Rising energy prices will alter water allocation and distribution. Water extraction and conveyance will become more costly and the demand for hydroelectric power will grow. The higher cost of energy will substantially increase the cost of groundwater, whereas increasing demand for hydroelectric power may reduce the price and increase supply of surface water. High energy prices and geopolitical considerations drive investment in land-and water-intensive biofuel technology, diverting land and water supplies to energy production at the expense of food production. Thus, rising energy prices will alter the allocation of water, increase the price of food and may have negative distributional effects. The impact of rising energy prices and the introduction of biofuels can be partly offset by the development and adoption of new technologies, including biotechnology. The models considered here can be used to determine the effects of rising energy prices on inputs, outputs, allocation decisions and impact on distribution.
High energy prices can be expected to have significant consequences for the water sector. It is therefore important to consider how energy prices affect water use and the value and allocation of water and to develop policies both to mitigate the negative impacts of rising energy costs and to exploit the benefits of potentially positive impacts. This paper uses economic theory to provide insights into and hypotheses about situations that are likely to occur in the future. It concentrates its analysis on irrigated agricultural systems, where it forecasts that the impact of rising energy prices will be particularly acute.
Using the tools of applied welfare economics and expanding basic models of water economics, this study identifies socially optimal outcomes. It also analyses institutional frameworks. In Sections 2 and 3 it considers the direct effect of higher energy prices on existing agricultural crops and water systems. The authors consider simple systems that model local extraction and use. In Section 4 they deal with the effect of biofuels on agricultural water use. Section 5 concludes and offers suggestions for further research.

By: D. Zilberman, T. Sproula, D. Rajagopalb, S. Sextona, P. Hellegers

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