“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

Brian H. Hurd, PhD, ProfessorDept. of Agricultural Economics & Agricultural BusinessNew Mexico State University bhurd @ nmsu.edu http://agecon.nmsu.edu/bhurd

OverviewLec 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

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

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

• 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

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

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

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

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

Objectives of Hydro-Economic Watershed ModelsRepresent 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

Hydro-Economic Models Economic Objectives Subject to Structural and Institutional Constraints

Consumptive and nonconsumptive economic servicesAgriculture, municipal and

industrial, thermoelectricHydropower, navigation, flood

damages, water qualityConstrained by inflows, river

characteristics, institutional provisionsOutcomes indicate efficient water use,

river flow, and storage Across the mixture of usersUpstream and downstream services

Intertemporal allocation

Model Basics

Develop a schematic diagram of the watershed systemDescribes physical structure (tributaries, inflows,

and reservoirsIdentifies and locates watershed services Show diversion points and instream uses

Derive estimates for the model’s objective functionDevelop demand and supply curves for each

service based on water diversion or instream flowDescribe model constraints

Mass balance (upstream to downstream flow)Intertemporal storage in reservoirsInstitutional flow restrictions

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 ($) = Σt 1/dft [(ag($) + indust($) + domestic($) + rec($) + env($))

– total costs($) – damages($)]

Water Values: Needs, Desires, and Willingness to Pay

Sources of ValueUse

Consumptive UseNon-consumptive

UseOption

Passive UseIntrinsic / ExistenceBequest

Use Value

Total Economic

Value (TEV)

Passive Use

Intrinsic / Existence ValueBequest Value

Non-consumptive ValueWater Quality

Recreation and SportHabitat

Biological DiversityScenic & Env Aesthetics

Cultural

Consumptive ValuesIrrigationDomestic

Industrial & CommercialWater Quality

Val

ue (

$)

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

Model Constraints: River Flow and Reservoir Storage Mass Balances

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

Economic EfficiencyAllocations 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

Changing Hydrographs

Water storage and distribution systems?

Urban and rural water users?

Water quality?Hydropower?Recreational and

cultural functions?Riparian ecosystems and

migratory patterns?

What does it mean for?

Model assumptions

temperature ↑ 4°C

Precipitation ↑ 10%

Adaptation: Terms and DefinitionsAdaptation 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 attemptrestoration 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”

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?

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

Merci’ Beaucoup!GrazieThank YouGracias

Brian H. Hurd, PhDDepartment of Agricultural Economics & Agricultural BusinessGerald Thomas Hall Rm. 350New Mexico State UniversityTel : (575) 646-2674Email: bhurd@nmsu.eduWeb: http://agecon.nmsu.edu/bhurd