Brian H. Hurd, PhD, Professor
Dept. of Agricultural Economics & Agricultural Business
New Mexico State University
bhurd @ nmsu.edu
http://agecon.nmsu.edu/bhurd
“Assessing Costs and Benefits of Adaptation: Methods and Data”
First Regional Training Workshop – Capacity Building Programme on the Economics of Adaptation
Bangkok, Thailand
11 Mar - 14 Mar 2013
Overview
Lec 1. Modeling and Economic
Assessment of Watersheds
•
Goals and objectives in watershed assessment
(1) System Dynamics models (simulation)
versus
(2) Hydro-Economic models (optimization)
Long-run watershed planning using Hydro-Economic
models
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Conceptual framework and key economic principles
Balancing water supply and demand
Allocating water across users, space, and time
Dams and reservoirs in watershed planning
Modeling climate change impacts and adaptation
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Climate change – Hydrology - Economics
Overview (cont.)
Lec 2. Hydro-Economic Models in Practice:
Two Case Studies of Model Design,
Data and Implementation
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Case #1: Colorado River
Case #2: Rio Grande
Lec 3. Using Hydro-Economic Models to
Estimate Adaptation Costs and
Benefits of Water Use and Allocation
Changes
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Conceptual framework and key economic principles
Balancing water supply and demand
Optimizing water allocations across uses and places
Overview (cont.)
Lec 4. Using HEMs to Estimate Costs and
Benefits of Dams and Reservoirs
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Water capture and storage
Managing variability and timing-of-use
Hydropower production
Flood-risk mitigation
Lec 5. Strategies for Developing Climate
Change Scenarios and Modeling Data
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Hydrological data and modeling
Economic data and water demand estimation
Collaborate, work t0gether and other final thoughts
Lec 1. Modeling and Economic
Assessment of Watersheds
•
Goals and objectives in watershed assessment
Long-run watershed planning using HydroEconomic models
•
•
Conceptual framework and key economic principles
•
•
•
•
Balancing water supply and demand
Allocating water across users, space, and time
Dams and reservoirs in watershed planning
Modeling climate change impacts and adaptation
•
Climate change – Hydrology - Economics
Economic Approaches to Water and Use,
Services and Value, and Project Evaluation
 The Water Problem: How might communities determine water
allocations and uses across users, across places and across time
periods?
 The Economic Problem: How can scarce water resources be used
effectively and efficiently?
 Case 1:
Surface Water (multiple users)
 Case 2: Reservoirs and Aquifers (multiple time periods)
 The Assessment Problem: How can alternatives and scenarios be
evaluated?
 Variations of applied Benefit – Cost Analysis (BCA)
 Including all market and non-market quantifiable benefits and
costs as practical
Watershed Assessment Goals
and Objectives
 Describe the important hydrological, bio-physical, economic, and institutional
characteristics at appropriate spatial and temporal scales
 Identify and characterize plausible alternative environmental and management
scenarios and/or system changes
 Assess, analyze and describe the bio-physical and economic consequences of
modeled scenarios and changes in environment, management, technology,
infrastructure etc.
 Models are tools that help planners
 examine data
 integrate concerns
 analyze alternatives
 evaluate outcomes
Methods and Conceptual Approach
Watershed Modeling Approaches
• System Dynamics models (simulation)
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
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Useful for simulating complex, non-linear, interdependent systems
Assessing ‘what if’ questions
Highly descriptive and non-normative modeling
Good choice for ‘operational’ scale modeling
• Hydro-Economic models (optimization)
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Assessing economic choices and tradeoffs with defined goals and
objectives
Not well suited for highly complex, non-linear systems where
conditions for successful optimization are unmet
Good choice for policy and planning assessments with long-run
decision horizons
Hydro-Economic Model
 A mathematical model of a watershed where economic objectives can be optimized
within a set of physical, technical, and institutional constraints
 Optimize the net benefits in the whole basin across a 30 year timeframe

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Benefits in M&I sector, for example:

Drinking water

Water to take a shower
Benefits in agricultural sector

Water to produce crops for the food
 Physical and institutional constraints,
for example:

U.S. and Mexico Treaty of 1906

Endangered Species of 1973

Rio Grande Compact
Objectives of Hydro-Economic
Watershed Models
 Represent major spatial, physical,
and economic characteristics of
water supply and use
 Evaluate welfare, allocation, and
implicit price changes associated
with alternative hydrologic,
management, and institutional
conditions
 Identify opportunities to improve
water management systems from a
watershed perspective
Hydro-Economic Models
Economic Objectives Subject to Structural and Institutional Constraints
 Consumptive and nonconsumptive
economic services
 Agriculture, municipal and industrial,
thermoelectric
 Hydropower, navigation, flood
damages, water quality
 Constrained by inflows, river
characteristics, institutional provisions
 Outcomes indicate efficient water use,
river flow, and storage
 Across the mixture of users
 Upstream and downstream services
 Intertemporal allocation
Model Basics
 Develop a schematic diagram of the watershed system
 Describes physical structure (tributaries, inflows, and
reservoirs
 Identifies and locates watershed services
 Show diversion points and instream uses
 Derive estimates for the model’s objective function
 Develop demand and supply curves for each service based on
water diversion or instream flow
 Describe model constraints
 Mass balance (upstream to downstream flow)
 Intertemporal storage in reservoirs
 Institutional flow restrictions
Colorado River Model (Upper Basin)
Model Objective Function
Given water supply, expected streamflows, and water demands in the watershed,
the model objective is to choose (manage) all water diversions (allocations),
reservoir storage and releases in order to:
Maximize present value of total long-run net economic welfare ($)
defined as the sum of all net benefits less the sum of all costs and damages
Welfare ($) = Σt 1/dft [(ag($) + indust($) + domestic($)
+ rec($) + env($))
– total costs($) – damages($)]
Water Values: Needs, Desires, and
Willingness to Pay
Sources of Value
 Use
Value ($)
Intrinsic / Existence Value
Bequest Value
Non-consumptive Value
Water Quality
Recreation and Sport
Habitat
Biological Diversity
Scenic & Env Aesthetics
Cultural
 Consumptive Use
Passive Use
 Non-consumptive Use
Total
Economic
Value (TEV)
Use Value
Consumptive Values
Irrigation
Domestic
Industrial & Commercial
Water Quality
Source and Quantity
 Option
Passive Use
 Intrinsic / Existence
 Bequest
Source: Derived from Rogers, Bhatia, Huber (1998).
Water as a Social and Economic Good: How to
Put the Principal into Practice.
http://info.worldbank.org/etools/docs/library/80637/IWRM4_TEC0
2-WaterAsSocialEconGood-Rogers.pdf
Model Constraints:
River Flow and Reservoir Storage Mass Balances

The Case of Groundwater
(and other SCARCE depletable or non renewable resources)
 How much to use NOW, how much to save for LATER

Deciding allocation across time

Balance the value of current use with future use
 ‘User cost’ measures the opportunity cost of NOT
having the resource available in the future
 User cost depends on demands and supplies


Current period
Future periods
 Dynamic efficiency requires:
price = marginal production costs (current opportunity costs) + marginal user cost (future opportunity costs)
 Inter-temporal allocation varies with interest rate
 Higher rates favor current period use
Economic Efficiency
 Allocations Across Users (Static Efficiency)
 Net benefits are maximized where marginal benefits
from an allocation equal the marginal costs, i.e., no
other allocation or uses are possible that produce greater
net benefits
 Allocations Across Time (Dynamic Efficiency)
 A resource allocation across n time periods is optimal
and efficient where the present value of net benefits is
maximized, i.e., present values of net marginal benefits
are equal
Changing Hydrographs
What does it mean for?
 Water storage and
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Model assumptions
temperature ↑ 4°C
Precipitation ↑ 10%
distribution systems?
Urban and rural water users?
Water quality?
Hydropower?
Recreational and cultural
functions?
Riparian ecosystems and
migratory patterns?
Adaptation: Terms and Definitions
Adaptation is a deliberate change in system design, function or
behavior in response to or anticipation of changing conditions or
events.
Reactive (autonomous) adaptation
A disturbance occurs and systems absorb impacts and attempt restoration to predisturbed conditions
Proactive (anticipatory) adaptation
The nature and timing of a disturbance is anticipated and systems reorganized to
improve capacity to avert damages and leverage any resulting opportunities
“… organizations increasingly face adaptive challenges requiring them to abandon the familiar
and routine. Instead, they need to develop the capacity to harness knowledge and creativity to
fashion unique responses, stimulate organizational learning and sometimes embrace
transformational change.”
Carl Sussman, “Building Adaptive Capacity: The Quest for Improved Organizational Performance”
Context for Adaptive Action
 Climatic change can cause significant harm to societies and
ecosystems
 Reducing GHG emissions (aka mitigation) will likely reduce
both the degree and likelihood of adverse conditions
 Longevity and inertia of atmospheric GHG forcing means some
degree of climate change is unavoidable
 Therefore, adaptation is not a question of ‘if’ but rather of
How? What? Where? and When?
How? – Building Adaptive
Capacity
Adaptive Capacity is the ability of systems,
organizations and individuals to:
 Adjust to realized and potential changes and
disturbance events
 Take advantage of existing and emerging opportunities
 Successfully cope with adverse consequences, mitigate
damages, and/or recover from system failures
Merci’ Beaucoup!
Grazie
Gracias Thank You
Brian H. Hurd, PhD
Department of Agricultural Economics & Agricultural Business
Gerald Thomas Hall Rm. 350
New Mexico State University
Tel :
Email:
Web:
(575) 646-2674
bhurd@nmsu.edu
http://agecon.nmsu.edu/bhurd