Gap Analysis of Freshwater Economic Valuation Information

Transcription

1 Final Report July 2011 Gap Analysis of Freshwater Economic Valuation Information Prepared for Ministry for the Environment

2 Authorship Tim Denne, Riccardo Scarpa (University of Waikato) and Stephen Beville (09) Covec Ltd, All rights reserved. Disclaimer Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, Covec Ltd accepts no liability for any actions taken on the basis of its contents

3 Contents Executive Summary i 1 Introduction Background to the Report Drivers for Water Values the Policy Questions Current and Future Policy Decisions Characteristics of Policy Choices Summary: Policy Questions and the Analytical Approach 17 2 Valuation Approaches Market and Non-Market Values Market Valuation Direct Use Values Non-Market Valuation Summary of Methods 30 3 Existing Data Market Valuation Extractive Water Uses Irrigation Stock Hydro Electricity Generation Industry Residential and Other Reticulated Users of Water Summary 50 4 Existing Data Non-Market Valuation Data Sources Fishing Recreational Value Other Values Passive or Non-Use Values Summary 59 5 Data Gaps Irrigation Stock Hydro Electricity Generation 62

4 5.4 Industry Residential Fishing Values Recreational and Other Values Summary of Issues 66 6 Cost Benefit Analysis Assumptions Estimates of the Physical Changes Impacts on Current Uses and Values Irrigation Value Net Present Value 70 7 Summary and Conclusions Filling Data Gaps Information Needs for Policy Making How to Value Different Uses Current Data Available Data Gaps and Means to Address Them Priorities for Data Collection 83 Annex 1: Approaches to Calculating LRMC 84 Marginal Incremental Cost Approach 84 Average Incremental Cost Approach 86 Long Run Incremental Cost 87 Annex 2 Non-Market Valuation Studies 88

5 Executive Summary Background to the Report This study aims to assist the Ministry for the Environment to identify and fill gaps in information that would improve decision making on the management of fresh water. Specifically this is information on the value of fresh water in different states (quantity and quality) which can be used as an input to decisions about the costs and benefits of changes in those states. The report: discusses the types of decisions that the government will be making and the information that would assist these decisions; notes ways in which information inputs to decisions can be classified in a way that allows gaps to be identified; summarises the existing literature for New Zealand and summarises available data and/or potential sources of data; identifies gaps and how they might be filled. Policy Questions In broad terms, policy decisions relating to fresh water can be characterised as allocation decisions. They are addressing the question of how much fresh water should be allocated to provide value in-stream or in consumptive uses, and to specific uses within these categories. The government s policy framework for freshwater is setting ecological flows and water levels that set limits to the quantity of water that can be extracted and the quality impacts of extraction, discharge and water use. Beyond these limits, water allocation is focussed on optimal use of water. Allocation involves addressing the following questions: What, and how much, can be discharged into a water body? What activities, and to what extent, can occur on, in or beside the water body? What can be abstracted from a water body and for what purpose? How to Value Different Uses Total Economic Value There is a very wide range of uses of water that can be summarised using the concept of total economic value (TEV) (Figure ES1). Such values have been categorised in different ways, but we divide it here into three categories: direct uses of water those that extract water from a water body or extract something from the water; indirect uses those that make use of the water in-situ; and passive uses - those that do not involve direct contact with the water and include option value (the value of retaining an option to use the water in the future), bequest value (the willingness to pay to retain a water ecosystem for Freshwater Economic Valuation i

6 people in the future) and existence value (the value of knowing something exists even if you don t visit it). Figure ES1 Simplified Total Economic Value Total Economic Value Direct Use Values Irrigation Stock water Hydro electricity Industry Residential Fishing Indirect Use Values Recreation Ecosystem services Navigation Passive Use Values Option value Bequest value Existence value Taking Account of Substitutability In estimating water values, it is important to separate out the value of water from the value of water in a specific water body. This applies particularly to direct (extractive) uses where water may be highly valued by a particular user but that user may have several potential sources of supply, but can also apply to in-stream uses of water where the user has the option of moving to an alternative water body. If water is not limited in supply, the user of the water (and thus society) will benefit from the use of the water regardless of whether it is supplied from one water body or another. In these circumstances, the value of the water specific to any individual water body is no more than the (avoided) cost of supply from another water body. Valuation Approaches Where water is being valued in general or there is excess demand, valuation approaches that reflect willingness to pay (WTP) are suitable. Generally, direct use values are relatively straightforward to measure: market values can be identified and the value of water estimated from the difference between the change in benefits and costs associated with a particular activity. For example, the value of water for irrigation use is estimated from the difference between the improvement in the net value of agricultural output from an irrigated versus an un-irrigated farm 1 and the costs of the irrigation scheme and of land use change. Where there are no market values, such as for fishing as a direct use and for indirect and passive use values, a number of other techniques are required to extract information using stated or revealed preferences. The valuation approaches are summarised in Table ES1. 1 It is a net value because it needs to take account of the differences in costs of the different farming systems also Freshwater Economic Valuation ii

7 Table ES1 Summary of Valuation Approaches TEV category Use Approach Net benefit valuation Direct Use Irrigation Market Change in value of agricultural output less the costs of the irrigation scheme (capital & operating costs), costs of land use change and change in the costs of farm activity Stock Water Market Change in value of agricultural output less the costs of land use change (if any) and change in the costs of farm activity Indirect Use Passive use value Hydro Electricity Market The electricity output per unit of water, times the (timespecific) price of electricity less the costs of hydro generation (for new plants this includes the costs of the hydro development) Industry Market Cost of supply only Residential Non-market Stated or revealed preferences (for valuing costs of supply restrictions) Fishing Non-market Stated or revealed preferences Eg Recreation Non-market Stated or Revealed Preference survey-based approaches or travel-cost measurements Non-market Stated preferences Stated or revealed preference approaches for non-market valuations include: Contingent valuation studies in which people are asked to state their willingness to pay (or to receive compensation) for a use of water (or its removal); Travel cost method in which people reveal values for recreational activities by how much time and money they are willing to spend to get to a location; Hedonic pricing in which preferences and values are revealed through behaviour. In this case it is purchase behaviour and house values that reveal the value of location close to a particular site; Choice modelling, which is similar to contingent valuation, but involves experiments in which people reveal their preferences and values indirectly. In addition, frequently benefit transfer is used in which the results of studies in one location are transferred to another site with appropriate manipulation to take account of differences between the sites. Current Data Available Available data relating to the different components of value varies widely and a summary is provided in Table ES2. There is a wide range of useful information to define the value of water for direct use in irrigation, as stock water and for hydro-electric power. For a number of other uses, eg industrial and residential uses, there are data available on supply costs that define the value of the water when there are clear substitutes. But there are comparatively few data on the values to end users, ie their willingness to pay for water. Freshwater Economic Valuation iii

8 Table ES2 Summary of Data Available TEV category Use Data required Data available Direct Use Irrigation Costs of alternative supplies Irrigation scheme costs Land conversion costs Data on individual schemes will need to be separated out to identify costs of transporting water Available for many individual schemes. Average prices can probably be estimated (but see comments on benefits below) Some available, but these will vary by location Indirect Use Passive Use values Benefits of irrigation via farm production improvements Gross margin values available for a wide range of farming types, and note many will include irrigation costs which may mean they do not need to be collected separately As for irrigation Stock Water Costs of alternative supplies Infrastructure costs Generally included in Gross Margins (see benefits) Land conversion costs Some available, but these will vary by location Benefits of irrigation via Gross margin values available for a wide range of farm production farming types, and note many will include improvements irrigation costs which may mean they do not need to be collected separately Hydro Electricity price Historical and projected future electricity prices Electricity are readily available (eg via MED) Conversion rate (water to Conversion rates require flow rates or head height electricity site specific) and efficiency. These data are available for some sites. Industry Costs of alternative Water prices are a reasonable proxy. Available in supplies some locations (chiefly Auckland) Residential Costs of alternative Water prices are a reasonable proxy. Available in supplies some locations (chiefly Auckland) Willingness to pay/accept One NZ study with very limited data compensation Fishing Substitutability/opportunity Some studies address this issue, particularly costs of alternative sites using choice modelling, but data are limited. Stated/revealed Data for a number of locations chiefly as $/angler preferences day Conversion factors There are few data on the relationship between between water state and water quantity or quality and fishing values, eg on fishing values the impact of change in quantity/quality on the Eg Recreation number of angler days or their value Substitutability/opportunity Very few data costs of alternative sites Stated/revealed Data for a number of locations chiefly as preferences $/visitor/day or $/household/year Conversion factors There are few data on the relationship between between water state and water quantity or quality and indirect use values, indirect use values eg on the impact of change in quantity/quality on the number of recreational days or their value Substitutability/opportunity No data identified costs of alternative sites Stated/revealed Very few data preferences Conversion factors No data identified between water state and indirect use values For non-market values that are used for fishing, indirect and passive uses, the values are far more site-specific, and there are fewer data that can be widely used. There are a number of studies that have produced data, largely for South Island rivers. Benefit transfer can be used to some extent, where water bodies are similar in terms of physical attributes and user populations. Freshwater Economic Valuation iv

9 Issues relating to substitutability are widely recognised but have been addressed by only a few studies; these have examined the additional benefits that arise from the unique characteristics of an individual water body, rather than the total values of use, some of which could have been gained by some other water body. This is an area for which additional research would be useful. Data Gaps The key data gaps for the different uses are the gaps in Table ES3. Table ES3 Main Available Data Use Relationship between change in quantity/ quality & value Substitutability Supply costs Willingness to pay Direct use Irrigation Indirect Use Passive use Stock water Hydro electricity Industry Residential Fishing The key missing data and ways to address the gaps are set out below under category headings. Non-Market Values: In general, data on non-market values are more patchy than for market values. This is because they are generally more site-specific, are often complex and costly to collect, and there is no market incentive to collect these data. Usefully data on fishing values might be collected using diary-type data collected over a number of seasons, to add to the variability of data, this might be supplemented by stated choices about a wider range of water qualities and quantities. Indirect and passive use values require survey approaches, either contingent valuation or stated choice methods. Usefully research would address the difference between stated values and real observations, ie the size of the hypothetical bias. Marginal Values: There are few data that allow analysis of the change in value as a result of small changes in allocation. For example, data on the value of water in irrigation schemes allow an estimate to be made of the value of allocating water to another whole irrigation scheme using a standard quantity of water, but do not generally have information on the impacts of different rates of water use in irrigation, eg application of half the amount of water. Such detail, obtained via agricultural research, would enable greater precision in achieving optimal allocations of water. Interactions amongst Values: There is a lack of data relating to the interaction between water quality and quantity in a river and the (value of the) uses that can be made of it. For example, how a small change in available water will affect the value of the water body for fishing or recreation. Freshwater Economic Valuation v

10 This might be addressed through the diary approaches, as noted above, being built up over a range of different conditions, supplemented by survey-based approaches to increase variability in the data. Market Definition: Recreational areas are not always well defined; estimates of the size and types of the population of users and other agents affected by the quantity and quality changes are unavailable for many fresh water systems. This has links to the issue of substitutability and can be addressed through recreation surveys. Substitutability: There is a lack of understanding of the substitutability patterns across water quality levels at different sites in a given system. For example, a worsening of water quality at a site with many high water quality substitutes is less economically damaging than a similar worsening at a site with few substitutes. This might be addressed through a mix of regular collection of water quantity and quality data from monitoring sites that are also substitutes (to see how activities shift between sites in response to changes in quantity and quality). It can also be addressed through surveys that directly address questions of substitutability of sites and relative values. Benefit Transfer Validation: It would be useful to develop a benefit transfer validation framework and a strategy to cumulatively build, over time, transferable benefit estimates across sites and water types as studies become available. In addition, it would be useful if studies were designed so that the results can be more easily used for benefit transfer. This would require a strategy to systematically collect transferable estimates for the most important categories of value. Value of Water Attributes There is a lack of valuation studies exploring the preferences of household and firms as to the type of fresh water supply services provided by local water utilities or other agencies managing fresh water systems (eg value of sprinkling bans, additional filtering systems, water de-hardening treatments, ozone-based rather the chlorine-based treatments to remove non-filterable components, etc. This might be addressed through a mix of survey-based approaches and defensive expenditure valuations (people must value clean water at least as much as they are prepared to pay for water treatment, eg in the form of filters). Priorities for Data Collection There are large numbers of gaps in data such that setting priorities for data collection is not straightforward. However, we suggest that the following represent a useful focus for future data gathering: Better understanding of the interactions between water quantity and quality and the values from fishing and indirect uses (and to a lesser extent passive uses), eg how a reduction in water quantity affects the value of a fishing day; Substitutability issues, ie the extent to which existing values for fishing and recreation would need to be modified to take account of the value of substitute locations; Freshwater Economic Valuation vi

11 Marginal values of water, particularly in irrigation, ie the impact on total value of reductions in quantities of water sent to irrigation. In addition, a useful and ambitious exercise would be a large scale comprehensive valuation project performing the full spectrum of valuations on a particular highly valued water resource where significant changes to the quality and quantity of water are proposed eg, the Hurunui River. This would entail mapping out extractive values under different scenarios, as well as direct, indirect, and passive values to the local community and society at large. Angler and kayaker use and substitution could form a component as well. Large scale exercises like this are all but absent from the existing research body, mainly because of the high costs. However, such an undertaking would provide a working model to future valuation. Usefully such a study could include a report on lessons learned and problems encountered during the exercise for each of the valuation components and their integration in a cost benefit analysis. Freshwater Economic Valuation vii

12 1 Introduction 1.1 Background to the Report This study aims to assist the Ministry for the Environment to identify and fill gaps in information that would improve decision making on the management of fresh water. Specifically this is information on the value of fresh water in different states (quantity and quality) which can be used as an input to decisions about the costs and benefits of changes in those states. The report: discusses the types of decisions that the government will be making and the information that would assist these decisions; notes ways in which information inputs to decisions can be classified in a way that allows gaps to be identified; summarises the existing literature for New Zealand and summarises available data and/or potential sources of data; identifies gaps and how they might be filled. 1.2 Drivers for Water Values the Policy Questions In broad terms, policy decisions relating to fresh water can be characterised as allocation decisions. They are addressing the question of how much fresh water should be allocated to provide value in-stream or in consumptive uses, and to specific uses within these categories. Allocation choices are generally spatial, ie they concern the physical location of water should it be in one place (eg a river) or another (eg an irrigated field)? They may be temporal, ie they concern when water is needed (eg during drought periods in agriculture, or during peak demand in hydro power generation). They may be functional, eg in-stream water might be allocated more to pollution absorption or to supporting natural systems. This latter category is another way of describing water quality issues, but we have used allocation terminology simply to demonstrate that ultimately all of these issues are allocation choices about what water should best be used for. 2 To address such questions there is a need for better information about the value of water in different uses or settings. In this section we set out the kinds of policy decisions that the government is expected to make relating to fresh water and we expresses these in economic terms as allocation choices. We then go on to identify the information needs to address these economic questions and possible sources of data. 2 We use use as a term to include all ways in which water provides value or utility. However, at times we also use the term non-use values to refer to non-consumptive, passive or in-stream values (and uses) of water. Freshwater Economic Valuation 1

13 1.2.1 Fresh Start for Fresh Water The Fresh Start for Fresh Water Programme, announced in May 2011, is a fresh water policy package aimed at obtaining maximum value from New Zealand s water resources, balancing the economic production potential of water resources with the environmental values that fresh water supports. The approach builds on 2009 Cabinet decisions to set a new direction for freshwater management, the outcome of which was expected to be the setting of ecological bottom lines that would effectively allocate water resources to public purposes, with the remaining resources allocated to maximise their economic value. 3 The package announced in May 2011 builds on recommendations in a 2010 Report from the Land and Water Forum; 4 it comprises: 5 A National Policy Statement (NPS) on fresh water management to set a consistent, nationwide regulatory framework for setting water quantity and quality limits to govern the allocation and use of freshwater further detail on the NPS is given below; An Irrigation Acceleration Fund of $35 million over five years to support the development of irrigation infrastructure proposals (eg for storage and distribution) to the investment-ready prospectus stage. The Government has also announced that it will consider investing up to $400 million of equity in water infrastructure schemes; A Fresh Start for Fresh Water Clean Up Fund to assist councils with historic pollution problems with reprioritised funding of $15 million over two years, and a total clean-up programme commitment of $264.8 million. Other work streams have been announced including those to define limits to water quality and quantity, and to develop more efficient allocation mechanisms to achieve efficient water use Proposed National Environmental Standards There are two relevant National Environmental Standards (NESs): for Drinking Water and a proposed NES for Ecological Flows and Water Levels. In addition, an NES for Water Measuring Devices was considered, although an alternative approach was decided on: regulation under Section 360 of the RMA. Drinking Water The NES for Sources of Human Drinking Water came into force in June Its purpose is to reduce the risk of contamination of drinking water sources such as rivers and groundwater. It does this by requiring regional councils to consider the effects of activities on drinking water sources in decisions on resource consents and regional plans. 3 Minister for the Environment and Minister of Agriculture (2011) Fresh Start for Fresh Water forward work programme. Cabinet Minute. 4 Land and Water Forum (2010) A Fresh Start for Freshwater. Report of the Land and Water Forum. 5 Freshwater Economic Valuation 2

14 During its development a Section 32 (cost benefit) analysis considered the distribution of costs of the (then) proposed NES amongst central government, regional councils, resource consent applicants, drinking water-suppliers and the general public. The benefit analysis was based on improvements in health, but the report noted that other unquantified benefits included: Protecting drinking water sources leading to improvements in recreational opportunities (swimming, kayaking, fishing); Ecological protection; Maintaining New Zealand s image as a safe tourist destination; and Maintaining NZ s clean green image as source of healthy, environmentally sound agricultural produce. As part of the policy development process a health and drinking-water expert group was convened to address the health benefits. It concluded that quantitative assessment was not possible. However MfE notes that health benefits were assessed using a linear dose-response relationship between drinking water contamination and disease based on NIWA advice. This work suggests gaps in knowledge on the relationship between: The proposed NES and decisions by regional councils; Those decisions, the resulting rules and the effects on water quality; Water quality and recreational activity; Water quality and ecological values; Water quality, its impacts and NZ s international image. Largely these are a step before the question of valuation. The questions that exist relate to the underlying dose-response functions as much as they do the values which are at stake, ie the values which may change as a result of the policy. Ecological Flows and Water Levels The proposed NES on Ecological Flows and Water Levels was developed in the context of the Sustainable Water Programme of Action which aimed to improve the sustainable management of freshwater and to protect freshwater resources for the future. Establishing environmental flows 6 and water levels was perceived to be a critical element of water management. The proposed NES aimed to set appropriate limits, taking account of the costs and benefits of doing so. Given the recent announcements on the Fresh Start for Freshwater one of the key issues is the basis for the establishment of the ecological flows and water levels, and specifically whether they are set only with reference to environmental requirements or if they involve some balancing of environmental and economic effects. The Fresh Start suggests that allocations to consumptive uses are based only on what remains after in-stream requirements are met. Consistent with this, the NES Discussion Document states that 6 This term is used as an alternative to minimum flows, recognising the ecological and cultural importance of flow variability Freshwater Economic Valuation 3

15 In the context of the proposed standard, ecological flows and water levels are defined as the flows and water levels required in a water body to provide for the ecological function of the flora and fauna present within that water body and its margins. 7 MfE notes that the chief methods used to define ecological flows and water levels are hydrological methods (eg based on a proportion of the mean annual low flow, or MALF) and in-stream habitat methods (eg based on a calculation of the impacts of water abstraction or discharge on dissolved oxygen, total ammonia, water temperature and habitat for aquatic life). The analysis of the NES that was undertaken quantified many of the costs, particularly those falling on central and regional government, but a number of impacts were not quantified including: 8 benefits to the wider public and consent holders of increased certainty and transparency in the resource consent and regional plan processes; the implications of increased national consistency whether there are net benefits; opportunity costs if resource users delay applying for resource consents until regional plans processes are in place; greater focus during decision-making on values and the appropriate levels of protection rather than on the debate about technical methods. The values at stake are relatively obscure, ie they are the benefits that accrue from consistency and/or certainty rather than necessarily any quantified change in environmental outcome. This is because the NES may not change the existence of flow limits, just the extent to which they are set at the same level. Thus the benefits or costs of the NES relate to: whether local decision makers can be expected to make optimal decisions; related to this, if nationally-consistent standards are closer to optimal than locally-defined standards; and any benefits from consistency per se. The nature of these benefits and costs is more to do with how to improve the optimality of decision making rather than what an optimal decision would achieve. Water Measuring Devices An NES for Water Measuring Devices was proposed in the Sustainable Water Programme of Action and a cost benefit analysis was undertaken for MfE. 9 The aim of the proposed NES was to ensure accurate and comprehensive measurement of water takes to facilitate sustainable management of water resources. It would do this by 7 MfE (op cit) 8 MfE (2008) Proposed National Environmental Standard on Ecological Flows and Water Levels. Discussion Document 9 Harris S and Skilton D (2008) Cost-benefit Analysis for a National Environmental Standard for Water Measuring Devices. Prepared for the Ministry for the Environment Freshwater Economic Valuation 4

16 setting minimum requirements for water-measuring devices and defining situations where water measuring devices are compulsory. This cost benefit analysis suggested that the quantitative benefits would arise from allocative efficiency gains. The size and distribution of the gains would depend on the direction of current mis-allocation. The cost benefit analysis was able to quantify only some of the effects, and largely those on irrigation. A cost benefit analysis was undertaken of the alternative regulatory approach, which was a regulation under Section 360 of the RMA. It examined costs that included the capital and operating costs of the measuring devices, and the reporting and enforcement costs for councils. The benefits included allocative efficiency benefits from irrigation, but the approach chosen was based on a broad assumption of a 5% improvement and an estimate that allocative efficiency would need to be at least a 2% improvement for these benefits to exceed the costs. A significant number of other allocative benefits were identified but not quantified. The implications of not being able to quantify these benefits are significant. The cost benefit analysis identifies a net benefit from allocative efficiency improvement, but the fact that not all the benefits can be quantified means that the trade-offs between values cannot be done with accuracy. It means that the prediction of the net effects of a shift in allocations is highly uncertain National Policy Statement for Freshwater Management A National Policy Statement (NPS) for Freshwater Management was gazetted in May 2011 and will come into force in July Consistent with the Fresh Start for Freshwater it sets out objectives and policies that direct local government to manage water in an integrated and sustainable way, while providing for economic growth within set water quantity and quality limits. 10 The objectives of the NPS are set out in Box 1. Specific requirements under the NPS include those for regional councils to: Water quality establish freshwater objectives (that describe desired environmental outcomes) and freshwater quality limits for all freshwater; establish methods to avoid over-allocation; where freshwater bodies do not meet objectives, to specify targets and implement methods to assist the improvement of water quality within a defined timeframe ; impose conditions on discharge permits to ensure limits and targets can be met; where permissible, make rules requiring adoption of the best practicable option (ie the best course of action) 11 to prevent or minimise any actual or likely effect on the environment of a discharge of a contaminant (including via discharge onto land); 10 New Zealand Government (2011) Freshwater Management National Policy Statement. Issued by notice in the Gazette on 12 May MfE (2009)An Everyday Guide To The RMA Series 1.3 Enforcement Freshwater Economic Valuation 5

17 Box 1 Objectives of the NPS for Freshwater Management Water quality To safeguard the life-supporting capacity, ecosystem processes and indigenous species including their associated ecosystems of fresh water, in sustainably managing the use and development of land, and of discharges of contaminants. The overall quality of fresh water within a region is maintained or improved while: protecting the quality of outstanding freshwater bodies protecting the significant values of wetlands and improving the quality of fresh water in water bodies that have been degraded by human activities to the point of being over-allocated. Water quantity To safeguard the life-supporting capacity, ecosystem processes and indigenous species including their associated ecosystems of fresh water, in sustainably managing the taking, using, damming, or diverting of fresh water. To avoid any further over-allocation of fresh water and phase out existing over-allocation. To improve and maximise the efficient allocation and efficient use of water. To protect significant values of wetlands. Integrated management To improve integrated management of fresh water and the use and development of land in whole catchments, including the interactions between fresh water, land, associated ecosystems and the coastal environment. Tāngata whenua roles and interests To provide for the involvement of iwi and hapū, and to ensure that tāngata whenua values and interests are identified and reflected in the management of fresh water including associated ecosystems, and decision-making regarding freshwater planning, including on how all other objectives of this national policy statement are given effect to. Water quantity set environmental flows and/or levels for all freshwater bodies to give effect to the quantity objectives; provide for the efficient allocation of freshwater, within quantity limits set, including by ensuring criteria exist for transfers of water take permits; identify methods to encourage efficient use of water; ensuring no decision will be likely to result in future over-allocation; setting timeframes by which over-allocation must be phased out; Integrated management managing freshwater and land use and development in catchments in an integrated and sustainable way to avoid, remedy or mitigate adverse effects, including cumulative effects; provide for the integrated management of effects of the use and development of land on freshwater; Tāngata whenua roles and interests take reasonable steps to identify and reflect tāngata whenua values and interests in freshwater and freshwater ecosystems through working with iwi and hapū and involving them in freshwater management; Progressive implementation programme implement the NPS promptly so that the objectives are achieved by 2014, where practicable and by 2030 at the latest. It is recognised that climate change may have an impact on what is required to meet the objectives of the NPS, and regional councils are required to take account of the reasonably foreseeable impacts. Freshwater Economic Valuation 6

18 A Section 32 analysis produced during its development considered the economic value of water in various uses, using data from a study by the Institute of Geological and Nuclear Sciences and others on the value of water in domestic, agricultural and industrial uses. 12 Environmental costs and benefits were not quantified Waitaki River There have been a number of studies of the costs and benefits of water allocation in the Waitaki River. This includes: a Section 32 Report on the Waitaki Catchment Water Allocation Regional Plan; 13 an analysis of impacts of irrigation in the Mackenzie Basin; 14 a report on option and existence values for the Waitaki Catchment; 15 a national cost benefit analysis conducted for Project Aqua. 16 Waitaki Catchment Water Allocation Regional Plan The Water Allocation Plan aimed at sustaining the qualities of the river to meet reasonably foreseeable needs. As such it considered the values that the river provided for different people, trade-offs between those values and how the management of the Waitaki could achieve the objectives of the RMA, ie sustainable management of resources. The Section 32 report outlines some of the effects and the trade-offs, but notes that the actual impacts are uncertain because it depends on the use of the water and on the specific circumstances of use, ie the plan could not pre-determine the preferences of private decision makers. Some of the values that are at stake, depending on use include: Natural character and intrinsic values ; Maintenance of habitats for birds (at different life stages) and fish; New recreational activities; Fishing values; Existence values. No quantification of values is provided but the report makes clear that allocation decisions involve trade-offs amongst different values obtainable, some of which are more easily quantified than others. 12 White PA, Sharp BMH and Reeves RR (2004) New Zealand water bodies of national importance for domestic use and industrial use. Prepared for Ministry of Economic Development 13 Waitaki Catchment Water Allocation Board (2005) Waitaki Catchment Water Allocation Regional Plan Section 32 Report. 14 Ian Brown Consulting & Harris Consulting (2005) Environmental, Economic and Social Impacts of Irrigation in the Mackenzie Basin. Report for Ministry for the Environment 15 Sharp B and Kerr G (2005) Option and Existence Values for the Waitaki Catchment. Report for the Ministry for the Environment 16 Sinclair Knight Merz Pty (2004) National Cost Benefit Analysis of Proposals to Take Water from the Waitaki River Freshwater Economic Valuation 7

19 Irrigation Impacts This study was undertaken to assess the impacts of additional irrigation in the upper Waitaki. The environmental impacts were described largely in qualitative terms. Economic impacts were quantified on the basis of estimated improvements in agricultural productivity from irrigation (using gross margins) alongside irrigation costs. Impacts on hydro were based on alternative costs of electricity generation. Social impacts were described in very broad terms based on literature, but no quantification was undertaken. The authors noted that very few social impact data specific to the upper Waitaki exist. Again, this illustrates the problems of allocation choice where some options are readily quantified and others are not. In the absence of quantified information it may not be clear when an allocation improvement is made. Project Aqua Cost Benefit Analysis The cost benefit analysis was undertaken for MED to understand the value to New Zealand of alternative allocations of water from the Waitaki River in the context of an application to take water for a major hydro-electric development (Project Aqua). The cost benefit analysis provided quantified estimates of the value of water for use in hydro electricity generation and for irrigation, but only qualitative estimates of the social, cultural and environmental impacts. These included impacts on: Water quality from land use intensification; Changes in aesthetic landscape values as a result of irrigation; Cultural impacts including effects on spiritual value (mauri). As for the other studies they illustrate that there are missing data relating to doseresponse relationships as well as that of monetary values. 1.3 Current and Future Policy Decisions Fresh Start for Freshwater as a Policy Framework The recent policy announcements on the Fresh Start for Fresh Water have made clear that the direction of future policy is to maximise the economic value of freshwater resources within environmental limits. The government recognises the huge potential and comparative advantage that New Zealand s water resources provide, while recognising the multiple and potentially conflicting uses and values. Freshwater fulfils roles that include provision for uses and intrinsic values (Table 1). The overall approach is that the management of freshwater involves an initial allocation to protect in-stream values; the remaining water can be allocated to the uses that Freshwater Economic Valuation 8

20 provide the greatest value. This approach applies both to quantity and quality issues. Discharges to freshwater can occur to the extent that they do not breach quality limits. Similarly uses of water volumes, including extractions from freshwater bodies, can occur only if quantity limits are not breached, noting that these might vary over time. Uses of water that do not breach the limits are to be efficient, ie they are to be the most valuable uses of the resource, noting that this might include in-stream and extractive uses of that water. The concept is shown in Figure 1; beyond allocations to protect instream values, allocation to further uses should be efficient, ie water should be allocated to where it will provide greatest net value. Table 1 Uses and Intrinsic Values of Water Uses domestic drinking and washing water animal drinking water community water supply fire fighting electricity generation commercial and industrial processes irrigation recreational activities (including waka ama) food production and harvesting eg, fish farms and mahinga kai transport and access (including tauranga waka) cleaning, dilution and disposal of waste Intrinsic values the interdependency of the elements of the freshwater cycle the natural form, character, functioning and natural processes of water bodies and margins, including natural flows, velocities, levels, variability and connections the natural conditions of fresh water, free from biological or chemical alterations resulting from human activity, so that it is fit for all aspects of its intrinsic values healthy ecosystem processes functioning naturally healthy ecosystems supporting the diversity of indigenous species in sustainable populations cultural and traditional relationships of Maori with fresh water historic heritage associations with fresh water providing a sense of place for people and communities. Source: New Zealand Government (2011) Freshwater Management National Policy Statement. Issued by notice in the Gazette on 12 May 2011 Figure 1 Water allocations within limits Quantity choices Quality choices Efficient use Efficient discharges Protection of in-stream values Protection of in-stream values We might characterise the policy and allocation decisions as being concerned with the following questions. Freshwater Economic Valuation 9

21 How to set limits to meet in-stream requirements? Limits are defined both in terms of quantity (volumes of water to be retained in a water body) and quality (chemical and biological attributes of the water body). As noted above, the limits are based on the flows and water levels required to provide for the ecological function of the flora and fauna present within that water body and its margins. These are hydrological and ecological decisions and, as specified, do not involve a weighing up of alternatives. What, and how much, can go into a water body? The question of what can enter a water body includes the appropriate quantities and qualities of discharge, and will include discharges both from point (eg outlets from waste water treatment plants, stormwater pipes) and diffuse sources (eg agricultural land). What can go in is determined, to a considerable extent, by the limits on quantity and quality for the water body. However, even within these limits, discharges that reduce water quality affect the values of that the water body. Decisions on discharges involve questions about which values should be promoted and which can be reduced, eg discharges into a stream may reduce water clarity making it less suitable for certain types of recreation, or they may reduce the value of the water for extractive use. Limits to discharges can, in turn, have implications for choices about adjacent land uses. Value judgements arise when there are competing discharges, eg if water quality is a constraint, allowing more agricultural discharge may mean less industrial discharge and thus less industrial production. The efficiency choices are about which discharges should be allowed and which should not, or how much should be allowed from different sources. They involve trade-offs both amongst discharges and between the value of discharges (or the activities that produce them), in-stream values and values of water in extractive uses. What activities, and to what extent, can occur on, in or beside the water body? Activities on or in the water body include a range of recreational pursuits and passive uses such as aesthetic appreciation have values which can be enhanced or reduced by the quality and quantity of water. These values need to be weighed up in assessing decisions on quality and quantity changes. What can be taken out of a water body and for what purpose? What can be extracted is defined by the quantity and quality limits also. Of the water available for extractive (consumptive) uses, the difficult choices are between competing uses, and this includes additional in-stream uses. Water available for consumption has a number of options for which it can be used to provide different values. The task of the decision maker might be to choose an optimal allocation, or enable an optimal allocation to be made (eg through enabling trading in water allocations). Optimal allocation involves choosing between potential uses and valuations can assist with this task. One way of organising the categories of value is to use the concept of Total Economic Value (Figure 2) which classifies values in terms of: Active use values that can be commercial and in-situ use values, or option values, ie a willingness to pay to retain the potential for future use; and Freshwater Economic Valuation 10

22 Passive use values including existence (the value of knowing that an environmental asset exists) and bequest (willingness to pay to bequeath resources to the future). Figure 2 Total Economic Value Source: EVRI (2009) in Nimmo-Bell (2009) Biodiversity Valuation Manual. A technical manual for MAF BNZ. These values are widely discussed in the literature, and although in practice it may not always be possible to separate out the different categories, 17 it is a useful conceptual tool that can be used to ensure that all potential values are considered and a way to organise information. Passive uses, in particular, are often combined into a single existence value category 18 and some researchers have noted that people often cannot distinguish between option and bequest values either Implications for Date Requirements The discussion above suggests that decisions about limits to meet ecological flows and water levels are separate from the others; they are the primary decisions and are based on ecological information. Economic valuation focuses on the other questions. Without compromising the ecological flows and water levels (limits), water is then available to achieve different values, summarised using the TEV framework. The policy questions are how to maximise TEV and they are faced when choices have to be made about inputs, outputs and in-stream uses of water bodies. The choices are summarised in Figure Sharp B and Kerr G (2005) Option and Existence Values for the Waitaki Catchment 18 See, for example Sharp B and Kerr G (2005) Option and Existence Values for the Waitaki Catchment. Report Prepared for Ministry for the Environment 19 David G, Herrenschmidt JB and Mirault E (2007) Social and Economic Values of Pacific Coral Reefs. CRISP Component 1A Project 1A4 Integrated Coastal Management Freshwater Economic Valuation 11

23 In the next section we examine the way in which economic analysis addresses these kinds of questions and the implications of this for valuation data within the TEV framework. Figure 3 Policy choices What and how much can go in to the water body? Existence value Direct use What activities, and to what extent, can occur on, in or beside the water body? Limits Bequest value Indirect use Option value What can be taken out of the water body and for what purpose? 1.4 Characteristics of Policy Choices Evaluation of Changes in Allocation Policy and other decision choices involve the assessment of change. Water is already allocated to some uses and provides a set of existing values. Policy evaluations, local plan decisions and individual consents involve questions about whether water should be allocated differently, including providing more of a sink for pollutants that change its quality. The questions above: what can go in or out of a water body or what can occur within it? are all questions about change relative to the status quo. Thus the evaluation involves the comparison of two (or more) states of the world: the costs and benefits of allocating water to some proposed use compared with the costs and benefits of some other allocation. This is often referred to as the comparison of a factual (the proposed allocation) with a counter-factual (what would happen otherwise) Decisions are Made at the Margin The concept of the margin is crucial to economic analysis and to the contribution of economics to decisions. Because decisions concern changes to the existing allocation, decision makers are interested in the effects of having more or less of something, eg should there be more water allocated to irrigation and less to in-stream values than there is currently? Freshwater Economic Valuation 12