EconWatSim - Developing an economic simulation-modelling framework as a decision-support tool for policymakers in the water sector

Abstract

The main achievement of this research project is the development of a generic integrated Economic Water Simulation (EconWatSim) modelling framework and its application for the case of Israel. The framework consists of two interconnected modules: MYWAS (Multi-Year Water Allocation System), a water-sector optimization module that provides a detailed depiction of topography as well as water supply infrastructure and STAGE_W (STatic Applied General Equilibrium model focussed on Water), a computable general equilibrium model that captures the linkages between the water sector and the broader economy by representing all relevant economic agents such as households, firms, and the government, as well as their interactions on commodity and factor markets. These modules are linked iteratively through the exchange of outcome variables. Moreover, the framework has been enhanced to represent different water qualities and their corresponding provision costs, a broad range of water management options (including various taxation schemes and cost recovery measures both within and outside the water sector), and strategies for managing non-revenue water (such as leakage, water reserved for nature, and water transferred to neighboring entities). Two case studies, developed in collaboration with stakeholders from the water sector, demonstrate the framework’s capability. In the first application, the implications of different water pricing schemes on the Israeli economy were examined. The pricing challenge stems from the presence of economies of scale in the water-supply system. Our objective is therefore to set water prices that induce both economic efficiency with respect to water allocation across users and at the same time cover the water-supplying costs. The findings indicate that the current pricing scheme could be improved from an efficiency standpoint. The integrated structure of EconWatSim enables us to show that, due to indirect effects on factor markets and income as well as price changes of consumer goods, the final effects on households’ welfare vary considerably between the pricing policies and between household groups. In a sensitivity analysis, it was shown that the outcomes remain robust even under scenarios with reduced replenishment rates due to climate change and with increased infrastructure development costs. In the second application, a proposed water-for-energy swap between Jordan and Israel was analysed from the perspective of Israel’s economy. According to the envisaged agreement, Israel would receive about 1,440 GWh of electricity from Jordan in exchange for increasing the water transfers to Jordan to 200 MCM and a payment of 180 million USD on an annual basis. It was found that the agreement would generate macroeconomic benefits for Israel, however, its distributional effects on households’ welfare are strongly influenced by its financing structure. Overall, the applications of EconWatSim demonstrate the potential of model-integration in allowing to address water policies in a new way. The approach provides complementary perspectives in terms of a detailed and spatial representation of the water sector on the one hand, and an economy-wide perspective on the other hand. EconWatSim allows for an in-depth welfare analysis at the household level, which could not be provided by the single model components alone as MYWAS ignores fixed costs, while STAGE_W overlooks spatial heterogeneity, and the resulting policy ramifications. The integrated framework enables a more holistic assessment of the impacts of changes in the water sector and supports the design of coherent policies within the water–energy–food nexus, ultimately contributing to a more efficient, sustainable, and integrated management of scarce water resources. The framework, including the extensive databases developed in this project, will be made publicly available such that they can be applied in other contexts and to a much wider set of policy questions.