Recovering the costs of irrigation water with different pricing methods: Insights from a Mediterranean case study

A key guideline of the European Water Framework Directive (WFD) asks to cover water costs in a way to encourage the efficient use of the resource, therefore its protection, but minimizing possible adverse environmental, social and economic impacts of cost recovery. We use a Mathematical Programming model of an Italian, Mediterranean agricultural area where a Reclamation and Irrigation Board (RIB) manages collective irrigation facilities, to simulate the impact of replacing the existing pricing system with several alternatives, at different degrees of water cost recovery. We estimate the water distribution cost (WDC) of the RIB with a Translog cost function, and consider the cost incurred by the Sardinian water agency (ENAS) for maintaining regional dams and primary water infrastructures. We also consider that a Regional subsidy pays part of the RIBs and ENAS energy cost for water lifting, and that ENAS rates are modulated among end-users to reduce agricultural fee by increasing the charge on industrial uses. We simulate the impact of alternative pricing under four scenarios of cost recovery: (i) current partial recovery of WDC, with no ENAS charge; (ii) current recovery of WDC, plus ENAS cost at modulated agricultural rates; (iii) full coverage of WDC, i.e. absence of the Regional aid, plus ENAS cost at modulated agricultural rates; (iv) full coverage of WDC, plus unmodulated ENAS rate. Solely changing the water pricing system, at current cost recovery level, generates limited total impacts, but substantial income redistributive effects among farm types whose magnitude grows increasing the level of recovery. The full cost recovery scenarios generate remarkable global impacts and drops of income in the single farm types, particularly when applying ENAS undiscounted rate. Major consequences also emerge for the use of water and other productive factors, and labour employment.