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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)