Water Pricing and Irrigation Water Demand: Economic Efficiency Versus Environmental Sustainability

European Environment
Eur. Env. 13, 100119 (2003)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/eet.316
WATER PRICING AND

IRRIGATION WATER
DEMAND: ECONOMIC
EFFICIENCY VERSUS
ENVIRONMENTAL
SUSTAINABILITY
Antonio Massarutto*
Università di Udine, Italy
Irrigation is by far the largest water user in
Europe and this is a cause of increasing
concern for European environmental
policy makers. Insufficient water pricing
as well as a subsidy policy that
encouraged the development of irrigated
crops have been blamed for having
favoured an excessive development of
water consumption. The policy
background is now changing: the reform
of the Common Agricultural Policy is
gradually reducing the price bonus paid to
agricultural commodities, while the Water
Framework Directive requires full-cost
recovery to be adopted as the guiding rule
for water price setting, thereby reducing or
eliminating artificial incentives to develop
irrigation. Will this reform achieve the
desired effect of fostering sustainable
irrigation water use? This paper, based on
an original study developed in eight
different test areas, suggests that this will
* Correspondence to: Antonio Massarutto, Dipartmento di
scienze economiche, Università di Udine, Via Tomadini 30/A,
33100 Udine, Italy. E-mail: antonio.massarutto@dse.uniud.it
Copyright 2003 John Wiley & Sons, Ltd and ERP Environment.
not necessarily be the case: irrigation

water use will become more efficient (in
the sense that water use will be more
concentrated on more valuable uses), but
this does not necessarily have positive
implications in terms of sustainability.
Copyright 2003 John Wiley & Sons, Ltd
and ERP Environment.
INTRODUCTION
rrigation represents a source of major

concern for European water policy, first
because of the absolute quantity of water
used, at an overall as well as at a regional
or local scale; second, because of the strong
dynamics that have been experienced in the
last two decades. Behind this development
there are spontaneous trends due to obvious
economic factors: irrigation allows a substantial increase of soil productivity, improves
reliability of crops, reduces vulnerability of
production to climatic variations and allows
therefore more risky cropping choices (Gibbons, 1986; Merrett, 2002). In short, irrigation
increases the profitability of farming (by up
to 700% and more according to Berbel et al.,
1999) and its capacity to compete in the global
WATER PRICING AND IRRIGATION WATER DEMAND

market. In this sense, demand for irrigation
originates from general market forces that are
beyond the control of public institutions; these
can in turn adopt environmental policy instruments in order to contrast spontaneous trends.
On the other hand, the extraordinary development of irrigated agriculture might have
been further pushed by at least two institutionally determined factors. First, national governments especially in Southern Europe have
been largely engaged in the past in the construction of waterworks, whose cost was for
the most part sustained through the public
budget. Second, the European Common Agricultural Policy (hereafter CAP), based until
recently on subsidized prices paid to farmers
in excess to the market value of crops, might
have further inflated the incentive to irrigate.
Farmers thus enjoyed the opportunity to use
cheaper water in order to obtain commodities
that could be sold at higher prices than the
market would have allowed.
The removal of both institutional factors
is currently taking place through the reform
of CAP and the introduction of Dir. 2000/60
(Water Framework Directive). Crop prices are
gradually being driven down to the world market level, while water prices will be required
to achieve full-cost recovery (hereafter FCR;
the concept also includes environmental externalities) and incentive pricing structures will
be adopted (Eu-DgAgr, 2000, 2002; Eu-DgEnv,
1999). The expectation of European policymakers is that both innovations will significantly
contribute to the achievement of sustainable
water management and curb excessive water
demand (Strosser, 2000).
In order to assess these expectations, a number of questions need to be raised. Will water
demand increase or be reduced, how much
and where? Will patterns of irrigation change
significantly? Will CAP reform and the Water
Framework Directive act in the same direction, and which one has the most powerful
effects? What will be the impact on farmers income? Is incentive water pricing able
Copyright 2003 John Wiley & Sons, Ltd and ERP Environment
to promote water saving and contrast spontaneous demand trends? What suggestions can
be derived in terms of sustainability of local
water uses in the concerned areas and for European environmental policy?
The literature on irrigation water demand
is far from conclusive with respect to the
above questions. From a theoretical point of
view, water demand should be evaluated on
a case-by-case approach, since it is ultimately
influenced by the cost of water and by the
improvement of farmers income, a function of
crop prices, market conditions and other kinds
of payment and subsidy: all variables that
are highly site specific and policy influenced
(Gibbons, 1986; Fontana and Massarutto, 1995;
OECD, 1999; Merrett, 2002). Applied studies
show that demand elasticity is generally low
or very low, and very much dependent
on cropping mixes and agricultural market
conditions. Above a certain critical threshold,
representing the maximum willingness to
pay, elasticity suddenly becomes much higher
(OECD, 1999).
Very little applied research has been done
so far in order to address these issues in
a European context and to understand the
impact of water price increases of the magnitude that would be required in order to
achieve FCR (among these, Garrido et al., 1997;
Varela Ortega et al., 1998; Arrojo and Carles,
1999; Berbel et al., 1999; Bazzani et al., 2002).
Within this literature, it is quite difficult to
single out results that can be generalized in
order to assess the overall impact of the ongoing reform on European water resources and
agriculture.
The present article is based on an original
study, developing a comparative analysis of
some representative case studies in various
geographic, climatic and agronomic locations,
in different locations in Southern Europe. In
the case studies, alternative market scenarios
have been simulated, in order to understand
the likely short and medium term response
of farmers to changing policy context, in
terms of irrigation water demand. Although
Eur. Env. 13, 100119 (2003)
101
A. MASSARUTTO
40 years. Agriculture represents on an overall base 30% of total water uses; in Southern Europe, the ratio reaches 7080%. Two
countries alone (Italy and Spain) represent
over 70% of total European irrigation. In Central and Northern Europe, figures are clearly
lower by one order of magnitude. Patterns
of growth show a very rapid increase during the last 40 years; however, large irrigators namely Italy and Spain seem to have
slowed down during the last decade, while
in other countries indicator continues to grow
rapidly.
Available data do not allow a precise
breakdown of water uses among different categories and sources, yet we can
at least try to sketch out some qualitative information. Table 2 shows that Central and Northern European irrigation is for
the largest part dedicated to medium and
high value productions, and uses mostly
underground water. In Continental Spain
and Southern Italy large water transfers
supply both low and medium value productions, while Mediterranean Spain and
the analysis is confined to three countries,

some results might be considered as a basis
of discussion for a larger European context.
The article is structured as follows. The
following section sketches the most important structural and environmental aspects of
European irrigation and the key aspects in
the ongoing policy reforms. The next section
derives some evaluation criteria for assessing
the outcome of the policy reform from the theoretical discussion on sustainable water use.
We then present the case studies, the methodology used for estimating water demand and
the main results; these are next more systematically discussed in a comparative way. We
then summarize the main conclusions of the
study and its policy implications.
IRRIGATION IN EUROPE AND THE

CHANGING POLICY FRAMEWORK
Table 1 provides an overall picture of European irrigation and its evolution in the last
Table 1. Background data of irrigation in Europe
Irrigated surface (thousands of km2 )
Water abstractions, 1995

(hm3 /year)
Total
AUT
BEL + LUX
DK
SF
FRA
GER
GRE
ITA
IRL
NL
POR
SPA
SWE
UK
EU-15
2200
7100
900
2400
40 600
46 300
5 000
42 000
1200
7800
7300
33 300
2700
11 800
210 600
Irrigation
200
18
140
58
4918
1389
5659
20 136
1
1128
4307
24 109
105
141
62 308
9%
16%
2%
12%
3%
80%
50%
1%
59%
72%
4%
1%
29
1960
1970
1980
40
90
391
360
321
430
2400
539
419
730
2400
870
460
961
2526
290
620
1950
20
108
6539
380
622
2379
33
88
7680
480
630
3029
70
140
9557
1990
4
1
435
64
1485
475
1314
2710
1
560
791
3193
115
108
11 256
1996
2001
1575
1330
944
3453
3364
Efficiency
% of agricultural
surface (1990)
m3 /ha/year
0.3
0.1
17.1
2.5
7.6
3.9
37.6
22.8
29
21.0
17.6
4.1
1.8
13.0
50 000
18 000
322
906
3312
2924
4307
7430
250
2014
5445
6982
916
1306
5382
Source: our elaboration on IEEP, 2000, and Irsa-Cnr, 1999.

102
Eur. Env. 13, 100119 (2003)

Table 2. Main features of European irrigation
Water supply cost
Value added of water
Cereals, oilseeds,
Occasional (citrus,
Vegetables, fruit,
Greenhouses
grassland
vineyards, olive)
rootcrops
Self supply,
groundwater
Northern France
Greece
Southern Italy
Spain
Greece
Mediterranean
Spain
Italy
Northern Europe
Mediterranean
Spain
Northern Europe
Collective,
basin-scale
Northern Italy
Southern France
Northern Italy
Greece
Southern Italy
Mediterranean
Spain
Southern Italy
Mediterranean
Spain
Collective, large
inter-basin
transfers
Continental Spain Spain

Southern Italy
Southern Italy
Southern Italy
Mediterranean
Spain
Mediterranean
Spain
Southern Italy
Dominant (the most representative and quantitatively relevant irrigation model for the country).
Important (representative and quantitatively relevant).
Some (there are examples, yet not representative of the countrys patterns of irrigation).
Source: our elaboration on IEEP, 2000.
some parts of Southern Italy show the

largest concentration of greenhouse production. Self-supply from underground water is
very common in Mediterranean Spain and
in Greece and to a lower but still significant degree in coastal areas of Southern Italy
and Portugal; it is particularly used as support (non-permanent) irrigation for open-air
high value crops such as fruit, citrus and
vineyards.
As we argued before, this development
depends on a mixture of external market
forces and policy factors that might have further strengthened the spontaneous trends of
water demand. The past structure of the CAP,
based on price support to some products and
especially continental ones such as cereals,
oilseed and dairy products, might have created a potential demand for irrigation by
artificially increasing the marginal value of
water for open-air subsidized crops and by
encouraging the cultivation of marginal land
(that, by chance, could be suitable for irrigation). On the other hand, farmers have
enjoyed the opportunity to purchase water at

a much lower price than the true cost, because
of state subsidies of various kinds (OECD,
1999).
The most meaningful changes brought forward by the CAP reform and the Water
Framework Directive can be summarized as
follows.
Increase of water prices up to an adequate
cost recovery, including external environmental costs.
Use of market-based instruments such as
tradable quotas and volumetric prices (per
cubic metre) instead of fixed allowances at
flat-rate prices (per hectare), in order to
promote water saving.
Decrease of agricultural commodity prices,
particularly in the case of previously subsidized crops (cereals, oilseeds, dairy products
etc) to the world market level.
Decoupling of income subsidies from
productivity; emphasis on non-productive
agriculture oriented to landscape and
Eur. Env. 13, 100119 (2003)
103
A. MASSARUTTO
environmental conservation, quality products and local territorial trademarks.
While the direction of change is clear and
explicitly set up by the European Commission
(Eu-DgEnv, 2000; Eu-DgAgr, 2000, 2002; Buckwell et al., 1998), the magnitude and speed of
changes that will actually occur are still uncertain for a number of reasons. First of all, the
increase of water prices will obviously depend
on the actual level of cost recovery, but also
on the exact meaning of adequate: will some
cross-subsidies between water uses be allowed
in the case of multi-purpose waterworks? On
which territorial base should costs and prices
balance? Will the government be allowed to
contribute to new irrigation facilities or to the
upgrading of existing ones in less advantaged
regions (Objective 1)? How will external costs
be measured?
A comprehensive and methodologically satisfactory comparison of water prices and actual
cost recovery levels has never been made so
far. An assessment of the full cost (to be compared with actual prices) is particularly difficult, since in many cases investment has been
made a long time ago (the economic life of
some irrigation facilities could last even for
centuries), or because irrigation facilities are
shared with other water uses (drinking water
supply, energy) or are used for the purpose of
providing publicly relevant services (such as
flood protection and drainage).
We have tried nonetheless to provide an estimate on a country basis, putting together available data at the macro scale, distinguishing
between operational and full costs (Table 3)1 .
1
In the following we shall focus on water supply costs only,

since very little applied research has been done so far in order
to assess properly the magnitude of external costs. From the
handful of studies available, a general idea is that external costs
will vary very much according to site-specific situations, with
special relation to the value of environmental functions requiring
non-use of water such as ecological, landscape and recreational
values (Turner and Postle, 1994; Fontana and Massarutto, 1995;
MacMahon and Postle, 2000; IVM-EFTEC, 1998). Unfortunately,
these values are also the most difficult to correlate with
quantitative abstractions for the sake of calculating a figure in
Euros per cubic metre, since they would require good knowledge
104
Although data is only indicative and general, it can be considered as representative of

national patterns. According to our estimate,
self-supplied irrigation recovers the full cost,
while the lowest recovery ratios can be found
where large water transfers are in place. In
order to achieve FCR of industrial costs, prices
should rise by 3050% in Northern Italy and
in France, but in some parts of Spain and
Southern Italy they should grow up to five
to 10 times higher than actual prices. It is also
interesting to note that cost recovery ratios are
not necessarily correlated with absolute water
prices. Areas with very low water supply costs
(e.g. Northern Italy) are already close to FCR
despite the very low price, while in other areas
the cost of supply is much higher and cannot
be fully recovered even if the water price is
substantially higher.
With respect to the second issue, the introduction of market mechanisms and/or incentive pricing has been widely discussed in the
literature (Dinar, 2000; Merrett, 1997, 2002).
While potentially interesting as a tool for allocating water more efficiently, market incentives have revealed important shortcomings
that limit their practical usefulness in the case
of irrigation2 . The basic question seems to be
transaction costs that farmers would have to
face in order to be able to trade water, including the cost of water transfers. These costs are
presumably higher as long as a reallocation
between districts (and not between farms in
the same district) are considered. In this sense,
the literature suggests that incentive pricing
and market mechanisms could be more effective when farms are larger (greater potential to
reallocate water within the same estate without
trading) and farmers behave economically, in
order to maximize profits (Gibbons, 1986; Iglesias et al., 1998; Merrett, 2002). On the other
of the hydrodynamics of the whole river basin and aquifer, which
in most cases is not available.
2
The most important applications of water markets regard
trading of water rights involving public water supply and other
uses with very high willingness to pay, rather than irrigation
alone (Easter and Dinar, 1999).
Eur. Env. 13, 100119 (2003)
Continental, surface
SPA
80100
100
90
Groundwater
Groundwater
UK
NL
100
100
100
100
100
100
100
7080
1020
100
100
5080
1030
100
52
35
97
Full cost
0.09
0.010.03
n.a.
Flat rate, sometimes

volumetric
volumetric
Direct cost
50300 /he
(0.010.1 /m3 )
251000 /he
(0.020.2 /m3 )
0.070.3 /m3
Direct cost
Direct cost
1.44 /m3 (from PWS)
Direct cost
Direct cost
Flat rate sometimes
volumetric
Direct cost
volumetric
Flat rate
volumetric
Flat rate or
volumetric
Direct cost
Price structure
120 /ha + 0.02
90210 /he
(0.020.07 /m3 )
50150 /he
30100 /he
(0.040.07 /m3 )
225 /he + 0.057 /m3
Free
n.a.
Supply and
distribution
0.060.08 /m3
Resource
management
0.0050.02
0.020.05
0.000 0006
0.0050.01
Abstraction
charge (/m3 )
Structure of irrigation water price
O&M, operation and management cost only.
Resource management = large water transfers, regulated rivers etc.
Direct cost = the cost is sustained directly by the farmer; flat rate = water services are purchased on a flat base (per hectare); volumetric = water
services are purchased on a volumetric base (per m3 ).
Source: Our estimate based on literature and institutional data from various sources (cfr. Massarutto, 2001).
Groundwater
GER
100
Individual
Collective
POR
100
30100
Mediterranean,
groundwater
Individual
Collective
GRE
70100
20100
100
North
South
ITA
100
100
100
100
O&M only
Cost recovery (%)
Mediterranean, surface
Individual
Collective, unregulated
Collective, regulated
Collective, small
systems
FRA
Irrigation system
Table 3. Irrigation water prices and cost recovery structure in selected European countries
Eur. Env. 13, 100119 (2003)
105
A. MASSARUTTO
hand, small farms, non-professional farms or
farms that are located at long distances will
find less scope in market transactions and will
be less responsive to incentive pricing.
In Europe, only in a few cases are water
prices already based on a volumetric scheme
(Southern France and areas of Spain); the
introduction of metering and/or of the legal
right to trade water allowances among farmers
and other users would require in the other
areas costly new investment, but above all a
substantial change in the traditional system of
water rights, which seems at the moment quite
difficult (IEEP, 2000; Berbel et al., 1999).
The last issues depend on CAP reform. The
core questions regard the pace at which agricultural commodity prices will reach the world
market level, and the degree to which compensative payments and other subsidies will
continue to remain conditioned by historical
income levels and patterns of productivity.
Since these elements are still being debated,
it is necessary to formulate hypotheses.
Agricultural prices have already experienced
a drastic cut after the MacSharry reform of
1992 (average cut of 33%) and Agenda 2000
(further cut of 15%). They remain, however,
still above the world market level, particularly for cereals (especially maize), oilseeds
and dairy products. On the other hand,
despite the fundamental innovation of agroenvironmental funds and the efforts of the
Commission to link financial aids to the
deployment of ecologically sustainable farming systems, compensation payments to farmers are still linked to soil productivity and continue in various ways to support agricultural
production as such3 (Buckwell et al., 1998). The
so-called Fischler reform proposes a further
substantial step, yet at present it is fiercely
debated (Eu-DgAgr, 2002).
3
For example, income support payments might be still correlated

with yields, reference yields on which compensations are paid
could be more or less standardized over large territories and
direct compensations linked to the practice of irrigation might
still be maintained.
106
Analysts of CAP reform have predicted

a more or less drastic reallocation of cultivated surface, particularly due to reallocation
of crops (with less surface devoted to cereals and more to other crops) and retirement
from production of marginal land, where the
economic viability of productive agriculture
will be reduced (Whitby, 1997; van Huylenbroek and Whitby, 1999; Anania, 2001). These
areas will probably be converted to ecological
farming, afforestation and landscape-oriented
agriculture; retirement will occur more probably in mountain and hilly areas, or in small
part-time agricultural estates.
Only by chance, however, will retirement
affect irrigated areas, since these are normally
the most productive and the least likely to
give up production. Nonetheless, there is some
evidence from Spain (Verges, 2001) and Italy
(Bernini Carri et al., 1996) that an overall
reduction of irrigated surface due to this effect
is in fact taking place here and there, partially
compensated by growth in other areas. We can
assume that this is correlated with the lowest
value added of water, due to inefficient farm
organization (e.g. part time, small estates) or
to inefficient use of water. Wherever farms
are efficiently organized and irrigation is
efficiently managed, in turn, retirement of
irrigated land seems most unlikely.
SUSTAINABILITY AND IRRIGATION

WATER USE
The evaluation of the actual framework in
terms of sustainability is not straightforward.
According to the now commonplace definition
agreed in the Dublin Declaration on Water
and the Environment (1992), this assessment
should involve the ecological dimension (water
as a finite and vulnerable resource), as well as a
social (need for a participatory and democratic
approach in water policy decisions) and an
economic one (water as an economic good to
allocate efficiently).
As a critical natural capital, sustainable use
of water cannot be assessed at an overall
Eur. Env. 13, 100119 (2003)

scale, but rather on a local scale, where all
relevant environmental functions should be
preserved and water use should be kept below
natural recharge of the renewable resource
(Turner and Dubourg, 1993; Faucheaux and
OConnor, 1998; Ekins, 2000). The relevant
territorial scale for the water balance can be a
larger one only if resources are averaged out
in a larger territorial unit by physical manmade infrastructure. Yet, in order to do so,
an economic as well as a social dimension of
sustainability should also be considered: the
cost of infrastructure should be fairly shared
among generations (i.e. the next generations
should not be charged for benefits that are
enjoyed by the present generation); at the same
time, the price charged to users for this purpose
should not exceed a critical limit that excludes
those who cannot pay (Barraque, 1999).
Without entering into the complex and rich
debate on the practical definition of indicators
for assessing sustainability of water use, we
can adopt as a general criterion, widely agreed
in spite of slightly different formulation and
terminology adopted, the idea that relevant
functions of the critical natural capital (water
needs) should be effectively satisfied without
creating prejudice for the integrity of the natural resource (quantitative and qualitative water
balance between available renewable resources
and uses) while socially relevant water uses
should be affordable for anybody regardless of
income levels and social conditions.
In order to assess sustainability of irrigation, further criteria should be considered.
First, irrigation regards mostly the quantitative
dimension of water rather than the qualitative
one4 . Irrigation, as the largest consumptive use,
is contributing to local water stress in quantity terms. While all consumptive uses have
the same effect, it is important to stress that
irrigation is more critical because its water
requirements are larger in the driest seasons

and in particularly dry years (that is, in cases
where water availability is lower). However,
water stress has to do not with absolute quantity, but rather with local water systems and
real-time balance between resources and uses.
In fact, evidence of water stress caused by
excessive irrigation water use has been increasingly reported even in regions characterized by
apparently lower consumption (e.g. in Northern Europe or in coastal areas of Southern
Europe), often in relation to self-supply from
aquifers. Large surface abstractions, particularly if regulated by upstream reservoirs, can
create other kinds of problem (e.g. landscape
change, alteration of natural flow patterns, low
flows). Applied studies also report evidence of
over-exploited rivers, although in these cases
most of the problems can be addressed at the
moment of releasing and enforcing the abstraction license (EEA, 1995; IEEP, 2000; Shortle and
Griffin, 2001).
On the other hand, irrigation might also
have environmentally beneficial effects: for
example, it can contribute to the beauty of
an agricultural landscape, or have a positive
impact on aquifer recharge depending on the
location of abstractions5 . If properly managed,
reservoirs could become a valuable asset for
recreational purposes.
From the ethical point of view, it is questionable whether the issue of affordability
should be valid for agriculture in the same
way as for household water supply. After all,
irrigation is a productive input used by an economic sector and it is not obvious why farmers or any other economic actor should use
inputs at subsidized price. On the other hand,
agriculture has been recognized for many reasons as a sector that deserves public protection, which justifies the very existence of the
CAP (Grant and Keeler, 2000). The water issue
Water quality as well as other relevant environmental

dimensions (e.g. soil stability, landscape conservation) could
nonetheless be indirectly linked to irrigation: for example,
because low flows reduce the pollution dilution potential of
rivers, or because dams and reservoirs alter the river landscape
permanently.
For example, in Northern Italy irrigation uses mostly regulated

surface waters (otherwise flowing directly to the sea), therefore
contributing to a net inflow to lowland aquifers. This irrigation
system has been in place for centuries, and the first drainage and
irrigation infrastructure can be dated back to the Middle Ages.
Eur. Env. 13, 100119 (2003)
107
A. MASSARUTTO
users share the cost equitably in a transparent
and democratically accepted way. If this occurs
for a collectivity of water users (e.g. an
irrigation association) or for larger units (e.g.
river basins), economic sustainability can be
compatible with under-cost pricing to some
users, provided that the economic balance is
achieved at a wider level within the present
generation; the issue then would not be to
charge each individual consumer for the exact
cost, but in turn to avoid the pricing system
encouraging inefficient ways of using and
allocating the resource.
should be therefore considered in the broader

context of agricultural policy. In this respect,
irrigation plays an asymmetric role in European agriculture: while being a welcome but
not essential addition in Northern Europe,
it becomes an indispensable input in Southern Europe, where agriculture could hardly
be carried on without water. Following this
line of discussion, the issue of affordability
of water prices might be of some relevance
in the assessment of sustainability, particularly in Southern Europe; at least, alternative
ways of supporting farmers income (including water subsidies) should be comparatively
evaluated.
Finally, from the economic point of view,
patterns of recovery of the full cost are
certainly important in order not to place undue
financial burdens on the next generations, yet,
as Barraque (2000) and Massarutto (2003) have
argued, what is most important is not cost
recovery at the individual level, but rather that
THE CASE-STUDIES:
METHODOLOGY AND ANALYSIS
Our study has focused on eight areas located
in three different countries (France, Spain and
Italy). This limitation to three countries could
perhaps limit the ambitions of generalizing
Table 4. Synoptic table of case studies

Case-study
location
Water supply
Cost of
based on:
water supply
Existing information sets
Methodology for
case study
1 Ledra-Tagliamento
ItalyNorthEast
Surface
Low
Short-term water demand

curve based on marginal
productivity of water in
normal and dry years
New estimate of the demand

curve according to CAP
scenarios
2 Tarquinia
ItalyCentral
Surface
Low
Linear programming model
Simulation with the LP model
3 Fortore
ItalySouth
Surface
Medium
high
Full set of data with

individual consumption of
water for a series of years
Simplified LP using technical

coefficients based on a
regional model
4 Charente
FranceSouth
Surface
Medium
5 Adour
FranceSouth
Surface
Medium
6 Cordoba
Spain
Surface
High
Detailed literature + official

data and documents
Macro-analysis and elaboration

of existing information
7 Almeria
Spain
Ground
water
High

data and documents

8 Catalonia
Spain
Surface
Medium
high
High

data and documents

Ground
water
108
Eur. Env. 13, 100119 (2003)

Table 5. Background information on case study areas
Irrigated Actual water
surface price (/m3 )
(he)
0.015
Dominant
farming
systems
Water-related
governance
issues
Trends/options
Continental (maize)
Excess abstraction
from watercourse
Absolute scarcity in
dry years
Excess abstraction
from watercourse
Conflict with PWS
in the summer
Severe scarcity in
the case of
drought; need to
avoid individual
abstractions
Available water for
irrigation is less
than theoretical
demand
Available water for
irrigation is less
than theoretical
demand
Competition with
other uses for the
water transfer
schemes
Depletion of aquifer
due to excess
abstractions
Competition with
PWS
Contested new
water transfers
Transform gravity
to spray irrigation
Set aside/
reforestation
Introduce drip
irrigation
Eliminate
continental crops
Invest for improving
productivity of
water; use
recycled/brackish
water
Some opportunity
to change
cropping mix
27 800
8200
0.040.1
Mediterranean
(horticulture)
180 000
0.080.1
Mediterranean
(fruit, vegetables,
durum wheat)
5000
0.01
Continental (cereals,
oilseeds)
20 000
0.18
oilseeds)
206 000
0.020.04
oilseeds)
46 000
0.1
244 000
0.08 (S)
0.63 (GW)
Mediterranean
(fruit, vegetables),
greenhouses
Mixed
Actual
recovery of
costs
Nearly achieved
(7080%)
Substantially
achieved
(6070%)
Achieved for
operational cost
only (50%)
Nearly achieved
(90%)
Little opportunity to
change cropping
mix
Nearly achieved
(90%)
Improve tradability
of water rights
Very low (1020%)
Purchase more
surface water
Achieved
Allocate water to
the more
productive crops
Achieved for GW,

low for S
(3040%)
The level of cost recovery has been only roughly estimated since accounting systems did not always allow an exact
calculation.
results to the rest of Europe. However, the

choice has been carefully made in order that
alternative combinations of water supply costs
and crop profitability would be adequately
represented (in terms of Table 2 above). Further research is needed in order to verify
to what extent results can be extended to
other European contexts, though our conclusions can at least represent a plausible
hypothesis. Table 4 contains an introductory
description of the eight areas, their precise

location, their water resource base and cropping mix and their key water management
issues. Some background information is contained in Table 5.
Case studies have followed different methodological approaches, either because budget
constraints forced the team to utilize already
existing models, or in order to compensate for
the relative deficiencies of alternative methods.
Eur. Env. 13, 100119 (2003)
109
A. MASSARUTTO
Since it is not possible to enter into a detailed
description of each one, we just provide some
basic explanatory information (see Massarutto,
2001, for more detailed information).
The Spanish cases adopt a macroeconomic
perspective and are concerned with the assessment of overall water demand at the scale of
a region and water allocation among crops in
the whole area. They are based on the desktop
elaboration of information derived from literature and institutional sources. Given the relative abundance of applied studies on demand
elasticity to price in the Spanish context (Garrido et al., 1997; Iglesias et al., 1998; Sumpsi
et al., 1998; Varela Ortega et al., 1998; Arrojo
and Carles, 1999; Berbel et al., 1999), all showing little elasticity below the exit price, our
study has focused on the problem of cost recovery and of the exit price, in order to assess at
a regional scale whether this threshold would
be reached or not.
The French case studies in turn are based
on linear programming models, assuming
that farmers will purchase water and allocate
it to crops in order to maximize a profit
function, subject to constraints such as land
and water availability, productivity, crop and
water prices etc. Both models have been
specifically constructed and calibrated for the
study areas and have been run under the
common hypotheses adopted in the present
study.
Among the Italian case studies, that of Tarquinia follows the same methodology as used
in the French case, with an expressly constructed and calibrated linear programming
model (already developed by Dono, 1995).
The case of Fortore again uses a linear programming approach; yet, due to the lack of
calibrated data and technical coefficients representing the area, it used coefficients derived
from another study conducted at the regional
level. The size of the study area is larger and
comparable to the large Spanish study areas.
Finally, the case of Ledra has used an already
estimated water demand curve based on the
110
ex post (net-back) calculation of farmers willingness to pay based on the extra income
produced by each marginal quantity of water,
considering only one crop, but distinguishing
between normal and dry years (Massarutto,
2000).
We have assumed that in each context the
water price would rise up to the recovery
of the full average cost within the concerned
territory, and that it would be fully based
on a volumetric scheme in order to have
the highest incentive potential6 . In order to
consider different alternatives for agricultural
commodity markets, we have then considered
two scenarios, one based on the pre-reform
situation (before scenario), one describing
a full implementation of the CAP reform
objectives (no price subsidies, fully decoupled
compensation payments; after scenario)7 .
Results of simulations, summarized in
Table 6, are seemingly inhomogeneous and
contradictory. Water demand does not decrease as expected, and sometimes even
increases despite the water price rise. Irrigated
surface decreases, but this is compensated by
more intensive water use in the remaining irrigated surface. Allocation of water among crops
follows different criteria, sometimes tending
towards specialization in a few profitable
crops, sometimes towards higher differentiation. Farmers income in general is negatively
affected, yet the magnitude of this effect is crucially dependent on the adaptation strategies
that are available to them.
Apparently, the impact of the new water
and agricultural policy will vary according to
local circumstances (level of water price and
6
In fact an even stronger incentive could have been introduced

with an increasing-block tariff scheme. This hypothesis could not
be tested here due to analytical limitations of the models used.
7
As we argued before, all of these hypotheses particularly
pessimistic from the farmers point of view are quite unrealistic:
water prices should only reach an adequate level of cost
recovery; 100% volumetric pricing would require costly new
investment and will probably not occur; the implementation of
CAP reform is going on more slowly and it will produce its final
outcomes if any only in the medium to long term. We have
preferred to adopt these strong hypotheses, under the belief
that our conclusions would be reinforced if real-world scenarios
were less drastic than we assumed.
Eur. Env. 13, 100119 (2003)
before
after
before
after
before
after
before
after
before
after
before
after
before
after
244 000
High reduction
of COP area
46 250
No reduction
206 000
High reduction
of COP area
20 761
18 996
5 301
4 962
86 000
86 000
8 200
8 200
27 800
27 800
Irrigated
surface
(he)
2196
4000
27
9
12
12
109
118
9
10
162
162
Water
demand
(hm3 )
Changes in water
and land use
Shift to high
value crops
Decrease of COP area
More diversification
No major change
Shift to high
value crops
No major change until

exit price is reached;
then drastic reduction
Shift to high
value crops
Concentration on
high value crops
More specialization
Concentration on
high value crops
More specialization
No major change
MED, Mediterranean cultures (e.g. hortives, fruit).

COP, continental cultures (e.g. cereals, oilseeds).
before
after
Scenario
Table 6. Summary of the main results of case studies
0.05 (COP)
0.41.3 (MED)
>1
0.050.10
(COP)
0.23
0.14
0.15
0.05
>0.5 (MED)
>0.5 (MED)
>0.5 (MED)
>0.5 (MED)
0.170.40
0.120.30
Exit price
(/m3 )
0.51 (COP)
>1 (MED)
>10
<1
1.2
0.7
13
4
>3
>3
>3
>3
1126
820
Exit
price/FCR
3002.500
1700
150250
183
46
229
75
0.20
0.40
Insignificant
0.70
2120
2023
1703
1522
0.320
0.70
Insignificant
Insignificant
4701300
370900
Absolute
margin
(/ha)
Insignificant
Insignificant
Elasticity
below
exit price
0.09
0.01
0.03
0.04
0.11
0.08
0.11
0
0.200.30
Margin
elasticity to
water price
Eur. Env. 13, 100119 (2003)
111
A. MASSARUTTO
magnitude of its increase for reaching FCR;
cropping specialization; price scenarios). This
is in fact not a surprising result, since it further
confirms the statement that CAP reform will
drastically redesign the panorama of European
agriculture by fostering substantial structural
transformation and reallocation between areas
and countries (Whitby, 1997; Anania, 2001). As
far as water policy objectives are concerned,
the effect is not straightforward: water demand
increases or decreases unresponsively to local
water stress situation.
Considered all together, these results nonetheless allow some generalization that can be
proposed as predictions of future developments of irrigation, not only, in the concerned
case-study areas, but also in a broader European context, and allow some suggestions for
European water and agricultural policy.
DISCUSSION OF RESULTS
Irrigation water demand and CAP reform
The CAP has often been blamed in the
past for its incentive to over-produce and
possibly to adopt environmentally unfriendly
farming techniques for the sake of increasing
production of subsidized crops (Buckwell et al.,
1998; IEEP, 2000). For the same reason, it is
widely believed that its reform, along the lines
we have described above, will contribute to
environmental sustainability.
The analysis we have made, as far as
irrigation is concerned, offers only partial
support to this thesis. It suggests in fact that in
most locations the CAP alone has had only a
weak and indirect impact on irrigation demand
in the past and that, conversely, its reform
alone will have limited impact as well. CAP
might have induced land use change in favour
of crops whose water requirements happened
to be high (especially maize), yet only in a few
circumstances could this be sufficient. Rather,
it might have some importance in deciding
which crops to irrigate, given the total quantity
of water available.
112
If water prices do not vary, none of the areas

considered in this study is likely to give up
intensive production, even in the drastic CAP
scenario that we have simulated. Absolute
quantities (at any given water price) remain
substantially unchanged, with the only exception of the Adour region in France, where after
the CAP reform implementation neither the
FCR water price nor the actual price would
be affordable for farmers. What happens, in
turn, is that wherever productive agriculture
remains in place, demand elasticity to water
price is reduced, the exit price becomes lower
and irrigated crop mix changes in favour of
the most profitable ones wherever this strategy is allowed by geographic and market circumstances. Where there is no opportunity
to shift towards more profitable crops, lowincome crops such as maize continue to be
irrigated despite the price reduction, even in
the more drastic application of the reform.
These effects seem more robust in areas that
are dedicated to high value products (e.g. horticulture, greenhouses), but also quite strong
in the case of open-air cultivation of cereals,
wherever this remains competitive. The same
conclusion should be valid wherever the value
added by agriculture increases, e.g. because of
quality-oriented marketing strategies (organic
agriculture, local trademarks etc8 ).
The fall in demand elasticity can be easily
explained by the fact that lower crop prices put
pressure on achieving lower unitary costs and
greater reliability of production. The reduction
of the umbrella of price support stresses the
search for efficiency and cost reduction in order
to recover the margins. What is important is
not the absolute cost of irrigation, but rather
the fact that with irrigation the farmer is able
to end up with lower average product costs
and lower variability of margins.
These results can probably be generalized:
wherever the cropping mix is already oriented
towards high value marketable products, not
8
This result is confirmed by another recent study in an area

dominated by quality production (Bazzani et al., 2002).
Eur. Env. 13, 100119 (2003)

affected by the CAP reform (since they did not
enjoy price support in the past), the effect is
likely to be the same. It must be stressed that
these crops represent the dominant share of
irrigated surface in most coastal Mediterranean
areas as well as in the whole of Northern
Europe9 : in all of these cases, CAP reform will
hardly reduce water demand (and, if any, will
probably increase it).
Large reductions of water demand induced
by CAP reform can be expected only from
the eventual retirement of irrigated land from
production (without shift to more valuable
crops, but rather to alternative land management opportunities including afforestation,
eco-farming, extensive pasture etc). As we suggested above, this is unlikely to happen in general since irrigated land is normally also more
productive. The most obvious candidates, if
any, are those areas in continental Spain and in
Italy in which both farming practices and water
efficiency are very poor because of geographic
or other factors. The condition for this to happen is more likely to occur when water is used
because it is very cheap (i.e. because its cost
is actually low or because farmers enjoy water
price subsidies), and not because it is very useful. Even if this demand reduction could be
meaningful in aggregate terms, it would occur
mostly in places where water is very abundant
thanks to local circumstances or where large
infrastructure is in place10 . At the same time, a
similar outcome could occur, as the Adour case
shows, in situations where the actual water
price is already very close to the exit threshold.
Irrigation water demand and full-cost
recovery
On the other hand, the hypothesis that water
underpricing has played a major role in the
9
A similar result, consistent with our conclusions, has been found

in England by Bate and Dubourg (1997).
10
For example Bernini Carri et al. (1996) forecast a significant
reduction of water demand in Northern Italy; this is mostly
concentrated in areas such as the rice district between
Lombardia and Piemonte, one of the richest in terms of water.
development of irrigation is well demonstrated. The massive development of irrigation

in Southern Europe, and particularly in Spain
and in Italy, is very clearly related to public investment in water storage, transport and
supply facilities. If users had to pay the full cost
of water, this would probably exceed in many
cases the threshold of convenience (exit price).
If price increase due to FCR is lower than the
threshold, price elasticity remains quite low (in
the range of 0.20.3, often lower and close to
zero11 ), in line with the results of most applied
studies found in the literature (see OECD, 1999,
for a survey). If higher, irrigation would be
stopped.
The decisive question is therefore whether
the new water price allowing FCR will be
higher or lower than the exit price. While the
former depends ultimately on local patterns
of water availability, the latter is a function
of the cost of water and its marginal value
(crop price). Obviously, the magnitude of this
value will differ among areas according to sitespecific geographic and agricultural features.
Nonetheless, we can try to formulate some
general assessment. The order of magnitude
emerging from the case studies analysed lies
between 0.05 and 0.15 m3 for low value
crops (e.g. cereals); up to 10 times greater
for medium value crops (e.g. Mediterranean
products, horticulture, fruit) and even more
for high value production (e.g. greenhouses).
Whether the achievement of FCR will imply
exceeding this threshold or not obviously
depends on local circumstances and especially
on the actual level of cost recovery, which
is lowest where large water transfers are in
place (that is, in Southern Italy and Continental
Spain)12 . These regions are the most likely
candidates for a drastic reduction of irrigation
demand if FCR is achieved. Our case studies
show that the exit price is likely to be reached
by most of the Spanish and Southern Italian
11
A value of elasticity of 0.2 means for example that if the price
rises by 50%, water demand will be reduced by 10%.
12
As we argued earlier, the actual level of cost recovery is in
many cases below 20%.
Eur. Env. 13, 100119 (2003)
113
A. MASSARUTTO
cereal and oilseed cultivations (exit price/FCR
ratio < 1).
On the other hand, high value products have
margins that can well afford the new water
price even if it is two or three times higher
than the actual price. All case studies show
that the exit price is one order of magnitude
higher with respect to the price allowing FCR.
The effect of FCR in these areas is more likely
to increase specialization into high value crops
and eliminate others completely.
Northern Italy and France are in a special
situation. Since water supply costs are far
lower and the recovery rate already reasonable,
price increases are likely to have far less
dramatic effects, although in some areas (such
as Adour) even a small price increase is likely
to reach the exit threshold. In these regions,
the effect of FCR should be assessed case by
case, as shown by the critical value of the exit
price/FCR ratio, close to or even lower than
unity in some cases.
In Northern Europe and in those Mediterranean areas dominated by self-supplied irrigation, the effect is much more difficult to
predict, since water supply costs are actually
recovered, but external costs are not. Since
applied research dedicated to the empirical
assessment of external cost is still haphazard and contradictory (see note 3 above), it is
not possible to foresee the magnitude of price
increases that would eventually be required to
achieve FCR of externalities. It seems nonetheless that high value crops (horticulture and
especially greenhouses) are ready to sustain
even a substantial increase of their actual water
price, given the high marginal value of water.
Less sure is this statement if we consider support irrigation to open-air cultivation of fruit,
citrus and vineyards, where unit marginal values are lower.
We can try to summarize these conclusions
in a more general way (Table 7). The likely
impact of FCR will be to stop irrigation in
some areas, wherever high or medium water
cost (large scale transfers) is combined with
low value production. This situation occurs
114
Table 7. Expected impact of FCR + CAP on

water demand
Value added
Low cost
Medium cost
High cost
Low
Medium
High
N
U
Y
N
N
U
N
N
N
Y, water price likely to exceed exit price.

N, water price will not exceed exit price.
U, uncertain.
in vast areas of Spain and Italy, especially

those with the highest water consumption. The
effect in the case of a high costmedium value
combination is uncertain, while in the other
cases the effect will be rather to reallocate
water in favour of the most profitable crops,
without significant reductions of total water
quantities. Elsewhere, the expected outcome is
the reduction of farmers gross margin without
substantial change of total water quantities.
As a result, some overall reduction of
water consumption can be expected at the
aggregate level. Since the foreseeable cost of
new waterworks is normally much higher than
actual average costs (for the obvious reason
that the most suitable sites and opportunities
have already been exploited), this conclusion
can be reinforced with respect to new irrigation
projects. It seems quite clear that, once FCR
is implemented, it will become very difficult
in the future to justify new state intervention
in the field of water resource management
unless in special circumstances for high value
crops, at least where this investment cannot
be demonstrated as useful for other purposes
(flood protection or drinking water supply).
Both effects are likely to be concentrated in a
few areas rather than being evenly distributed.
Water framework directive, CAP reform and
sustainability
Evaluating the expected outcome of policy reform in terms of sustainability is not
straightforward. As we have argued before,
Eur. Env. 13, 100119 (2003)

sustainable irrigation should be assessed with
respect to an environmental, an economic and
possibly an ethical dimension: for all of these,
we have likely beneficial as well as negative
effects, depending on local conditions.
With respect to the first dimension, we have
argued above that environmental sustainability should be evaluated according to local
water balance and not in aggregate terms.
While an overall reduction of aggregate water
demand and a likely slowdown to further
water transfer schemes is expected, this results
from a strong reduction in some (a few) areas
and a stabilization or increase in many other
areas. This is not necessarily good news for a
sustainability-oriented European water policy,
since there is no guarantee at all that demand
reductions will occur in the areas with the most
serious water stress problems. In particular, it
seems that the policy reform will have minor
impacts on a number of areas that are widely
recognized as the ones in which water stress
due to irrigation is highest (namely, those characterized by self-supply as in Northern Europe
as well as in coastal areas of Southern Europe).
The CAP reform and FCR seem to have much
higher effects on large, traditional irrigators
served by collective systems and large infrastructure.
Effects on water demand are much more
due to the fact that water prices in some
areas will reach the exit threshold, rather than
resulting from many small reductions caused
by marginal adaptation of irrigation demand
to price variations. As a result, the quantitative
effect on water demand will occur regardless
of the pricing structure (marginal cost or flat
rate), provided that the total cost of water
for the farmer is high enough. On the other
hand, below the exit threshold, water demand
elasticity is always very small, especially once
the most obvious water saving techniques have
been implemented. This is particularly true in
the short run (during the irrigation season,
once cropping choices have been made and
irrigation assets are fixed). In the long run,
higher degrees of flexibility can be expected,
either at the farm or at the water supply

management level, but it cannot be expected
that incremental water prices or Pigouvian
taxes can have a major role to play for the sake
of environmental policy in order to manage
water stress situations.
This conclusion is particularly critical if we
consider the opportunity of introducing water
abstraction charges for the sake of discouraging underground water abstractions (independently of cost recovery). In order to have
an effect on demand, a water tax should be
high enough so as to alter the economic convenience of irrigation; yet this is likely to react
far less in the case of more valuable crops. In
order to permanently reduce water demand,
quantitative restrictions will be probably more
effective, as suggested elsewhere in the literature, with economic incentives having their
best use as accompanying measures (Merrett,
1997; Dono, 1995).
This effect is probably overestimated by
the econometric models used, since they
assume fixed water consumption coefficients
(per hectare and per crop) and do not consider
opportunities of water saving. In fact, water
saving measures are already in place wherever
the water price is high enough and value added
high enough for justifying water-saving investment. This results in a more productive use
of water (less water abstraction per irrigated
hectare; higher value added per cubic metre)
rather than in a lower overall water quantity.
Eventual water savings would be employed
in order to irrigate extra surfaces rather than
left unused in the environment13 . On the other
hand, the effect could be a different one if the
value added of water is not high enough to justify this investment14 . In these cases, a selective
13
This assumption cannot be demonstrated through the
simulation made, but results from interviews with local water
administrators (at least in the Italian and Spanish case studies),
as well as from national statistics. In most countries (certainly in
Italy, France and Spain) surface that has already been adapted
for irrigation is reported to be much larger than actual irrigated
surface.
14
For example, this could happen in Northern Italy, where actual
patterns of irrigation can be sustained economically only because
Eur. Env. 13, 100119 (2003)
115
A. MASSARUTTO
subsidy policy (e.g. allowing public support for
water-saving innovations) could be an option.
Finally, we should consider another potential environmental shortcoming, in case there
is a trade-off between costly (but relatively
more secure and controlled) surface supply,
and cheaper self-supply from aquifers, which
may also happen to be more harmful to the
water environment. The paradox here could
be that farmers who cannot benefit from subsidized surface water transfers would then turn
to underground water, whose use is much
more difficult to control. FCR would then ultimately result in environmental damage.
From the point of view of economic sustainability, again the outcome is not straightforward. On the one hand, full-cost water pricing should well be seen as a decisive step
towards economic sustainability, promoting a
more efficient use of water and freeing financial
resources that were previously freezed in the
investment needs for maintaining and improving water assets. By reducing the scope for
new water transfers, the reform will also produce a permanent benefit for the public budget
as well as an incentive towards a wiser use
of available resources at a more local scale.
On the other hand, some potentially undesired effects could occur as well, with respect
to maintenance of already existing infrastructure. If water demand would fall in a whole
region, it is quite possible that already built
infrastructure will not be reallocated to other
uses, but simply left unused. However, their
maintenance or decommissioning costs will
need to be sustained in some way, notably
through the public budget. Where this risk is
concrete, short-run marginal cost instead of
full cost would become the most desirable
pricing criterion (Massarutto, 2003).
water is abundant and cheap. However, if new water users press
to have access to irrigation in the same area, the extensive use
of available resources cannot be sustainable for all of them. On
the other hand, investing in order to implement water saving
techniques (e.g. reduce distribution loss, adopt pressure spray
irrigation, use non-conventional resources such as brackish water
or reused effluents) would require extra capital and operational
(energy) costs, which would easily bring the water price above
the exit level.
116
Finally, with respect to ethical sustainability

and affordability of water prices, the combination of CAP reform and FCR is likely to entail
relevant distributive effects. The impact of FCR
on farmers welfare is significant, although
crucially dependent on alternative land management opportunities available and partially
remediable through improved water use efficiency15 . As far as reallocation is possible, a net
income gain (or at least a limited income loss)
for each irrigation area can be predicted, and
new beneficiaries could eventually compensate
losers so that everyone would ultimately be
better off. When reallocation is not possible,
however, or would require costly waterworks
for transferring water, the effect will be more
simply to erode actual margins or, at worst,
force farmers to adopt dryland techniques and
even retire. It seems clear that the distributive
effects of FCR will be highest in a few areas,
particularly in Southern Europe.
Unfortunately, our analysis could not enlighten this aspect. At the smaller scale in which
simulation models have been operated in
the case studies, reallocation was assumed
to occur spontaneously, because farmers
would allocate each quantity of water to the
most productive uses. No transaction costs
are considered, thus reallocation can occur
nearly automatically as long as a certain
crop is a practicable option for that area. It
can be argued that reallocation is easier if
farms are larger and behave economically:
therefore, the economic structure of agriculture
in any given region can be an important
explanatory cause. At a larger territorial scale
some easy opportunities for reallocation might
occur for example if upstream uses (most
often open-air crops such as cereals) leave
more water available for downstream uses
(e.g. horticulture in coastal Spain and Italy).
15
A very clear result from both Italian and Spanish case studies
is that cheap water normally means inefficient water use, with
income improvements in the order of 50% maximum, since water
is allocated to crops regardless of its actual productivity. Water
pricing would force farmers to use water more efficiently and
therefore to allocate it in the most productive and profitable
destinations.
Eur. Env. 13, 100119 (2003)

However, in general, we cannot assume that
every theoretical opportunity for reallocation
will actually be caught; as long as it will not
occur, efficiency gains will obviously be more
modest and impacts on single farmers higher.
In the end, areas that will be forced to abandon
intensive irrigation will be the net losers of the
game. Unless this negative distributional effect
will be compensated there will a substantial
net loss for a number of European agricultural
regions. If compensation cannot come from
crop reallocation and water trade among
farmers, it should be found through alternative
agricultural policy instruments. In this sense,
FCR should be considered within the broader
context of the CAP reform and not as a separate
policy tool.
CONCLUSIONS AND IMPLICATIONS

FOR EUROPEAN WATER POLICY
Water pricing seems to be potentially a very
important and useful instrument of agricultural policy. To subsidize agriculture through
free provision of water is a costly and inefficient way of sustaining farmers incomes. It
encourages wasteful use of water and inefficient farming choices, with limited gains for
farmers and large costs for society as a whole.
Provided that efficiency gains will be used
in order to compensate net losers, the overall impact in terms of economic welfare seems
unquestionable.
On the other hand, benefits of water pricing
as an environmental policy instrument have
probably been overemphasized and some of
its shortcomings often neglected. Even if an
overall reduction of both aggregate water
consumption and pressure for new water
supply schemes is likely to occur, effects will
be concentrated in a few areas, while other
areas will probably have an increase of water
demand. With the environmental impact of
irrigation dependent on local conditions, this
trade-off is not necessarily beneficial for the
water environment. This will be more likely to
occur in areas that are served by large water

transfer system, particularly where cereals and
oilseeds cannot be easily substituted by more
productive crops; a significant reduction will
not necessarily occur in areas where irrigation
pressure on the water environment is higher.
Since the outcome in terms of sustainability
will be site specific (according to local water
management patterns as well as agricultural
economy) and not necessarily beneficial, European water policy should adopt water pricing
within a wider set of policy tools to be used
in each context according to local specific features. Quantitative restrictions, well targeted
subsidies (e.g. to help water-saving investment
where appropriate), water resources planning
and (to some extent) public involvement in
managing waterworks will continue to be necessary and fundamental. The adoption of an
economic approach, strongly requested by the
Water Framework Directive, cannot mean that
the market will be able to achieve sustainable
water use without regulatory intervention.
Water prices have an impact on irrigation
more because of their absolute level (provided
it is high enough to compensate the differential margin that water allows to farmers) and
not because of the marginal reaction of water
users to marginal variations. Therefore, the
impact of incentive pricing seems quite modest and more likely to promote efficiency (that
is, a higher value added generated by irrigation) rather than environmental sustainability
(reduction of water use below the quantity
that becomes harmful for some of the desired
environmental functions of water at the local
scale).
Our simulations show clearly that using
water more efficiently does not necessarily
have the effect of reducing water demand: to
the contrary, high value crops entail usually
higher water requirements and lower elasticity.
Productivity of water might become greater,
but pressure on water resources is not likely
to vary too much. A more efficient water use
might well be also a less sustainable one.
Eur. Env. 13, 100119 (2003)
117
A. MASSARUTTO
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