Economic Modeling of Water GLOBAL ISSUES IN WATER POLICY VOLUME 3 Series Editors Ariel Dinar José Albiac Eric D. Mungatana Víctor Pochat Rathinasamy Maria Saleth For further volumes: http://www.springer.com/series/8877 Glyn Wittwer Editor Economic Modeling of Water The Australian CGE Experience Editor Dr. Glyn Wittwer Centre of Policy Studies Monash University Wellington Road 11th Floor, Menzies Building 11E Clayton, VIC 3800 Australia glyn.wittwer@monash.edu ISSN 2211-0631 e-ISSN 2211-0658 ISBN 978-94-007-2875-2 e-ISBN 978-94-007-2876-9 DOI 10.1007/978-94-007-2876-9 Springer Dordrecht Heidelberg New York London Library of Congress Control Number: 2012934055 © Springer Science+Business Media Dordrecht 2012 This work is subject to copyright. 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Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specifi c statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) v By 2030, the OECD predicts that over half the world’s population will be living with water scarcity. By this they mean that these people will be living in a world where water availability, or more correctly the lack of it, limits economic opportunity. To get to the bottom of this issue, one needs to understand how local water supply conditions infl uence water use and what changes in availability mean for local, regional, and national economies. Before the advent of TERM – The Enormous Regional Model – any discussion about the likely impacts of changes in water policy or changes in supply tended to be based on a combination of some partial analysis coupled with speculative assertions about fl ow on effects to other sectors. As any CGE modeler will tell you, in the complex world we live in, changes in one sector often have counterintuitive implications for other sectors. Assertion making is a risky and unwise business to be in. The recommended approach is to use a model to estimate the likely impacts of a change in one sector on all other sectors. Expect to be surprised. For many problems, fi ne scale insights are needed. One needs to know which industries in which towns will gain income and which will lose income. It is impor- tant to know how quickly people can adjust. TERM was built to allow such analysis. Think about 50 regions each with 170 sectors. Yes, TERM is enormous, and yes, it is constructed from the “bottom up.” But, by taking a bottom-up approach, the detail that determines the fate of any region and its relationship with all other regions can be captured realistically. This book shows how such models can be built. But the book does not stop there. Catchments and rivers have little respect for statistical survey boundaries so TERM’s architects have spent considerable time working out how to convert a conventional regional CGE model into one that respects catchment and other biophysical boun- daries. This is no easy task but, once completed, the resultant model is extremely powerful. The power comes from the use of regional boundaries that are consistent with the very same regions that people are arguing about. TERM-H2O demonstrates the potential of this approach. The boundaries used align with catchment, not statistical division boundaries, and the amount of water available for use in each region described precisely. Objective exploration of the effects of water Foreword vi Foreword scarcity, policy changes, and government expenditure becomes possible. Moreover, because the boundaries used align with catchment boundaries, it is diffi cult for water managers to dismiss the results as irrelevant. Instead, they are given a platform that allows them to examine impacts at local, regional, and national levels. The development of TERM-H2O and, more importantly, the completion of this book enable others to see how to build such a model. It represents an important breakthrough. The power of models like TERM-H2O to bring objectivity to complex political issues is important. This is best demonstrated in Chaps. 6 and 7 of this book. Chapter 6 is about the impacts of a government water entitlement buyback scheme in Australia’s Murray Darling Basin. Water entitlements are traded throughout this region, and in an attempt to resolve over-allocation problems, the government has been purchasing water entitlements and transferring them to a body responsible for making water available for environmental purposes. Many irrigation communities are strongly opposed to this buyback program because they perceive the resultant capital fl ight would destroy their livelihood. TERM-H2O shows that the reverse is the case. Buyback programs increase economic activity in the region. TERM-H2O has also been used to show that most of the adverse fi nancial impacts experienced by irrigators in recent times can be explained by the severity of the drought not government policy reforms (see Chap. 7 ). Variants of TERM work in urban, as well as rural areas, and in Chap. 8 one can see how models like this can be used to assess the merits of different water infrastructure and demand management options. Powerful insights about the economic wisdom of different investment strategies emerge. In summary, the power of modeling systems like TERM-H2O has proven to be greater than many people had expected. This power comes from the richness that fl ows from the construct of models whose regions align with catchments rather than broader statistical areas, have hydrological integrity, and allow objective exploration of options at a level of detail and complexity consistent with the way people talk around a dinner table. Is this approach generally applicable? The answer is a resounding yes – read Chap. 9 . The world we are living in is changing rapidly and becoming increasingly complex; the approach taken in this book is one that should be applied to all problems. The future will be much better if we explore options carefully and avoid listening to those who make assertions that cannot be shown to be real. Prof. Mike Young Executive Director, The Environment Institute The University of Adelaide, Australia Reference OECD (2009) Managing water for all: an OECD perspective on pricing and fi nancing. OECD, Paris vii Multiregional national CGE modeling took a dramatic turn in 2002 when Mark Horridge devised a new approach to regional representation in TERM (The Enormous Regional Model). The Australian version of this new model became available just in time to undertake modeling of the 2002–2003 drought. The new model was based on a massive master database which had to be aggregated to undertake any simulation. In theory, this implied that the model could be aggregated to focus on any number of issues in the Australian economy. In practice, water issues have dominated the model’s use. Starting in 2003, various government agencies including the Productivity Commission, the Murray-Darling Basin Authority, and Victoria’s Department of Primary Industries have commissioned studies concerning the Murray-Darling Basin that required use of the model. CSIRO funded a study of rural and urban water usage. The Productivity Commission has also sponsored database develop- ment that has been important in improving the model. Consulting fi rms, including Frontier Economics, Marsden Jacob Associates, and Deloitte Touch Tohmatsu, have subcontracted work to the Centre of Policy Studies requiring TERM. Two Australian Research Council grants have been instrumental in TERM-H2O development. The fi rst (LP0667466) was undertaken through a linkage with Victoria’s Department of Sustainability and the Environment. The second (DP0986783) pro- vided the resources to bring this volume into being. A number of people in government departments and consulting fi rms mentioned above have assisted us in various ways in developing TERM-H2O, thereby bringing this volume into being. I thank in particular Michael Vardon for ongoing guidance on database development, and Mike Young, who remains an inspiration for others pursuing water issues in Australia and the rest of the world. Nadya Ivanovna provided invaluable background information for the fi nal chapter. Glyn Wittwer Preface ix 1 Practical Policy Analysis Using TERM 1 Glyn Wittwer Part I The TERM Approach 2 The TERM Model and Its Database 13 Mark Horridge 3 Introducing Dynamics to TERM 37 Glyn Wittwer and George Verikios Part II Water Modeling 4 Water Resources Modeling: A Review 59 Marnie Griffi th 5 The Theory of TERM-H2O 79 Peter B. Dixon, Maureen T. Rimmer and Glyn Wittwer 6 Buybacks to Restore the Southern Murray-Darling Basin 99 Peter B. Dixon, Maureen T. Rimmer and Glyn Wittwer 7 The Economic Consequences of a Prolonged Drought in the Southern Murray-Darling Basin 119 Glyn Wittwer and Marnie Griffi th 8 Urban Water Supply: A Case Study of South-East Queensland 143 Glyn Wittwer Contents x Contents 9 Applying TERM-H2O to Other Countries 163 Glyn Wittwer About the Authors 179 Index 183 [...]... of USE Together with matrices of primary factor costs and production taxes, these add to the costs of production (or value of output) of each regional industry In principle, each industry is capable of producing any good The MAKE matrix at the bottom of Fig 2.1 shows the value of output of each commodity by each industry in each region A subtotal of MAKE, MAKE_I, shows the total production of each good... Defeating the Curse of Dimensionality The database for a CGE model consists of matrices of flow values dimensioned by commodity, industry, and region The model will contain quantity and price variables for each of these flows, so the number of variables and equations tends to track database size The computer resources (time and memory) needed to solve the model increase super-proportionately4 as the size of the. .. whether domestic or imported (s in SRC) The diagonal of this matrix (r = d ) shows the value of local usage which is sourced locally For foreign goods (s = ‘imp’), the regional source subscript r (in ORG) denotes the port of entry The matrix IMPORT, showing total entry of imports at each port, is simply an add up (over d in DST) of the imported part of TRADE The TRADMAR matrix shows, for each cell of. .. region of, say, vegetables, source their vegetables from other regions according to common proportions 2.3.2 The TERM Data Structure Figure 2.1 is a schematic representation of the model’s input-output database It reveals the basic structure of the model, which is key to its efficiency The rectangles indicate matrices of flows Core matrices (those stored on the database) are shown in bold type; the other... are shown in bold type; the other matrices may be calculated from the core matrices The dimensions of the matrices are indicated by indices (c, s, i, m, etc.) which correspond to the sets of (Table 2.1); there, the sets DST, ORG, and PRD are in fact the same set, named according to the context of use The matrices in Fig 2.1 show the value of flows valued according to three methods: 1 Basic values = Output... Progress in Australian Regional Economic Modeling Since ORANI, related models have developed in several new directions ORANI’s solution algorithm combined the efficiency of linearised algebra with the accuracy of multi-step solutions, allowing the development of ever more disaggregated and elaborate models The GEMPACK software developed by Ken Pearson (1988) and colleagues since the mid-1980s simplified the. .. assumed: the matrix DELIVRD_R is a CES composite (over r in ORG) of the DELIVRD matrix A balancing requirement of the TERM database is that the sum over user of USE, USE_U, shall be equal to the sum over regional sources of the DELIVRD matrix, DELIVRD_R It remains to reconcile demand and supply for domestically produced goods In Fig 2.1, the connection is made by arrows linking the MAKE_I matrix with the. .. aggregated level The assumption is that the share of, say, Middle, in providing road margins on trips from South to North, is the same whatever good is being transported Although not shown in Fig 2.3, a parallel system of sourcing is also modeled for imported vegetables, tracing them back to port of entry instead of region of production 2.4.2 Other Features of TERM The remaining features of TERM are common... sales to the seafood and other food products in our 144-sector disaggregation When the intermediate sales split was less obvious, we used activity weights of the purchasing sectors for the split The 144-sector national database has an independent value for our modeling work (e.g., it forms the bulk of the MONASH database) For TERM purposes, it was converted to a simpler format prior to the addition of regional... split for these large public expenditure items For other commodities, population shares by statistical division were used to calculate the distribution of Commonwealth and state government spending across regions By applying these shares to the national CGE database, we were able to compute the USE, FACTOR, and MAKE matrices on the left-hand side of Fig 2.1 None of these matrices distinguish the source . for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the. the UN survey on water accounts 170 List of Tables Part I The TERM Approach 13 G. Wittwer (ed.), Economic Modeling of Water: The Australian CGE Experience, Global Issues in Water Policy. representation in TERM (The Enormous Regional Model). The Australian version of this new model became available just in time to undertake modeling of the 2002–2003 drought. The new model was based