Mutual Benefits as Incentives for Transboundary Water Cooperation? An Analysis of Negative and Positive Externality Problems Ines Dombrowsky / Dept. of Economics London, May 6, 2006
Content (1) The problem (2) Analysis of negative externality problems (3) Analysis of positive externality problems (4) Empirical evidence (5) Conclusions
1. The Problem
The Problem Problems of incompatibility between institutional arrangements and biogeophysical systems Misfit of hydrological and political boundaries Transboundary externalities Potential conflict Opportunities for benefit-sharing? i Graphics: IRS
Concept of Benefit-Sharing Idea: Do not share the water (=zero-sum game), but the benefits from the water (=potential positive-sum game) Q: Under which conditions do opportunities for mutual benefits exist in transboundary settings and can cooperation be explained on the basis of self-interested rational aoabea behavior?
Water Uses and +/- Effects Effect on Water Water Water Ecology Water uses (= benefit) quantity quality regulation Water extraction for various uses (-) (-) Wastewater a e discharge/pollution o ((+)) (-) (-) Hydropower generation (+/-) ((-)) (+/-) (-) Navigation (+) (-) Recreational uses (-) Fisheries (-) Flood control by dyke (-) (-) Flood control by retention area (+) (+) Consumption of forests, wetlands & flood plains (-) (-) (-) => Negative and positive externalities
Unidirectional vs. Reciprocal Effects A. Transboudary River B. Border River C. Shared Lake/Sea Flow Flow Party A Party A Party B Party A Party B Party B Unidirectional externalities Reciprocal externalities
A Typology of Externality Problems Type of externality Negative Positive Unidirectional Type 1 Upstream water abstraction Upstream water pollution Type 2 Upstream wastewater treatment Upstream provision of retention area Reciprocal Type 3 Water abstraction from a border river/shared lake or aquifer Wastewater discharge into a border river/shared lake Type 4 Wastewater treatment at a border river/shared lake Provision of retention area at a border river => Can cooperation be explained on the basis of rational selfinterested behavior?
2. Negative Externality Problems
Negative Externalities & Efficiency MB to A MC to B MB max P MC MC max MB 0 q P q max q q: A s level of economic activity
Implications of the Coase Theorem Negative externalities may be internalized through bilateral negotiations But: restrictive set of assumptions Specified property rights Perfect information Sufficiently low transaction costs, in particular low negotiation costs: successful bargaining over gains low monitoring and enforcement costs International rivers: Property rights a priori not specified Imperfect information Bargaining g over gains of cooperation No enforcing authority Sometimes > 2 parties
Property Rights: International Law Four Theories 1. Absolute territorial sovereignty (ATS) 2. Absolute territorial integrity (ATI) 3. Limited territorial sovereignty (equitable and reasonable utilitzation and participation) (LTS) 4. Community of interests (CI) ATS and ATI rejected by international customary law Law introduces notion of equity/justice
Neg. Effects: Incentives for Cooperation? Assumption: Upstream appropriates first 3 possible outcomes: 1. Status quo accepted as starting point (=ATS): agreement on basis of side-payment (or issue-linkage): efficient, not fair 2. Downstream rejects status quo as starting point (ATI/LTS), upstream rejects realloction of rights (ATS): no agreement: not effcient, not fair 3. Agreement on rights first (LTS), benefit-sharing/side-payments second: potentially efficient and fair Efficiency considerations not sufficient for legally satisfactory outcome
3. Positive Externality Problems
Positive Externalities E.g. Upstream hydropower dam with flood control benefits downstream Assumptions: 2 countries A,B choosing among project alternatives a through d which vary in their hydropower and flood control benefits Country A Country B Dam a Dam b Dam c Dam d Flood control benefits d c b a 45 Hydropower benefits B s attitude depends on A s action and B s interest to participate in upstream infrastructure design and operation In absence of unilateral action by A=> coordination problem with distributional conflict at benefit level No water rights problem No enforcement required
Summary Theory Negative Positive i Externalities Externalities Cooperation incentive Yes Depends Cooperation dependent on: Agreement on property rights Yes No Agreement on benefit-sharing Yes Yes Relevant information Yes Yes Enforcement mechanism Yes No Incentives exist, but cooperation not straight forward Positive externality yproblems tend to be easier to solve than negative
4. Empirical Evidence
Empirical Evidence Problem Water quantity Pollution problem Hydropower & Hegemon conflict (-) (-/+) flood control (+) Upstream Euphrates: ATS Danube/Rhine: LTS Zambezi: ATS? Jordan: [ATS] Kidron: ATS Downstream Nile: [ATI] WB Aquifer: [ATI] Elbe: LTS Senegal: CI Elbe: ATS->LTS? (Lesotho-H.: [ATS]) US, Mexico: LTS Blue Nile: ->CI? LTS/CI appears to be more likely for pos. than for neg. externalities. but also for pollution than for quantity conflicts Reversed riparian positions conducive towards LTS
4. Conclusions
Conclusions/Implications for HH Theory 1. Need to differentiate water use to understand the cooperation problem role of riparian position, order of appropriation, utilitarian and normative compliance-producing i mechanisms 2. Economic focus of benefit-sharing concept is useful (however demanding), but in case of neg. externalities, efficiency considerations alone not sufficient for a legally and morally satisfactory outcome As long as this is not acknowledged, the discourse remains intransparent ( sanctioned )
Questions for Hydro-Hegemony Theory What is a hegemon (leader vs. dominant riparian; relation to IR notion of coercive versus benign h.?) What is a hydro-hegemon h (riparian i who appropriates first, riparian with preponderent structural power, riparian who uses hegemonic strategies, all three?) Is consolidated control = negative sum and shared control o = positive sum? Definition of cooperation? (realization of benefits versus limited sovereignty/sharing g of control versus both)
Thank you!
Do Incentives for Cooperation Exist? Neg. ext.: Dilemma for downstream! Can he morally induce upstream to adopt LTS? Pos. ext.: Is downstream interested to participate in upstream infrastructure design and operation?
Neg. Effects: Incentives for Cooperation2? Case 2: Downstream withdraws first 4 possible outcomes: 1. Status quo accepted as starting point (=ATI): agreement on basis of side-payment (or issue-linkage): efficient, not fair (unlikely!) 2. Upstream rejects status quo as starting point (ATS/LTS), downstream rejects realloction of rights (ATI) => Is upstream able to withdraw unilaterally? a. If no: not efficient, not fair for upstream. b. If yes, probably not efficient, not fair, conflict. 3. Agreement on rights first (LTS), benefit-sharing/side-payments second: potentially efficient and fair
Game-theoretic Analysis: The Enforcement Problem A: abate (cooperate) pollute (defect) B: side-payment (cooperate) no side-payment (defect) Side-payment is acceptable Ordinal preference orders A abate C pollute D B pay C pay D 3, 3 1, 4 4,1 2,2 N N: Nash equilibrium Prisoner s Dilemma with Side-payments 1. CC is Pareto superior vis-à-vis DD => negotiation incentive 2. but: incentive to free-ride persists in one-shot game => Cooperation can be sustained in infinitely repeated game if enforcement mechanism is in place