Pricing of irrigation water under alternative charging methods: Possible shortcomings of a volumetric approach

Abstract

The European water framework directive aims to protect the environmental quality of water and encourage its efficient use. EU member states are required to implement efficient water management systems and appropriate water-pricing methods. This paper examines the economic effects that may arise given the introduction of two different methods for pricing irrigation in the Mediterranean area. The considered pricing methods charge farmers for the costs incurred by water user associations (WUAs) in managing water distribution networks. The first method, based on the metered use of water by farms, is known as the volumetric pricing method. The second is an area-based pricing method, whereby fees are charged per hectare according to the estimated average water use for each crop. The economic effects and the impacts on the water usage of these two schemes are analyzed using a mathematical model that represents the farm sector in a Mediterranean area that relies on a dam for irrigation. The possible effects are analyzed under two scenarios: first, the methods are applied to the observed water-pricing conditions, second, an additional charge is introduced to recover unaccounted costs of the water supply system (e.g., long-term costs related to infrastructure, and the operational and maintenance costs of dams) in line with the water framework directive principle of cost recovery. The results show that the introduction of an additional charge via the volumetric pricing method could stimulate the substitution of water provided via collective networks with groundwater. This could adversely affect the financial situation of the WUA and have negative environmental consequences. This negative outcome does not arise in the case that an additional charge is applied via the area-based pricing method.