The impact of new regulations on water pricing in the agricultural sector: a case study from Northern Italy

Transcription

1 77 Te impact of new regulations on water pricing in te agricultural sector: a case study from Nortern Italy Francesco Galioto a *, Elisa Guerra a, Meri Raggi b and Davide Viaggi a a Department of Agricultural Sciences, University of Bologna; Viale G. Fanin, 5; 4127, Bologna, Italy b Department of Statistical Sciences, University of Bologna; Via delle Belle Art 41; 4126, Bologna, Italy * Corresponding autor: francesco.galioto@unibo.it Abstract Te present study intends to investigate te expected impact of canges in pricing policies applied to te use of water resources recently experienced in an agricultural area located in Nortern Italy. Te study begins introducing te pricing criterion adopted by a water autority in different region supplied by its irrigation network. Tis pricing criterion is, ten, analysed in ligt of te new regional mandatory requirement on water pricing and modified accordingly. A metodology is developed to evaluate te expected impact of te new pricing policy on te amount of water applied, land allocation and irrigation tecnology adoption. Te metodology follows a two-step approac. In a first step we estimate te yield response to decreased water uses for te main crops cultivated in te area and for different irrigation tecniques. In a second step, te estimated production function is integrated into an economic optimisation model to calculate relevant impacts. Te results igligt tat te cange in pricing criteria would not cause substantial variations in water uses. Tis is mainly due to inelastic demand for water in agriculture. However, te new pricing criteria incentivize te adoption of water saving tecnologies. Te study concludes by addressing tat attention sould be paid to synergies of water pricing wit co-financing subsidies on investments for furter promoting te adoption of water saving tecnologies. Keywords: WFD, water pricing, irrigation, matematical programming JEL: Q5 1. Introduction Global water resources are under pressure mainly because of two linked penomena: world population growt and climate cange impacts. Te agriculture sector remains te single largest user of water (International Institute for Sustainable Development (IISD) 213). Water pricing reforms are among various measures designed to encourage te efficient use of water resources (Renzetti 2). Literature demonstrates tat many countries ave been engaged in suc pricing reforms (Dinar 215; Kail et al. 216). Since investments in new water tecnologies represent a ig effort for bot private and public funding, water pricing represents a key issue bot for developing and developed countries (Ducin and López-Morales 212). Tese features sould be considered in modeling irrigation adoption decisions and te impacts of water pricing reforms.

2 78 Moreover, lessons learned from te extensive analysis of agricultural water use in middle and ig-income countries can be transferred to low-income countries. For instance, te political economy of water price reform in Australia (Dinar 215) confirms tat successful reform requires te backing of an effective political coalition, and also it demonstrates te difficulty of costs identification, measurements, and saring, particularly in te rural sector. Oter works on water pricing in US (Read 29) conclude tat irrigation tecnology, crop coice, and land allocation are affected by te price of water as well, altoug elasticity is relatively small. However, te widespread absence of metering in tis sector limit te possibility to set up incentive pricing mecanisms (Molle 29). Te impact of new regulation on irrigated agriculture, including water pricing, as already widely discussed in literature (Joansson 2). Neverteless, conclusions from existing studies, comparing te performance of water pricing criteria among different countries, agree tat tere is no best practice tat can be recommended to one country or sector (Kail et al. 216; TSUR et al. 24). Te reason is tat optimal prices depend on te objectives of te water agency, as well as on te types of information available to it (Iglesias and Blanco 28). Te Water Framework Directive 6/2 (WFD from now on) is a cornerstone of te European Union s view on water pricing, stressing te importance of treating water as an economic good and, in particular, of "setting te price rigt", to provide effective economic incentives to water users (Bank et al. 22). Specifically, te polluter s pay and te full cost recovery principles introduced wit te WFD call for using water pricing to incentivize efficient and sustainable uses of water resources bot in te civil sector, te industrial sector and in agriculture. Tese principles ave been ardly applied to incentivize efficient water uses in agriculture, at least in Italy (Massarutto, Antoniol and Ermano 213). Neverteless, te Emilia Romagna Region recently publised guidelines on water pricing (Regione Emilia Romagna 212) to omogenize te pricing citeria implemented by te water autorities operating in te region, also coerently wit te WFD pricing principles. Teoretically, by pricing water for irrigation on a volumetric basis it is possible to acieve a profit-maximizing equilibrium modulating te amount of water applied until marginal profits equal te unit price of water. Oterwise, if te tariff is not directly connected to water uses, i.e. te marginal cost of water is zero, te optimal level of water use is te same as te maximum level of production in te production function. Terefore, farmers still irrigate even wen te marginal productivity of water falls below te real (social) marginal costs of water. In fact, water metering is a prerequisite to put into practice suc principles and tis rarely occurs in te nortern Italian agricultural regions. Here, water for agriculture is mainly supplied troug surface irrigation network and te witdrawal of water by farmers is not monitored. But, even were it is possible to meter irrigation water consumption (e.g. farmlands served by pressure pipes), volumetric tariffs migt not be applied, because for example, manometers to monitor water use may be exposed to sabotage (Cornis et al. 24). Even in some circumstances, were users pay volumetric tariffs, te reduction of water uses are negligible, as irrigation water demand is often inelastic (Fragoso et al. 211). Yet, some autors igligt tat tariffs linked to te actual or alleged uses of water for irrigation may incentivize a wider adoption of water

3 79 saving tecnologies, indirectly affecting demand for irrigation water (Moreno and Sunding 25). Altogeter, te possibility and te benefits of a sift towards volumetric pricing remain a rater empirical issue (Molinos-Senante, Hernandez-Sanco, and Sala- Garrido 213). In tis context, te present paper compares te pricing criteria adopted by te Burana Reclamation Irrigation Board, (Burana RIB from now on), before and after te adoption of WFD pricing principles, as proposed by te new regional guidelines. Specifically, te study simulate te impact of te new pricing criteria wit respect to te amount of water applied, land allocation and irrigation tecnology adoption by elaborating an economic optimization model. Te economic optimization model accounts of detailed tecno-economic information about irrigation and about water pricing collected by te means of direct interviews and involving bot farmers and water managers. A standard Positive Matematical Programming metod (PMP from now on) is used to reproduce initial conditions (Howitt 1995), Part of te inputs used for te economic optimization model are temselves output of a crop evapotranspiration estimation model (Guerra et al. 214). In te present study we adopted te standard PMP approac as we ad te opportunity to exploit detailed tecno-economic information about irrigation and oter agricultural practices and about water pricing for all te agricultural districts served by te case study irrigation network. Different pricing scenarios consistent wit te regional guidelines on water pricing and wit te caracteristics of te irrigation water supply network were identified wit te support of a representative of te RIB to simulate te relevant impacts. Tis case study enrices te current debate around te effectiveness and practicality of new pricing criteria, able to incentivize a more rational use of water resources. Results provide practical policy recommendations to support local water autorities in te new regulation implementation process. Te paper is organized as follow: (i) te problem section, wic starts wit te description of te case study region, and ten, explain te new pricing rules implemented by a local water autority to recover te costs faced to supply water for irrigation; (ii) te material and metod section, describing a combined approac of crop growt models wit economic optimisation models to estimate impacts of any variation in water pricing mecanisms, (iii) te results and discussion, addressing te impact of current and new pricing criteria on te amount of water applied, land allocation and irrigation tecnology adoption; (iv) discussion and conclusions, providing some water policy recommendations. 2. Te problem Caracteristics of te case study region Te Burana RIB is a consortium administered by te same land owners under its jurisdiction and is responsible for reclamation and irrigation services. Te area is located in Emilia-Romagna (Nortern Italy). Its territory is enclosed by te Po River (in te Nort), te Seccia River (in te East), te Samoggia River (in te West), and te Tosco-Emiliano Apennines (in te Sout), and covers 14, ectares, of wic 16,5 are irrigated. Open canals cover 9% of te plain area under te consortium s jurisdiction. Tese canals play te twofold functions of reclamation, mainly during te winter, and irrigation, mainly during te summer period. Pressure pipes cover te

4 8 remaining 1% of te region were water is delivered to end-users on demand (Fig. 1). Fig Map of te area served by te Burana RIB irrigation services. Open canals serve four main sub regions, caracterised by differences in altitude (low-plain and ig-plain areas) and network infrastructures. Differences in infrastructure affect te possibility of setting rules for water use (imposition of turns), as well as imposing tariffs proportional to te amount of water used for irrigation. Water is priced on a per-area basis, in most of te sub-regions, and on a per our basis for tose farmers using furrow irrigation in two sub-regions. Arable crops account for more tan a alf of te total cultivated area in te region served by te RIB (56%) and are mainly concentrated in te low plain areas. Orcards and vineyards occupy 8% of te irrigated agricultural area, most of wic are located between te low plain and ig plain areas. Finally, vegetable crops account for 2% of te total UAA, most of wic are located in te low plain region. In te wole region, farmers integrate surface water sources wit ground water sources to satisfy total crop water requirements, and tere is no significant correlation between crop type and distance from water abduction sources. A iger implementation of water saving tecnologies is registered for sectors served by pressure pipes. Specifically, 25% of te irrigated crops are irrigated wit drip irrigation systems for sectors served by PP and only 9% of te irrigated agricultural land is equipped wit drip irrigation systems for sectors served by open canals. Current and new water pricing policies Under te current pricing system, te water autority applies different tariff strategies for te various sectors of te irrigation network. According to te caracteristics of eac sector, te tariffs are: (I) proportional to te total farmland; (II) differentiated wit te distance from te main source of water; (III) differentiated wit te type of crop and type of irrigation system; (IV) proportional to te duration of te irrigation interventions

5 81 (for furrow irrigation tecnique). Te new regional guidelines on water pricing (Regione Emilia Romagna 212) called water autorities to revise teir pricing criteria consistently wit EU regulation (WATECO 2). Tese guidelines were publised wit te main intent to drive local water autorities to sift from pricing policies merely oriented to recover supply costs to pricing policies oriented to incentivize rational water uses. According to te guidelines, supply costs for irrigation water sould be recovered by te imposition of a two-parts tariff: a flat carge to recover fixed costs, and a variable carge to recover variable costs. Te flat carge includes capital costs, full-time labour costs, ordinary operating and maintenance costs tat te water autority faces independently from of te amount of water supplied. Te variable carge includes mainly part-time labour costs, conveyance and pumping costs tat te water autority sustains in relation to te water amount supplied. Te fixed component of te tariff must be applied to te total irrigable agricultural region covered by te irrigation network, independently of weter tis is (or is not) irrigated. Te payment of a minimum price is motivated by te need to guarantee te functionality of te irrigation network and by te fact tat te potential usage of water for irrigation assured by te presence of te irrigation network is a value added of its own. In addition, te fixed component of te tariff must decrease wit te distance of te field from te closest point of te irrigation network to assure tat fields located in well equipped areas are priced more tan fields located in region marginally covered by te network. In addition, according to te regional guidelines, te variable component of te tariff must be tied to te amount of water applied in tose region were it is possible to meter water uses, ensuring te conditions for te optimal use of water from an economic perspective. In te absence of water metering, regional guidelines mandate to differentiating tariffs according bot to te type of crop grown and to te irrigation tecnology adopted. Te new mandatory Regional water pricing policy forced local water autorities, including te one operating in te case study region, to reformulate teir pricing criterion accordingly. Up until te publication of tese guidelines, local water autorities adopted arbitrary criteria to price water. Tese criteria were largely inconsistent wit te ones deemed by te regional guidelines. Since te variable component was absent or kept to a minimum under te previous regulatory setting, it is expected tat most of te water autorities operating in te region will experience a significant increase in te variable component. Tese new guidelines affect also te pricing policies of te Burana RIB wo is called to increase te quota of supply costs to be recovered troug a variable tariff and to omogenize te pricing criterion adopted in te different regions served by te irrigation network. Actually, te RIB recovers supply costs by imposing a flat rate for some of te sectors served by te irrigation network and a two-part tariff for oters. Tus, te new regional water pricing reform is expected to impact differently te different region served by te network, wit negligible effects in some region and evident effects in some oters. Tis condition motivates te purpose of te present study tat is to carry out an exante assessment to evaluate te possible impacts of te new pricing criteria addressed by te regional guidelines on te irrigated agriculture served by te RIB. In tis respect we developed a metodology trying to answer to te following questions: ow sould te

6 82 Burana RIB allocate te water supply costs amongst users, to meet Emilia-Romagna regional guidelines? In addition, since new regulation requires a variable tariff, combined wit a fixed tariff, does te variable tariff affect irrigation water demand? In te following section we provide a description of te metodology adopted to answer tese questions. 3. Material and metods Te metodology is designed to simulate te impact of variations in pricing scenarios determined by te enforcement of te regional guidelines on water pricing in te case study region. Te metodology follows a two-step approac: 1) te estimation of te production function wit respect to water uses for te main crops in te district and te main irrigation systems adopted; 2) a simulation troug economic optimisation under different pricing conditions, troug a PMP approac. Te first step made it possible to estimate te relation between crop production and te amount of water applied for te main crops cultivated in te district area and for different irrigation tecniques, given te local meteorological conditions. In te second step, te estimated production function is used to set up te economic optimisation model, togeter wit te inclusion of oter tecno-economic variables. Te amount of water applied, land uses (allocation of land among crops) and irrigation tecnology coices appear as a decisional variable of te economic optimization model. Different water pricing conditions, after optimisation, entail different optimal values of te decision variables, affecting farmer s profits, water uses and land use allocation. 4. Te production function estimation Tis paragrap intends to explain ow crop production function were developed from local meteorological data and information collected troug farmers interviews. Meteorological data (temperatures, precipitation amount, and wind speed) referring to te time period , and collected from a local meteorological station (Mirandola, Modena, Italy were used as inputs to compute te montly mean reference evapotranspiration (ETo) for te considered irrigation period, wic goes from May to September. Te montly mean calculated ETo togeter wit te montly mean values for te same local climate variables were used as input in an ET model, named KcMod based on crop coefficient metods (Guerra et al. 214) to determine crop evapotranspiration, ETC, under well-watered conditions (absence of water stress) for a given crop, and for a given irrigation tecnology,, as it follows: Kc( obs),.261( ET 7.3) (1) i Kc( tab) 1.261( ET 7.3) were: Kc(obs) is te tabular value of te crop coefficient for a given crop and for a given irrigation tecnology; 7.3 (mm) is te July ETo, wic is te reference evapotranspiration, being July te mont corresponding to te midseason period of te typical climate were Kc were developed, calculated using local meteorological data wit te Penman-Monteit metod (Allen et al. 1998). Terefore, Eq. (1) allows to calculate te base-climate Kctab values from researc derived Kcobs in a non-base climate, suc as te Burana district climate. Ten, ETC is calculated as it follows:

7 83 ETc Kc( tab) ET (2) Te cumulative crop evapotranspiration of te entire irrigation season (CETC) was used in te program MAD6, to obtain te actual cumulated crop evapotranspiration CETA as a result of crop water stress simulation, for a given crop, and for a given irrigation tecnology,, under specific soil and climatic conditions (Raes et al. 29; Smit and Steduto 212). Specifically, CETA data were assumed as optimum to simulate te effect on yields of a Variable Rate Irrigation (VRI) on main crop categories, according to te different irrigation tecnique adopted in te region of investigation. Yield responses to water stress were estimated in MAD6 by applying an algoritm, wic is a variation of te metodology described in te FAO working paper 33 (Kaboosi and Kave 211). Ten, yield responses for a given crop i and a given irrigation tecnique to decreasing levels of actual evapotranspiration, ETA, allowed to estimate te cropwater production functions wit respect to water uses, as Eq. 3 sows: CET [1 1 (3) A i y µ ] i, Yci KY CETC i were: Ky is te reference yield crop coefficient (Smit and Steduto 212), tat is, te marginal productivity of water; Yci is te maximum yield (detected troug interviews) obtained under base climate conditions (i.e. standard relative umidity and standard wind speed), for a given crop i; µ is a coefficient, wic relates crop water requirement wit te amount of water applied, and it varies wit te type of irrigation tecnology,. Finally, we carried out a sensitivity analysis wit respect to CETA, varying from to CETC, to estimate te corresponding yield. Te model simulates te water stress effect on crop yields, due to decreased irrigation amounts. In suc a way, yield and CETA value pairs allowed to estimate a non-linear concave crop yield function for te main crop cultivated in te case study region and for te main irrigation tecnologies, y(w), were w is te amount of water applied, wit y (w) > and y (w) <. Coefficients of water production function were used as input in te economic optimisation model to assess any impacts determined by variation on water pricing in te case study region. By exploiting tree existing evapotranspiration (ET) models: te first one was used to calculate te reference evapotranspiration (ETo); te second one allowed to compute te crop evapotraspiration (ETc); and te tird model permit to simulate te effect of decreased irrigation amount on crop yields 5. Te economic optimisation model Te following optimisation model estimates te impact of existing and teoretical pricing criteria wit respect to te amount of water applied, land allocation and te irrigation tecnology adoption. A modified Positive Matematical Programming metod is adopted to obtain an exact representation of te reference situation. Te metod assumes a profit-maximising equilibrium in te baseline situation and uses te observed levels of production activities as a basis for estimating te coefficients of a non-linear objective function, in a way similar to wat as been done in recent studies (Mérel and Howitt 214; Solazzo et al. 214). Specifically, te metod follows four stages: i) development of a background

8 84 optimization model were te regulator set tariffs according to te actual pricing scemes enforced in eac district of te irrigation network, including a constraint on land uses to calculate te relevant sadow prices; ii) removal of te constraint on land uses and inclusion of a quadratic cost function wit respect to land use incorporating sadow prices in te objective function; iii) replacement of actual tariff scemes wit te new pricing scemes suggested by te regional policy guidelines; iv) comparing te impacts of te canges in pricing rules on water uses, tecnological canges and variations in land use. Te district is te reference unit of investigation. We identify te district wit te subscript a. Te coice of tis level of investigation is based on te fact tat eac district represents an independent management unit of te irrigation network, caracterised by different supply infrastructures and by different operational and maintenance costs. Te set of decisional variables considered in te model are: xa,z,, te amount of cultivated land in district a, differentiated in sub-sectors varying wit te distance of te field from te closest point of te irrigation network, z, for eac crop type, and for eac type of irrigation tecnology adopted by farmers, ; w, te amount of water for irrigation, differentiated wit te type crop, and wit te type of irrigation system,. Oter variables are te tariffs implemented by te water provider to recover supply costs. Tariffs levels and caracteristics differs wit te sector of te irrigation network. Tese are: ta,z,, tariffs not directly connected to te amount of water applied, wic are differentiated among districts and sub-sectors of te irrigation network, differing also wit te type of crop cultivated and te type of irrigation system used; va, tariffs proportional to te amount of water applied, differing wit te district. Land use and tariffs are continuous variables, wile te amount of water is a discrete variable, as farmers are able to modulate te application of irrigation water for fixed amounts, differing wit te type of irrigation system adopted. Specifically, for drip irrigation te farmer is not subjected to any significant tecnical constraints, wile for sprinkler and furrow irrigation eac intervention is subjected to a timing constraint conditioned respectively by te workforce and by water flows. Tus, a mixed-integer non-linear positive matematical programming model as been adopted to solve Equation 4, wic represents te optimisation problem: max a [ pi y ( w ) cz i xa z i w t z i vaw xa z i a i,, (,,,, ) ( i,, )] (4),,,,, z, s.t.: xa z, w Land a a, z (5), z, z, z, xa, z, w Wata a (6) sc [( t a, z, t aw )] xa z i Fa Va wi x i,,,,, a, z, (7) z, w ; x wit w t Z + and x a,z,t R + a, z, sc were: a represents farm profits; pi represents te price of te crop, differentiated wit te type of crop; cz,(xa,z,, w ) represents costs, differentiated wit te distance from te main source of water, te type of crop and te type of irrigation system. Costs are bot linear functions of te amount of water applied for irrigation,

9 85 estimated troug te information provided by te water provider, and quadratic functions of crop size, estimated troug te cited PMP approac1. Equation 5 is te constraint for land availability, landa,z; Equation 6 is te constraint for water availability, Wata. Finally, Equation 7 is te cost recovery constraint. Tariffs are determined observing bot cost recovery and pricing rules. Fasc and Vasc are respectively for fixed and variable supply costs. Tese are differentiated wit te district served by te irrigation network. Vasc never exceeds a quarter of te total supply costs in eac sector of te network. Wit respect to te pricing rules currently adopted by te water provider, fixed tariffs are sometimes differentiated wit te distance of te field to te closest point of te irrigation network, wile variable tariffs are sometimes differentiated wit te type of crops and wit te type of irrigation systems for sectors served by OC. Te new policy guidelines oblige te WA to apply a two-part tariff watever are te caracteristics of te network. In addition, te guidelines call WAs to reformulate te criterion tey adopted for identifying te supply costs items to be recovered troug te variable component of te tariff. Te new pricing scenarios differ from te current tariff scenario mainly by te way in wic tariff options and levels are set up. Te new tariff scenario introduces a twoparts tariff for all of te sectors served by te irrigation networks. For tose sectors served by open canals, te variable component is linked to te alleged use and is differentiated wit te type of crops and irrigation system. For tose sectors served by pressure pipes, te variable component is linked to actual uses. In te current tariff scenario, only a few sectors of te irrigation network experienced te implementation of a two-parts tariff and none of te fields served by pressure pipes experienced te imposition of volumetric tariffs. Wit respect to tariff levels, te level of te variable component is very low wen applied and te setting of tariff levels is arbitrary. Tis state of arbitrariness breaks down wit te publication of te new regional guidelines tat set te rules for te calculation of te type of costs to be recovered respectively troug variable and fixed tariffs. Tis new pricing condition poses te need to reformulate Equation 7 accordingly and to run again te optimization problem so far described. Moreover, for te new tariff scenario an iterative optimisation is carried out to obtain a sensitivity analysis wit respect to te sare of supply costs recovered troug te variable and, respectively, te fixed component of te tariff. Te impact of te cange from te old to te new tariff system may take different forms, suc as a variation for applied water, land allocation, and irrigation tecnology adoption. Teoretically, variations for applied water occur only wen water is carged on a volumetric basis, wile variations in land allocation and irrigation tecnology adoption occur wen tariffs differ wit te type of crop and wit te type of irrigation system adopted, respectively. Moreover, te amount of costs recovered troug te variable part of te irrigation tariff influences te relevant impacts. 1 Te quadratic component of te cost function of te above described optimization model was estimated by first including a constraint on land uses for eac crop, irrigation system and district to calculate te relevant sadow prices,. Ten te quadratic component was set as follows:, were x obs is te observed level of land use. Tis way wen te irrigated land reaces is observed values ten te cost reaces its sadow price level. In addition, sadow prices were calculated including te effect of tariff scemes currently applied by te WA.

10 Yield (q/a) Margina revenue ( /a) 217, Vol. 18, No To carry out te assessment, information on prices and costs were retrieved by exploiting te regional farm accountancy data network (FADN, ttp://ec.europa.eu/agriculture/rica/). Information on land uses and irrigation tecnology adoption were collected from maps of te case study irrigation network. Crop management data were collected by interviewing farmers from te different sectors of te irrigation network. Finally, representatives of te RIB provided information on te pricing sceme currently implemented to recover supply costs. 6. Results Tis section describes te results obtained from te two-steps metodology described above. Tey consist of: (i) a description of crop responses to water pricing; (ii) a comparison between te current and new tariff scenarios and te relative impact of te pricing scenario variation on water uses, land allocation and irrigation tecnology adoption; (iii) a sensitivity analysis of quotas of supply costs recovered troug te variable component of te tariff and te relative impact on water uses, land allocation and irrigation tecnology adoption. For example, Figure 2 sows yield responses to te amount of water applied (a) and te derived demand of water (b) for a crop (cerries) managed wit two different irrigation systems: furrow and drip irrigation, under given climatic conditions. Water production function (a) Water demand function (b) , 1,5 2, 2,5 3, 3,5 4, 4,5 5, Irrigation water (m3/a) , 1,5 2, 2,5 3, 3,5 4, 4,5 5, Irrigation water (m3/a) Fig Estimation of te production functions wit respect to water uses (a) and estimation of te water demand function wit a representation of te effects of pricing on water uses (b) for cerries managed wit two different irrigation systems: furrow and drip irrigation, cultivated in te case study region. Te figure depicts te relation between yield and te amount of water applied rater tan te relation between yield and crop water requirements. Indeed, te amount of water applied may significantly differ from crop water requirements and is mainly conditioned by te efficiency of te irrigation system adopted by te farmer. As expected, Figure 2 (a) sows tat for a given level of production, te amount of water applied is iger for furrow irrigation. Te intercept wit te y-axis indicates te production level for rain fed cultivation, wilst canges in te slope of te estimated functions express te transition from under-watered to over-irrigated crops. Te amount of water needed to obtain te maximum yield corresponds to te projection of te peak of te curves on te x_axis. Here, te slope of te functions is equal to zero. Figure 2 (b) sows te caracteristics of te water demand function derived from te estimated production function. Te intercept of te functions wit te x_axis indicates te amount

11 87 of water needed to maximise te yield, wic is iger for furrow irrigation. Functions differ also for te slope, wic represent te demand elasticity. Demand elasticity decreases wit te increasing slope of te curve. In general, bot te amount of crop water requirements and demand elasticity decrease wit te transition from furrow to drip irrigation systems. Tis condition implies tat, wit te imposition of a volumetric tariffs, drip irrigated crops may experience a lower reduction in te amount of water applied tan furrow irrigated crops. However, for furrow irrigation farmers are forced to use discrete amount of water wit te consequence tat, even wit te implementation of a volumetric tariff, tere are no significant canges in water use attitudes, until a given pricing tresold is reaced (discontinuous slopes in Figure 2 (b) for furrow irrigation). Tab Percentage variation of land uses and water applied for sectors served by pressure pipes (PP) and sectors served by open canals (OC) wit te transition from te current to te new tariff scenario for te main crop categories cultivated in te case study area. GROWING LAND USE WATER APPLIED CATEGORIES OC PP OC PP Non-irrigated crops % 1% - - Vineyards Orcards Arable crops Vegetables Source: Autors own elaboration % -1% -4% -1% % % % -1% % % % % % % % % Tab Percentage variation on land uses and water applied for sectors served by pressure pipes (PP) and sectors served by open canals (OC) wit te transition from te current to te new tariff scenario for te main irrigation systems adopted in te case study region. IRRIGATION LAND USE WATER APPLIED SYSTEMS OC PP OC PP Furrow irrigation -9% - -8% - Sprinkler irrigation % % % -1% Drip irrigation 1% % % -1% No irrigation % 1% % % Source: Autors own elaboration Tables 1 and 2 sow te estimated impact of te variation in tariff regimes on land allocation, te amount of water applied, and te irrigation tecnology adoption for bot

12 88 sectors served by pressure pipes (PP) and te sectors served by open canals (OC). Specifically, wit respect to te main type of crops cultivated in te case study region (Table 1), te transition to te new tariff scenario does not sow any appreciable impact for eiter land allocation or te amount of water applied. Table 1 sows a sligt estimated variation in impacts between PP and OC. A variation in land uses is only registered for PP, were te transition to te new tariff scenario results in increased land coverage for non-irrigated crops. Tis is compensated by a land coverage reduction for vineyards. A reduction in te amount of water applied is registered for bot OP and CC, but wit a sligt variation between te two groups of sectors in terms of intensity and te type of crops involved. Wit respect to te main type of irrigation systems adopted in te case study region (Table 2), te transition to te new tariff scenario results in a significant impact for furrow irrigation in OC. Here, furrow irrigation undergoes a significant reduction bot in terms of land coverage and te amount of water applied. Wit respect to te oter types of irrigation systems, Table 2 sows a sligt increase in te presence of drip irrigation systems in OC and a reduction in te amount of water applied for bot drip and sprinkler irrigation systems in PP. Te different impacts estimated for te two groups of sectors are due to te combined effect of te differences in pricing instruments and farming caracteristics. Wit respect to farm caracteristics, te main difference between te two groups of sectors is traceable to te type of irrigation systems implemented (see Table 2). Specifically, furrow irrigation is represented only in OC. Here, wit te transition to te new tariff scemes, furrow irrigated crops experience a pricing variation from flat rates to volumetric tariffs. As a result, an appreciable reduction in furrow irrigation is registered bot in terms of land coverage and te amount of water applied. Tis is particularly evident for vineyards; te main crop irrigated wit furrow irrigation systems. Wit respect to te differences in pricing instruments between OC and PP, OC will experience mainly a transition from flat rates to tariffs partially differentiated by te type of crops wit premium prices for drip-irrigated crops. As a consequence, a sligt increase in land coverage is noted for drip irrigation systems. On te oter and, PP will experience a variation from flat rates to tariffs partially connected to water uses. As a result, irrigated crops tend to suffer a sligt reduction in land coverage in favour of nonirrigated crops and a reduction in te amount of water applied. Tab Percentage impact of te compared tariff scenarios on income, for sectors served by pressure pipes (PP) and open canals (OC). CURRENT TARIFF NEW TARIFF CROP SCENARIO SCENARIO CATEGORIES OC PP OC PP Non-irrigated crops 5% 59% % 39% Vineyards Orcards Arable crops Vegetables Source: Autors own elaboration 1% 9% 1% 7% % 2% % 3% 4% 4% 5% 5% 1% 5% 1% 4%

13 Fixed Tariff ( ) / Total Contribution ( ) Fixed Tariff ( ) / Total Contribution ( ) Fixed Tariff ( ) / Total Contribution ( ) Fixed Tariff ( ) / Total Contribution ( ) Fixed Tariff ( ) / Total Contribution ( ) Fixed Tariff ( ) / Total Contribution ( ) 217, Vol. 18, No Table 3 sows te differences in te per cent weigt of tariffs on income for eac crop category between te two tariff scenarios, for bot OC and PP. Wit te transition to te new tariff scenario, tis difference tends to decrease, particularly for PP, guaranteeing a more omogeneous allocation of costs among growing categories wit respect to te alleged water uses. Indeed, Table 3 sows a significant reduction of te impact of tariffs on income for no irrigated crops and an increase for orcard and arable crops. Figure 3 addresses te canges on land uses, irrigation tecnology adoption and te amount of water applied tat may occur wen increasing te amount of supply costs recovered troug te variable component of te two-part tariff wic is to be implemented under te new tariff scenario. Wit increasing quotas of supply costs recovered troug te variable component of te tariff tere is not muc variability eiter in land uses or te amount of water applied in te wole region served by te RIB. Tis impact is particularly negligible for sectors served by OC. However, tis is not te case wen considering te types of irrigation systems. (a) Land uses for irrigation Land uses for irrigation - Sectors served by open canals Land uses for irrigation - Sectors served by pressure pipes % -2% -1% -1% -1% % % Relative variation of te irrigated land (%) -4% -3% -2% -1% % 1% 2% 3% 4% Relative variation of te irrigated land (%) -4% -3% -2% -1% % 1% 2% 3% 4% Relative variation of te irrigated land (%) PRESSURE PIPES OPEN CANALS DRIP IRRIGATION FURROW IRRIGATION SPRINKLER IRRIGATION DRIP IRRIGATION SPRINKLER IRRIGATION (b) Water applied Water applied - Sectors served by open canals Water applied - Sectors served by pressure pipes % -2% -1% -1% -1% -1% % Relative variation of amount of water applied(%) -4% -3% -2% -1% % 1% 2% 3% 4% Relative variation of te irrigated land (%) -4% -3% -2% -1% % 1% 2% 3% 4% Relative variation of te irrigated land (%) PRESSURE PIPES OPEN CANALS DRIP IRRIGATION FURROW IRRIGATION SPRINKLER IRRIGATION DRIP IRRIGATION SPRINKLER IRRIGATION Fig Relative variation in land uses for irrigation (a) and in amount of applied water (b) wit te variation of supply costs, recovered troug te fixed and variable component of te tariff, assuming te implementation of te new tariff scenario. Te transition to te new pricing criteria migt result in an estimated 8% reduction in furrow irrigation systems compensated by a 1% increase in drip irrigation systems. Tis effect increases wit increasing quotas of supply costs recovered troug te variable component of te tariff until it reaces a 35% reduction in furrow irrigation systems and a 3% increase in drip irrigation systems. Here, wit respect to OC, furrow irrigation suffers a consistent reduction in bot land uses and te amount of water applied. Tis is compensated by an increasing representativeness of drip irrigation systems. Drip irrigation tends to increase in terms of land uses, including in te case of PP. Tis is compensated by a reduction in land use for sprinkler irrigation systems. In general, te representativeness of water saving tecnologies would increase wen farmers undergo a transition from flat rates to tariffs tied to actual or alleged uses. However, tariffs tied to actual or alleged uses may result in different impacts on water uses. Indeed, despite te increasing representativeness of drip irrigation systems it is estimated an overall reduction in water uses for tose sectors served by PP, were tariff are tied to actual

14 Fixed Tariff / Total contribution (%) 217, Vol. 18, No. 2 9 uses. Tis is not te case for tose sectors served by OC, were tariff are tied to te alleged uses, for wic it is estimented an overall increase in water uses. Here, te reduction in water uses determined by te reduction in irrigated land equipped wit furrow irrigation (we remind tat only 1% of te irrigated land is equipped wit furrow irrigation in sectors served by OC) is offset by an increase in water uses determined by te increase in land equipped wit drip irrigation (we remind tat about 1% of te irrigated land is equipped wit drip irrigation in sectors served by OC). In general, te implementation of te new tariff scenario in te two regions promote a reduction in water uses, but wile for OC te pricing system favours te transition to water saving tecnologies witout affecting te amount of water applied, for PP te pricing system affects bot tecnology adoption and te amount of water applied. Figure 4 Relative variation of farm profits wit increasing quotas of supply costs recovered troug te variable component of te tariff, assuming te implementation of te new tariff scenario % 1% 2% 3% 4% 5% 6% 7% Relative variation of profits (%) PRESSURE PIPES OPEN CANALS Fig Relative variation of farm profits wit increasing quotas of supply costs recovered troug te variable component of te tariff, assuming te implementation of te new tariff scenario. Finally, Figure 4 sows tat wit increasing quotas of supply costs recovered troug te variable component of te tariff, farm profits increase across te entire region served by te RIB. Tis is particularly evident for PP and in tose regions were te variable component of te tariff is proportional to te amount of water applied. 7. Discussion and conclusions Te present paper documented te canges in pricing rules recently experienced by a water provider in Nortern Italy and analysed te relevant consequences. Tese canges were due to a regional regulation implementing te WFD pricing principles (full cost recovery and incentive pricing) in Emilia-Romagna. Te analysis of pricing adaptation to new rules in te case study region reveals tat, even assuming full compliance wit te regional guidelines, canges in water uses are unlikely. Tis is mainly due to infrastructural constraints tat limit te number of available pricing options and regulatory issues conditioning te quotas of supply costs recovered troug te imposition of tariffs. Indeed, te imposition of tariffs only makes it possible to partially recover supply costs borne by water providers, as most of te costs are co-funded by te State. As a result, water is under-priced wit respect to an ideal full cost. Under-pricing of irrigation water as been singled out as one of te crucial reasons for unabated use of water for irrigation by many water and development experts (Cosgrove and Rijsberman 214).

15 91 Besides te financial and infrastructural constraints conditioning te efficacy of te new pricing criteria, te negligible impacts on water uses addressed in tis study are also affected by te demand. Tat is, te water demand function for te main irrigated crops in te region is strongly inelastic, limiting te impact of pricing on water uses even in tose sectors of te irrigation network were it is possible to implement volumetric tariffs. In te economic optimisation model presented in tis study, demand elasticity is bot conditioned by te slope of marginal profits wit respect to water uses and by te fact tat te amount of water applied appears as a discrete decisional variable, implicitly including tecnical constraints tat limit te farmer s ability to modulate water uses. Oter scolars (Fragoso et al. 211) ave also documented low demand elasticity for irrigation water. Even toug te estimated impact of pricing variation on water uses is negligible, te imposition of tariffs connected to actual or alleged water use may affect farmers decisions regarding ow to irrigate. Indeed, te transition to te new pricing criteria migt result in a reduction in furrow irrigation systems compensated by a increase in drip irrigation systems. However, te variation in tecnology adoption does not necessarily imply tat tere will be a resulting reduction in water use, as increasing levels of water use efficiency may be compensated by increasing sare of irrigated land. Tis compensating effect is called te Jevon Paradox. Suc a paradox seems to be more evident wen tariffs are not directly connected to water uses, since tariffs incentivize te adoption of more efficient irrigation tecnologies witout conditioning te amount of water used. Similar results were addressed by oter studies analysing canges in water pricing policies in oter regions as, among te oters, Mexico (Lopez-Morales and Ducin 211), Spain (Berbel et al. 214), and Cina (Song et al. 218). Tese studies reveal tat national and regional policies on water pricing are not primarily directed to use water pricing as an economic instrument to incentivize te adoption of water saving practices. In general, te results obtained by tese studies indicate tat water saving policies (wit particular reference to water pricing) aimed at improving water productivity are not as effective as expected because of te partial rebound effect determined by an increase in te irrigated land. Finally, te transition to te new tariff scenario causes an appreciable variation in supply cost allocations. Notably, wit te new pricing criteria tere is a reduction in tariffs paid for non-irrigated crops, compensated by an increase in tariffs paid for irrigated crops. Te metodology adopted in te present study reveal some important weaknesses tat migt limit te model capacity to correctly portray te possible impacts determined by canges in te pricing criteria used to recover supply costs. Te first weakness is about te fact tat te model relies on a profit-maximizing criterion under te assumption of perfect information. Tat is, te model neglect to consider tat farmers decisions on te type of irrigation system to be implemented and on te type of crop to be cultivated migt be influenced by teir tecnological knowow, wic migt be limited (Zaedi and Zaedi 212). In addition, it is assumed tat te variable tariff is perfectly enforced and tat it does not imply any additional cost. In reality, few scolars addressed te fact tat canges in pricing criteria determine te occurrence of additional costs, especially wen tese canges concern te variation from fixed to variable tariffs (Galioto, Ragg and Viaggi 213; A Lika et al. 216; Alban Lika, Galioto, and Viaggi 217).

16 92 Te second weakness is about te assumption tat te variation in te tariff policy is lasting and tat tere is no foreseen variation in output and input prices and in water availability. Tis assumption condition ard decisions about canges in te irrigation tecnology and/or in te crop to be cultivated. A robust scenario analysis about future trends in prices and te availability of resources would provide more consistent results about te foreseen impacts. Te tird and final weaknesses is about te metodology adopted. To estimate impacts te paper adopted a Positive Matematical Programming metod built following te seminal work of Howitt (Howitt 1995) in order to obtain an exact representation of te reference situation. Tis is a widely used approac for te specification of programming models designed for policy analysis (McCarty, Hancock, and Raine 214). Te metod assumes a profit-maximising equilibrium in te baseline situation and uses te observed levels of production activities as a basis for estimating te coefficients of a non-linear objective function. Te PMP approac used in te present study neglect to consider few relevant last advances in PMP tat elped improve so sortcoming of te original PMP approac. Since te pioneering paper of Howitt (1995) it is wort to mention te PMP metod wit variant activities developed by Röm and Dabbert (Rom and Dabbert 23), wic is capable of capturing te factors tat determine te elasticity of substitution between crops wit similar caracteristics, or different tecnologies seen as variants of te same crop. Few extensions of te PMP metod wit variant activities were offered by Cortignani and Severini (Cortignani and Severini 29) to include activities tat are not present in te reference year. Alternative metodologies to te PMP approac ave been ten suggested by Heckelei (Heckele Britz, and Zang 212). Scolars proposed variant to te standard PMP approac basically to compensate for te absence of information and to drive any canges from te reference condition caused by variation on prices and on te availability of resources. Despite te metodological limitations above addressed, tis study confirms tat pricing is not a particularly efficient instrument in conditioning water uses as it is seldom applied to te amount of water used (Molle 29), and also tat pricing may incentivize te adoption of water saving tecnologies (Moreno and Sunding 25) and condition te allocation of supply costs (Molinos-Senante, Hernandez-Sanco, and Sala-Garrido 213), but tat even in tose rare circumstances were water pricing is capable to incentivize te adoption of water saving tecnologies te effect on water uses in ambiguous because of te rebound effect on te irrigated land uses (Berbel et al. 214; Lopez-Morales and Ducin 211; Song et al. 218). In any case, water pricing, wic is an instrument commonly adopted by local water autorities to recover supply costs, could also be considered as an appropriate instrument for co-financing subsidies on investments, furter promoting te adoption of water saving tecnologies (Lopez- Morales and Ducin 211). Cross-compliance between te WFD and te CAP-reform could make it possible to identify a set of complementary measures wit te aim of favouring te diffusion of water saving tecnologies. Te new CAP-reform explicitly addresses tis aspect, by promoting bot te development of advisory services and cofinancing investments for te implementation of water saving tecnologies, especially for tose regions were water bodies are compromised by bot qualitative and quantitative pressures (European Court of Auditors 214).