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All-in-auctions for water

All-in-auctions for water. David Zetland Senior water economist Wageningen University, The Netherlands 27 July, 2011. Water scarcity is increasing. Demand for water is increasing as population rises and more people increase the water-intensity of their lifestyle.

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All-in-auctions for water

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  1. All-in-auctions for water David Zetland Senior water economist Wageningen University, The Netherlands 27 July, 2011

  2. Water scarcity is increasing • Demand for water is increasing as population rises and more people increase the water-intensity of their lifestyle. • Supply of water is fixed or falling as climate change speeds up the hydrological cycle and we redefine “good quality.” • More demand and less supply means more scarcity. Shortages will occur if these forces are not brought into balance.

  3. Bulk water needs to be reallocated • Increasing scarcity means greater competition for limited water supplies. • Most “developed” water is used for agricultural irrigation, but there is increasing pressure to reallocate water to municipal, industrial, energy and environmental uses. • There is also pressure to reallocate water among agricultural users.

  4. All-in-auctions can help • AiAs can be used to reallocate water among existing and/or new users according to value in use. • AiAs will establish a local price for water that accurately reflects supply and demand. • AiAs explicitly recognize and reward existing property rights in water. • AiAs can be used within a community.

  5. How AiAs work • Water rights must be quantified and assigned to individuals. These permanent rights will be associated with temporary annual flows. • The known quantity of flows are put into an auction (“all in”). • Those flows are allocated to high bidders; the price they pay depends on everyone’s bids. • Auction revenue goes to owners of rights.

  6. For example • Farmers A, B and C each own 2 units of water. • Six units are put into the AiA. A, B and C bid. • $Bids: A (4, 5, 8), B (10, 10, 3) & C (1, 2, 6) • Bids are ordered: 10, 10, 8, 6, 5, 4, 3, 2 & 1 • Six highest are accepted; price set to 7th bid. • A gets 3 units; B gets 2 units; C gets 1 unit. • A pays $3; B pays nothing ($6-$6); C gets $3.

  7. For more information • Read the full length paper on AiAs at: http://ssrn.com/abstract=1658193 • Listen to my presentation on AiAs at: http://tinyurl.com/3huhu3y • Contact me for more information at: dzetland@gmail.com

  8. Add to presentation? • AiA moves water to higher value • AiA will increase production (value) from same water supply • AiA reallocates @ low cost • AiA establishes price (reference point) that will facilitate other water use/investment decisions • Prices and/or AiA does NOT mean privatization or communal death • Politicians can “fix” 20% of water to each of three sectors (ag, urban, industrial) and then put 40% into AiA. Each sector can increase its supply by 200% (in theory), but they will have to reconcile demands (via price). Politician doesn’t need to make hard choices but can take credit for offering the opportunity. • Good governance/Rule of law required (implied) • Farmers and other users of “free” water will manage it like a scarce input with financial value (if sold) and opportunity cost (if held)

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