Abatement and transaction costs of water reallocation

Abstract

Water reallocations have costs to the users of water, or abatement costs (e.g., charges designed to marginally increase environmental water flows), but also nontrivial institutional transaction costs (e.g., costs incurred to develop institutions and organizations to support and enforce environmental reallocations). However, institutional transaction costs studies are very limited and those available do not integrate abatement costs measurements, which constrains our ability to assess the performance of water reallocation. This paper presents the first integrated analysis of abatement and transaction costs of water reallocation. The analysis is illustrated with an application to the Douro River Basin, an agricultural basin in central Spain that has recently finished its second planning cycle (2015–2021). First, we use a hydroeconomic model that accounts for the two-way feedback responses between human and water systems to estimate the abatement costs of water reallocations, as well as their effectiveness in achieving the good ecological status of water bodies. Second, we measure and monetize realized institutional transaction costs of river basin planning over time and build on this cutting-edge longitudinal dataset to assess future directions and magnitude of transaction costs. We use this information to assess and rank the performance (through cost-effectiveness) of the water reallocations considered in the latest Douro River Basin Plan under alternative climate change scenarios. We find that under the hypothesis of stationary transaction costs, these can represent between 5.7% and 8.3% of the total reallocation costs (abatement plus transaction costs). This non-trivial magnitude highlights the need to account for both abatement and transaction costs when assessing the performance of water reallocations, and environmental policy overall.