Optimisation and valuation of water use in Scotland

Abstract

Valuation draws heavily on the economic theory of demand. This tells us that users have preferences for water and are willing to pay different amounts for units of water put to different uses. Water should be allocated between these uses to the point that equalises the value of the last or ‘marginal’ unit. In other words, it is impossible to find a higher value for this marginal unit. Application of this principle of equi-marginal returns requires us to have some clarity about water values in competing uses. This is also important since water is rarely free to supply, and therefore suppliers need to charge a price that is in some sense equal to the supply cost and value to achieve full cost recovery.

Even though inclusion of this economic rationale in the management of water resources has been a widely accepted principle, and is included in national and the EU policies, the actual practice does not fully reflect this endorsement. While many countries recognise the vital nature of water resources, few, if any, pursue a rigorous analysis of revealing the explicit value of water as a basis for determining whether water is actually being allocated to sectors in order to maximise its overall benefit to society. Aspiring to be the first Hydro Nation, maximising the social return from its water uses ought to be a policy objective in Scotland.

This thesis constructs a portfolio of different water uses, estimating the approximate value for each and their current allocation in Scotland. This aims to stimulate an informed debate on actual allocation of water among different uses, relative values and trade-offs of these allocations in Scotland so that alternative allocation scenarios can also be discussed. I then focus on the valuation of water by manufacturing industries, the biggest consumptive use and a significant added value creator in Scotland. I investigate the factors that affect the valuation of water and the responsiveness to prices in manufacturing industries using a meta-analysis technique. These values are obviously not the same for each manufacturing sector due the nature of their use and value of their final output. Some sectors create premium value out of their use. The whisky industry stands out as a water-intensive and high value creating sector, as well as a vital contributor to the rural and overall Scottish economy. It is analysed here as the first case study using water footprint and marginal productivity analyses methods, both analyses highlighting the importance of quality and quantity of local water resources in Scotland and its value to the industry. The second case study is the livestock industry, which has been overlooked in the valuation of water use literature yet is significant for livelihoods in rural Scotland where reduced land capability limits agricultural production options.

Following the portfolio of water uses, meta-analysis and case studies that analyse the current situation of value and allocation, I explore how the current situation can be improved through the application of tradability. Currently the main problem in Scotland is not the amount of water used or abstracted, but the pollution reaching water bodies as the result of run-off and leaching from agricultural fields. Therefore, the feasibility of trading water rights is more concerned with the permits to pollute rather than the rights to use. Using a linear optimisation I look into the potential of designing a payment for ecosystem services scheme based on tradability of water pollution in agricultural catchments that are affected by from diffuse pollution. The results indicate that trading schemes help reduce the cost of pollution to all users while creating additional income for farms. For constructing more precise pollution rights and robust schemes more research efforts are required.