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Ekin Birol 1 , Phoebe Koundouri 2 * and Yiannis Kountouris 3

Assessing the economic viability of alternative water resources in water scarce regions: The roles of economic valuation, cost–benefit analysis and discounting. Ekin Birol 1 , Phoebe Koundouri 2 * and Yiannis Kountouris 3

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Ekin Birol 1 , Phoebe Koundouri 2 * and Yiannis Kountouris 3

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  1. Assessing the economic viability of alternative water resources in water scarce regions: The roles of economic valuation, cost–benefit analysis and discounting Ekin Birol1, Phoebe Koundouri2* and Yiannis Kountouris3 1 International Food Policy Research Institute 2033 K Street, NW Washington, DC 20006-1002, USA. Email:E.Birol@cgiar.org 2 Department of International and European Economic Studies, Athens University of Economics and Business, Patision 76, 104 34, Greece. Email: pkoundouri@aueb.gr 3Department of International and European Economic Studies, Athens University of Economics and Business, Patision 76, 104 34, Greece. Email: ykountouris@aueb.gr *Corresponding Author Yiannis Kountouris, 24/3/2009

  2. Purpose • Illustrate a methodology for estimating the total economic value derived from environmental interventions • Derive the Total Economic Value (TEV) of an environmental good • Explicitly recognize the long term nature of the environmental intervention and account for it in CBA • Examine the efficiency of using alternative water resources in a water scarce region • Evaluate the economic efficiency of aquifer recharge and water recycling Yiannis Kountouris, 24/3/2009

  3. Values and the Relation to Population Segments • TEV= Use Value + Non-Use Value TEV= Direct Use Value + Indirect Use Value + Existence Value+ Bequest Value+ Aesthetic Value +… (Pearce, 1993) • Specific values of an environmental resources/goods are estimated based on a random sample of the overall population (Adamowicz, Boxall, Williams and Louviere, AJAE 1998) • Different people understand the same things in different ways and can gain different values from the same environmental good • Capturing is TEV can be complicated because: • of the multitude of values • a single experimental instrument may not be able to capture different values across different segments of the population due to limitations of the experimental design • In this paper: • Discriminate among the values derived from the environmental good • Apply 2 distinct choice experiments aimed to capture different sets of values • Aggregate the benefits across the relevant populations Yiannis Kountouris, 24/3/2009

  4. Methodology – Choice Experiment • Non-Market Experimental Valuation to circumvent the absence of markets and market prices • Creates a hypothetical market in which individuals are called to participate • Stated preference method • Survey based data collection • In environmental economics: • Boxall, Adamowicz and Swait (EcolEcon, 1996); Hanley, Wright and Adamowicz (ERE, 1998); DeShazo and Fermo (JEEM, 2002) , Bosworth, Cameron and DeShazo (JEEM, 2008); Ladenburg and Olsen (JEEM, 2008) • In water resources • Hensher, Shore and Train (ERE, 2005); Birol, Karousakis and Koundouri (EcolEcon, 2006), Viscusi, Huber and Bell (ERE, 2008) Yiannis Kountouris, 24/3/2009

  5. Methodology – Choice Experiment • Based on: • Lancaster’s (1966) characteristics theory of value: Demand is defined over the characteristics/attributes defining a good and not on the good itself • Random utility theory: How individuals make choices over discrete alternatives • Survey Design: • The good to be valued is defined in terms of its constituent attributes and their levels • If one of the attributes is monetary, then the marginal WTP for each attribute can be extracted • Profiles are constructed from the attributes and their levels • Respondents are called to make a series of choices between different profiles and an opt-out alternative • Data are analyzed using the Multinomial Logit Model or its variants Yiannis Kountouris, 24/3/2009

  6. Methodology – Choice Experiment The utility of an individual i from a profile j is given by: (1) Where is the systematic component of utility assumed to be a linear function of the alternative’s characteristics and εij is the random component of utility • A profile j is chosen over an profile q if (2) (3) Yiannis Kountouris, 24/3/2009

  7. Methodology – Choice Experiment The probability of an individual i selecting an alternative j is given by (4) Willingness to Pay for an attribute is calculated as (Hanemann, AJAE 1984) (5) The consumer surplus from moving from state 0 to state 1 is calculated as (6) Yiannis Kountouris, 24/3/2009

  8. Case Study Particulars • Location: Akrotiri Aquifer • Southernmost part of Cyprus • Major source of irrigation water for local farmers • Provides significant ecological benefits • Sustains the Akrotiri wetland which has been found to harbor significant nonuse values (Birol, Koundouri and Kountouris, JEPM 2008) • Severely depleted aquifer, mined to 15% of its capacity • Sea-water intrusion to maintain the hydrological balance • Renders groundwater useless. Yiannis Kountouris, 24/3/2009

  9. Case Study Particulars • Aquifer Recharge with tertiary treated wastewater • Benefits: • Prevention of seawater intrusion to the aquifer – maintenance of water quality in terms of salinity • Water security for farmers • Sustain irrigated agriculture • Conservation of the current environmental conditions • Prevention of desertification • Objections • Domestic use will be barred • Not all crops can be irrigated • Response to objections • In case of no recharge neither irrigation, nor domestic use will be possible due to increased salinity Yiannis Kountouris, 24/3/2009

  10. Identification of Stakeholders • Methods: • Discussions with scientists, policy makers and the local public • Focus groups with members of the public, farmers and experts • Two major stakeholders: • Farmers • Residents Yiannis Kountouris, 24/3/2009

  11. Stakeholders • Stakeholder groups draw different benefits from the same environmental services • Different motivations behind the values derived from each stakeholder group • Farmers value the aquifer for its contribution to their business ventures • Primarily direct use values • Residents value the aquifer for the maintenance of environmental conditions • Primarily indirect use values and non-use values • Focusing exclusively in either one of the two stakeholder groups will not capture the full economic benefit from the recharge and the contribution to social welfare will be underestimated • Solution: a distinct choice experiment is implemented for each stakeholder group and the valuations are aggregated across the respective populations Yiannis Kountouris, 24/3/2009

  12. Experimental Design - General • The good to be valued: Aquifer recharge with treated wastewater • The attributes at various levels are combined to construct different profiles of the environmental good • Subjects are called to make a sequence of choices between a number of alternative profiles Yiannis Kountouris, 24/3/2009

  13. Experimental Design - Farmers • Attributes: • Water quality • Water quantity • Employment in agriculture • Price per m3 of water • Orthogonal “main-effects only” experimental design (Louviere Hensher and Swait, 2000; Hensher, Rose and Greene, 2005) • Design blocked in two versions • 8 choice sets composed of 2 aquifer management scenarios and a status quo option (Rolfe and Bennet, EcolEcon 2009) Yiannis Kountouris, 24/3/2009

  14. Experimental Design - Residents • Attributes: • Environmental conditions • Water quality • Employment in agriculture • Price per m3 of water • Orthogonal “main-effects only” experimental design • Design Blocked in two versions • 8 choice sets composed of 2 aquifer management scenarios and a status quo option Yiannis Kountouris, 24/3/2009

  15. Attributes definition - Farmers • Water quality: • Current level: Water quality is at a medium level. Current levels of salinity allow the cultivation of all potential crops. Recharge will maintain water quality in terms of salinity • Low level: Water salinity will increase in the medium run to a level that will make the cultivation of most crops infeasible and will damage soils beyond repair. Farmers will have to alter their cropping patterns which will entail capital costs and additional investments or abandon farming altogether. • Water quantity: • Current level: Water supply for irrigation is sufficient for farmers needs. Recharge will maintain the current level and pumping cost will remain at current levels • Low level: Water supply will decrease limiting water availability for irrigation by 25-50%. Pumping costs will increase by 50%-100% • Employment in agriculture • Employment in agriculture will decrease in the near future. If no intervention is implemented employment will decrease by 20% to 1200 farmers. With intervention employment will decrease to 1455, 1380 or 1275 farmers. • Water price • The price of water per m3 pumped for irrigation. The can remain at its current level or increase by 50%, 25% or 10% Yiannis Kountouris, 24/3/2009

  16. An example of a choice set Yiannis Kountouris, 24/3/2009

  17. Attributes definition - Residents • Ecological Conditions: • Current level: Current landscape will be maintained. No desertification. Existing natural wetlands will be maintained and continue to sustain current biodiversity • Low level: Desertification of 20% of the overlying area. Existing wetlands will be drained resulting to biodiversity loss • Water quality: • Current level: Water quality is at a medium level. Current water quality allows watering gardens and public lands as well as agricultural lands. Under the recharge water will not be used for domestic purposes • Low level: Low water quality will be inappropriate for the production of domestic crops. • Employment in agriculture • Employment in agriculture will decrease in the near future. If no intervention is implemented employment will decrease by 20% to 1200 farmers. With intervention employment will decrease to 1455, 1380 or 1275 farmers. • Water price • The price of water per m3 of domestic water. The can remain at its current level or increase by 50%, 25% or 10% Yiannis Kountouris, 24/3/2009

  18. Treatments for Potential Biases • Hypothetical bias (Carlsson and Martinsson, JEEM 2001; List, AER 2001; Cummings and Taylor, AER 1999) • Cheap talk: • remind of other financial obligations and budget constraints • explain hypothetical bias and ask respondents to answer truthfully • Starting point bias and anchoring • Randomized sequence of choice sets across respondents • Trained personnel used for data collection Yiannis Kountouris, 24/3/2009

  19. Experimental application • Data collected: • Choice • Environmental attitudes • Socioeconomics • Samples: • 150 randomly selected farmers (out of a population of approximately 1500) • 8 protestors identified and excluded • 300 randomly selected non-farming residents (out of a population of approximately 170,000) • 14 protestors identified and excluded • Data collection method • Face to face interviews after a scheduled appointment • Data collection: March-April 2008 Yiannis Kountouris, 24/3/2009

  20. Variable Coding • Water quantity, water quality and environmental conditions are dummy coded • Employment in agriculture enters as a continuous variable • Price enters as a continuous variable Yiannis Kountouris, 24/3/2009

  21. Multinomial Logit Models Results *** significance at 1%, ** significance at 5%, * significance at 10% • Positive/Negative coefficients: respondents are more/less likely to select an alternative with higher level of the attribute • Farmers are more concerned about water quantity over water quality • Residents are more concerned about water quality over environmental conditions • Negative coefficients on price indicate aversion towards higher prices Yiannis Kountouris, 24/3/2009

  22. Willingness to Pay Estimates Values in CYP per m3 of water • Farmers WTPquantity>WTPquality • Residents WTPquality>WTPEnvoronmental conditions Yiannis Kountouris, 24/3/2009

  23. Cost Benefit Analysis Assumptions • Recharge will be 6,000,000m3 per year • Direct use values accrued by farmers • Indirect use values, non-use values accrued by residents • Fixed cost of infrastructure development: CYP100,000 • Maintenance and other variable costs: CYP720,00 per annum • Costs are assumed to be constant over the time horizon • Once recharged the aquifer cannot return to the previous state • Implementation of the recharge implies that current employment, ecological conditions, water quantity and water quality will can be maintained for 200 years Yiannis Kountouris, 24/3/2009

  24. Aggregation of Benefits • The total economic value is defined as: TEV=Values derived by farmers + Values derived by residents TEV=CSF*WF+CSR*WR CSF and CSR :the farmer’s and resident’s consumer surpluses per m3 of water respectively WFand WR :the yearly consumptions of water for farmers and residents respectively Benefits are assumed to be constant over the time period Yiannis Kountouris, 24/3/2009

  25. Discounting • Aquifer recharge has long run effects • Sustainability of irrigated agriculture • Continuing recharge guarantees the hydrological balance for 2 centuries • Exponential discounting places less weights on future costs and benefits relative to future • Declining discounting: • Experimental evidence (Viscusi, Huber and Bell, JRU 2008) • Uncertainty over future growth (Gollier, JET 2002) • Intergenerational equity arguments Yiannis Kountouris, 24/3/2009

  26. Discounting • Discounting profile adapted from Gollier, Koundouri and Pantelides (Economic Policy, 2008) • Estimated using historical data on the real interest rate • Country specific declining discount rates are estimated for 9 countries • A global discount rate calculated as a weighted average of the 9 country specific rates • Weight is the ratio of a country’s GDP over the aggregate GDP Yiannis Kountouris, 24/3/2009

  27. Discounting Yiannis Kountouris, 24/3/2009

  28. Cost Benefit Analysis Results Yiannis Kountouris, 24/3/2009

  29. Cost Benefit Analysis Results Values in CYP • Under the DDR the average NPV is • 1.28 times the NPV under the 4% constant discount rate • 1.6 times the NPV under the 5% constant discount rate • 1.9 times the NPV under the 6% constant discount rate Yiannis Kountouris, 24/3/2009

  30. Conclusions • A single survey instrument cannot capture the entirety of economic values involved in aquifer recharge • Risk of underestimating TEV • Separate surveys should be implemented on each segment of the population to extract all relevant values • Discounting assumptions do not affect the outcome of the CBA • Both farmers and residents gain significant benefits from aquifer recharge • The recharge is economically viable and efficient Yiannis Kountouris, 24/3/2009

  31. Thank You!!! Yiannis Kountouris, 24/3/2009

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