“Assessing Costs and Benefits of Adaptation: Methods and Data”

1. Brian H. Hurd, PhD, ProfessorDept. of Agricultural Economics & Agricultural BusinessNew Mexico State University bhurd @ nmsu.edu http://agecon.nmsu.edu/bhurd Climate Change Adaptation in the Water Sector:Lec1. Modeling and Economic Assessment of Watersheds Water 水 agua น้ำaigua eau ura wasser vesi nướcνερό acqua baда पानीtubigనీరుதண்ணீர்ນ້ໍາ “Assessing Costs and Benefits of Adaptation: Methods and Data” First Regional Training Workshop – Capacity Building Programme on the Economics of Adaptation Bangkok, Thailand 11 Mar - 14 Mar 2013

2. Overview Lec 1. Modeling and Economic Assessment of Watersheds • Goals and objectives in watershed assessment • (1) System Dynamics models (simulation) versus (2) Hydro-Economic models (optimization) • Long-run watershed planning using Hydro-Economic models • Conceptual framework and key economic principles • Balancing water supply and demand • Allocating water across users, space, and time • Dams and reservoirs in watershed planning • Modeling climate change impacts and adaptation • Climate change – Hydrology - Economics

3. Overview (cont.) Lec 2. Hydro-Economic Models in Practice: Two Case Studies of Model Design, Data and Implementation • Case #1: Colorado River • Case #2: Rio Grande Lec 3. Using Hydro-Economic Models to Estimate Adaptation Costs and Benefits of Water Use and Allocation Changes • Conceptual framework and key economic principles • Balancing water supply and demand • Optimizing water allocations across uses and places

4. Overview (cont.) Lec 4. Using HEMs to Estimate Costs and Benefits of Dams and Reservoirs • Water capture and storage • Managing variability and timing-of-use • Hydropower production • Flood-risk mitigation Lec 5. Strategies for Developing Climate Change Scenarios and Modeling Data • Hydrological data and modeling • Economic data and water demand estimation • Collaborate, work t0gether and other final thoughts

5. Lec 1. Modeling and Economic Assessment of Watersheds • Goals and objectives in watershed assessment • Long-run watershed planning using Hydro-Economic models • Conceptual framework and key economic principles • Balancing water supply and demand • Allocating water across users, space, and time • Dams and reservoirs in watershed planning • Modeling climate change impacts and adaptation • Climate change – Hydrology - Economics

6. Economic Approaches to Water and Use, Services and Value, and Project Evaluation • The Water Problem: How might communities determine water allocations and uses across users, across places and across time periods? • The Economic Problem: How can scarce water resources be used effectively and efficiently? • Case 1: Surface Water (multiple users) • Case 2: Reservoirs and Aquifers (multiple time periods) • The Assessment Problem: How can alternatives and scenarios be evaluated? • Variations of applied Benefit – Cost Analysis (BCA) • Including all market and non-market quantifiable benefits and costs as practical

7. Watershed Assessment Goals and Objectives • Describe the important hydrological, bio-physical, economic, and institutional characteristics at appropriate spatial and temporal scales • Identify and characterize plausible alternative environmental and management scenarios and/or system changes • Assess, analyze and describe the bio-physical and economic consequences of modeled scenarios and changes in environment, management, technology, infrastructure etc. • Models are tools that help planners • examine data • integrate concerns • analyze alternatives • evaluate outcomes

8. Methods and Conceptual Approach

9. Watershed Modeling Approaches • System Dynamics models (simulation) • Useful for simulating complex, non-linear, interdependent systems • Assessing ‘what if’ questions • Highly descriptive and non-normative modeling • Good choice for ‘operational’ scale modeling • Hydro-Economic models (optimization) • Assessing economic choices and tradeoffs with defined goals and objectives • Not well suited for highly complex, non-linear systems where conditions for successful optimization are unmet • Good choice for policy and planning assessments with long-run decision horizons

10. Hydro-Economic Model • A mathematical model of a watershed where economic objectives can be optimized within a set of physical, technical, and institutional constraints • Optimize the net benefits in the whole basin across a 30 year timeframe • Benefits in M&I sector, for example: • Drinking water • Water to take a shower • Benefits in agricultural sector • Water to produce crops for the food • Physical and institutional constraints, for example: • U.S. and Mexico Treaty of 1906 • Endangered Species of 1973 • Rio Grande Compact

11. Objectives of Hydro-Economic Watershed Models • Represent major spatial, physical, and economic characteristics of water supply and use • Evaluate welfare, allocation, and implicit price changes associated with alternative hydrologic, management, and institutional conditions • Identify opportunities to improve water management systems from a watershed perspective

12. Hydro-Economic Models Economic Objectives Subject to Structural and Institutional Constraints • Consumptive and nonconsumptive economic services • Agriculture, municipal and industrial, thermoelectric • Hydropower, navigation, flood damages, water quality • Constrained by inflows, river characteristics, institutional provisions • Outcomes indicate efficient water use, river flow, and storage • Across the mixture of users • Upstream and downstream services • Intertemporal allocation

13. Model Basics • Develop a schematic diagram of the watershed system • Describes physical structure (tributaries, inflows, and reservoirs • Identifies and locates watershed services • Show diversion points and instream uses • Derive estimates for the model’s objective function • Develop demand and supply curves for each service based on water diversion or instream flow • Describe model constraints • Mass balance (upstream to downstream flow) • Intertemporal storage in reservoirs • Institutional flow restrictions

14. Colorado River Model (Upper Basin)

15. Model Objective Function Given water supply, expected streamflows, and water demands in the watershed, the model objective is to choose (manage) all water diversions (allocations), reservoir storage and releases in order to: Maximize present value of total long-run net economic welfare ($) defined as the sum of all net benefits less the sum of all costs and damages Welfare ($) = Σt1/dft[(ag($) + indust($) + domestic($) + rec($) + env($)) – total costs($) – damages($)]

16. Water Values: Needs, Desires, and Willingness to Pay Sources of Value • Use • Consumptive Use • Non-consumptive Use • Option • Passive Use • Intrinsic / Existence • Bequest Intrinsic / Existence Value Bequest Value Passive Use Total Economic Value (TEV) Non-consumptive Value Water Quality Recreation and Sport Habitat Biological Diversity Scenic & Env Aesthetics Cultural Value ($) Use Value Consumptive Values Irrigation Domestic Industrial & Commercial Water Quality Source: Derived from Rogers, Bhatia, Huber (1998). Water as a Social and Economic Good: How to Put the Principal into Practice. http://info.worldbank.org/etools/docs/library/80637/IWRM4_TEC02-WaterAsSocialEconGood-Rogers.pdf Source and Quantity

17. Model Constraints: River Flow and Reservoir Storage Mass Balances

18. The Case of Groundwater (and other SCARCE depletable or non renewable resources) • How much to use NOW, how much to save for LATER • Deciding allocation across time • Balance the value of current use with future use • ‘User cost’ measures the opportunity cost of NOT having the resource available in the future • User cost depends on demands and supplies • Current period • Future periods • Dynamic efficiency requires:price = marginal production costs (current opportunity costs) + marginal user cost (future opportunity costs) • Inter-temporal allocation varies with interest rate • Higher rates favor current period use

19. Economic Efficiency • Allocations Across Users (Static Efficiency) • Net benefits are maximized where marginal benefits from an allocation equal the marginal costs, i.e., no other allocation or uses are possible that produce greater net benefits • Allocations Across Time (Dynamic Efficiency) • A resource allocation across n time periods is optimal and efficient where the present value of net benefits is maximized, i.e., present values of net marginal benefits are equal

20. Changing Hydrographs What does it mean for? • Water storage and distribution systems? • Urban and rural water users? • Water quality? • Hydropower? • Recreational and cultural functions? • Riparian ecosystems and migratory patterns? Model assumptionstemperature ↑ 4°C Precipitation ↑ 10%

21. Adaptation: Terms and Definitions Adaptation is a deliberate change in system design, function or behavior in response to or anticipation of changing conditions or events. Reactive (autonomous) adaptation A disturbance occurs and systems absorb impacts and attempt restoration to pre-disturbed conditions Proactive (anticipatory) adaptation The nature and timing of a disturbance is anticipated and systems reorganized to improve capacity to avert damages and leverage any resulting opportunities “… organizations increasingly face adaptive challenges requiring them to abandon the familiar and routine. Instead, they need to develop the capacity to harness knowledge and creativity to fashion unique responses, stimulate organizational learning and sometimes embrace transformational change.” Carl Sussman, “Building Adaptive Capacity: The Quest for Improved Organizational Performance”

22. Context for Adaptive Action • Climatic change can cause significant harm to societies and ecosystems • Reducing GHG emissions (aka mitigation) will likely reduce both the degree and likelihood of adverse conditions • Longevity and inertia of atmospheric GHG forcing means some degree of climate change is unavoidable • Therefore, adaptation is not a question of ‘if’ but rather of How? What? Where? and When?

23. How? – Building Adaptive Capacity Adaptive Capacity is the ability of systems, organizations and individuals to: • Adjust to realized and potential changes and disturbance events • Take advantage of existing and emerging opportunities • Successfully cope with adverse consequences, mitigate damages, and/or recover from system failures

24. Merci’ Beaucoup! Grazie Gracias Thank You Brian H. Hurd, PhD Department of Agricultural Economics & Agricultural Business Gerald Thomas Hall Rm. 350 New Mexico State University Tel : (575) 646-2674 Email: bhurd@nmsu.edu Web: http://agecon.nmsu.edu/bhurd