Download All-in-auctions for water

All-in-auctions for water
David Zetland
Senior water economist
Wageningen University, The Netherlands
27 July, 2011
Water scarcity is increasing
• Demand for water is increasing as population
rises and more people increase the waterintensity of their lifestyle.
• Supply of water is fixed or falling as climate
change speeds up the hydrological cycle and
we redefine “good quality.”
• More demand and less supply means more
scarcity. Shortages will occur if these forces
are not brought into balance.
Bulk water needs to be reallocated
• Increasing scarcity means greater competition
for limited water supplies.
• Most “developed” water is used for
agricultural irrigation, but there is increasing
pressure to reallocate water to municipal,
industrial, energy and environmental uses.
• There is also pressure to reallocate water
among agricultural users.
All-in-auctions can help
• AiAs can be used to reallocate water among
existing and/or new users according to value
in use.
• AiAs will establish a local price for water that
accurately reflects supply and demand.
• AiAs explicitly recognize and reward existing
property rights in water.
• AiAs can be used within a community.
How AiAs work
• Water rights must be quantified and assigned
to individuals. These permanent rights will be
associated with temporary annual flows.
• The known quantity of flows are put into an
auction (“all in”).
• Those flows are allocated to high bidders; the
price they pay depends on everyone’s bids.
• Auction revenue goes to owners of rights.
For example
•
•
•
•
•
•
•
Farmers A, B and C each own 2 units of water.
Six units are put into the AiA. A, B and C bid.
$Bids: A (4, 5, 8), B (10, 10, 3) & C (1, 2, 6)
Bids are ordered: 10, 10, 8, 6, 5, 4, 3, 2 & 1
Six highest are accepted; price set to 7th bid.
A gets 3 units; B gets 2 units; C gets 1 unit.
A pays $3; B pays nothing ($6-$6); C gets $3.
For more information
• Read the full length paper on AiAs at:
http://ssrn.com/abstract=1658193
• Listen to my presentation on AiAs at:
http://tinyurl.com/3huhu3y
• Contact me for more information at:
[email protected]
Add to presentation?
•
•
•
•
•
•
•
•
AiA moves water to higher value
AiA will increase production (value) from same water supply
AiA reallocates @ low cost
AiA establishes price (reference point) that will facilitate other
water use/investment decisions
Prices and/or AiA does NOT mean privatization or communal death
Politicians can “fix” 20% of water to each of three sectors (ag,
urban, industrial) and then put 40% into AiA. Each sector can
increase its supply by 200% (in theory), but they will have to
reconcile demands (via price). Politician doesn’t need to make hard
choices but can take credit for offering the opportunity.
Good governance/Rule of law required (implied)
Farmers and other users of “free” water will manage it like a scarce
input with financial value (if sold) and opportunity cost (if held)