Evaluating Alternatives to the Spanish National Hydrological Plan Executive Summary

Transcription

1 Evaluating Alternatives to the Spanish National Hydrological Plan Executive Summary Unidad de Economía Agraria Centro de Investigación y Tecnología Agroalimentaria

2 This brochure summarizes the Working Document Evaluación de las Alternativas al Trasvase del Ebro del Plan Hidrológico Nacional, prepared by José Albiac, Javier Tapia and Anika Meyer from the Department of Agricultural Economics, Centro de Investigación y Tecnología Agroalimentaria (Government of Aragón); Michael Hanemann from the Department of Agricultural & Resource Economics, University of California at Berkeley; Javier Calatrava from the Department of Business and Marketing, University of Cartagena; and Javier Uche from the Department of Mechanical Engineering-CIRCE (University of Zaragoza). The ideas and opinions in this document are responsibility of the authors and not those of the institutions supporting the research. To obtain reprints of the Working Document contact: José Albiac Unidad de Economía Agraria CITA-DGA P.O. Box Zaragoza Spain Telephone: Electronic mail: maella@unizar.es Cover photograph: greenhouses in Mazarrón, Valle del Guadalentín county.

3 Evaluating Alternatives to the Spanish National Hydrological Plan José Albiac Department of Agricultural Economics, Agrifood Research and Technology Center, Zaragoza, Spain Michael Hanemann Department of Agricultural & Resource Economics, University of California, Berkeley, USA Javier Calatrava Department of Business and Marketing, University of Cartagena, Cartagena, Spain Javier Uche Department of Mechanical Engineering-CIRCE, University of Zaragoza, Zaragoza, Spain Abstract This study analyzes alternatives to the Ebro interbasin transfer, the main project of the Spanish National Hydrological Plan. The Ebro transfer project has been prompted by pervasive pressures on water resources, acute water scarcity and the ensuing severe degradation of southeastern basins of the Iberian Peninsula. The focus of the analysis is on the agricultural sector, the main destination of transferred water. Water management supply and demand alternatives are examined, including banning aquifer overdraft, water pricing, introducing water markets, and augmenting supply with water from the Ebro river or from seawater desalination. Results show that the best alternative is a combination of measures including water control of aquifer overdraft, water trading between irrigation areas, and water supply expansion through seawater desalination. Costs of this combined alternative are estimated at less than 100 million per year, in terms of net income losses to farmers. Compared to this, the Ebro interbasin project maintains farmers net income, but needs subsidies amounting to 300 million per year to cover the gap between transferred water costs and the low water prices farmers pay now. The combined alternative requires the implementation of demand management measures, and this implementation could be difficult because farmers are against controlling aquifer overdraft, rising water prices, or introducing water markets. Losses to farmers should be compensated, otherwise an excessive burden on agricultural activities will be met by social opposition and make the measures fail. Keywords: Spanish National Hydrological Plan, Ebro interbasin transfer, water scarcity in southeastern Iberian Peninsula, water supply and demand measures.

4 1 1. Introduction Hydrological planning in Spain has been an important issue for the past century, with consecutive planning efforts by the National Plan of Hydrological Works (Lorenzo-Pardo 1933) in republican Spain, the Development Plans of the industrialization period of the nineteen sixties and seventies, the Hydrological Plan of last decade (MOPU 1990), and the present National Hydrological Plan enacted by the Spanish Parliament in 2001 (MIMAM 2000a y 2000b). All these planning efforts have been motivated by a supply management philosophy which was elaborated by Joaquín Costa (1911 and 1912). This philosophy was based on the importance of water to promote economic growth in agrarian Spain and at the same time improving the farmers social conditions. Joaquín Costa was heavily involved in gathering the social impetus to bring about one century ago the early irrigation projects of Canal de Aragón y Cataluña and Riegos del Alto Aragón in the Ebro basin (Bolea 1986). The key premise of this traditional supply approach is that water is a plentiful resource to be developed by public and private agents (Carles and García 2003). The first author in Spain who questioned this supply management philosophy based on economic arguments, was Aguilera-Klink (1993) in the discussion with González and Rubio (1993) on the Spanish Hydrological Plan of last decade (MOPU 1990). This Plan was intended to interconnect all main basins of the Iberian Peninsula, with huge investments in waterworks. González and Rubio had assumed that costs of supplying and using water within basins were zero, and the only relevant costs were those of transporting water among basins, so profits from water arbitrage among basins would force water trades through interbasin transfers. Responding to Aguilera-Klink comments, Rubio and González (1993) accepted that there could be an increasing cost curve of water in each basin, generating positive water prices in surplus basins. They also acknowledged that to evaluate the change in social welfare from water transfers, information is needed on each basin water supply and demand equilibrium prices, and these prices have to be compared with costs of imported water. The present study intends to apply to the National Hydrological Plan of 2001 the key tasks that were recognized by Rubio and González one decade ago: assess the costs of alternatives to solve water scarcity in the southeastern basins of the Iberian Peninsula, and analyze the response of demand to water prices. However, these important tasks have been disregarded by the current National Hydrological Plan of 2001, which maintains the traditional supply management philosophy of the water authority administration. The key project of the Plan is the Ebro interbasin

5 2 transfer, from northeastern to southeastern Spain, designed to solve the severe degradation of water resources in the receiving basins. The approach of solving the problems of pervasive pressure on water resources and severe water quality degradation in southeast Spain by importing water from outside the region has met with strong opposition from the Ebro basin, from which the imported water would be obtained. 1 The main argument against the Ebro transfer is that the traditional approach of using supply augmentation to deal with water scarcity is now obsolete, and new water management policy initiatives are needed. These policy initiatives should be based on reasonable management measures, such water pricing, revision of water rights, abstraction limits on surface and subsurface waters, development of regulated water markets, new supply technologies such desalination, and water resources reuse and regeneration. Along these lines, the European Union has approved the new Water Framework Directive, which adopts a new focus on water policy based on the management of demand, full recovery costs including environmental costs, and setting up standards on water flow and on emissions and ambient pollution levels. The Directive promotes the use of economic tools as opposed to increasing the availability of water resources, in order to avoid mismanagement and reduce environmental degradation. Economic cost of water must be considered as a signal of water scarcity, and the water costs should be recovered from users, at least a reasonable part of them. The reliance of the Directive on water pricing to curb demand would fail in the coastal counties of southeastern Spain, where pressure on water resources is pervasive and degradation is severe. The reason is that water demand will not respond to higher prices in coastal counties with highly profitable greenhouse crops and individual abstractions from aquifers (Massarutto 2003). 2 In the coastal areas of the Segura and South basins, the acute water scarcity and aquifer overdraft have been driven by the strong expansion of water demand from the highly profitable greenhouse production of fruits and vegetables. 3 Large investments are currently proposed by the National Hydrological Plan to transfer water resources from the Ebro to the Segura, South and Júcar basins, in order to solve the severe degradation of water resources. 1 Economic and environmental arguments against the transfer can be found in Arrojo (2001), who published the opinions provided by a large number of experts at the request of the Spanish Ministry of Environment. A comprehensive assessment of the degradation of the Ebro Delta and the fluvial and marine ecosystems, as a result of the interbasin transfer, can be found in Ibañez and Prat (2003) and Prat and Ibañez (2003). 2 Water pricing will not solve scarcity and quality problems in the coastal countries, but would reduce consumption in large irrigation districts of inland Spain based on collective systems and low profitable crops, where degradation problems are moderate. 3 Quintanilla et al. (1997) using remote sensing, indicate that irrigation acreage has more than tripled in the Segura basin from 1970 to 1995.

6 3 2. The economic analysis of the Ebro project The economic analysis of the Ebro transfer project is presented in the documentation of the National Hydrological Plan (MIMAM 2000a and 2002, Trasagua 2003). Because the report adopts an engineering economics approach, following the tradition of Spanish water administration planning, there are some critically important theoretical and empirical shortcomings in the economic analysis. The Plan considers three alternative solutions for the problems of water scarcity and water quality in southeastern basins: provide an additional supply of 1,050 hm 3 via the Ebro transfer, provide an additional supply of 1,050 hm 3 via desalination, or no action (provide no additional supply and allow the consequences to unfold). The report does not consider alternative levels of supply augmentation, including smaller amounts than 1,050 hm 3 : the amount of water needed in the receiving area is taken as a fixed and given quantity. The basis for the municipal and industrial component of this quantity, 440 hm 3, is explained and justified on the basis of some projections of population and per capita water use, but no economic justification is provided for remainder, 561 hm 3, which is targeted for agriculture and intended to cover the elimination of aquifer overdraft (419 hm 3 ) and to guarantee supply reliability (142 hm 3 ).The analytical foundation for the determination of these specific quantities is flimsy and unconvincing. The Plan estimates the average cost of the water delivered at 0.31 /m 3, but there are several reasons to believe that this is an understatement. The experience with other large water projects in Spain and elsewhere is that final costs are considerably higher than what had been originally anticipated. The analysis makes over-optimistic assumptions about the time needed for construction and it omits some cost items, including costs to users in the receiving areas resulting from the fact that the salinity in the Ebro at the point of diversion exceeds 1.0 ds/m. The cost analysis does include a charge of 0.03 /m 3 for environmental compensation, but this is amount is arbitrary and not based on any systematic assessment of the project s environmental impacts and their non-market valuation. In addition, the water project authority has indicated that they will charge a uniform price for project water throughout the receiving areas regardless of the great difference in the pumping cost required to deliver water from one end of the canal to the other; this postage stamp pricing clearly violates economic efficiency. 4 4 Spatial variation of marginal costs of delivering Ebro water, has been calculated by Uche (2002, 2003b) for the initial (MIMAM 2000b) and latest (Trasagua 2003) transfer paths.

7 4 The benefits of the transfer for urban and industrial users are calculated as the difference between costs of transferred water (0.31 /m 3 ) and the cost of obtaining water through the desalination of seawater (0.81 /m 3 ). This implicitly assumes that the urban and industrial demand for water is entirely price inelastic, which seems inappropriate, and it overlooks the potential for water conservation in these sectors which, in the US has been found to be a significant alternative source of supply. Both of factors are likely to cause the analysis to overstate the benefit to urban and industrial water users. The majority of the water transferred, 561 hm 3, will go to agricultural users in the southeastern Iberian Peninsula to solve the scarcity and degradation of water resources that the fourfold increase in irrigated acreage has created during the last thirty years. The transferred water substitutes for aquifer overdraft abstractions by farmers, and the agricultural benefits are calculated as the average value product of the water, which is estimated at 0.75 /m 3. However, the correct benefit measure of the incremental water supply in the receiving areas is the marginal value of water, in order to calculate the profit loss that is avoided by importing transferred water. By using the average value of water the project makes two heroic assumptions: profits are exclusively a return to water, and that the average value is constant and not declining with the amount of water. Because of the possibility of changing the crop mix and the varying land quality, the marginal profit loss from reducing water is likely to be well below this 0.75 /m 3 average value of water. The analysis fails to deal with two key issues. It does not assess the farmers demand function for imported project water, and it does not realistically address the prices that farmers will be paying for water from other sources when the imported water becomes available. Information on these prices is essential in order to estimate the existing marginal value of water and also because, if demand elasticity is non-zero, pricing the imported water above the cost of water from existing sources, which appears likely, would greatly depress the demand for imported water. The type of analysis used by Plan, known as an ability to pay analysis has been found in the United States to be highly unreliable for predicting demand for project water and consistently overstates this demand (Wahl, 1989; Wilson, 1997). The shortfalls in demand have forced project managers to charge prices to agricultural users which were well below the estimated ability to pay both in the Central Valley Project in California and, most recently, in the Central Arizona Project (Hanemann 2002). Because farmers real willingness to pay turned out to be substantially less than the estimates of their ability pay, these and many other federal water projects have consistently failed to recover their costs.

8 5 In the US over the past century, the federal government spent 21.8 billion dollars oin 133 water projects in western states, of which 7.1 billion dollars was allocated to be paid by irrigation users; at present, less than 1 billion dollars of this cost has been repaid.. There are two further omissions in the economic analysis of the Ebro project. One is the failure to allow for the uncertainty in estimating the future costs and benefits of project water, especially in the agricultural sector which is vulnerable to potential future changes in the European Union agricultural and trade policies, changes in the continued availability of inexpensive foreign labor, and changes in energy prices. There is also no allowance for the potential future effects of climate change. The second omission is the lack of an explicit economic evaluation of the project s environmental impacts, both negative and positive. As indicated above, the compensation cost accounts for the negative environmental impacts within the Ebro basin, but this compensation is not based on any economic analysis. The experience worldwide indicates that the improvement of environmental conditions can generate significant economic benefits associated with recreation, eco-tourism, and the non-use value of ecosystem protection, which could outweigh the benefits from agricultural or even urban water use. 5 The analysis presented below addresses some of the shortcomings in the economic analysis of the Ebro transfer project. The focus is on the agricultural benefits, examining both the water demand response in the southeastern basins, and the marginal value of water in each county of these basins. The Spanish government has indicated that transferred water will be maintained at the current low water prices in receiving basins, but subsidized transferred water could not justify the Ebro project. The reasons are that the transfer degrades the Ebro Delta and the Ebro fluvial and marine ecosystems, and also because keeping low profitable crops in the receiving region exacerbates water scarcity and does not compensate the environmental costs of using water resources. Several demand and supply water policy alternatives to the Ebro project are assessed in this study, and a very important question in order to evaluate the water policy alternatives is the response of irrigation to water prices in southeastern basins. The findings show that compromise solutions between water supply and demand management measures should be considered. These solutions combine reducing water demand and augmenting water supply through desalination. The reduction in water demand could be achieved by water pricing, or by water markets coupled with rationing the resource. 5 In the Mono Lake Decision, the diversion from Mono Lake was reduced by two thirds, despite the loss of hydropower and water supply to Los Angeles, in order to protect habitat for wildlife. Non-use values associated with habitat protection being the main components of environmental benefits (Wegge et al. 1996).

9 6 The information is presented as follows. First the analytical setting is examined, describing the methodology and the technical and economic information. Then, the simulation results are presented considering water demand management alternatives and water supply expansion alternatives. Finally, the conclusions of the research are stated. 3. Analytical setting and data A linear programming model has been developed, incorporating a large quantity of technical and economic information specified at the county level. The aggregation problem has been solved using the procedure suggested by McCarl (1982), and Önal and McCarl (1989, 1991). The model is used to simulate several water supply and demand policy scenarios, and details on the model building, parameter estimation procedures, and simulation results are presented in Albiac et al. (2002a, 2002b and 2004). The model covers the Levante and Southeast counties of the Iberian Peninsula that receive water from the Ebro transfer (Figure 1). The objective function maximizes net income of irrigated cultivation activities, and the decision unit is the county. There are 22 counties in the Comunidad Valenciana (Castellón, Valencia and Alicante provinces), 6 counties in the Comunidad de Murcia (Murcia province), and 7 counties in Almería (Almería province). The constraints represent land, water and labor resource availability, considering irrigation acreage by type of crop, irrigation water by month, and labor by month. The cultivation activities are fruits, vegetables and cereals and alfalfa. Substitution among vegetables is permitted in the vegetables acreage, and substitution among cereals and alfalfa is permitted in their acreage, but the acreage of fruit trees is maintained for each species. The irrigated acreage studied covers 94 percent of the total in Comunidad Valenciana, 80 percent in Comunidad de Murcia, and 86 percent in Almería. Cost data come from publications by the Government of Murcia (AMOPA-Gobierno de Murcia 2000), the central government Ministry of Agriculture (MAPA 2002), and other monographic studies. Quasi-rent or net income for each crop is calculated subtracting from gross revenue the direct costs, machinery and paid labor, and indirect costs and amortizations. Net income changes by county, because yields are different and costs are adjusted accordingly. Other coefficients are calculated from official statistical sources, such as municipal crop acreage or yield data, or they have been elaborated from different sources as in the case of water availability by county, which is estimated from meteorological data from the Instituto

10 7 Figure 1. Map of the water transfer path and counties in the receiving basins. Source: Trasagua (2003) for the latest water transfer path.

11 8 Table 1. Acreage, water use and revenue in southeastern basins (2001). Basins Total Cereals, alfalfa and sunfower Fruit trees Open air vegetables Greenhouse vegetables Júcar Acreage (1,000 ha) Irrigation water (hm 3 ) 1, , Revenue (million ) 1, Segura Acreage (1,000 ha) Irrigation water (hm 3 ) Revenue (million ) 1, South Acreage (1,000 ha) Irrigation water (hm 3 ) Revenue (million ) 1, Nacional de Meteorología, and technical data from research institutes from Valencia, Murcia and Andalucía. The year of reference for all technical and economic data is 2001, and the baseline data on acreage, water use and revenue are presented in table 1. Water consumption for each crop is obtained multiplying the water requirement per hectare, by the acreage filled by the crop in the county. Gross water requirement of a crop is equal to net water requirement divided by the irrigation system efficiency (0.6 for surface irrigation and 0.9 for drip irrigation), and net water requirement is equal to the crop evapotranspiration less precipitation. Crop evapotranspiration is calculated from county meteorological data and crop coefficients K c, following the procedure of Martínez-Cob et al. (1998), based on the procedure recommended by the FAO (Allen et al. 1998). There are three groups of constraints: soil, water and labor constraints. Soil constraints are based on crop acreage in recent years for each municipality by irrigation system. One soil constraint (surface irrigation) defines soil availability for cereals and alfalfa; two soil constraints (surface and drip irrigation) for open air vegetables; one constraint (drip irrigation) for green house vegetables; and two soil constraints (surface and drip irrigation) for each fruit species. There are twelve water consumption constraints corresponding to the monthly water needs of crops in each county and irrigation system. The calculation of water availability in each county is estimated from gross water requirements of crops (or irrigation water applied in plots). Labor constraints incorporate the requirements of this resource, which are different for each crop. Labor needs are calculated from the costs information that includes details on monthly labor requirements. The linear program for each county includes around 80 crop activities and 60 resource constraints. Resource constraints include 22 soil constraints, 12 water constraints, and 12 labor constraints.

12 9 Table 2. Energy consumption of the Ebro transfer at each destination. 1 /m 3 Almería, 79 hm 3 0,8 Altiplano, 42 hm 3 Almanzora, 31 hm 3 0,6 0,4 Castellón Sur, 21 hm 3 Tous, 63 hm 3 Villena, 168 hm 3 Bajo Segura, 341 hm 3 0,2 0 Tortosa Mijares, 42 hm 3 Castellón Norte, 21 hm km Costs of the Ebro project Uche (2003b) has calculated the costs of the Ebro project at each delivery location (Table 2). The investment costs of the transfer project have been calculated by applying the methodology of the project (MIMAM 2000b), 6 although some discrepancies have been detected and included in the costs. The amortization period is reduced to 25 years for channels and electromechanical components (pumping systems), instead of the 50 years used in the project. Compensation to hydroelectrical companies exploiting the Lower Ebro dams is included, to account for the regulation needed for supplying water to southeastern basins. Costs of the Integral Plan to reduce the impact of the transfer on the Ebro Delta, are also included amounting to 451 million and with 50 years amortization. Other cost items that have been included are the costs of the new Marquesado and Azorín dams in the receiving basins, and the costs of new power lines to supply pumping stations. Table 2 and Figure 2 show the costs of diverted Ebro water by county. Costs of diverted water are lower than seawater desalination up to the Tous outlet, but beyond Tous desalination costs are lower than transfer costs, and transfer costs in Almería are double the desalination costs. The energy costs of pumping are an important cost component of the transfer project, and the specific energy consumption at each section is closely related to the channel s elevation. The energy consumption at the endpoint of the transfer reaches 4 kwh/m The reference study is CEDEX (1998). 7 See Uche (2003b) for deatails.

13 10 Informal water trading in southeastern basins One of the scenarios being simulated is water trading among counties through existing water conveyance facilities. The procedure for simulating water markets is the following, first it is assumed that aquifer overdraft is prohibited and the resulting shadow prices of water are calculated for each county. Then, the excess water supply and demand functions by county are computed, and welfare is measured by the economic surplus or area between the water excess supply and excess demand functions. The assessment of the present situation of water trading is important for introducing regulated water markets in southeastern basins. In the Segura basin, informal water trading is quite common, predominating spot exchanges over occasional trading of water rights. There are wells owned by private companies, individual farmers or landowners, who sell water to individual irrigators, irrigation districts, industries and urban water companies. The main sources of surface or subsurface water for irrigation are farmers own wells, and water entitled to irrigation districts by the basin authority. Some irrigation districts in the province of Alicante allocate their water allotment among farmers through auctions, albeit there exist limits to the amount of water an individual farmer can bid for. Informal water trading is common among farmers belonging to the same irrigation district. Water trading volume is difficult to assess, because irrigation districts are reluctant to discuss the question. Survey efforts are met with ambiguous answers of a strategic nature, although managers admit that spot water trading is common. This includes exchanges of water supplied by the district, and of water from irrigators private wells belonging to the district. The range of prices is /m 3 in years of normal water supply, with a 0.15 /m 3 average. However, the range of prices increases to /m 3 in years of water scarcity, with a 0.35 /m 3 average. Groundwater is commonly priced higher than surface water. Another common practice is the exchange of water among farmers, without any monetary transaction. Farmers lease water among themselves in the district, when they need water during the irrigation season. These are quite informal agreements based on customary trust that exists among farmers in a district. There are a large number of illegal wells that are used mostly in dry years (called drought wells). Some of them belong to irrigation districts and are used as a flexible source of supply for drought periods, but many other belong to individual farmers or landowners that sell the water. To obtain additional water, farmers buy agricultural land sometimes as far as 100 kilometers upstream, and use the water in downstream farms, where water is more scarce and valuable. The areas of origin are usually the higher Segura and Vinalopó

14 11 rivers, using the water in the mean and lower Vinalopó and Segura rivers, and in the Campo de Cartagena county. Ecologist NGOs claim that these practices often hide illegal water sales to either agricultural or urban users. There are also water rights transactions among farmers through informal agreements within irrigation districts, and ecologist organizations have reported illegal water rights transactions between irrigation districts, and urban developers or domestic water companies. The reformed water law allows for voluntary water exchanges among right holders and water banks, although these water exchanges need approval of the basin authority. However, the main urban water agency in the basin (Aquagest Levante) by using the reformed water law, has placed offers to buy water rights from agricultural users but no irrigation districts so far accepted such bids, to our knowledge. The agricultural sector in southeastern basins is quite wary of such formal water markets. Most farmers organizations prefer the status quo, relying on public management of water at basin level and decentralized management of irrigation district by water users associations. Formal water markets arouse a high degree of distrust in the agricultural sector of southeastern basins, even in the case of public water banks. The general belief is that they would spread corruption and result in water resources mismanagement. This belief is specially strong in areas with severe water scarcity or low supply reliability, despite the fact that these areas could benefit significantly from establishing formal water markets among districts. The main reasons seem to be disregard of market potential to improve welfare, and distrust of markets that could be linked to new or higher water or pollution taxes on irrigation activities, once public monitoring of water exchanges is established. In some areas with more abundant water supplies, water user associations are more aware of the advantages of formal spot water markets among districts, and seem to be willing to participate selling surplus water in years of average availability. In other areas, strategic answers are frequent and water user associations are reluctant to recognize their willingness to sell water, because they fear that disclosure would indicate that they don t really need the water. The Spanish water law recognizes the possibility of revising administrative water concessions, although this rarely occurs. 4. Water management scenarios The model has been used to assess the effects of several water management alternatives in the irrigated agriculture of southeastern basins. Two of the alternatives involve water

15 12 demand management measures, two others are water supply expansion measures, and the last alternative is a combined management alternative. In the first scenario, a strategy is analyzed in which groundwater overdraft is forbidden, and there are no transfers of water from external basins. In the second scenario, a price increase is considered in order to find the price level that balances water demand with the available water resources in the Levante and Southeast basins of the Iberian Peninsula. This scenario follows the full recovery cost principle of the Water Framework Directive. The third alternative is to expand water supply with transferred water from the Ebro project, linked to water subsidies to maintain the low water prices that farmers pay now. 8 The fourth alternative combines water trading among counties with prohibition of aquifer overdraft. Water trades may take place along present conveying facilities of main rivers and canals, allowing for additional supply of desalinated water. Desalinated water is considered in coastal counties that exhibit very high shadow prices of water. Elimination of groundwater overdraft The elimination of aquifers overdraft reduces the availability of water for agriculture, and the effects are concentrated in the counties where aquifers are located. 9 In the Júcar and Segura basins, the reduction of available water and cultivated acreage mainly affects low profit crops. But in the South basin, the reduction of water and cultivated acreage affects highly profitable crops, since there are few low profit crops to be given up (Table 1). Losses are quite substantial in the South where revenue and net income of farmers fall by almost 50 percent, while in Segura they decline by 20 percent and in Júcar by less than 10 percent. More than 60 percent of loss in net income, that is 261 million of 408 in losses, occurs in the South basin due to the abandonment of high profitable greenhouse crops. The counties with larger losses in Almería are Campo Dalías and Campo Níjar, and in Segura Noreste, Campo de Cartagena and Valle del Guadalentín, which bear the greatest reduction of available water. Revenue and net income fall 343 and 172 million in Campo Dalías, and they fall 66 and 28 million in Campo de Cartagena, respectively. The quantity of water from the Ebro transfer project targeted to solve groundwater overdraft in the South basin is only 58 hm 3 ; this is insufficient to offset the current overdraft which reaches 71 hm 3. In contrast, the proposed Ebro transfer quantities into the Júcar and Segura basins are much more generous. Even if the proposed transfers are carried out, aquifer overdraft in Almería will not be eliminated. Therefore, additional 8 The former central government indicated that prices of transferred water for agriculture, would be close to current water prices for irrigation (See table 1). 9 This measure would be difficult to implement by the administration, and at present the number of illegal abstractions is huge.

16 13 measures of demand management must be introduced in order to balance availabilities and uses. If the measure of demand management chosen to solve scarcity is that of banning groundwater overdraft, then mechanisms should also be introduced to transfer water between counties in the interior of the South, Segura and Júcar basins, so that farmer losses are minimized. This alternative is examined at the end of this section. Increasing water prices The increase in water prices for irrigation is a demand management instrument advocated by the new Water Framework Directive of the European Union. Agricultural water prices could be maintained below prices paid by other users, but scarcity in Levante and Southeast Iberian Peninsula could be solved increasing prices by 0.12 /m 3. Previous studies show that prices up to 0.12 /m 3 would reduce but not eliminate moderately profitable agricultural activities such as cereals (Feijoó et al. 2000, Berbel et al. 1999, Sumpsi et al. 1998), mitigating water scarcity with a negative effect on farmers net income that may be compensated. This water pricing policy is analyzed here, and results demonstrate that increasing water prices contributes to balancing water demand and supply. A 0.12 /m 3 increase in water prices, reduces agricultural water demand by 509 hm 3, with a fall of 3 percent in farmers revenue and 17 percent net income, due to the decline in the acreage of cereal and woody crops which are less profitable. The impact on net income is much greater in the Júcar and Segura basins, at 28 and 18 percent, than in Almería, at 5 percent. The reduction of 509 hm 3 in water demand is close to the agricultural and environmental allotment from the Ebro water transfer project of 561 hm 3. With this increase in the price of irrigation water, the volume of water freed up from agricultural uses would reduce the need for expanding water supply in southeastern basins to 311 hm 3, of which 52 hm 3 would be destined to agricultural and environmental use and 259 hm 3 to urban and industrial use. This water supply expansion of 311 hm 3 is significantly less than the figure of 820 hm 3 currently proposed by the Ebro project, and the cost to farmers of this solution would not be excessive, estimated as a 3 percent fall in revenue and 17 percent loss in net income. The loss of 287 million in net annual income is a measure of the compensation that could be offered by the administration, or by other water user groups, so that farmers would voluntarily accept the raise in water prices (Tables 4 and 5). An increase of 0.18 /m 3 in water prices reduces water demand by 605 hm 3 in southeastern basins, with a decline of 4 percent in revenue and 24 percent in net income, as a consequence of abandonment of cereal cultivation and reduction in cultivation of woody

17 14 crops. The decline in net income is greater in Júcar (-40%) than in Segura (-25%) due to the greater specialization in Segura on more profitable vegetables, and the elevated consumption of more expensive water in Júcar, while the drop in net income is moderated in South (-6%). The water demand contraction of 605 hm 3 is not far from the 820 hm 3 of transferred water that the Ebro project assigns to the three basins for urban and industrial use (259 hm 3 ), plus the allocation to cover aquifer overexploitation and irrigation guarantee (561 hm 3 ). The fall in demand is 350 hm 3 in Júcar, 181 hm 3 in Segura and 74 hm 3 in South, which almost covers the water transfers designated for urban, industrial, and agricultural use of 300 hm 3 in Júcar and 100 hm 3 in South. In Segura the 181 hm 3 demand reduction does not balance the 420 hm 3 of transferred water for all uses. This imbalance of 239 hm 3 could be dealt with by transferring the excess water from the Júcar basin ( ), and by seawater desalination, since there is an effective demand of 215 hm 3 in the coastal counties of the Segura basin. 10 As indicated above for the case of prohibiting aquifer overdraft, there is also a potential for water trades among counties in Segura. This demand management approach of increasing water prices by 0.18 /m 3 coupled with seawater desalination in coastal counties of the Segura basin, solves the water shortage by balancing supply and demand of water without the need of the enormous investment in diverting the Ebro and transferring the water. This measure has to be seriously considered as an alternative to the Ebro project by those responsible for making decisions in the state governments of the Ebro basin, in the Spanish central government and in the European Union, and by political and pressure groups. The cost of this proposal to farmers of the southeastern Iberian Peninsula, is given by their revenue and net income reduction and by the cost of seawater desalination. Raising water prices to 0.18 /m 3 reduces farm revenue by only 4 percent, although the decline in net income is substantial, amounting to 24 percent. The compensation that would be required to ensure that farmers voluntarily accept this increase in prices equals the 405 million of yearly net income they lose, and could be paid by the administration or by other groups of water users. This compensation is an alternative to society for not making the water transfer investment diverting the Ebro. The construction costs in diverting the Ebro exceed 4 billion, with some costs estimates above 6 billion, and if invested in other projects, could produce annual profits greater than 405 million. 10 The effective demand at the 0.52 /m 3 desalination price, is 52 hm 3 in Baix Segura, 53 hm 3 in Campo de Cartagena and 110 hm 3 in Valle del Guadalentín.

18 Figure 2. Costs and flow of diverted Ebro water by delivery location (Cents of euro/m 3 ). 15

19 16 County Table 3. Water demand and prices in southeastern basins, by county. Water Use (hm 3 ) Current Prices of Water ( /m 3 ) Costs of water from Ebro transfer Seawater desalination Average revenue Value of water ( /m 3 ) Average net income Marginal value of water (shadow price) Baix Maestrat 29 0,09 0,20 1,80 0,81 0,34 Plana Alta 45 0,09 0,23 1,44 0,67 0,42 Plana Baixa 120 0,09 0,29 1,23 0,58 0,56 Camp de Morvedre 48 0,09 0,30 0,95 0,46 0,34 Camp de Turia 127 0,09 0,31 0,98 0,45 0,40 Horta Nord 50 0,06 0,31 0,82 0,37 0,18 Valencia 25 0,06 0,32 0,58 0,26 0,13 Hoya de Bunyol 13 0,06 0,32 1,40 0,69 0,15 Horta Oest 39 0,06 0,32 0,80 0,38 0,16 Horta Sud 65 0,06 0,33 0,66 0,33 0,19 Ribera Alta 272 0,06 0,35 0,68 0,34 0,31 Ribera Baixa 227 0,06 0,35 0,32 0,18 0,13 Safor 99 0,06 0,46 0,52 0,83 0,40 0,37 Vall d Albaida 12 0,06 0,46 1,42 0,58 0,14 Costera 30 0,06 0,46 1,01 0,49 0,25 Marina Alta 47 0,09 0,56 0,52 1,04 0,51 0,34 Marina Baixa 17 0,12 0,56 0,52 0,84 0,42 0,20 Alacantí 27 0,12 0,56 0,52 1,54 0,8 0,14 Alt Vinalopó 37 0,12 0,56 0,33 0,17 0,15 Vinalopó Mitja 65 0,15 0,56 1,10 0,67 0,20 Baix Vinalopó 55 0,12 0,57 0,52 0,63 0,30 0,13 Baix Segura 247 0,12 0,57 0,52 0,76 0,37 0,16 Noreste 57 0,12 0,72 0,93 0,53 0,21 Vega del Segura 273 0,12 0,57 0,75 0,42 0,24 Centro 20 0,06 0,57 0,86 0,44 0,18 Noroeste 40 0,06 0,57 0,89 0,43 0,11 Campo de Cartagena 64 0,12 0,61 0,52 3,12 1,40 0,19 Valle del Guadalentín 163 0,12 0,67 0,52 2,29 1,14 0,19 Bajo Almanzora 33 0,15 0,78 0,52 3,61 2,08 0,23 Alto Almanzora 34 0,06 0,92 0,65 0,29 0,08 Campo Tabernas 20 0,06 0,92 0,66 0,30 0,07 Río Nacimiento 11 0,06 1,05 0,72 0,29 0,13 Campo Níjar-Bajo Andarax 47 0,18 1,05 0,52 6,22 3,52 0,29 Alto Andarax 16 0,06 1,05 1,13 0,54 0,15 Campo Dalías 72 0,21 1,05 0,52 9,14 4,59 3,43 Desalination of seawater is a measure complementary to increasing water prices, that expands supply and balances water resources demand and supply in southeastern basins. The cost of desalination is 0.52 /m 3 (Uche 2003a), and the effective water demand at this price in the coastal counties from Safor to Campo Dalías is 387 hm 3. Desalination cost is lower than the costs of transferred water in the counties south of Safor. 11 Water supply and demand could be balanced by desalination coupled with an increase of 0.12 /m 3 in water prices. The effective demand for desalination is 387 hm 3, and water demand reduction if 11 Costs of transferred water are 0.56 /m 3 in Marina Alta, Marina Baixa and Alacantí; 0.57 /m 3 in Baix Vianlopó and Baix Segura; 0.61 /m 3 in Campo de Cartagena; 0.67 /m 3 in Valle del Guadalentín; 0.78 /m 3 in Bajo Almanzora; and 1.05 /m 3 in Campo Níjar and Campo Dalías.

20 17 water prices increase 0.12 /m 3 is 408 hm 3. Both sum 795 hm 3, a quantity very close to the Ebro water transfer allocation of 820 hm 3 for all uses. Transferring water from the Ebro This is the Ebro water transfer project alternative of the National Hydrological Plan Law. Diverted water will have high costs which depend on the distance from the Ebro river (Uche 2003b), with a range of prices between 0.20 /m 3 in Baix Maestrat county and 1.05 /m 3 in Campo Dalías county (Figure 2). These prices are well above the low prices in the range /m 3 that farmers pay now (Table 3), and at these prices the project water will only pay for itself in counties with highly profitable crops. The volume of imported water that counties can absorb at the prices shown in Table 3 is 761 hm 3 in Júcar, 294 hm 3 in Segura and 132 hm 3 in South. These quantities contrast with the planned water transfer targets for agricultural and environmental use of 141 hm 3 in Júcar, 362 hm 3 in Segura and 58 hm 3 in South. Thus, in the Segura basin there is a significant problem of inconsistency in the proposed transfer project, since this basin can only absorb 294 hm 3 of water destined to agricultural use at the water transfer price, which doesn t cover the Ebro project assignment of 362 hm 3 to end groundwater overdraft and meet a guarantee of supply reliability. In the Júcar basin, the agricultural water demand at the water transfer price is greater than the Ebro project assignment, but this is still inconsistent with the project proposal because there are several counties in the province of Alicante where the volume of groundwater overdraft equals or exceeds the amount of water that farmers would be willing to buy at the water transfer price. Farmers in these regions would not be willing to pay for the same quantity of imported project water as the amount now being overdrafted, which means that overdrafting will continue to occur. Figure 3 shows the counties where the effective demand for imported is lower than the amount of overdraft. Consequently, the Ebro project will not eliminate aquifer overdraft in these counties. This incoherence in the project demonstrates the superiority of alternative management policies, that use water pricing, water markets or desalination instead of supplying Ebro water with its enormous cost to society. Alternative water management measures are superior from the economic point of view, and could be even more advantageous when environmental impacts are taken into account.

21 Figure 3. Differences between effective demand and groundwater overdraft (hm 3 ). 18

22 19 The former central Spanish government asserted that farmers in the receiving basins would pay for Ebro water at the same price they are paying for water now. Therefore the central government was intending to resolve the inconsistency in transfer allocation targets by subsidizing the price of transferred water allocated to agriculture, and by charging higher prices to urban and industrial water users. The subsidies will assure the survival of the less profitable agricultural activities, which are supported by the Common Agricultural Policy. The option of subsidizing diverted water for agricultural use would be costly for nonagricultural water users of Segura. In Segura, if a surcharge is placed on the water allotment destined to urban and industrial use, in order to subsidize the allotment for agricultural and environmental use, the surcharge would come to 187 million or 3.22 /m 3 to be added to the cost of transferred water. Another more workable alternative would be to establish the surcharge on present urban and industrial use in the Murcia region and on the future transfer allotment destined to urban and industrial use, which implies a surcharge for this group of users of about 0.76 /m 3 and resulting in a final price of 1.62 /m 3. The subsidy needed to maintain the whole 561 hm 3 of transferred water for agriculture, at the present low water prices that farmers pay in Levante and Southeast, amounts to 301 million per year (Table 5). This option is frankly unjustifiable from an economic perspective as well as in terms of equity, since non-profitable agricultural activities would be maintained in an unsustainable framework, diverting water resources that degrade the ecological functioning of the donating basin and jeopardize its future. It also may not turn out to be politically viable; in the US, the experience with the Central Arizona Project was that the urban users of the imported water rebelled when they were asked to subsidize excessively low prices for the agricultural users. The economic analysis presented above differs in several fundamental ways from that conducted by the Spanish Ministry of Environment. The planning documents for the Ebro River interbasin transfer project (MIMAM 2000b, Trasagua 2003) of the National Hydrological Plan (NHP) consider the effects of the Ebro water transfer on net income, final agricultural production and agricultural employment, in the irrigation areas of the southeastern receiving basins. Two aspects are evaluated, the elimination of groundwater overdraft and the enhanced reliability of agricultural water supply. As indicated above, the procedure used in the NHP lacks rigor, since it starts with a fixed volume of water to be transferred from the Ebro without justifying the quantity. This volume of water is then divided by a standard irrigation assignment per hectare, and in this way the affected acreage

23 20 area is calculated. From the affected acreage, the NHP estimates net income by multiplying this acreage by a representative net income per hectare. The procedure used in the NHP is excessively simple and poorly supported, and thus cannot be regarded as reliable. The procedure used here is more consistent with economic theory and more precise because it incorporates the acreage of each crop by county, meteorological information relevant for modeling irrigation water demand, agronomic information about yields and costs, and technical information about irrigation systems. Most importantly, the marginal value of water is calculated in each county of the receiving basins, and water demand responds to changes in water prices. Net Income. The NHP estimates as 222 million the sum of losses in net income from the elimination of groundwater overdraft (210 million ) and for lack of enhanced reliability of agricultural water supply (12 million ). In this study, the loss of net income due to the elimination of groundwater overdraft and lack of enhanced reliability in the three basins has been valued at 408 million, which is distributed between losses of 46 million in Júcar, 101 million in Segura and 261 million in Almería (Table 5). 12 Notably, more than 70 percent of the losses occur in Almería, due to the enormous net profit derived from greenhouse crops. Nevertheless, the NHP assigns only 58 hm 3 to Almería for groundwater overdraft and enhanced reliability of the total of 561 hm 3 of water transferred for agricultural use to southeastern basins. The allotment for Almería of 58 hm 3 does not even cover groundwater overdraft, which is 71 hm 3. Clearly, this water transfer has no economic justification based on southeastern agriculture. Almería is the zone where the elimination of groundwater overdraft has the greatest economic impact and, despite being easily able to pay the high price of diverted water, 13 it does not receive a sufficient share to eliminate overdraft. At the same time, Segura receives 362 hm 3 for agricultural and environmental uses, 142 hm 3 higher than the groundwater overdraft in the basin, and 68 hm 3 higher than what we estimate is the effective demand for water at the price charged for imported water. Several counties in Segura cannot pay the price of imported water since they do not have sufficiently lucrative crops to absorb the whole water project allocation. 12 Net income losses correspond to the studied crops which cover 88 % of total irrigated acreage, and these figures would be larger for the whole irrigated acreage in southeastern basins. All data in the present study correspond to the year 2001, and are more recent than NHP data corresponding to However, Albiac et al. (2002a and 2003) have performed similar economic analysis using 1998 data, with results very close to those presented here. 13 Current shadow prices of water are 3.43 /m 3 in Campo Dalías, 0.29 /m 3 in Campo Níjar and 0.23 /m 3 in Bajo Almanzora (Table 2). When groundwater overdraft is forbidden, shadow prices rise to 5.21 /m 3 in Campo Dalías, 4.19 /m 3 in Campo Níjar and 0.56 /m 3 in Bajo Almanzora (Figure 4).