Groundwater pricing

When dealing with the need for more efficient groundwater use and allocation, a prime recommendation is usually the introduction of a groundwater tariff or fee. The rationale is that groundwater users have an incentive to use water efficiently when it has a price. If it is free, they will use more than they would otherwise, unnecessarily reducing the availability of water for everyone and increasing scarcity of, and thus competition for, the resource. If 'the price is right', users will have incentives to use less water and introduce water-saving technologies, thus freeing water for other uses.

In groundwater, pricing issues are distinct from surface water, given that abstraction of the groundwater resources usually takes place on private land and with private equipment. Therefore, there are actually two options for pricing: pricing the resource itself or pricing the other inputs needed in order to pump groundwater such as the pump, borehole and, most importantly, energy.

Energy pricing

The cost of energy is usually seen as the most important incentive to reduce over-abstraction. Figure 8.3 depicts the Mexican situation and we can see that there was a noticeable decrease of electricity consumption in 1990, when an increase in the special rural energy tariff took place. One can infer from the results that the elasticity with regard to energy pricing in Mexico is significant, i.e. water users clearly respond to price changes that affect their energy bills. Usually, however, this type of action is not easy to apply due to political reasons - as was also the case in Mexico when the government responded to pressures and decreased the tariffs again. This is reflected in the downturn in the price curve in Fig. 8.3, and a corresponding increase in pumping from 1992 and onwards.

The Mexican situation is not unique. Many countries subsidize agricultural inputs and, among them, rural energy (e.g. a number of states in India, Brazil, etc.). Once this has happened, it is politically very difficult to return to, or start implementing, energy prices that actually reflect the cost of energy to the state. The effect is not only a clear incentive for groundwater overabstrac-tion, but also important fiscal implications for the state. Depending on the cal-

Electricity Tariff Mexico
Year

Consumption- Tariff

Fig. 8.3. Relationship between electricity tariff and consumption in Mexico, 1982-1997.

culation method, energy subsidies to agriculture in India amount to between $1.9 billion and $6.5 billion per year (Bhatia, 2005).4 At the all-India level, electricity subsidies to agriculture are estimated at 26% of gross fiscal deficit. They may vary from 80% in Madhya Pradesh and Haryana to 50% in Andhra Pradesh, Gujarat and Karnataka, and to about 40% in Rajasthan, Punjab and Tamil Nadu (Bhatia, 2005).5

Even here innovative ways need to be sought. While energy pricing is seen by many politicians as an effective means to subsidize rural producers - and therefore a number of countries even apply zero tariffs (e.g. the states of Tamil Nadu and Andhra Pradesh in India reverted to zero tariffs after the elections in May 2004 (Bhatia, 2005)) - the detrimental effect on groundwater aquifers needs to be taken into account.6 The well-intentioned 'pro-poor' policy may eventually turn into an 'anti-poor' policy when the aquifers become overex-ploited and only the rich can afford to continue pumping. That is why other types of subsidies should be contemplated. An option could, for instance, be lump sum payments to small farmers that would permit them either to pay the full electricity bill or to reduce their pumping, pay a lower bill and use the 'gain' for something else. In this way the energy tariff would not distort the true price of groundwater, and at the same time not hurt the poor (World Bank, 2006).

Pricing the groundwater resource

Another way to provide an incentive to use water more efficiently is to price the resource itself, i.e. users pay for the abstraction of the groundwater resource itself. For the maximum impact, this should be based on volumetric metering, thus providing an incentive to use less water. Many times, however, metering equipment is not installed on wells or it is not effectively monitored by the (ground)water management agency. Therefore, few countries practise direct groundwater pricing, especially in agriculture where there tend to be large numbers of users, and transaction costs for monitoring are disproportionately high. In some countries, e.g. Mexico and France, industrial and municipal users pay, but because agricultural users are exempt and they use the largest share of the water, the impact on the groundwater resource is little.

Due to the cost of monitoring individual wells - and also due to the possibilities of corruption in meter reading or tampering - there are now efforts to develop remote-sensing tools, which can help calculate groundwater use based on the observed crop cover. The advantage of these tools is their visual power and the fact that water users themselves can learn to interpret them. This affords the possibility for aquifer self-management rather than reliance on well-by-well monitoring, thus increasing transparency in aquifer management and reducing strategic transaction costs. By using remote-sensing information, users can monitor each other's groundwater use, for example, by comparing neighbours' type of crops and area under cultivation, enabling peer pressure to enforce abstraction agreements (including use efficiency) and reducing possibilities of shirking.

In spite of some caveats (e.g. how to accurately model and calculate evapotranspiration), remote sensing can develop into an important and increasingly affordable tool for groundwater management. Attempts at its use are taking place, for instance, in Idaho, USA, and in South Africa.

Another option is self-declaration as practised in New Mexico and in Arizona, USA. In these states groundwater users declare once a year what their actual abstraction has been. In Arizona, every time a permit expires, it is reconsidered from a technical point of view and the new permit will be issued taking into account the potential water savings that the user could make by installing more efficient irrigation technology. This way, total abstraction from the state's aquifers is brought down over time (Jacobs and Holway, 2004). South Africa also uses self-declaration.

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