SPONSOR:
WRRIP 2008
PROJECT PERIOD:
03/01/08 - 02/28/09
ABSTRACT:
We proposed an intertemporal and spatial optimization model to derive an efficient pricing scheme for the integrated water system of Southern Oahu. Welfare gains from this scheme were analyzed and compared to those associated with the pricing scheme initiated by the Honolulu Board of Water Supply in October 2006. Recommended management schemes extended the useful life of the Southern Oahu aquifers, delaying use of costly desalination, and induce conservation through pricing mechanisms that account for marginal user cost. In addition, we incorporated the impact of future climate change on the efficient allocation of water. Global warming will likely have a significant impact on rainfall frequency and intensity, which will in turn affect groundwater recharge. Under the current pricing structure, groundwater is already being over-consumed, and failing to account for climate change will exacerbate the extant under-pricing problem.
Nature and Scope of the Proposed Research
Our previous USGS-funded research has provided estimates of efficient water allocation over space and time for the Honolulu water district (e.g. Pitafi and Roumasset, 2007). We have also shown how the efficient solutions can be implemented with marginal cost pricing, and how infra-marginal blocks of water can render efficient pricing politically feasible. This research involved a reassessment of the Honolulu aquifer, taking into account both the new pricing scheme instigated by the Honolulu Board of Water Supply (HBWS) on October 1, 2006 and the sewage charges associated with water consumption.
In the upcoming grant period, we updated the above using consumption and pumping data and extended our previous work in three primary ways. First, we extended the analysis to the Pearl Harbor water district and solved for the optimal allocation across space and time for the two aquifers as an integrated system. After solving for the optimal allocations in the Honolulu and PHA systems independently, the solution was recalculated allowing for inter-aquifer transfers. The magnitude of the differential in shadow prices between the two autonomous solutions determines if imports/exports between districts are warranted under the efficiency-pricing scheme. Transfers were allowed until the shadow price differential equals the per-unit transfer cost.
The second extension involved constructing a multiple aquifer model, integrating extraction, distribution, and consumption from the two sources. This framework provided analysis of a situation much closer to what was actually observed in reality. HBWS currently pumps groundwater from the Honolulu and Pearl Harbor aquifers into an interconnected pipeline serving both districts. In particular, water extracted from the Pearl Harbor aquifer is imported into Honolulu to meet growing demand.
We derived optimal price and hydrologic head paths of the two aquifers as well as the time at which desalination will be efficiently introduced. We expected that that efficient joint management would have significant welfare gains over the status quo policy. As in the Honolulu case, the efficient pricing policy would extend the useful life of the integrated system of aquifers through conservation efforts induced by holding consumers responsible for the marginal user cost, i.e. higher future extraction costs owing to increased drawdown, of the water they consume.
Finally, we incorporated the impact of future climate change on the efficient allocation of water. Economic models of water use for Hawaii to date had assumed that weather patterns will remain constant. Since the island of Oahu obtains nearly 90% of its fresh water from groundwater stocks, any substantial decrease in aquifer recharge due to climate change would likely have a large impact on consumers. It is possible that average annual rainfall will decline as a result of global warming, which unambiguously results in less groundwater recharge. There is also a possibility that overall rainfall will remain fairly constant but that weather patterns will change, i.e. there may be more intense storms more often. In that case, the resulting increased runoff still implies that water will be scarcer in the future.
Under the current pricing structure, groundwater is already being over-consumed. The current practice of pricing at average extraction and distribution costs results in under-pricing and over-use in the present because it account for neither the marginal user cost, nor the implicit subsidy to higher elevation users. Thus, failing to account for changing rainfall patterns will exacerbate the extant under-pricing problem.
Research Benefits
The model was designed to optimize water consumption over space and time in Southern Oahu, which is supplied by the Pearl Harbor and Honolulu aquifers. We have therefore derived efficient price and hydrologic head paths for both aquifers, thus revealing the time at which desalination will be optimally incorporated. Since efficient pricing policy is intended to increase the useful life of the integrated system of aquifers, the project recommended a demand-side management plan that will substantially increase social welfare relative to that obtained under the current pricing scheme.
In addition, we compiled a detailed description of the entire estimation process, from how the data was obtained to the actual numerical methods used in the optimization procedure. We hope that doing so will allow other researchers interested in deriving intertemporally and spatially optimal pricing policy to replicate the procedure for Oahu or in other contexts.
Our research takes on the problem of growing water demand and the future decline in groundwater recharge owing to climate change by providing a solution for the extension of the useful life of the integrated water system. In doing so, it contributes to the WRRC objectives regarding water institutions, water supply, water systems management, and economics.
PRINCIPAL INVESTIGATOR