Newsletter #3 November 2008

The Role of Integrated Hydro-Economic Modelling in Sustainable Water Resources Management


eeWater is increasingly considered an economic good. Policy demand for information about the economic value of water and the economic consequences of water management has grown correspondingly over the past decades. In a special issue of the journal Ecological Economics, guest editors Roy Brouwer and Marjan Hofkes from IVM’s Environmental Economics Department provide an overview of international experiences and state-of-the-art modelling of the complex interactions between hydrological and economic systems. Different methodological approaches are highlighted, addressing a wide variety of surface and groundwater resource management problems worldwide, including water pollution, water scarcity, water allocation, and flooding.

Traditionally, engineers developed integrated hydro-economic models, containing a detailed description of the hydro-geological conditions of a river basin, such as surface and groundwater flow processes, and a simple economic optimization algorithm. Agriculture has been the prime focus of many of these models, going back to the 1960s when resource economists developed the first optimal control groundwater models for demand management in irrigated agriculture. More comprehensive approaches to model economic behaviour in connected market systems are included in the special issue to counterbalance the traditional engineering approach. Computable general equilibrium (CGE) models illustrate, for example, the economy-wide impacts of water policy, and are particularly useful for the evaluation of water pricing policies. Important institutional-economic aspects of integrated water management can be captured in these models through (changes in) water allocation rights, existing or new water trade systems and other economic instruments like water taxes and fees. However, also here a clear trade-off exists: modelling the economy-wide impacts of water policy in CGE models is at the expense of the level of hydro-geological detail.

Special attention is paid to the methodological and operational issues and challenges when linking hydrological and economic system models. This refers to different spatial and temporal scales (e.g. river basin versus administrative boundaries of a region), but also fundamental feedback mechanisms between hydrological and economic systems. The reciprocal effect of changes in the water system on the economic system and vice versa the effect of changes in the economic system on the water system is considered one of the most important future challenges in integrated hydro-economic modelling. Systematic feedback mechanisms are missing in most existing models. The direction of influence is usually one-way. For instance, pollution abatement in economic activities has an impact on emission levels and hence water quality, but the corresponding change of water quality on these economic activities through changes in productivity or avoided damage and treatment costs are often not accounted for. Similarly, flood damage models investigate the impact of climate change and flood events on economic activities and corresponding damage costs, but these models usually do not account for changes in economic behaviour as a result of flood events. Adaptation and mitigation can significantly influence the longer-term economic effects of environmental change. Adaptation and resilience to new circumstances based on socio-economic learning processes are expected to play an increasingly important role in the future development of integrated hydro-economic models according to the guest editors.

References:

Brouwer, R. and Hofkes, M. (guest editors). Integrated Hydro-Economic Modelling: Approaches, Key Issues and Future Research Directions. Special Issue Ecological Economics Integrated Hydro-Economic Modelling for Effective and Sustainable Water Management. Vol. 66, No. 1, 15 May 2008, pp 16-22.

Brouwer, R., Hofkes, M. and Linderhof, V.  General equilibrium modelling of the direct and indirect economic impacts of water quality improvements in the Netherlands at national and river basin scale. Special Issue Ecological Economics Integrated Hydro-Economic Modelling for Effective and Sustainable Water Management. Vol. 66, No. 1, 15 May 2008, pp 127-140.