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The Wealth of Waste: The economics of wastewater use in agriculture
4.4 ISSUES ARISING FROM THE USE OF THE ECONOMIC METHODOLOGY The variety of case material presented from Spain and Mexico provides a good field testing for the approach presented in Chapter 3, and demonstrates that this is an appropriate framework of analysis for projects involving the reuse of effluent. In general, the framework presented, consisting of the three-fold approach – Cost-Benefit Analysis, Cost-Effectiveness Analysis, and finally Financial Feasibility – has proved its merits as a method of justifying the projects concerned. The viewpoint adopted by the hypothetical CBA analyst in this report is that of the national or regional water or environmental authority. Such an agency takes an “IWRM” stance on water management, taking account of the interests of all relevant stakeholders. Although the two that are most prominent in this report are municipalities and farmers, there is an important third part at the table – the environment – which needs a champion and a custodian. Reflecting the needs of the environment, valuing its assets and services and ensuring that its financing needs are met, is a challenge to analysts in this area. The case studies confirm that effluent reuse is an area ripe for the application and refinement of the tools of environmental cost-benefit analysis. The case material demonstrates that certain items of costs and benefits are more robust than others. On the cost side, the capital costs of treatment units, pumps and canals can be estimated with some confidence, and their operating costs (pumping, chemicals, labor, etc.) are also fairly evident. The technology of wastewater treatment (including desalination) is, however, evolving, and it is difficult to make firm assumptions about future unit costs. Turning to benefits, most of the case studies rely on the perceived benefits to farmers from the nutrient properties of effluent, savings in groundwater pumping, and the greater reliability of effluent compared with other sources in arid climates. While pumping costs are reasonably firm, the benefits of fertilization depend on local empirical evidence (“with and without project”), which is patchy and will need to be reinforced, for instance through agronomic trials. The benefits of reliability also need to be demonstrated more convincingly, possibly by closer study of farmers’ response behavior (insurance, aversive actions, etc.). From the viewpoint of urban water demand, the case studies reflect the widespread view that water supply tariffs are too low, hence there is a pervasive underestimation of the benefits created by developing new solutions to growing demand (e.g. Llobregat). However, some of the cases (e.g. Durango) illustrate the importance (stressed in chapter 3) of distinguishing genuinely new benefits, on the one hand, from the avoided costs of meeting existing demand in a different way. In several cases the data were missing or incomplete, and a comprehensive CBA was not feasible. In these and all other cases, however, the use of sensitivity analysis (including switching value estimation) provides a good guide to the “value of information” approach – where scarce research time should be focused in cases where data is weak across the board. The following is a list of other items where information proved to be problematic: ¾ Market prices were typically used, without adjustment to reflect economic scarcity values or transfer payments; ¾ Calibration of the potential public health risk from using effluent, and information on the impact of produce restrictions; ¾ The downstream impact (on other users, the environment, etc.) of recycling water; ¾ The appropriate rate of discount for projects of this nature (justification of the rate employed, typically 6%); ¾ The difficulty in some cases of carrying out cost-effectiveness analysis because of the wide variety of alternative options available, and the need to place the project in the context of regional strategies (e.g. that of the regional Government of Catalunya);