The Debate on Water Policies: Evidence from Drought in Spain

Water scarcity is a critical environmental issue worldwide, especially in arid and semiarid regions. In those regions, climate change projections suggest further reductions in freshwater supplies and increases of the recurrence, longevity and intensity of drought events. At present, one important question for policy debate is the identification of water management policies that could address the mounting water scarcity problems. Suitable policies should improve economic efficiency, achieve environmental sustainability, and meet equity needs. This paper applies an integrated hydro-economic model that links a reduced form hydrological component, with economic and environmental components to such issues. The model is used to make a direct comparison of three water management alternatives, water markets, water pricing and institutional policies, based on their economic, environmental and equity outcomes. The analysis is performed in the Jucar Basin of Spain, which is a good natural experiment for studying the policies to confront water scarcity and climate change. Results indicate that both institutional and water market policies are good instruments to smooth the economic damage costs of droughts, achieving almost the same social benefits. However, the environmental effects of water markets are worrying. Another important finding is that water pricing is the worst policy option not only in terms of private and environmental benefits but also in terms of equity.