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Water prices for agriculture

 

Remarks made by Angel Gurría, Secretary-General, OECD
International Advisory Committee of Expo Zaragoza 2008
Zaragoza, Spain, 8 September 2008

Good morning Ladies and Gentlemen,

It is a great honour to be invited to this prestigious event, addressing one of the most important challenges that the global community will be facing in the 21st century: water. Water is, of course, a very important topic here in Spain, where drought risk is extremely high and water scarcity is already a reality.

Many governments in OECD countries have taken it for granted that there will always be sufficient water. Unfortunately, this is no longer true. A growing and wealthier global population means that more households, industries, and agricultural users are demanding and competing for the use of water. The pressure on water has been compounded by severe weather events, such as droughts in Australia and Spain or floods in the United States or Southeast Asia, and by climate change leading to changes in the frequency and location of rainfall.

The need to ensure access to water will test our ability as policymakers, farmers, industrial leaders and consumers to work together, both within and across countries to prevent water shortages and water conflict. At the OECD, we have made water a priority and we are working to identify best practices and develop policy proposals to assist countries in moving towards sustainable water management. As an economic organisation, we focus on economic tools and incentives to manage this valuable resource and promote the most efficient uses of water, including in agriculture.

A recent OECD report on the environmental performance of agriculture in OECD countries since 1990 focuses on the fact that agriculture is the largest user of water in OECD countries. Agricultural water use has increased more rapidly than other uses over the past decade and now accounts for 45% of the total. In many developing countries the share is much higher, often exceeding 75%.  And where irrigated farming provides the major share of agricultural production, as in Australia, Mexico, Spain, and the United States, OECD projections to 2030 suggest that demand for irrigation water will continue to grow.

The use of groundwater for irrigation is so large that it exceeds recharge in some regions, threatening the economic viability of farming. Agriculture is also a main source of water pollution from nutrient run off and pesticides, often concentrated in specific regions and localities where intensive agricultural activities take place.

Reconciling the economic, social and environmental demands within the agricultural sector is a big challenge. Technological and managerial improvements have certainly helped to increase the productivity of water use by agriculture over the past 40 years, leading to higher food production.  Israel, which is negotiating its membership in the OECD, provides ample evidence of this. But productivity increases alone will not be sufficient. We need to go further to achieve long-term sustainable management of water.

Currently, there are four main factors that stand in the way of progress: policies, property rights, prices and governance. 

  • Prices: Farmers often pay very low prices for water delivered and used. They pay much less than households or industry, although price comparisons need to be made with care, as the water that farmers receive is sometimes of a different quality. The lack of proper incentives to reduce consumption and the lax application of the polluter pays principle also contribute to over-use of water and water pollution.
  • Governance:  There is also a problem of governance in the water sector. Policy measures to address water quality and quantity issues are rarely seen as part of a broader approach. But sustainable water management will only be achieved with a policy package that encompasses a range of policy instruments, institutional reforms and broader community engagement.
  • Policies: Regardless of reforms, over 60% of OECD countries’ support to farmers (that is 60% of USD258 billion, i.e. USD155 billion) is provided through measures that are closely linked to the production of farm commodities. But raising prices to farmers for what they sell or lowering prices for their inputs discourages farmers from producing in economically efficient ways and encourages them to use more water than would otherwise be the case.
  • Property rights: In many countries, water property or use rights for farmers are not clearly defined. In other cases, water is deemed a common resource, resulting in little control over use by individual farmers and lack of accountability for pollution. The latter problem is exacerbated by the fact that it is generally difficult to identify the farmer who is the source of water pollution in a specific water body.

Removing these four obstacles will require moving towards a greater reliance on market-based instruments. Providing artificially cheap access to scarce resources like water is counter-productive. When resources like water are under-valued, they are treated as though they were abundant, further exacerbating already existing strains. Policy makers need to ensure that water used by agriculture is efficiently allocated to meet the demands for food, fibre and fuel. They need to design incentives in ways that address water pollution and support ecosystems, while allowing agriculture to adjust in ways that reflect market developments.

Let me mention just one example of how reforms of water pricing and trading can increase efficiency: In Australia, water reforms, including higher prices for water and water trading, have contributed to a 50% reduction in the amount of irrigated water per hectare, while maintaining agricultural production.

The good news is that some OECD governments, although still too few, are now seriously trying to go down this avenue. To advance faster, OECD work suggests that the following reforms are necessary:

First, the reform of agricultural support and energy subsidies is essential to provide the right framework of incentives facing farmers. This is, of course, a huge policy challenge, as witnessed just recently by the collapse of the Doha talks, but one that we must take on and pursue with determination.

Second, we will need increased cost recovery through tariffs and water pricing mechanisms that encourage water resource saving, technological innovation and a shift to higher value agricultural commodity production, while providing incentives to reduce pollution. In general, farmers’ responsiveness to price requires that they have control over the water they take from the irrigation system. But to successfully implement water pricing mechanisms it is also important for policy makers to reflect and be sensitive to the social, environmental and institutional context.  

Third, the property rights attached to water withdrawals and the rights attached to allowing discharges into water bodies from agricultural activities need to be better defined.  Limits are usually imposed on water rights, such as drawing water from aquifers, but some countries are now engaged in the process of separating water entitlements from land title rights, as in Australia. 

Finally, the governance of water policies should be coherent across different scales of decision-making from the farm through to aquifer and river basin, as well as national and international levels. Policy design should also consider the interactions between different water uses and policies to avoid conflicting incentives to farmers.

But reform takes time, it involves on-going adjustments, and it needs to be inclusive. I am pleased to tell you that the OECD is addressing these water policy issues in an integrated programme involving several directorates in the organisation as well as external water experts. The first results of this cutting-edge work will be presented in Istanbul in March 2009 at the World Water Forum.

In conclusion, let me say that improved water pricing alone will not provide all the answers but it will go a long way towards finding solutions to one of the biggest challenges for humankind. At the OECD, we look forward to working with you on this formidable challenge.

Thank you.

 

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