SESSION 3_Tom Hertel, Purdue Univ._Water scarcity and economic growth- CIRCLE workshop Oct. 2014

1. Water Scarcity and Economic Growth
Thomas Hertel and Jing Liu
Purdue University
Presented October 2, 2014 to the
OECD CIRCLE Workshop
Paris, France

2. Three perspectives on water scarcity and economic growth
•Water as a publicly provided good, with reuse, but subject to congestion (Barbier, 2004)
•Water as a conventional input into the national production function (in the tradition of Solow)
•Water in a global CGE model (allocative distortions, second best effects and terms of trade changes)

3. Water as a publicly provided good with congestion
•Optimal growth model
•Firms draw on common pool of water; however, marginal productivity declines with increasing withdrawals (congestion)
•Cost of withdrawal rises at increasing rate
•Optimal rate of water utilization maximizes economic growth rate (Fig.1)
•Empirical results
•Focus on 163 countries during 1990’s
•Positive elasticity of growth wrt water withdrawals (10% rise boosts growth rate from 1.3% to 1.33%)
•Most countries could increase growth rate by boosting water withdrawals
•Just 10% face extreme water scarcity
•However, sub-national story is surely different

4. Water as a conventional input into national
production function: y = f(K,W)
• Central issue is the potential for substituting accumulating human and
physical capital for water, summarized by
• If then, as K/W rises, water’s share of GDP will rise, eventually limiting growth
• If then, as K/W rises, water’s share of GDP will diminish and growth will not be
constrained, as increasingly abundant capital is used to improve water efficiency as
well as enhance available supplies of water to the economy
• But is an abstract concept – how can this be captured in a CGE model? It
is determined by four different components:
• Sector level technologies
• Inter-sectoral responses to water scarcity
• Consumers’ willingness to substitute away from water intensive goods
• Potential for recycling/reuse and desalinization
• Calculating implied value of from CGE-water models would be a useful
component of any assessment of impact of water scarcity on growth
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5. Water and real income growth in a global CGE model
•Direct cost to economy of reductions in water availability depends on marginal value product of water in the CGE model; appropriate valuation of water, by sector/use is critical
•In many economies there are large (even 100x!) divergences in the MVP of water by sector; this opens the way for large second best effects in the face of any exogenous shock, provided it results in water reallocation
•Water scarcity can lead to reallocations across distorted sectors which can improve, or exacerbate losses (Liu et al. find the latter)
•Terms of trade effects can also be significant as the price of water intensive goods rises; welfare impact depends on geography of trade

6. Irrigated Agriculture: The Dominant Water Use
•Each calorie produced requires roughly 1 liter of water through crop evapotranspiration; feeding the world each year requires enough water to fill a canal 10m deep and 100m wide encircling the globe 193 times!
•Four-fifths is rainwater, one-fifth is irrigation water; accounts for 70% of global freshwater withdrawals
•Irrigated area accounts for nearly 20% of cropland and 40% of production

7. Groundwater irrigation has become increasingly important
•Accessible without large scale government initiatives at low capital cost (although high operating costs)
•Offers irrigation on demand
•Reliability in time and space: low transmission and storage losses
•Drought resilience; surface water not available during drought
•If undertaken in areas with high recharge rates, then it is also sustainable

8. But most rapid growth has been in arid areas with low recharge rates
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Source: cited in Burke and Villholth

9. There is substantial scope for increasing water use efficiency in agriculture, given appropriate incentives
•Improving delivery of water to plants: Global irrigation efficiency = 50%
–But not all losses are really lost – reuse of water further downstream
–Improved irrigation efficiency can also increase total use: ‘Jevons’ paradox’
•Increasing ‘crop per drop’: Water use efficiency of crops themselves
–Can be achieved by reducing non-beneficial evaporative losses and limiting deep percolation of rainwater
–Also by boosting grains share of total biomass, limiting pest damage, and improving drought tolerance
–Small-scale farms can boost production with less than proportionate rise in water use; for commercial scale operations, tend to rise in equal proportions

10. Evidence of conservation in the face
of scarcity: The Australian experience
• Drought in 2002/3 led to a 29% drop
in water usage in the Murray-Darling
Basin
• However, water used in irrigated rice
production dropped by 70%
• Early modeling work failed:
– predicted only modest declines in
irrigation water usage
– Missed the potential for:
• Shifting land to rainfed
production
• Shifting rice production to
other regions
• Required significant modification of
the TERM-H2O CGE model
Flexibility facilitated by water trading: when water is
available, produce rice. When it is scarce, sell water
rights instead of growing rice! (Will Fargher, National
Water Commission)

11. Increasing irrigation scarcity will alter the geography of food trade
Irrigation. reliability index = actual water consumption / potential irrigation demand
Red color means potential irrigation demand is less satisfied by actual irrigation consumption
Source: Liu et al. GEC, 2014

12. Focus on India results…
As output falls, consumers substitute low cost imports for domestic crops, exports & production decline
Source: Liu et al. GEC, 2014

13. Water use in power generation
•Hydropower consumes water through evaporative demand
•Water for cooling is key water demand
•World Bank report highlights adverse impacts of water scarcity:
–“In the past five years, more than 50% of the world’s power utility and energy companies have experienced water-related business impacts. At least two-thirds indicate that water is a substantive risk to business operations.”
–In India, South Africa, Australia and the United States, power plants have recently experienced shut-downs due to water shortages for cooling purposes.

14. Water use in power generation
• Hydropower consumes water through
evaporative demand
• Water for cooling is key power demand
• World Bank report highlights adverse
impacts of water scarcity:
– “In the past five years, more than 50% of the world’s
power utility and energy companies have experienced
water-related business impacts. At least two-thirds
indicate that water is a substantive risk to business
operations.”
– In India, South Africa, Australia and the United States,
power plants have recently experienced shut-downs due
to water shortages for cooling purposes.
• Projections for India suggest that power
sector’s share of water use could rise
from 4% today to 20% in 2050 – primarily
for cooling; abstracts from potential for
installation of water efficient capacity

15. Residential, commercial & industrial uses
•Residential demands well-studied:
–Avg price elasticity of demand in industrialized countries = -0.4
–In developing countries, households draw on multiple sources of water: tap, wells, tankers, vendors, rain and surface water – it is complicated!
•Urban formal: tap water – as with rich countries
•Urban slums: inadequate water and sewage svces; price is often time
•Rural consumption: household labor required to collect water
•Commercial sector is heterogeneous, difficult to assess: assume same behavior as residential demands
•Industrial demands vary greatly by industry:
–Water often self-supplied – hard to monitor
–Industrial steam is important source of demand for both water and energy; conservation of energy leads to reduced water use
–Scope for water savings, given incentives: elasticity= -0.15 to -0.6 depending on sector

16. Environmental demands (in-stream use)
•Requirements depend on total volume as well as high/low flows
•Portion of flow reserved for environmental purposes varies from 10% (IFPRI’s IMPACT-WATER model) to 50% (IWMI – see map below)

17. Water Supply
•What is the relevant spatial unit for supply? Global models focus on river basin; take inputs from hydrological model
•Reuse of water is key:
–Seckler et al. suggest that reuse will be one of the most important sources of supply in the coming decades
–Main barrier to reuse is pollution; therefore pollution control is source of water supply
•Luckman et al study reduced water availability in Israel emphasizing reuse
– seven different types of water separately, breaking out: freshwater, seawater, brackish groundwater (all natural resources), which can be converted to potable water, brackish water and reclaimed water via some production process; also allow for desalinization
–50% reduction in freshwater costs economy 0.2%GDP
•Rules for allocation across sectors are critical

18. Research Challenges & Priorities
•Main barrier to global CGE modeling of water scarcity is data availability: not broken out in the typical social accounting matrix:
–Break out activities by river basin
–Identify physical volumes by use – draw here on hydrological models
–What price? Marginal value product varies widely across and within sectors
•Important to distinguish different types of water: endowments, outputs, byproducts and intermediate inputs along with associated technologies
•Putty-clay treatment to capture impact of new investments on efficiency
•Need to establish links to hydrological models which:
–Ensure that laws of gravity are enforced!
–Incorporate impacts of infrastructure development and depreciation
–Deal with temporal and spatial variation
•Important to accommodate alternative allocation rules (e.g., M-D Basin water reforms)
–How will scarcity be accommodated?
–Which sectors have priority?
–Will scarcity lead to institutional reforms?