“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:Lec 5. Strategies for Developing Climate Change Scenarios and Modeling Data 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. 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

3. Hydrological Data and Modeling • Water management agencies/authorities may have measured streamflows from various locations on the river • Naturalized streamflows (native streamflow without reservoirs) is desirable, sometimes synthesized datasets are available • Various hydrologic models are available from simplified water-balance models, such as WATBAL, to more sophisticated variable Variable Infiltration Capacity (VIC) Macroscale Hydrologic Models (http://www.hydro.washington.edu/Lettenmaier/Models/VIC/index.shtml)

4. Economic Data and Water Demand Estimation • Water demand studies are conducted in many places and regions, providing information on water prices, costs, and demand elasticities. • In developing countries, water demand estimates maybe difficult to find, estimates may need to be made based on water use estimates and available water price information

5. Defining Prices, Benefits, Costs • Willingness-to-pay is a monetary measure of the intensity of individual preferences (needs, wants, desires) • Market goods • Observed equilibrium market prices represent the willingness-to-pay at the margin of potential buyers and the willingness-to-accept of potential sellers for a good or service. • Non-market goods • Benefits are based on individual values in the form of willingness-to-pay (WTP) and their aggregation across all affected individuals • Costs are the value of the opportunities forgone because of the commitment of resources to a project, or the willingness-to-pay to avoid detrimental effects (damages).

6. Identify Types of Water Values • Long-run versus short-run • At-site versus at-source (in situ) • Per period (e.g., annual) versus capitalized • Use, nonuse and Total Economic Values • Units of water quantity measures • Withdrawal – amount removed from source • Delivery – amount delivered to place of use • Depletion or consumptive use – amount evaporated or transpired into the atmosphere, incorporated into crops and products, removed from the local water environment.

7. From Young, 2005, pp. 47-49, Table 2-1. Main Types of Nonmarket Water Valuation Methods, Their Characteristics, and Uses Taxonomy of Water Valuation Methods

8. From Young, 2005, pp. 47-49, Table 2-1. Main Types of Nonmarket Water Valuation Methods, Their Characteristics, and Uses Taxonomy of Water Valuation Methods

9. A Common Appoach for Estimating Use Values:Residual Analysis Methods • Value of water is imputed by accounting for the values and payments to all other inputs and factors of production, the residual claimant • Maximum willingness to pay is bounded by the amount or share of Total Revenues remaining after all other variable and fixed factors have been paid their fair price – either a market price or the price required to attract that factor into production

10. Valuing Water as a Residual Claim on Revenues (max WTP) Total Revenue = $16.5 million Total Non-water Costs and Payments = $14.1 Value of water = $16.5 - $14.1 = $2.4

11. Value of Water (Net Return to Water) • With Production Function • Y=Y(XM, XH, XK, XL, XW) • where: Y-output, M-materials, H-labor, L-land, K-capital, W-water • If all inputs are paid according to their VMP, then the total product value is completely allocated as: • Assuming competitive input markets and optimizing producer behavior (i.e., choose Xj such that VMPXj = Pj) then • the ‘value of water’ is found by solving for the shadow price of water: • The maximum willingness to pay for water is the RESIDUAL value remaining after all other factors (both fixed and variable) have been paid.

12. Other Deductive Approaches • Input-Output Models • Alternative Cost Method • Benefit Transfer Inductive Approaches: Empirical and Statistical Methods • Estimated production functions • Market analysis – observation of water markets, trades, leases, and water rights • Hedonic property value method

13. 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