Can hydro-economic river basin models simulate water shadow prices under asymmetric access?

Modeling Non-Cooperative Water Use in River Basins

Conventional water use and management models have mostly emulated purposefully designed water use systems where centralized governance and rule-based cooperation of agents are assumed. However, water use systems, whether actively governed or not, involve multiple, independent decision makers with diverse and often conflicting interests. In the absence of adequate water management institutions to effectively coordinate decision processes on water use, water users’ behaviors are rather likely to be non-cooperative, meaning that actions by individual users generate externalities and lead to sub-optimal water use efficiency. The objective of this review is to evaluate the advantages and disadvantages of recently proposed modeling systems dealing with non-cooperative water use regarding their ability to realistically represent the features of complex hydrological and socioeconomic processes and their tractability in terms of modeling tools and computational efficiency. For that purpose, we conducted a systematic review of 47 studies that address non-cooperative water use in decentralized modeling approaches. Even though such a decentralized approach should aim to model decisions by individual water users in non-cooperative water use, we find that most studies assumed the presence of a coordinating agency or market in their model. It also turns out that most of these models employed a solution procedure that sequentially solved independent economic decisions based on pre-defined conditions and heuristics, while only few modeling approaches offered simultaneous solution algorithms. We argue that this approach cannot adequately capture economic trade-offs in resource allocation, in contrast to models with simultaneous solution procedures.

Simulating water markets with transaction costs

This paper presents an optimization model to simulate short-term pair-wise spot-market trading of surface water abstraction licenses (water rights). The approach uses a node-arc multicommodity formulation that tracks individual supplier-receiver transactions in a water resource network. This enables accounting for transaction costs between individual buyer-seller pairs and abstractor-specific rules and behaviors using constraints. Trades are driven by economic demand curves that represent each abstractor's time-varying water demand. The purpose of the proposed model is to assess potential hydrologic and economic outcomes of water markets and aid policy makers in designing water market regulations. The model is applied to the Great Ouse River basin in Eastern England. The model assesses the potential weekly water trades and abstractions that could occur in a normal and a dry year. Four sectors (public water supply, energy, agriculture, and industrial) are included in the 94 active licensed water diversions. Each license's unique environmental restrictions are represented and weekly economic water demand curves are estimated. Rules encoded as constraints represent current water management realities and plausible stakeholder-informed water market behaviors. Results show buyers favor sellers who can supply large volumes to minimize transactions. The energy plant cooling and agricultural licenses, often restricted from obtaining water at times when it generates benefits, benefit most from trades. Assumptions and model limitations are discussed.

KEY POINTS

Transaction tracking hydro-economic optimization models simulate water marketsProposed model formulation incorporates transaction costs and trading behaviorWater markets benefit users with the most restricted water access.