The impact of water-pricing policy in Spain: an analysis of three irrigated areas

Abstract

Linear programming (LP) has been widely used to solve company resource allocation problems. The technique's ability to predict how companies will adjust to changes in a variety of exogenous factors is well known, and when used at company level, it enables us to avoid aggregation problems. The decision-maker's objective in this type of research is to maximize profit estimated as gross margin. We apply the LP model to three farms in three different irrigation units that, we believe, provide a representative sample of Spanish irrigated agriculture. In focusing on the goals of this research we stress that water pricing as a single instrument for control of water use is not a valid means of significantly reducing agricultural water consumption. This is because consumption does not fall until prices reach such a level that farm income and agricultural employment are negatively affected. If water pricing is selected as a policy tool, among the consequences for agricultural sector will be that: farm income will decrease by around 40% before water demand decreases significantly. The impact of this reduction on rural areas that are dependent on irrigated agriculture will be catastrophic. Secondly there will be a reduction in the number of crops available for farming, with the consequence of a smaller number of alternatives and greater technical and economic vulnerability of the agricultural sector. Finally when water consumption decreases as a consequence of substitution of crops with higher demands for water (cotton, sugar beet, onions, corn) there will be a significant loss of employment both directly on farms and indirectly on processing facilities. These conclusions are drawn from our analysis of three irrigation units in Spain, but we believe that they offer a realistic estimate of policy impacts on the irrigated sector of Spanish agriculture. Even if price increases are not a suitable policy because of the high negative impact, we suggest that a price (around 2 PTAs/m 3) might be of interest in order to make farmers aware of the scarcity of water resources, and to induce them to adopt water-saving technologies without affecting crop distribution. To make water pricing work properly under Spanish conditions, the revenues should be administered by “Comunidades de Regantes” for investment in environmental and water-saving activities, while revenues that are not appropriately invested could be transferred to the Regional Water Authority.