b c aA

c c c c

95

Another application: 320 French plants in the Adour-Garonne and Seine-Normandie river basins

Variable Mean Std. Deviation

Minimum Maximum

B 3278.1 9962.1 4.00 112286

δ 0.5793 0.3023 0.0024 0.9960

τ 225.4 63.2 91.0097 561.06

B : BOD (Biological Oxygen Demand) emission level, in kg. / dayδ : BOD abatement rate (in percent)

τ : BOD emission tax (in French Francs)

Source: Lavergne and Thomas, J. Empirical Econ., 2005

96

Estimated equation log( ) 0.0143 log( ) 0.5699 log( )

+ 0.0933 Food and drinks

+ 0.1634 Dair

B

y and milk products

+ 0.0233 Chemicals

- 0.4629 Iron and steel

- 0.6553 Paper and wood

+ 0.0422 Textile

0.9750 and 2.7547

Less efficient industries: ‘‘iron and steel’’ and ‘‘paper and wood’’Most efficient industries: ‘‘Dairy and milk products’’ and ‘‘food and drinks’’

97

4.4 An example: the Brazilian water policy

Federal Water law: January 1997

River basin chosen as basic administrative unit: decentralisation principle following the French experience

Brazil is a federal state, each state designs its own water policy, in compliance with the 1997 federal law

Pioneer implementation of the new policy framework: in theParaíba do Sul river basin

Southeast region of Brazil, across states of Minas Gerais (20,700 km2),Rio de Janeiro (20,900 km2) and São Paulo (13,900 km2)

5 million inhabitants, 8 500 industrial plants, and 10 percent of country’s GDP

98

Main problem in river basin: water pollution due to industrial and domesticeffluents

Rapid demographic growth of basin’s urban areas not accompanied byadequate planning and sanitation measures

Lack of sanitation infrastructure, indiscriminate occupation of riverbanks

About 69 percent of households connected to municipal sewage networkbut only 12 percent of collected domestic wastewater treatedbefore release in water bodies

Estimated domestic BOD discharge in river basin: 240 tons / dayEstimated industrial BOD ’’ ’’ ’’ ’’ : 40 tons / day

99

1996-1997: Creation of the Paraiba do Sul River Basin Committee(CEIVAP)

2000 : Negotiations about water charge methodology, according to participation principle

2002 : Creation of the river basin Water Agency

The following principles were adopted during negotiation about water charges:

- Simplicity (conceptual and operational): water charges based ondirectly measurable parameters, for clear understanding by users

- Acceptability by all users, facilitated by participatory approach in theCEIVAP

- Signaling: water charges are expected to act as signals about economicvalue of water resources, and importance of sustainable use

- Minimisation of economic impacts, in terms of cost increases

100

Therefore, tradeoff between incentive nature of water charge and economic impacts (signaling vs. acceptability)

Hence, charges are set at very low levels during initial implementation period(2003-2006).

Industry and residential users:Water withdrawal charge: R$ 0.008 / m3Water net consumption charge: R$ 0.02 / m3Effluent emission charge: up to R$ 0.02 / m3

Agriculture:Water withdrawal charge: R$ 0.0002 / m3Total charges defined to be < 0.5 percent of rice and sugar production

production costs

Note: 1 R$ (Real) is about 0.38 Euros

101

IndustryWater demand

elasticity

Food and beverage -0,82

Clothing -0,31

Wood, rubber and plastics -0,40

Pulp and paper -0,76

Chemicals -0,71

Non-metal minerals -0,22

Iron and steel -0,48

Mechanical industry -0,31

Transport equipment -0,51

Others -0,33

How reactive is industrial water demand to water price ?

102

Simulation of the impact of water charge changes

ΔPW = 10 % ΔPW = 20 % ΔPW = 30 % ΔPW = 40 % ΔPW = 50 %

ΔXW - 3,23 % - 6, 38 % - 9,40 % -12, 28 % -14,99 %

ΔC 0,05 % 0,11 % 0,16 % 0,21 % 0,26 %

ΔPW : percent change in water charge

ΔXW : percent change in water demand

ΔC : Percent change in production cost

103

Simulation of the impact of changes in water charge (ΔPW) and production levels (ΔY)

ΔY

0 % 5 % 10 % 15 % 20 %

ΔPW

0 % - ΔW= 3.39 % ΔW= 6.66 % ΔW=9.81 %ΔW=12.86 %

10 % ΔW= -3.23 % ΔW= -0.12 % ΔW= 2.86 % ΔW=5.74 % ΔW=8.53 %

20 % ΔW= -6.38 % ΔW= -3.52 % ΔW= -0.77 % ΔW=1.89 % ΔW=4.46 %

30 % ΔW= -9.40 % ΔW= -6.75 % ΔW= -4.20 % ΔW=-1.73 % ΔW=0.65 %

40 % ΔW= -12.28 % ΔW= -9.80 % ΔW= -7.42 % ΔW=-5.12 % ΔW=-2.89 %

50 % ΔW= -14.99 % ΔW= -12.68 % ΔW= -10.44 % ΔW=-8.28 % ΔW=-6.19 %

104

4.4 Regulating irrigation and emissions from agriculture

Water stress if WEI > 20%

WEI for Europe : 353 km3/year / 3500 km3/an (10%)

Selected figures by country

Ireland 2 %France 8 % (18 % including energy sector )Germany 10 % (25 % )Portugal 15 % (17 % )Belgium 20 % (45 % )Spain 32 % (36 % )

Some basic figures on water use in Europe

Water Exploitation Index (WEI): average water extraction / average water resources

105

0

10

20

30

40

50

60

70

South

west

Nothw

est

Centra

l Eur

ope

Europ

e Cen

tre-O

uest

Energy

Industry

Agriculture

Water use by major European zone (Eurostat, 2003)

106

► Other key figures, for France

Average precipitation: + 440 billion m3/year- Evaporation : 270 billion m3/year- Outflow in rivers and streams : 170 billion m3/year= 0

Water withdrawal and use, mainland France (billion m3)

0

5

10

15

20

25

Energy Drinkingwater

Irrigation Industry

Withdrawals

Net consumption

107

4.4.1. Water for irrigation

Worldwide: 18 % of arable (cultivated) land is irrigated (267 million hectare,World Bank, 2001)but contribute for 40 % of total agricultural production

In France: about 1.6 million ha irrigated in 2000 (out of 2.6 potential irrigated)

Between 1988 and 2000: 50 % of the increase in irrigated land has been dueto maize only

50 % for maize (corn, grain and seeds)18 % for horticulture, vineyards, fruit trees10 % for oilseed.

108

Region Irrigation (million

m3)

Irrigated land(1000 ha)

Share of maize in irrigated land (%)

Share of horticulture, vineyards, fruit trees in irrigated land (%)

Poitou-Charentes 234.66 169.02 79 3

PACA 616.86 114.95 6 33

Aquitaine 408.96 278.69 74 17

Midi-Pyrénées 361.96 269.26 70 8

Languedoc-Roussillon

238.76 64.76 8 44

Regional statistics for irrigation, 2002

Source : French Agricultural Census, 2000.

109

Water withdrawal for irrigation in France:5.6 billion m3 each year (12 percent of total), of which 88 percent from surface water

Net consumption: 43 percent of the total

Irrigated areas have increased threefold from 1970 and 1995 (1.6 million hectare out of total agricultural land of 30 million hectare).

Input-Output process in the water cycle:

In OutRainfall PumpingRun-off (lessivage) EvaporationInfiltration TranspirationLeaching (percolation) Output to surface

waters

110

Problem 1: Over-use of surface water for irrigation

- Minimum river flow for survival of downstream species

not guaranteed- Biodiversity and economic losses- Increase in pollutant concentration

Problem 2: Over-use of ground water

- Increased cost of pumping- Subsidence (affaissement de terrain)- Decrease in surface water flow, and lake water level- Decrease in groundwater recharge potential

111

Technical Solutions

1/ Management of Available Volumes- Desalinization (costly, energy-intensive)- Dams and reservoirs (technical constraints due to

evaporation, difficulty to find new sites)

- Re-cycling :Drinking-direct: « toilet-to-tap » ; Non drinking- direct: Parallel network of wastewater ; Drinking and non-drinking-indirect: groundwater

recharge by injection.

2/ More efficient irrigation Sprinkler and low-flow rather than gravitation or flooding.

3/ Water-saving seedsAgronomic research

112

Irrigation water pricing

► Demand for irrigation water

3

1

Let : water input for crop ;

: water price per m ;

: output price of crop

Production function of crop : ( )

Profit of producer , 1,2, , : ( ) ,

j

j

j j

m

i j j j jj

q j

w

p j

j f q

i i n p f q wq

Consider n producers, each growing m cropsFor each crop, a production function associating water input to crop yield

Economic solutions

113

1

1

1

Water demand from producer (across all crops) :

( ) , 1,2, , ,

Total water demand from all producers : ( ) ( ).

m

i ijj j

n

ii

i

wq w f i n

p

q w q w

1

( )( )

, 1,2, , .

j jj j j j

j

j jj

f qp p f q w w

q

wq f j m

p

Maximisation of profit with respect to qj :

Inverse of derivative of production function

114

Demand-side management of irrigation: through water pricing→ Performance of pricing policy depends on water demand elasticity

( ) log ( )Elasticity of water demand with respect to price:

( ) logi i

i

q w w q w

w q w w

Efficient water pricing: maximisation of total surplus

(farmers plus water producers)

For a water price w :

Users (farmers) :

Demand ( ) such that ,

Surplus is ( ) ( )

q w f q w p

pf q w wq w

115

Water supplier :

Operation profit is : ( ) ( )

where (.) : Variable Cost of producing water

wq w VC q w

VC

Total Surplus is : ( )

( ) ( )

V w V q w

pf q w wq w wq w VC q w

pf q w VC q w

Total profit of water supplier : ( ) ( )

: Total Cost =

wq w TC q w

TC VC FC

Fixed Cost

Operation worthwhile in the short run if operation profit > 0But fixed costs have to be covered in the longer run

116

► Only efficient pricing: MC pricing

Average Cost (AC) pricing : inefficient, - It increases producer’s surplus, but decreases farmers surplus- Fixed production costs can be covered by AC pricing

* *

( )0 ( ) ( ) 0

( ) ( ) ( )

( )

dV w dqpf q w MC q w

dw dwMC q w pf q w w

w MC q w

Maximise surplus with respect to water price w

117

Marginal or Average Cost pricing

Euros/m3

3m

AC

MC

Derived Demand

MCw

ACw

( )ACq w ( )MCq w

A

B

C

D E

Total Surplus under MC pricing : A + B + C + D + ETotal Surplus under AC pricing : A + B + D

118

- Volumetric : direct measure (water meter)

- Input/output : water paid in proportion to production or input (tax)

- Area : payment according to irrigated area

- Block pricing : volumetric method with consumption thresholds

- Two-part tariff : fixed charge + constant marginal price

- Formal or informal water markets…

Available pricing methods

- NB 1 : Two-part tariff is often used when MC < AC- NB 2 : Area payment may depend on irrigation method, season, etc.

and sometimes also on non-irrigated area (if important investments)

119

Why is (efficient) MC pricing not more widely used in practice?

► Implementation costs (metering, etc.)

Evidence by Bos and Wolters (1990 ) : out of 12.2 million irrigated hectares in the world

- 60 % concerned by area pricing- 25 % concerned by volumetric method

Tsur and Dinar (1997) : area pricing can be preferable if one integrates implementation costs

► Tariff proportional to output / input :Imperfect information on production technology

► The method to choose depends mostly on localimplementation costs (regional heterogeneity)

120

Tariff Implementation Potential efficiency

Efficiency horizon

Demand control

Volumetric

(uniform rate)

Complicated First-best Short run Easy

Output/Input Less complicated Second-best Short run Fairly easy

Area Easy None - Through crop restrictions

Two-part Fairly complicated

First-best Long run Fairly easy

Water markets

Difficult First-best Short and long run

Depends on market’s type

Comparison of the different pricing methods

121

To conclude on irrigation: water price should act as a signal on resource’s value

(Increasing) Block pricing  : Users with higher consumption (revenue ?) paymore in proportion (per cubic meter)

Efficiency principle : water should be paid at a price equal to marginal cost of provision

Efficient pricing : - A fixed fee for covering indirect costs (not related to

consumed volumes)- A volumetric price allowing to cover operation costs

Problem of observing consumption : all users should be paying for the volumes actually consumed

122

4.4.2. Nitrogen and other inputs

Fertilizer used in agriculture:

- Chemical (industrial) and Organic (animal) sources- Chemical fertilizer: mostly a combination of Nitrogen (N), Phosphorus (P)

and Potash (K).

France: 2nd world user of fertilizer (3.6 million ton nitrogen in 1995, 37 % of animal origin)

63 percent of mainland in excess nitrogen areas (more than 170 kg N/ha)

Agriculture: Main nitrogen (65 %) and phosphorus (20 %) emission source

Intensive cattling (élevage): 50 % of hog and poultry production, and 40 % of beef production concentrated on 6 - 8 %of territory

123

Pesticide: France 3rd world user (95 000 tons)

Nitrogen loss due to leaching and/or run-off: 25 percent (6.10 – 12.20 Euros / hectare)

Problem 3: Impact on the environment and health risk

Nitrates in rain and irrigation water carried into surface water (run-off) and groundwater (leaching):

- Eutrophisation of surface water (proliferation of algae, reduction of oxygen contained in water)

- Human health: nitrates convert into carcinogenic nitrosamines. Reduction of blood-carying capacity by haemoglobin.

124

Other inputs:

- Accumulation of heavy metals from animal feed

- Pesticides in food and water: allergic reactions, may affect nervous system, kidney and liver functions

- Antibiotic residues

Technical solutions

- Better management of manure stocking and spreading

- Use intermediary crops to trap nitrogen (legumes)

- Better production risk management (hedging behaviour and self-insurance against crop yield uncertainty).

125