European EnvironmentEur. Env. 13, 100–119 (2003) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/eet.316 WATER PRICING AND IRRIGATION WATER DEMAND: ECONOMIC EFFICIENCY VERSUS ENVIRONMENTAL SUSTAINABILITY Antonio Massarutto* Universit`a di Udine, Italy Irrigation is by far the largest water user in Europe and this is a cause of increasing concern for European environmental policy makers. Insufficient water pricing as well as a subsidy policy that encouraged the development of irrigated crops have been blamed for having favoured an excessive development of water consumption. The policy background is now changing: the reform of the Common Agricultural Policy is gradually reducing the price bonus paid to agricultural commodities, while the Water Framework Directive requires full-cost recovery to be adopted as the guiding rule for water price setting, thereby reducing or eliminating artificial incentives to develop irrigation. Will this reform achieve the desired effect of fostering sustainable irrigation water use? This paper, based on an original study developed in eight different test areas, suggests that this will * Correspondence to: Antonio Massarutto, Dipartmento di scienze economiche, Universit`a di Udine, Via Tomadini 30/A, 33100 Udine, Italy. E-mail:
[email protected] Copyright 2003 John Wiley & Sons, Ltd and ERP Environment. not necessarily be the case: irrigation water use will become more efficient (in the sense that water use will be more concentrated on more valuable uses), but this does not necessarily have positive implications in terms of sustainability. Copyright 2003 John Wiley & Sons, Ltd and ERP Environment. INTRODUCTION I rrigation represents a source of major concern for European water policy, first because of the absolute quantity of water used, at an overall as well as at a regional or local scale; second, because of the strong dynamics that have been experienced in the last two decades. Behind this development there are spontaneous trends due to obvious economic factors: irrigation allows a substantial increase of soil productivity, improves reliability of crops, reduces vulnerability of production to climatic variations and allows therefore more risky cropping choices (Gibbons, 1986; Merrett, 2002). In short, irrigation increases the profitability of farming (by up to 700% and more according to Berbel et al., 1999) and its capacity to compete in the global WATER PRICING AND IRRIGATION WATER DEMAND market. In this sense, demand for irrigation originates from general market forces that are beyond the control of public institutions; these can in turn adopt environmental policy instruments in order to contrast spontaneous trends. On the other hand, the extraordinary development of irrigated agriculture might have been further pushed by at least two institutionally determined factors. First, national governments – especially in Southern Europe – have been largely engaged in the past in the construction of waterworks, whose cost was for the most part sustained through the public budget. Second, the European ‘Common Agricultural Policy’ (hereafter CAP), based until recently on subsidized prices paid to farmers in excess to the market value of crops, might have further inflated the incentive to irrigate. Farmers thus enjoyed the opportunity to use cheaper water in order to obtain commodities that could be sold at higher prices than the market would have allowed. The removal of both institutional factors is currently taking place through the reform of CAP and the introduction of Dir. 2000/60 (Water Framework Directive). Crop prices are gradually being driven down to the world market level, while water prices will be required to achieve full-cost recovery (hereafter FCR; the concept also includes environmental externalities) and incentive pricing structures will be adopted (Eu-DgAgr, 2000, 2002; Eu-DgEnv, 1999). The expectation of European policymakers is that both innovations will significantly contribute to the achievement of sustainable water management and curb excessive water demand (Strosser, 2000). In order to assess these expectations, a number of questions need to be raised. Will water demand increase or be reduced, how much and where? Will patterns of irrigation change significantly? Will CAP reform and the Water Framework Directive act in the same direction, and which one has the most powerful effects? What will be the impact on farmers’ income? Is incentive water pricing able Copyright 2003 John Wiley & Sons, Ltd and ERP Environment to promote water saving and contrast spontaneous demand trends? What suggestions can be derived in terms of sustainability of local water uses in the concerned areas and for European environmental policy? The literature on irrigation water demand is far from conclusive with respect to the above questions. From a theoretical point of view, water demand should be evaluated on a case-by-case approach, since it is ultimately influenced by the cost of water and by the improvement of farmers’ income, a function of crop prices, market conditions and other kinds of payment and subsidy: all variables that are highly site specific and policy influenced (Gibbons, 1986; Fontana and Massarutto, 1995; OECD, 1999; Merrett, 2002). Applied studies show that demand elasticity is generally low or very low, and very much dependent on cropping mixes and agricultural market conditions. Above a certain critical threshold, representing the maximum willingness to pay, elasticity suddenly becomes much higher (OECD, 1999). Very little applied research has been done so far in order to address these issues in a European context and to understand the impact of water price increases of the magnitude that would be required in order to achieve FCR (among these, Garrido et al., 1997; Varela Ortega et al., 1998; Arrojo and Carles, 1999; Berbel et al., 1999; Bazzani et al., 2002). Within this literature, it is quite difficult to single out results that can be generalized in order to assess the overall impact of the ongoing reform on European water resources and agriculture. The present article is based on an original study, developing a comparative analysis of some representative case studies in various geographic, climatic and agronomic locations, in different locations in Southern Europe. In the case studies, alternative market scenarios have been simulated, in order to understand the likely short and medium term response of farmers to changing policy context, in terms of irrigation water demand. Although Eur. Env. 13, 100–119 (2003) 101 yet we can at least try to sketch out some qualitative information. The article is structured as follows.5 7.6 22. Patterns of growth show a very rapid increase during the last 40 years. Env. while in other countries indicator continues to grow rapidly. 13. however. We then summarize the main conclusions of the study and its policy implications. The next section derives some evaluation criteria for assessing the outcome of the policy reform from the theoretical discussion on sustainable water use.0 50 000 18 000 322 906 3312 2924 4307 7430 250 2014 5445 6982 916 1306 5382 Source: our elaboration on IEEP. 1999. 2000.A.1 17. In Central and Northern Europe. The following section sketches the most important structural and environmental aspects of European irrigation and the key aspects in the ongoing policy reforms. and ∗ Irsa-Cnr. 1995 (hm3 /year) Total AUT BEL + LUX DK SF FRA GER GRE ITA∗ IRL NL POR SPA SWE UK EU-15 2200 7100 900 2400 40 600 46 300 5 000 42 000 1200 7800 7300 33 300 2700 11 800 210 600 Irrigation 200 18 140 58 4918 1389 5659 20 136 1 1128 4307 24 109 105 141 62 308 9% – 16% 2% 12% 3% 80% 50% – 1% 59% 72% 4% 1% 29 1960 1970 1980 40 90 391 360 321 430 2400 539 419 730 2400 870 460 961 2526 290 620 1950 20 108 6539 380 622 2379 33 88 7680 480 630 3029 70 140 9557 1990 4 1 435 64 1485 475 1314 2710 1 560 791 3193 115 108 11 256 1996 2001 1575 1330 944 3453 3364 Efficiency % of agricultural surface (1990) m3 /ha/year 0.9 37. IRRIGATION IN EUROPE AND THE CHANGING POLICY FRAMEWORK Table 1 provides an overall picture of European irrigation and its evolution in the last Table 1. and uses mostly underground water.1 1. while Mediterranean Spain and the analysis is confined to three countries. 100–119 (2003) . the methodology used for estimating water demand and the main results.6 4. the ratio reaches 70–80%.1 2.8 13.8 – 29 21.6 3. MASSARUTTO 40 years. Table 2 shows that Central and Northern European irrigation is for the largest part dedicated to medium and high value productions. Available data do not allow a precise breakdown of water uses among different categories and sources. Agriculture represents on an overall base 30% of total water uses. Two countries alone (Italy and Spain) represent over 70% of total European irrigation. figures are clearly lower by one order of magnitude.0 17. In Continental Spain and Southern Italy large water transfers supply both low and medium value productions. Copyright 2003 John Wiley & Sons. some results might be considered as a basis of discussion for a larger European context. Ltd and ERP Environment 102 Eur. these are next more systematically discussed in a comparative way. ‘large irrigators’ – namely Italy and Spain – seem to have slowed down during the last decade. We then present the case studies. in Southern Europe.3 0. Background data of irrigation in Europe Irrigated surface (thousands of km2 ) Water abstractions. oilseed and dairy products. citrus and vineyards. 1999). it is particularly used as support (non-permanent) irrigation for open-air high value crops such as fruit. yet not representative of the country’s patterns of irrigation). Occasional (citrus. oilseeds. based on price support to some products and especially ‘continental’ ones such as cereals. large inter-basin transfers Continental Spain∗∗∗ Spain∗∗ Southern Italy∗∗∗ Southern Italy∗∗ Southern Italy∗∗ Mediterranean Spain∗∗ Mediterranean Spain∗ Southern Italy∗ ∗∗∗ Dominant (the most representative and quantitatively relevant irrigation model for the country). particularly in the case of previously subsidized crops (cereals. including external environmental costs. Vegetables. ∗ Some (there are examples. • Increase of water prices up to an ‘adequate’ cost recovery. The past structure of the CAP. in order to promote water saving. emphasis on non-productive agriculture oriented to landscape and Eur. 2000. olive) rootcrops Self supply. Ltd and ERP Environment enjoyed the opportunity to purchase water at a much lower price than the true cost. • Use of market-based instruments such as tradable quotas and volumetric prices (per cubic metre) instead of fixed allowances at flat-rate prices (per hectare). Source: our elaboration on IEEP. • Decrease of agricultural commodity prices. oilseeds. this development depends on a mixture of external market forces and policy factors that might have further strengthened the spontaneous trends of water demand. basin-scale Northern Italy∗∗∗ Southern France∗∗∗ Northern Italy∗ Greece∗ Southern Italy∗∗ Mediterranean Spain∗∗ Southern Italy∗∗ Mediterranean Spain∗ Collective.WATER PRICING AND IRRIGATION WATER DEMAND Table 2. Env. As we argued before. might have created a ‘potential demand’ for irrigation by artificially increasing the marginal value of water for open-air subsidized crops and by encouraging the cultivation of marginal land (that. could be suitable for irrigation). groundwater Northern France∗∗∗ Greece∗∗ Southern Italy∗∗ Spain∗ Greece∗∗ Mediterranean Spain∗∗ Italy∗ Northern Europe∗∗ Mediterranean Spain∗∗ Northern Europe∗ Collective. farmers have Copyright 2003 John Wiley & Sons. by chance. • Decoupling of income subsidies from productivity. 100–119 (2003) 103 . The most meaningful changes brought forward by the CAP reform and the Water Framework Directive can be summarized as follows. ∗∗ some parts of Southern Italy show the largest concentration of greenhouse production. Self-supply from underground water is very common in Mediterranean Spain and in Greece and to a lower but still significant degree in coastal areas of Southern Italy and Portugal. On the other hand. Greenhouses grassland vineyards. dairy products etc) to the world market level. Important (representative and quantitatively relevant). because of state subsidies of various kinds (OECD. Main features of European irrigation ←−−−− Water supply cost Value added of water −−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−→ Cereals. 13. fruit. According to our estimate. 1998. since they would require good knowledge Copyright 2003 John Wiley & Sons. In this sense. Areas with very low water supply costs (e. market incentives have revealed important shortcomings that limit their practical usefulness in the case of irrigation2 . On the other of the hydrodynamics of the whole river basin and aquifer. While the direction of change is clear and explicitly set up by the European Commission (Eu-DgEnv. the introduction of market mechanisms and/or incentive pricing has been widely discussed in the literature (Dinar. 2 The most important applications of ‘water markets’ regard trading of water rights involving public water supply and other uses with very high willingness to pay. energy) or are used for the purpose of providing publicly relevant services (such as flood protection and drainage). IVM-EFTEC. Northern Italy) are already close to FCR despite the very low price. First of all. 1997. while in other areas the cost of supply is much higher and cannot be fully recovered even if the water price is substantially higher. Merrett. 13. 2002)..g. which in most cases is not available. 2000. Unfortunately. These costs are presumably higher as long as a reallocation between districts (and not between farms in the same district) are considered. The basic question seems to be transaction costs that farmers would have to face in order to be able to trade water. It is also interesting to note that cost recovery ratios are not necessarily correlated with absolute water prices. since in many cases investment has been made a long time ago (the economic life of some irrigation facilities could last even for centuries). From the handful of studies available. Env. distinguishing between operational and full costs (Table 3)1 . While potentially interesting as a tool for allocating water more efficiently. 1 In the following we shall focus on water supply costs only. or because irrigation facilities are shared with other water uses (drinking water supply. With respect to the second issue. but also on the exact meaning of ‘adequate’: will some cross-subsidies between water uses be allowed in the case of multi-purpose waterworks? On which territorial base should costs and prices balance? Will the government be allowed to contribute to new irrigation facilities or to the upgrading of existing ones in less advantaged regions (Objective 1)? How will external costs be measured? A comprehensive and methodologically satisfactory comparison of water prices and actual cost recovery levels has never been made so far. it can be considered as representative of national patterns. Fontana and Massarutto. MASSARUTTO environmental conservation. rather than irrigation alone (Easter and Dinar. the magnitude and speed of changes that will actually occur are still uncertain for a number of reasons. but in some parts of Spain and Southern Italy they should grow up to five to 10 times higher than actual prices. ‘quality products’ and local territorial trademarks. Buckwell et al. with special relation to the value of environmental functions requiring non-use of water such as ecological. 2000. 1995. 1998). in order to maximize profits (Gibbons. MacMahon and Postle. We have tried nonetheless to provide an estimate on a country basis. the increase of water prices will obviously depend on the actual level of cost recovery. 1999). Iglesias et al. 100–119 (2003) . An assessment of the full cost (to be compared with actual prices) is particularly difficult. 1994. landscape and recreational values (Turner and Postle. self-supplied irrigation recovers the full cost. putting together available data at the macro scale. 1986. 2002). these values are also the most difficult to correlate with quantitative abstractions for the sake of calculating a figure in Euros per cubic metre. 2000. Merrett.. prices should rise by 30–50% in Northern Italy and in France.A. Eu-DgAgr. 2000. 2002. while the lowest recovery ratios can be found where large water transfers are in place. 1998). Ltd and ERP Environment 104 Although data is only indicative and general. a general idea is that external costs will vary very much according to site-specific situations. including the cost of water transfers. Eur. the literature suggests that incentive pricing and market mechanisms could be more effective when farms are larger (greater potential to reallocate water within the same estate without trading) and farmers behave ‘economically’. since very little applied research has been done so far in order to assess properly the magnitude of external costs. In order to achieve FCR of industrial costs. 000 0006 0. surface Individual Collective.04–0.2 ¤/m3 ) 0.Copyright 2003 John Wiley & Sons.02–0.02–0. surface SPA 80–100 100 90 Groundwater Groundwater UK NL 100 100 100 100 100 100 100 70–80 10–20 100 – 100 – 50–80 10–30 100 52 35 97 Full cost 0. sometimes volumetric Flat rate or volumetric Direct cost Price structure∗∗ 120 ¤/ha + 0.057 ¤/m3 Free n.07–0. flat rate = water services are purchased on a flat base (per hectare).09 0.05 –¸ 0. sometimes volumetric Flat rate Flat rate.3 ¤/m3 Direct cost Direct cost – 1. Source: Our estimate based on literature and institutional data from various sources (cfr. sometimes volumetric Direct cost 50–300 ¤/he (0. 100–119 (2003) 105 .44 ¤/m3 (from PWS) Direct cost Direct cost Flat rate sometimes volumetric Direct cost Flat rate. Ltd and ERP Environment Continental.08 ¤/m3 Resource management∗ 0. Flat rate.06–0.01–0. ∗∗ Direct cost = the cost is sustained directly by the farmer. Massarutto. ∗ Resource management = large water transfers.02–0. 2001). Irrigation water prices and cost recovery structure in selected European countries WATER PRICING AND IRRIGATION WATER DEMAND Eur. unregulated Collective. regulated Collective.02 90–210 ¤/he (0.1 ¤/m3 ) 25–1000 ¤/he (0.03 – – – – n.005–0.07 ¤/m3 ) 225 ¤/he + 0.01 Abstraction charge (¤/m3 ) Structure of irrigation water price O&M.01–0. regulated rivers etc. groundwater Individual Collective GRE 70–100 20–100 100 North South ITA 100 100 100 100 O&M only Cost recovery (%) Mediterranean. Supply and distribution 0. Groundwater GER 100 Individual Collective POR 100 30–100 Mediterranean. sometimes volumetric Flat rate.a. Env. 13. small systems FRA Irrigation system Table 3.02 0.a.07 ¤/m3 ) 50–150 ¤/he 30–100 ¤/he (0. operation and management cost only.005–0. volumetric = water services are purchased on a volumetric base (per m3 ). still above the world market level. As a critical natural capital. since these are normally the most productive and the least likely to give up production. afforestation and landscape-oriented agriculture. Anania. 2001) and Italy (Bernini Carri et al. where the economic viability of productive agriculture will be reduced (Whitby. or in small part-time agricultural estates. These areas will probably be converted to ecological farming. however. sustainable use of water cannot be assessed at an overall Eur. 1999. They remain. 1997.. despite the fundamental innovation of agroenvironmental funds and the efforts of the Commission to link financial aids to the deployment of ecologically sustainable farming systems. 100–119 (2003) . and the degree to which compensative payments and other subsidies will continue to remain conditioned by historical income levels and patterns of productivity. On the other hand. particularly for cereals (especially maize). The core questions regard the pace at which agricultural commodity prices will reach the world market level. only in a few cases are water prices already based on a volumetric scheme (Southern France and areas of Spain). retirement of irrigated land seems most unlikely. Wherever farms are efficiently organized and irrigation is efficiently managed. According to the now commonplace definition agreed in the Dublin Declaration on Water and the Environment (1992). MASSARUTTO hand. but above all a substantial change in the traditional system of water rights. 2002). 2001). compensation payments to farmers are still linked to soil productivity and continue in various ways to support agricultural production as such3 (Buckwell et al. oilseeds and dairy products. Agricultural prices have already experienced a drastic cut after the ‘MacSharry’ reform of 1992 (average cut of 33%) and Agenda 2000 (further cut of 15%). which seems at the moment quite difficult (IEEP. Env. small farms. 13. Berbel et al. We can assume that this is correlated with the lowest value added of water. Since these elements are still being debated. in turn. 2000..g. The last issues depend on CAP reform. retirement will occur more probably in mountain and hilly areas.A. income support payments might be still correlated with yields. In Europe. 3 For example. it is necessary to formulate hypotheses. van Huylenbroek and Whitby. yet at present it is fiercely debated (Eu-DgAgr. The so-called ‘Fischler reform’ proposes a further substantial step. part time. 1998). 1996) that an overall reduction of irrigated surface due to this effect is in fact taking place here and there. Ltd and ERP Environment 106 Analysts of CAP reform have predicted a more or less drastic reallocation of cultivated surface. particularly due to reallocation of crops (with less surface devoted to cereals and more to other crops) and retirement from production of marginal land. Copyright 2003 John Wiley & Sons. Only by chance.. Nonetheless. as well as a social (need for a participatory and democratic approach in water policy decisions) and an economic one (water as an economic good to allocate efficiently). reference yields on which compensations are paid could be more or less standardized over large territories and direct compensations linked to the practice of irrigation might still be maintained. this assessment should involve the ecological dimension (water as a finite and vulnerable resource). non-professional farms or farms that are located at long distances will find less scope in market transactions and will be less responsive to incentive pricing. will retirement affect irrigated areas. 1999). partially compensated by growth in other areas. due to inefficient farm organization (e. the introduction of metering and/or of the legal right to trade water allowances among farmers and other users would require in the other areas costly new investment. there is some evidence from Spain (Verg´es. small estates) or to inefficient use of water. SUSTAINABILITY AND IRRIGATION WATER USE The evaluation of the actual framework in terms of sustainability is not straightforward. however. g. Copyright 2003 John Wiley & Sons. it can contribute to the beauty of an agricultural landscape. reservoirs could become a valuable asset for recreational purposes. it is important to stress that irrigation is more critical because its water requirements are larger in the driest seasons and in particularly dry years (that is. Large surface abstractions.g. water stress has to do not with absolute quantity. or have a positive impact on aquifer recharge depending on the location of abstractions5 . 2000). but rather with local water systems and real-time balance between resources and uses. Shortle and Griffin. After all. Without entering into the complex and rich debate on the practical definition of indicators for assessing sustainability of water use. Env. in order to do so. as the largest consumptive use. If properly managed. First. it is questionable whether the issue of ‘affordability’ should be valid for agriculture in the same way as for household water supply. in Northern Europe or in coastal areas of Southern Europe). in Northern Italy irrigation uses mostly regulated surface waters (otherwise flowing directly to the sea).e. 1995. an economic as well as a social dimension of sustainability should also be considered: the cost of infrastructure should be fairly shared among generations (i. the idea that relevant functions of the critical natural capital (‘water needs’) should be effectively satisfied without creating prejudice for the integrity of the natural resource (quantitative and qualitative water balance between available renewable resources and uses) while ‘socially relevant’ water uses should be affordable for anybody regardless of income levels and social conditions. irrigation is a productive input used by an economic sector and it is not obvious why farmers – or any other economic actor – should use inputs at subsidized price. we can adopt as a general criterion. On the other hand. Faucheaux and O’Connor. although in these cases most of the problems can be addressed at the moment of releasing and enforcing the abstraction license (EEA. However. agriculture has been recognized for many reasons as a sector that deserves public protection. but rather on a local scale. Irrigation. The water issue 4 Water quality as well as other relevant environmental dimensions (e. 13. particularly if regulated by upstream reservoirs. in cases where water availability is lower). landscape change. is contributing to local water stress in quantity terms. can create other kinds of problem (e. 1998. Ekins. low flows). 100–119 (2003) 107 . evidence of water stress caused by excessive irrigation water use has been increasingly reported even in regions characterized by apparently lower consumption (e. This irrigation system has been in place for centuries. therefore contributing to a net inflow to lowland aquifers. While all consumptive uses have the same effect. Applied studies also report evidence of over-exploited rivers. On the other hand. the price charged to users for this purpose should not exceed a critical limit that excludes those who cannot pay (Barraqu´e. 2000. where all relevant environmental functions should be preserved and water use should be kept below natural recharge of the renewable resource (Turner and Dubourg. at the same time. 1993.WATER PRICING AND IRRIGATION WATER DEMAND scale. From the ‘ethical’ point of view. IEEP. irrigation might also have environmentally beneficial effects: for example. landscape conservation) could nonetheless be indirectly linked to irrigation: for example. Eur. 1999). alteration of natural flow patterns. often in relation to self-supply from aquifers. the next generations should not be charged for benefits that are enjoyed by the present generation). Yet.g. soil stability. 2001). In fact. or because dams and reservoirs alter the river landscape permanently. which justifies the very existence of the CAP (Grant and Keeler. In order to assess sustainability of irrigation. Ltd and ERP Environment 5 For example. further criteria should be considered. because low flows reduce the pollution dilution potential of rivers. 2000). and the first drainage and irrigation infrastructure can be dated back to the Middle Ages. widely agreed in spite of slightly different formulation and terminology adopted. irrigation regards mostly the quantitative dimension of water rather than the qualitative one4 . The relevant territorial scale for the water balance can be a larger one only if resources are ‘averaged out’ in a larger territorial unit by physical manmade infrastructure. A. where agriculture could hardly be carried on without water. from the economic point of view. it becomes an indispensable input in Southern Europe.g. Following this line of discussion. Synoptic table of case studies Case-study location Water supply Cost of based on: water supply Existing information sets Methodology for case study 1 Ledra-Tagliamento Italy–NorthEast Surface Low Short-term water demand curve based on marginal productivity of water in normal and dry years New estimate of the demand curve according to CAP scenarios 2 Tarquinia Italy–Central Surface Low Linear programming model Simulation with the LP model 3 Fortore Italy–South Surface Medium– high Full set of data with individual consumption of water for a series of years Simplified LP using technical coefficients based on a regional model 4 Charente France–South Surface Medium Linear programming model Simulation with the LP model 5 Adour France–South Surface Medium Linear programming model Simulation with the LP model 6 Cordoba Spain Surface High Detailed literature + official data and documents Macro-analysis and elaboration of existing information 7 Almeria Spain Ground water High Detailed literature + official data and documents Macro-analysis and elaboration of existing information 8 Catalonia Spain Surface Medium– high High Detailed literature + official data and documents Macro-analysis and elaboration of existing information Ground water Copyright 2003 John Wiley & Sons. If this occurs for a collectivity of water users (e. at least. but in turn to avoid the pricing system encouraging inefficient ways of using and allocating the resource. economic sustainability can be compatible with under-cost pricing to some users. Env. as Barraqu´e (2000) and Massarutto (2003) have argued. yet. should be therefore considered in the broader context of agricultural policy. Ltd and ERP Environment 108 Eur. Finally. river basins). the issue then would not be to charge each individual consumer for the exact cost. the issue of affordability of water prices might be of some relevance in the assessment of sustainability. but rather that THE CASE-STUDIES: METHODOLOGY AND ANALYSIS Our study has focused on eight areas located in three different countries (France. patterns of recovery of the full cost are certainly important in order not to place undue financial burdens on the next generations. what is most important is not cost recovery at the individual level. In this respect. irrigation plays an asymmetric role in European agriculture: while being a welcome but not essential addition in Northern Europe. alternative ways of supporting farmers’ income (including water subsidies) should be comparatively evaluated. an irrigation association) or for larger units (e.g. MASSARUTTO users share the cost equitably in a transparent and democratically accepted way. 13. particularly in Southern Europe. Spain and Italy). This limitation to three countries could perhaps limit the ambitions of generalizing Table 4. 100–119 (2003) . provided that the economic balance is achieved at a wider level within the present generation. 02–0. vegetables.01 Continental (cereals. or in order to compensate for the relative deficiencies of alternative methods. use recycled/brackish water Some opportunity to change cropping mix 1 27 800 2 8200 0. oilseeds) 6 206 000 0.08–0. the choice has been carefully made in order that alternative combinations of water supply costs and crop profitability would be adequately represented (in terms of Table 2 above).04–0. vegetables). either because budget constraints forced the team to utilize already existing models. need to avoid individual abstractions Available water for irrigation is less than theoretical demand Available water for irrigation is less than theoretical demand Competition with other uses for the water transfer schemes Depletion of aquifer due to excess abstractions Competition with PWS Contested new water transfers Transform gravity to spray irrigation Set aside/ reforestation Introduce drip irrigation Eliminate continental crops Invest for improving productivity of water. their water resource base and cropping mix and their key water management issues. durum wheat) 4 5000 0. Background information on case study areas Irrigated Actual water surface price (¤/m3 ) (he) 0. though our conclusions can at least represent a plausible hypothesis. greenhouses Mixed Actual recovery of costs∗ Nearly achieved (70–80%) Substantially achieved (60–70%) Achieved for operational cost only (50%) Nearly achieved (90%) Little opportunity to change cropping mix Nearly achieved (90%) Improve tradability of water rights Very low (10–20%) Purchase more surface water Achieved Allocate water to the more productive crops Achieved for GW. Case studies have followed different methodological approaches. results to the rest of Europe.18 Continental (cereals. their precise location. oilseeds) 5 20 000 0.1 8 244 000 0.08 (S) 0. 13. oilseeds) 7 46 000 0. However.1 Mediterranean (fruit. Env.WATER PRICING AND IRRIGATION WATER DEMAND Table 5.1 Mediterranean (horticulture) 3 180 000 0. Ltd and ERP Environment description of the eight areas. Further research is needed in order to verify to what extent results can be extended to other European contexts. Eur. Some background information is contained in Table 5. Table 4 contains an introductory Copyright 2003 John Wiley & Sons.015 Dominant farming systems Water-related governance issues Trends/options Continental (maize) Excess abstraction from watercourse Absolute scarcity in dry years Excess abstraction from watercourse Conflict with PWS in the summer Severe scarcity in the case of drought. low for S (30–40%) ∗ The level of cost recovery has been only roughly estimated since accounting systems did not always allow an exact calculation.63 (GW) Mediterranean (fruit. 100–119 (2003) 109 .04 Continental (cereals. The case of Fortore again uses a linear programming approach. due to the lack of calibrated data and technical coefficients representing the area. Allocation of water among crops follows different criteria. 100% volumetric pricing would require costly new investment and will probably not occur. MASSARUTTO Since it is not possible to enter into a detailed description of each one. ‘after’ scenario)7 . sometimes towards higher differentiation. Water demand does not decrease as expected. the case of Ledra has used an already estimated water demand curve based on the Copyright 2003 John Wiley & Sons. 1998. fully decoupled compensation payments. subject to constraints such as land and water availability.. sometimes tending towards specialization in a few profitable crops. This hypothesis could not be tested here due to analytical limitations of the models used. Sumpsi et al. yet. yet the magnitude of this effect is crucially dependent on the adaptation strategies that are available to them. the impact of the new water and agricultural policy will vary according to local circumstances (level of water price and 6 In fact an even stronger incentive could have been introduced with an increasing-block tariff scheme. We have preferred to adopt these ‘strong’ hypotheses. Irrigated surface decreases. it used coefficients derived from another study conducted at the regional level. Among the Italian case studies.. Env. Berbel et al.A. our study has focused on the problem of cost recovery and of the ‘exit price’. in order to assess at a regional scale whether this threshold would be reached or not. with an expressly constructed and calibrated linear programming model (already developed by Dono. The size of the study area is larger and comparable to the large Spanish study areas. Eur. Ltd and ERP Environment 110 ex post (net-back) calculation of farmers’ willingness to pay based on the extra income produced by each marginal quantity of water.. They are based on the desktop elaboration of information derived from literature and institutional sources. we just provide some basic explanatory information (see Massarutto. The French case studies in turn are based on linear programming models.. we have then considered two scenarios. Apparently. for more detailed information). 2000). considering only one crop. Results of simulations. Iglesias et al. are seemingly inhomogeneous and contradictory. In order to consider different alternatives for agricultural commodity markets. 2001. Arrojo and Carles. Finally. one describing a full implementation of the CAP reform objectives (no price subsidies. Given the relative abundance of applied studies on demand elasticity to price in the Spanish context (Garrido et al. crop and water prices etc. 7 As we argued before. but this is compensated by more intensive water use in the remaining irrigated surface. We have assumed that in each context the water price would rise up to the recovery of the full average cost within the concerned territory. one based on the pre-reform situation (‘before’ scenario). 1995). 1998. summarized in Table 6. 100–119 (2003) . assuming that farmers will purchase water and allocate it to crops in order to maximize a profit function. Both models have been specifically constructed and calibrated for the study areas and have been run under the common hypotheses adopted in the present study. that of Tarquinia follows the same methodology as used in the French case. The Spanish cases adopt a macroeconomic perspective and are concerned with the assessment of overall water demand at the scale of a region and water allocation among crops in the whole area.. and that it would be fully based on a volumetric scheme in order to have the highest incentive potential6 . 1998. 1999. Farmers’ income in general is negatively affected. and sometimes even increases despite the water price rise. 13. all showing little elasticity below the ‘exit price’. but distinguishing between ‘normal’ and ‘dry’ years (Massarutto. 1999). Varela Ortega et al. under the belief that our conclusions would be reinforced if real-world scenarios were less drastic than we assumed. all of these hypotheses – particularly pessimistic from the farmers’ point of view – are quite unrealistic: water prices should only reach an ‘adequate’ level of cost recovery. the implementation of CAP reform is going on more slowly and it will produce its final outcomes – if any – only in the medium to long term. productivity. 1997. 70 Insignificant Insignificant 470–1300 370–900 Absolute margin (¤/ha) Insignificant Insignificant Elasticity below exit price – – – 0.05–0.500 1700 150–250 183 46 229 75 −0.30 Exit price (¤/m3 ) 0. ‘before’ ‘after’ 1 Scenario Table 6. COP.5–1 (COP) >1 (MED) >10 <1 1.5 (MED) 0.20 −0.11 – 0 0.5 (MED) >0. 13. Mediterranean cultures (e.10 (COP) 0. Summary of the main results of case studies 0.g. Ltd and ERP Environment ‘before’ ‘after’ ‘before’ ‘after’ ‘before’ ‘after’ ‘before’ ‘after’ ‘before’ ‘after’ ‘before’ ‘after’ ‘before’ ‘after’ 2 3 4 5 6 7 8 244 000 High reduction of COP area 46 250 No reduction 206 000 High reduction of COP area 20 761 18 996 5 301 4 962 86 000 86 000 8 200 8 200 27 800 27 800 Irrigated surface (he) 2196 4000 27 9 12 12 109 118 9 10 162 162 Water demand (hm3 ) Changes in water and land use Shift to high value crops Decrease of COP area More diversification No major change Shift to high value crops More diversification No major change until exit price is reached. Env.11 0.40 0. cereals.17–0.Copyright 2003 John Wiley & Sons.70 2120 2023 1703 1522 −0.12–0.15 0.05 >0.5 (MED) >0.01 0.2 0. hortives.05 (COP) 0. continental cultures (e.4–1.14 0. 100–119 (2003) 111 .23 0.04 0.320 −0. oilseeds). then drastic reduction Shift to high value crops More diversification Concentration on high value crops More specialization Concentration on high value crops More specialization No major change MED.7 13 4 >3 >3 >3 >3 11–26 8–20 Exit price/FCR – – 300–2.03 0.08 0.20–0.3 (MED) >1 0.5 (MED) >0. fruit).30 Margin elasticity to water price WATER PRICING AND IRRIGATION WATER DEMAND Eur.09 0.g.40 Insignificant −0. Eur. but also quite strong in the case of open-air cultivation of cereals. none of the areas considered in this study is likely to give up intensive production. 100–119 (2003) . Ltd and ERP Environment 112 If water prices do not vary.. cropping specialization. where after the CAP reform implementation neither the FCR water price nor the actual price would be affordable for farmers. This is in fact not a surprising result. it is widely believed that its reform. Absolute quantities (at any given water price) remain substantially unchanged. conversely. price scenarios). lowincome crops such as maize continue to be irrigated despite the price reduction. Anania. local trademarks etc8 ).. 2000). IEEP. Copyright 2003 John Wiley & Sons. CAP might have induced land use change in favour of crops whose water requirements happened to be high (especially maize). will contribute to environmental sustainability. these results nonetheless allow some generalization that can be proposed as predictions of future developments of irrigation. 2002). demand elasticity to water price is reduced. 2001). horticulture. What is important is not the absolute cost of irrigation. is that wherever productive agriculture remains in place. Rather. and allow some suggestions for European water and agricultural policy. not only. it might have some importance in deciding which crops to irrigate. given the total quantity of water available. What happens. Considered all together. the effect is not straightforward: water demand increases or decreases unresponsively to local water stress situation. but also in a broader European context. Where there is no opportunity to shift towards more profitable crops. MASSARUTTO magnitude of its increase for reaching FCR. As far as water policy objectives are concerned. 1997. The same conclusion should be valid wherever the value added by agriculture increases. greenhouses). its reform alone will have limited impact as well. along the lines we have described above. offers only partial support to this thesis. The analysis we have made. because of quality-oriented marketing strategies (organic agriculture. DISCUSSION OF RESULTS Irrigation water demand and CAP reform The CAP has often been blamed in the past for its incentive to over-produce and possibly to adopt environmentally unfriendly farming techniques for the sake of increasing production of subsidized crops (Buckwell et al.A. as far as irrigation is concerned. The fall in demand elasticity can be easily explained by the fact that lower crop prices put pressure on achieving lower unitary costs and greater reliability of production. not 8 This result is confirmed by another recent study in an area dominated by quality production (Bazzani et al. 13. even in the more drastic application of the reform. in the concerned case-study areas. 1998. the ‘exit price’ becomes lower and irrigated crop mix changes in favour of the most profitable ones wherever this strategy is allowed by geographic and market circumstances.g. These results can probably be generalized: wherever the cropping mix is already oriented towards high value marketable products. The reduction of the ‘umbrella’ of price support stresses the search for efficiency and cost reduction in order to recover the margins. Env. e. since it further confirms the statement that CAP reform will drastically redesign the panorama of European agriculture by fostering substantial structural transformation and reallocation between areas and countries (Whitby. even in the drastic CAP scenario that we have simulated. It suggests in fact that in most locations the CAP alone has had only a weak and indirect impact on irrigation demand in the past and that. with the only exception of the Adour region in France. but rather the fact that with irrigation the farmer is able to end up with lower average product costs and lower variability of margins. yet only in a few circumstances could this be sufficient. wherever this remains competitive. For the same reason. These effects seem more robust in areas that are dedicated to high value products (e. in turn.g. Obviously.2–0.g. fruit) and even more for high value production (e. this is mostly concentrated in areas such as the ‘rice district’ between Lombardia and Piemonte. if any. Irrigation water demand and full-cost recovery On the other hand. horticulture. it would occur mostly in places where water is very abundant thanks to local circumstances or where large infrastructure is in place10 . It must be stressed that these crops represent the dominant share of irrigated surface in most coastal Mediterranean areas as well as in the whole of Northern Europe9 : in all of these cases. The massive development of irrigation in Southern Europe. price elasticity remains quite low (in the range of 0. Large reductions of water demand induced by CAP reform can be expected only from the eventual retirement of irrigated land from production (without shift to more valuable crops. has been found in England by Bate and Dubourg (1997). this would probably exceed in many cases the threshold of convenience (exit price). transport and supply facilities. often lower and close to zero11 ). The condition for this to happen is more likely to occur when water is used because it is very cheap (i. The decisive question is therefore whether the new water price allowing FCR will be higher or lower than the exit price. which is lowest where large water transfers are in place (that is. At the same time. if any.2 means for example that if the price rises by 50%.g. in situations where the actual water price is already very close to the exit threshold. 1999. Whether the achievement of FCR will imply exceeding this threshold or not obviously depends on local circumstances and especially on the actual level of cost recovery. 12 As we argued earlier. The most obvious candidates. Ltd and ERP Environment development of irrigation is well demonstrated. 10 For example Bernini Carri et al. the latter is a function of the cost of water and its marginal value (crop price). CAP reform will hardly reduce water demand (and.15 ¤ m−3 for low value crops (e. is very clearly related to public investment in water storage. up to 10 times greater for medium value crops (e.3. Env. consistent with our conclusions. 100–119 (2003) 113 . the magnitude of this value will differ among areas according to sitespecific geographic and agricultural features. eco-farming. greenhouses). As we suggested above. a similar outcome could occur.e. Mediterranean products. one of the richest in terms of water. the hypothesis that water underpricing has played a major role in the 9 A similar result. cereals). in Southern Italy and Continental Spain)12 . this is unlikely to happen in general since irrigated land is normally also more productive. extensive pasture etc). 13.g. If users had to pay the full cost of water. in line with the results of most applied studies found in the literature (see OECD. the effect is likely to be the same. and not because it is very useful. as the Adour case shows. If higher. irrigation would be stopped. These regions are the most likely candidates for a drastic reduction of irrigation demand if FCR is achieved. Our case studies show that the exit price is likely to be reached by most of the Spanish and Southern Italian 11 A value of elasticity of 0. If price increase due to FCR is lower than the threshold. Copyright 2003 John Wiley & Sons. we can try to formulate some general assessment. are those areas in continental Spain and in Italy in which both farming practices and water efficiency are very poor because of geographic or other factors.WATER PRICING AND IRRIGATION WATER DEMAND affected by the CAP reform (since they did not enjoy price support in the past).05 and 0. but rather to alternative land management opportunities including afforestation. will probably increase it). for a survey). Eur. The order of magnitude emerging from the case studies analysed lies between 0. the actual level of cost recovery is in many cases below 20%. and particularly in Spain and in Italy. Nonetheless. (1996) forecast a significant reduction of water demand in Northern Italy. Even if this demand reduction could be meaningful in aggregate terms. because its cost is actually low or because farmers enjoy water price subsidies). While the former depends ultimately on local patterns of water availability. water demand will be reduced by 10%. 100–119 (2003) . U. On the other hand. high value products have margins that can well afford the new water price even if it is two or three times higher than the actual price. this conclusion can be reinforced with respect to new irrigation projects. although in some areas (such as Adour) even a small price increase is likely to reach the exit threshold. In Northern Europe and in those Mediterranean areas dominated by self-supplied irrigation. MASSARUTTO cereal and oilseed cultivations (exit price/FCR ratio < 1). especially those with the highest water consumption. without significant reductions of total water quantities. while in the other cases the effect will be rather to reallocate water in favour of the most profitable crops. at least where this investment cannot be demonstrated as useful for other purposes (flood protection or drinking water supply). water price will not exceed exit price. water price likely to exceed exit price. citrus and vineyards. Northern Italy and France are in a special situation. It seems nonetheless that high value crops (horticulture and especially greenhouses) are ready to sustain even a substantial increase of their actual water price. 13. in vast areas of Spain and Italy. since water supply costs are actually recovered. where unit marginal values are lower. In these regions. Water framework directive. wherever high or medium water cost (large scale transfers) is combined with low value production. it is not possible to foresee the magnitude of price increases that would eventually be required to achieve FCR of externalities. uncertain. The effect in the case of a high cost–medium value combination is uncertain. It seems quite clear that. close to or even lower than unity in some cases. Env. CAP reform and sustainability Evaluating the expected outcome of policy reform in terms of sustainability is not straightforward. The effect of FCR in these areas is more likely to increase specialization into high value crops and eliminate others completely. Eur. Elsewhere. Ltd and ERP Environment 114 Table 7.A. We can try to summarize these conclusions in a more general way (Table 7). price increases are likely to have far less dramatic effects. All case studies show that the exit price is one order of magnitude higher with respect to the price allowing FCR. as shown by the critical value of the exit price/FCR ratio. The likely impact of FCR will be to stop irrigation in some areas. the expected outcome is the reduction of farmers’ gross margin without substantial change of total water quantities. Since water supply costs are far lower and the recovery rate already reasonable. N. but external costs are not. Since applied research dedicated to the empirical assessment of external cost is still haphazard and contradictory (see note 3 above). once FCR is implemented. This situation occurs Copyright 2003 John Wiley & Sons. it will become very difficult in the future to justify new state intervention in the field of water resource management unless in special circumstances for high value crops. As we have argued before. As a result. the effect is much more difficult to predict. some overall reduction of water consumption can be expected at the aggregate level. the effect of FCR should be assessed case by case. Expected impact of FCR + CAP on water demand Value added Low cost Medium cost High cost Low Medium High N U Y N N U N N N Y. given the high marginal value of water. Since the foreseeable cost of new waterworks is normally much higher than actual average costs (for the obvious reason that the most suitable sites and opportunities have already been exploited). Less sure is this statement if we consider support irrigation to open-air cultivation of fruit. Both effects are likely to be concentrated in a few areas rather than being evenly distributed. quantitative restrictions will be probably more effective. the quantitative effect on water demand will occur regardless of the pricing structure (marginal cost or flat rate). depending on local conditions. traditional irrigators served by collective systems and large infrastructure. Effects on water demand are much more due to the fact that water prices in some areas will reach the exit threshold. where actual patterns of irrigation can be sustained economically only because Eur. water demand elasticity is always very small. this could happen in Northern Italy. the effect could be a different one if the value added of water is not high enough to justify this investment14 . an economic and possibly an ethical dimension: for all of these. As a result. Eventual water savings would be employed in order to irrigate extra surfaces rather than left unused in the environment13 . On the other hand. In most countries (certainly in Italy. France and Spain) surface that has already been adapted for irrigation is reported to be much larger than actual irrigated surface. those characterized by self-supply as in Northern Europe as well as in coastal areas of Southern Europe). since there is no guarantee at all that demand reductions will occur in the areas with the most serious water stress problems. 14 For example. a water tax should be high enough so as to alter the economic convenience of irrigation. as well as from national statistics. In particular. This results in a more productive use of water (less water abstraction per irrigated hectare. In the long run. On the other hand. In fact. water saving measures are already in place wherever the water price is high enough and value added high enough for justifying water-saving investment. Dono.WATER PRICING AND IRRIGATION WATER DEMAND sustainable irrigation should be assessed with respect to an environmental. 100–119 (2003) 115 . below the exit threshold. yet this is likely to react far less in the case of more valuable crops. In order to permanently reduce water demand. While an overall reduction of aggregate water demand and a likely slowdown to further water transfer schemes is expected. with economic incentives having their best use as accompanying measures (Merrett. Ltd and ERP Environment either at the farm or at the water supply management level. Env. as suggested elsewhere in the literature. The CAP reform and FCR seem to have much higher effects on large. we have argued above that environmental sustainability should be evaluated according to local water balance and not in aggregate terms. since they assume fixed water consumption coefficients (per hectare and per crop) and do not consider opportunities of water saving. higher degrees of flexibility can be expected. especially once the most obvious water saving techniques have been implemented. In order to have an effect on demand. This is not necessarily good news for a sustainability-oriented European water policy. a selective 13 This assumption cannot be demonstrated through the simulation made. In these cases. This effect is probably overestimated by the econometric models used. this results from a strong reduction in some (a few) areas and a stabilization or increase in many other areas. but it cannot be expected that incremental water prices or Pigouvian taxes can have a major role to play for the sake of environmental policy in order to manage water stress situations. 13. higher value added per cubic metre) rather than in a lower overall water quantity. Copyright 2003 John Wiley & Sons. 1995). 1997. we have likely beneficial as well as negative effects. This is particularly true in the short run (during the irrigation season. once cropping choices have been made and irrigation assets are fixed). it seems that the policy reform will have minor impacts on a number of areas that are widely recognized as the ones in which water stress due to irrigation is highest (namely. rather than resulting from many small reductions caused by marginal adaptation of irrigation demand to price variations. This conclusion is particularly critical if we consider the opportunity of introducing water abstraction charges for the sake of discouraging underground water abstractions (independently of cost recovery). With respect to the first dimension. provided that the total cost of water for the farmer is high enough. but results from interviews with local water administrators (at least in the Italian and Spanish case studies). and cheaper self-supply from aquifers. FCR would then ultimately result in environmental damage. the effect will be more simply to erode actual margins or. full-cost water pricing should well be seen as a decisive step towards economic sustainability. Ltd and ERP Environment 116 Finally. the combination of CAP reform and FCR is likely to entail relevant distributive effects. our analysis could not enlighten this aspect. or would require costly waterworks for transferring water. which may also happen to be more harmful to the water environment. 2003). investing in order to implement water saving techniques (e. By reducing the scope for new water transfers. As far as reallocation is possible. notably through the public budget. the ‘extensive’ use of available resources cannot be sustainable for all of them. if new water users press to have access to irrigation in the same area. MASSARUTTO subsidy policy (e. whose use is much more difficult to control. which would easily bring the water price above the exit level. Unfortunately. No transaction costs are considered. at worst. On the other hand.g. 100–119 (2003) . However. with respect to ethical sustainability and affordability of water prices. At the smaller scale in which simulation models have been operated in the case studies. the reform will also produce a permanent benefit for the public budget as well as an incentive towards a wiser use of available resources at a more local scale. reallocation was assumed to occur ‘spontaneously’. the economic structure of agriculture in any given region can be an important explanatory cause. but simply left unused. water is abundant and cheap. some potentially undesired effects could occur as well. Water pricing would force farmers to use water more efficiently and therefore to allocate it in the most productive and profitable destinations. When reallocation is not possible. force farmers to adopt dryland techniques and even retire. horticulture in coastal Spain and Italy). It seems clear that the distributive effects of FCR will be highest in a few areas. On the other hand. At a larger territorial scale some easy opportunities for reallocation might occur for example if upstream uses (most often open-air crops such as cereals) leave more water available for downstream uses (e. with respect to maintenance of already existing infrastructure. use non-conventional resources such as brackish water or reused effluents) would require extra capital and operational (energy) costs. it is quite possible that already built infrastructure will not be reallocated to other uses. and new beneficiaries could eventually compensate losers so that everyone would ultimately be better off. 15 A very clear result from both Italian and Spanish case studies is that cheap water normally means inefficient water use. a net income gain (or at least a limited income loss) for each irrigation area can be predicted.g.g. in case there is a trade-off between costly (but relatively more secure and controlled) surface supply. Copyright 2003 John Wiley & Sons.A. However. reduce distribution loss. again the outcome is not straightforward. The paradox here could be that farmers who cannot benefit from subsidized surface water transfers would then turn to underground water. Eur. From the point of view of economic sustainability. short-run marginal cost – instead of full cost – would become the most desirable pricing criterion (Massarutto. Where this risk is concrete. 13. because farmers would allocate each quantity of water to the most productive uses. since water is allocated to crops regardless of its actual productivity. allowing public support for water-saving innovations) could be an option. thus reallocation can occur nearly automatically as long as a certain crop is a practicable option for that area. their maintenance or decommissioning costs will need to be sustained in some way. On the one hand. with income improvements in the order of 50% maximum. we should consider another potential environmental shortcoming. although crucially dependent on alternative land management opportunities available and partially remediable through improved water use efficiency15 . adopt pressure spray irrigation. particularly in Southern Europe. Finally. promoting a more efficient use of water and freeing financial resources that were previously freezed in the investment needs for maintaining and improving water assets. Env. If water demand would fall in a whole region. however. The impact of FCR on farmers’ welfare is significant. It can be argued that reallocation is easier if farms are larger and behave ‘economically’: therefore. a significant reduction will not necessarily occur in areas where irrigation pressure on the water environment is higher. CONCLUSIONS AND IMPLICATIONS FOR EUROPEAN WATER POLICY Water pricing seems to be potentially a very important and useful instrument of agricultural policy. In this sense. well targeted subsidies (e. To subsidize agriculture through free provision of water is a costly and inefficient way of sustaining farmers’ incomes. This will be more likely to Copyright 2003 John Wiley & Sons. Therefore. It encourages wasteful use of water and inefficient farming choices. Even if an overall reduction of both aggregate water consumption and pressure for new water supply schemes is likely to occur. FCR should be considered within the broader context of the CAP reform and not as a separate policy tool. but pressure on water resources is not likely to vary too much. Quantitative restrictions. Productivity of water might become greater. Our simulations show clearly that using water more efficiently does not necessarily have the effect of reducing water demand: to the contrary. this trade-off is not necessarily beneficial for the water environment. strongly requested by the Water Framework Directive. The adoption of an ‘economic approach’. while other areas will probably have an increase of water demand. Ltd and ERP Environment occur in areas that are served by large water transfer system. efficiency gains will obviously be more modest and impacts on single farmers higher. On the other hand. effects will be concentrated in a few areas. a higher value added generated by irrigation) rather than environmental sustainability (reduction of water use below the quantity that becomes harmful for some of the desired environmental functions of water at the local scale). high value crops entail usually higher water requirements and lower elasticity. Provided that efficiency gains will be used in order to compensate net losers. In the end. Eur. A more efficient water use might well be also a less sustainable one. 100–119 (2003) 117 . cannot mean that the market will be able to achieve sustainable water use without regulatory intervention. particularly where cereals and oilseeds cannot be easily substituted by more productive crops. as long as it will not occur. areas that will be forced to abandon intensive irrigation will be the net losers of the game. with limited gains for farmers and large costs for society as a whole. European water policy should adopt water pricing within a wider set of policy tools to be used in each context according to local specific features. the overall impact in terms of economic welfare seems unquestionable.g. we cannot assume that every ‘theoretical’ opportunity for reallocation will actually be caught. If compensation cannot come from crop reallocation and water trade among farmers. benefits of water pricing as an environmental policy instrument have probably been overemphasized and some of its shortcomings often neglected.WATER PRICING AND IRRIGATION WATER DEMAND However. Since the outcome in terms of sustainability will be site specific (according to local water management patterns as well as agricultural economy) and not necessarily beneficial. With the environmental impact of irrigation dependent on local conditions. in general. 13. to help water-saving investment where appropriate). water resources planning and (to some extent) public involvement in managing waterworks will continue to be necessary and fundamental. 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