The research project

Climatologists and hydrologists have demonstrated that, in the coming decades, global warming will significantly impact on the hydrological cycle worldwide. In particular, research has stressed that the Mediterranean region will be particularly affected during : the summer season, rainfalls are expected to decrease and temperatures to increase; at the same time, the winter rainy season is expected to get shorter and temperatures to increase.
The hydrological regime of rivers and recharge to aquifers will be affected, low flow periods becoming more common, more severe and longer. The impact will be further exacerbated in mountainous regions (in Italy, France and Spain, for example ) as a result of reduction in snowfalls. In this context, stru ctural water deficits and drought risk are expected to become more frequent, putting at stake the current mechanisms of water management and allocation. The establishment of water markets or systems of tradable abstraction quotas could represent a possible alternative. The use of a “cap and trade” approach could simultaneously guarantee environmental protection as required by the Water Framework directive and enhance flexibility in allocation to maximize water use utility and possibly reducing conflicts. The present research proposal aims at investigating the potential for water market scenarios in Southern Europe, focusing in particular on their socio-economic implications by mobilizing complementary socio-economic methods and tools.

The research project will address the following questions and issues:

• Which type of water market scenarios could be proposed for Southern Europe?
Answering this question will build on a review of the few experiences in Europe (Spain mainly) and of the experiences elsewhere (US, Australia, Chile…). Combining the results of this review with exchanges and interviews with selected stakeholders and water managers, the project will help developing different types of water market scenarios (intra- or inter-sectorals, intra- or inter-basin, temporary or permanent). Option markets will also be considered as an adaptation strategy to cope with increased drought risk. The scenarios Project description 5 Water Cap & Trade elaborated will finally be discussed with water stakeholders at local, district and national scales.

• Which potential for water re-allocation through market mechanisms? And which expected socio-economic impact?
These questions will be addressed via the use of micro-economic models that will help: assessing the marginal values of water; building water demand curves; assessing the potential for water reallocation and estimating market fixing price; assessing the economic impact of reallocation…
Models will be developed for the agriculture sector in particular, and also for the domestic water supply sector, providing the possibility to investigate inter-sectoral transfer. In France, modeling will be carried out in the Pyrénées orientales (Roussillon plain) and in the Marais poitevin, building on past activities and existing models that will be updated and improved.

• Are water market scenarios socially acceptable? And which institutional mechanisms for enhancing acceptability?
Specific efforts will be put in assessing stakeholders’ perception about the market mechanisms and the different scenarios of water markets that have been proposed. Semistructured interviews and focus group interviews will be carried out in the selected case study areas representing a diversity of hydrological and institutional conditions, in particular those for which socioeconomic impacts and economic modeling has been carried out (Marais poitevin and Roussillon for France). This assessment will help identifying factors that might constraint the development of water markets and possible means for enhancing acceptance. The information will also be used for identifying organizational mechanisms and institutions that appears as best suited to the local contexts and that will account for stakeholders’ (negative) perception.

• What is the order of magnitude of transaction costs that are likely to result from establishing and operating water markets? How do they compare with expected economic benefits resulting from water reallocation?

A methodological framework will be developed for assessing transaction costs arising from different water market scenarios (e.g. because of the need to establish new water rights, to change organizational structures, to collect information, etc.). This framework will also be applied to the case study areas. The estimated transaction costs will then be confronted with economic benefits from water reallocation estimated above with the use of microeconomic models. This will help identifying thresholds (in terms of prices for agricultural markets, water scarcity, etc.) above which water markets are expected to increase welfare overall.

• What can be learned from the Spanish experience with water markets?
Since 2005, Spain has accumulated some experience with various forms exchange mechanisms. There have been intra- and inter-basin water market transfers, and with temporary and long-term lease agreements. Both groundwater and surface waters have been exchanged. In all these cases, the public authorities have had a crucial role in reviewing and eventually approving the transfers. Prices have been relatively high, showing that water is becoming increasingly scarce and valuable, but far from competitive. Spanish experts have evaluated the experience and agreed that the regulatory framework should be amended. There is also the risk dimension attached to drought and scarcity risks that offer avenues for improvement, which the project will specifically address in the Spanish case studies.

Building on the answers to these different questions, the research will investigate how water markets could develop in basins or water systems where they do not currently exist. To do so, the political economy concepts and framework will be mobilized. Policy exercises involving stakeholders from different case studies (Marais poitevin and Roussillon again, plus 4-5 additional French case study areas representing a diversity of situations) will be carried out to discuss the feasibility of different water market scenarios, and also constraints and resistance from stakeholders that might arise and would need to be tackled throughout a well-thought policy/political process.

The research activities will be implemented in close relationship with stakeholders, be it at the local (case study) level and at the national level. An advisory committee will be established in each country (including France) for discussing progress and research results in the French national policy context. At the local scale, a steering group will also be proposed for the Roussillon and Marais poitevin areas where most efforts are allocated. Finally, different (national & European) workshops will be organized for sharing knowledge and information to a wider audience. Overall, these different efforts will ensure a progressive understanding and possibly ownership of the research methods, hypotheses and results by stakeholders and water policy makers.

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