Valuing Colorado's Agriculture: A Workshop for Water Policy MakersMonday, October 7, 2013 Cheyenne Mountain Resort, Colorado SpringsColorado Agricultural Water Alliance Colorado Water InstituteModerator: Richard G. BrownSand Dollar ResearchFrank A. WardAg, Consumer, and Environmental Sciences (ACES) CollegeNew Mexico State University
Road Map • Opportunity costs • Common denominators • Assessing comparative economic values • Developing flexible water transfer institutions • Use of nonmarket approaches for valuing water
Opportunity Costs • The difference between bad and good choice: • Bad choice limits itself to visible effects. • Good choice accounts for both effects that are seen and those that must be foreseen. • Difference: when immediate effect is favorable, later effects can prove disastrous. • Bad policy pursues a small current good followed by a great future cost. • Good policy pursues a great future good, at the risk of a small present cost.
Opportunity Costs • Definition: Economic value displaced by transferring water from its current use when water is scarce. • Measurement: The loss of benefit from the highest valued choice displaced by the alternative chosen. • Efficiency: For water, measuring opportunity cost helps ensure that scarce water is used efficiently. • Guidance: Measuring the value of water in irrigation guides choices on how much should be kept in irrigation and protected from transfer.
Common Denominators • Example: Ag to urban water transfers that avoid ‘buy and dry.’ • Use of common denominators to guide policy • Will measure all costs • Will minimize costs • Will compensate for costs • Will respect constraints to avoid unacceptable costs • Will require total benefits (urb) > total costs (ag) • If these 5 conditions aren’t all satisfied, the transfer may fail to serve the state’s welfare.
Assessing Comparative Economic Values • An important legal principle in Colorado limits water transfers: No injury • Economic value of water in irrigation that allows comparison to value for urban use: • What irrigators are willing to accept in payment (wtap) for an ag-urban water transfer that avoids injury to the water right holder • What community of origin is wtap for the ag-urban water transfer to compensate for a water transfer avoids injury to the community
Developing flexible water transfer institutions • Rotational fallowing (transfer varying amounts of water by year, ditch, and grower, depending on urban need) • Growers take water out of lowest valued crops • Vary crops, ditches, and growers by year • Flexible, avoids loss of water right • Avoids buy and dry • RF reduces the opportunity cost of water displaced from irrigated agriculture. And it helps urban users find the cheapest source of water. • Community of origin could reveal their value of water in ag by paying growers to keep water in agriculture.
Use of nonmarket approaches for valuing water • Efficiency Value: Economic values of water not observed from market prices • Approaches: Infer value of water in existing uses that would be displaced by transfer • Willingness to pay for current water use • Willingness to accept in payment in place of water • Constraints satisfied: Important values of water that cannot be measured but cannot be violated by any ag to urban transfer.
Farm Income Produced By Irrigation Water • One data source - cost and return enterprise budgets targeted by crop, time, place, and irrigation technology. • Crop price • Water Price • Water use (ET) • Yield • Production cost/acre • Land in production • Historical prices paid for water transfers
References (short list) • R.A. Young and S.L. Gray (1972), The economic value of water: Concepts and empirical estimates, Unpublished Report to the National Water Commission. CSU • F.A. Ward and Ari Michelsen (2002), “The Economic Value of Water in Agriculture: Concepts and Policy Applications,” Water Policy. • R.A. Young, Determining the Economic Value of Water: Concepts and Methods (2005), Resources for the Future.