Combining the best of two worlds - An integrative water modelling approach

Jonas Luckmann1, Ami Reznik2, Eli Feinerman2, Finkelshtain2, Harald Grethe1, Iddo Kan2

1Humboldt University

2Hebrew University of

Abstract This paper presents a generic and flexible modelling approach combining a water focused computable general equilibrium model (STAGE_W) with a non-linear mathematical programming model for the water sector (MYWAS). The advantage of this setup is that it allows to consider economy-wide effects of changes in the water sector, while considering topography and infrastructural limitations of water supply which affect regional provision costs. Further our approach considers a flexible set of different water qualities. The two models are linked by exchanging changes of result variable vectors in an iterative process. We apply our approach to study the case of the water-energy-food nexus in Israel. A large share of the potable water consumption in Israel stems from desalination and wastewater recycling. Although both activities are considered as viable means to reduce pressure on the already overused aquifers, they are highly energy intensive and thus expansive. Recently, three large gas fields have been discovered in the Mediterranean Sea close to the Israeli coast. Their exploitation is expected to considerably decrease domestic energy prices. This in turn will make the production of energy- intensive commodities including desalinated and recycled water cheaper. The economy wide effects of this shock are analyzed in this paper.

Keywords: water-energy-food nexus, Israel, water sector model, CGE model

1. Introduction Water scarcity is an increasing problem in many regions of the world. Already in the year 2000, 1.6 billion people were living under severe water-stressed conditions, a figure which is expected to reach 3.9 billion by 2050 which would be more than 40% of the world’s population (OECD, 2012). It is estimated that in the same period global freshwater demand will increase by 55% due to a growing global population and increasing economic wealth, leading to higher demand for water as well as water- intensive products.(OECD, 2012). The quantity of water available for usage is limited however and mostly determined by precipitation. With continuing climate change rainfall patterns are predicted to become more erratic whereas due to rising temperatures, evaporation rates are expected to increase in many parts of the world, resulting in a reduced and more unsteady supply of freshwater predominantly in regions which already suffer from water scarcity today (Collins et al., 2013).

These opposing trends result in many cases an unsustainable overexploitation of water resources. An increased use of alternative water sources such as desalination of seawater and reclamation of wastewater is often considered as a possible mitigation strategy, however producing water from these sources is energy-intensive. On the consumption side the agricultural sector accounts for about 70% of global water withdrawals. Therefore in order to sustainable manage the water sector one needs to look at it from a cross-sectoral perspective. The concept of the water-energy-food nexus has been applied in this respect to describe the complex and inter-related nature of the global resource system (FAO, 2014).

Computable General Equilibrium (CGE) models have been proven useful to analyze economy wide effects of changes in such complex and interlinked systems, as they allow depicting the direct and indirect reciprocal linkages between all economic activities and agents within and economy. Therefore this type of models has been increasingly used in recent years to analyze water related problems However, economy-wide models are often quite aggregated, and lack the spatial resolution needed to account for the profound variability in water quality and supply costs. Also infrastructural capacities and hydrological conditions might pose regionally differentiated limits to water supply. Yet, CGE models depicting the water economy usually assume a countrywide unified supply price and a completely integrated water supply network which allows the conveyance of any water quantity from A to B.

Hydro-economic modeling poses an alternative approach, which is commonly used for the analysis of water management policies (Harou et al., 2009). For that purpose, highly detailed water sector models are utilized, which are capable of including regional detail and constraints as well as the water supply topology as existent. However, these models only provide a rather crude picture of the demand side as well as the rest of the economy (e.g. neglecting substitution effects on different levels, changes in welfare, trade, etc.). Therefore, in this paper an integrative water modelling approach is developed in order to combine the strengths of both approaches while overcoming their complementing weaknesses.

2. Previous Approaches Similar approaches of linking CGE and single sector models have been applied to other research fields such as the analysis of biofuel policies (Britz & Hertel, 2011). However, there are only few previous studies which focus on the water sector. Robinson & Guneau (2013) combine a dynamic CGE model with a regional water system model to analyze the impacts of changes in water resources in the Indus rivers basin. Yet, this application is limited to surface water and agricultural water use only. Baum et al. (2016) link a CGE model of the Israeli economy to a farm-level model to empirical estimate substitution

elasticities of different water qualities. Also this application is focused on the water consumption by the agricultural sector and provides no regional differentiation.

The approach presented here goes beyond those previous applications. Our model also incorporates different water qualities (e.g. potable water, desalinated water, recycled wastewater and brackish water) such as in Baum et al. (2016) and which can be flexibly adjusted. Specific water activities (e.g. groundwater pumping, desalination, wastewater recycling) produces these water qualities using different specific water resources (e.g. groundwater, seawater, and wastewater). Thereby the quantity of wastewater available is linked to the potable water consumption of municipalities. Also we include different household groups in order to determine distributional effects. Moreover by incorporating a detailed and dynamic water sector model, our approach allows to determine specific water provision costs at different localities and for the endogenous expansion of water related infrastructure.

3. STAGE_W-MYWAS modelling framework The approach presented in this paper is based on the integration of STAGE_W, a water focused CGE model (Luckmann & McDonald, 2014) with MYWAS a non-linear mathematical programming (NLP) model for the water sector (Fisher & Huber-Lee, 2011). The later was recently extended to allow higher flexibility in the optimization process (Reznik et al., 2014). The two models are linked by exchanging changes of result variable vectors in an iterative as shown in Figure 1 for an energy price shock: The economy-wide effects of a change in the energy price are simulated with the help of STAGE_W. Resulting changes in the electricity price as well as in water demand are fed into MYWAS. MYWAS in turn is used to calculate the specific regional supply costs of the demanded different water commodities (i.e. potable water from groundwater or desalination, reclaimed wastewater, brackish water) considering topography and possible restrictions of infrastructure. The change in total water supply costs as well as in regional (efficient) water prices are fed back to STAGE_W, which is solved again in order to determine the demand shifts induced by the new water supply prices. The updated demand quantity is fed back to MYWAS, which endogenously allows the expansion of local water supply infrastructure if required. As this again influences water provision costs, this procedure is iterated minimizing changes in water supply prices and demand quantities.

Exogenous change of coal/oil/gas shock price

STAGE_W

Feedback-loop: 1. change in total costs of water commodities ChangeChangechange of regionalof regional of potable potable potable water 2. change in regional price of waterdemandwater supply supply by costsdifferent costs users water commodities

change of domestic ChangeChangechange of regionalof regionalof reclaimed potable potable water electricity price waterdemandwater supply supply by costsdifferent costs users

ChangeChange of ofregional regional change of brackish water potablepotable water water supply supply demand by different users costscosts MYWAS

ChangechangeChange of of ofregional potable regional water ChangeChangechange of ofregional of regional reclaimed ChangeChangechange of ofregional ofregional brackish potablepotablesupply water costswater supply in supply different potablepotablewater water water supply supply supply costs in potablepotablewater water water supply supply supply costs in costscostsregions differentcostscosts regions differentcostscosts regions

Figure 1: STAGE_W-MYWAS modelling framework, interlinkages of an energy-price shock.

4. Case study We demonstrate our approach by applying it to the case of the water-energy-nexus in Israel. A large share of the potable water consumption in Israel stems from desalination and wastewater recycling. Although both activities are considered as viable means to reduce pressure on the already overused aquifers, they are highly energy intensive and thus expansive. Recently, three large gas fields have been discovered in the Mediterranean Sea close to the Israeli coast. Commercial exploitation started in 2013 but will be significantly expanded in 2016/17 (Siddig & Grethe, 2014). With the help of STAGE_W we analyze the effect this has on the price of energy in Israel. The results are fed into MYWAS as described in section 3.

5. Expected results and conclusions The additional gas supply is expected to considerably reduce domestic natural gas and energy prices. This in turn will make the production of energy-intensive commodities including desalinated and recycled water cheaper. Leading to an increasing demand from water intensive activities such as irrigated agriculture, inducing an expansion of water supply infrastructure. While total production expands there are also substitution effects which might lead to a depression of factor prices. Yet total domestic production is expected to expand and the overall welfare effect on households to be positive.

The presented integrated modelling approach allows quantifying these changes and providing details regarding the required additional water infrastructure. Still, the modelling setup is generic and flexible such that it can be applied to a much wider set of scenarios studying the water-energy nexus and beyond.

6. References Baum, Z., Palatnik, R.R., Kan, I. & M. Rappaport-Rom, 2016. Economic Impacts of Water Scarcity Under Diverse Water Salinities. Water Economics and Policy, 2(1): 1550013. Britz, W., & T., Hertel, 2011. Impacts of EU biofuels directives on global markets and EU environmental quality: An integrated PE, global CGE analysis. Agriculture, Ecosystems & Environment 142(1-2): 102-109. Collins, M., Knutti, R., Arblaster, J., Dufresne, J.-L., Fichefet, T., Friedlingstein, P., Gao, X., Gutowski, W.J., Johns, T., Krinner, G., Shongwe, M., Tebaldi, C., Weaver A.J., & M. Wehner, 2013. Long-term Climate Change: Projections, Commitments and Irreversibility. In: T.F. Stocker, D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex & P.M. Midgley (eds.) Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press, Cambridge, UK and New York, USA, 1029-136. FAO, 2014. The Water-Energy-Food Nexus A new approach in support of food security and sustainable agriculture. Food and Agriculture Organization of the United Nations (FAO) Rome, Italy. Fisher, F.M. & A.T. Huber-Lee, 2011. The Value of Water: Optimizing Models for Sustainable Management, Infrastructure Planning, and Conflict Resolution. Desalination and Water Treatment 31: 1-23. Harou, Julien J., Pulido-Velazquez, M., Rosenberg, D.E., Medellin-Azuara, J., Lund, J.R., & R.E. Howitt, 2009. Hydro-Economic Models: Concepts, Design, Applications, and Future Prospects. Journal of Hydrology 375(3-4): 627-643. Luckmann, J. & S. McDonald, 2014. STAGE_W: an applied general equilibrium model with multiple types of water; technical documentation. Working Paper. Kommunikations-, Informations- und Medienzentrum der Universität Hohenheim Institute of Agricultural Policy and Agricultural Markets. OECD, 2012. OECD Environmental Outlook to 2050. OECD Publishing, Organisation for Economic Co-operation and Development, Paris, France. Reznik, A., Huber-Lee, A., Joyce, B., Feinerman, E., Finkelshtain, I., Kan I., & F. Fisher, 2014. Understanding the Economics of Water in Israel: the Multi-Year Water Allocation System Model. Discussion Paper No. 11.14, The Hebrew University of Jerusalem. Robinson, S., & A. Gueneau, 2013. CGE-W: an Integrated Modeling Framework for Analyzing Water-Economy Links Applied to Pakistan. Conference Paper presented at the 16th GTAP Conference, Shanghai, June 2013. Siddig, K. & H. Grethe, 2014. No more gas from Egypt? Modeling offshore discoveries and import uncertainty of natural gas in Israel. Applied Energy 136: 312-324.

Combining the best of two worlds – An integrative water modelling approach

Jonas Luckmann1 Ami Reznik2, Eli Feinerman2, Israel Finkelshtain2, Harald Grethe1, Iddo Kan2 1 Humboldt‐Universität zu Berlin 2 Hebrew University of Jerusalem

19th Annual Conference on Global Economic Analysis Washington DC, USA June 15‐17, 2016 Rationale

2 • Complementarity of General Equilibrium and Single Sector Models: – CGE‐Models: economy‐wide linkages and indirect effects – Single sector models: high resolution, (spatial) detail • Water – Economy wide integration – Regionally differentiated supply/demand, infrastructural capacities Previous Approaches

3 • Robinson & Guneau (2013) – dynamic CGE model with + regional water system model – analyze the impacts of changes in water resources in the Indus rivers basin • Baum et al. (2016) – link a CGE model of the Israeli economy + farm‐level model – empirical estimate substitution elasticities of different water qualities MYWAS

4 • The Multi‐ Year Water Allocation System model MYWAS

5 • High‐resolution NLP‐model of economy‐wide water supply (Fisher & Huber‐Lee, 2011) • Reznik et al., 2014: – Topology adjustments: • Urban (21) and agricultural (18) consumption regions separated • Sources (46) differentiated from demand regions • Including wastewater treatment, desalination and additional conveyance infrastructure – Calibrated to Israeli data for 2010 Topology

6

Freshwater System Freshwater + Non‐ Wastewater System Fresh water system freshwater ‐Fresh and Brackish Agriculture water for Waste water system 3002 Agriculture Western 3001 3000 Eastern Galilee Golan Golan Galilee WG Local Golan GW Local Western Galilee Western Kineret Golan WG Local Local 3003 Western Galilee GW Sea of Galilee Golan GW Lower Jordan River 1202 1201 1200 Kineret Tzfat Golan 3103 1205 3001 3000 Acco Western Galilee Eastern Galilee Golan Carmel 3100 1204 Coast GWD 3103 Golan Kishon 3102 3101 3100 Acco Kineret Tzfat Golan 3002 Western Kineret 3102 3101 Carmel Coast Western Galilee GW Sea of Galilee Kineret Tzfat Lower Galilee 3104 3006 3006 1203 Carmel Coast 3003 Carmel Coast Beit Shean Lower Jordan 3108 River Hadera Hadera 3105 3004 SWD Zalmon Jeezrael Valley 3106 3105 Eastern 1207 Jordan Valley Jordan Valley Jeezrael Valley Local North Coast 3104 3007 Lower Galilee 3007 Carmel Coast Haifa Hadera Menashe 3009 Hadera Northern Coast 3109 and Sharon Samaria 1206 Jordan Valley 3004 Zalmon 1208 Jordan Valley Central Coast 3008 Metzer Northern Sharon South Mountain 3008 1213 Sharon South 3110 Judea and Samaria Carmel Menashe Petah Tikva Coast 3108 Brackish 3106 Eastern Hadera Jordan Valley 1209 Central Coast Local 3107 Yarkon Judea and Eastern Aquifers 3111 Rosh Metzer Samaria 3010 Tel Aviv 3010 Haain Northern Coast Tel Aviv Tel Aviv 3011 3107 Lod 3013 Judea and Eastern Aquifers 3011 Central Samaria Lod Modieen 3012 Mountain Jerusalem 3009 3005 1211 1210 Judea and Dead Sea Northern 3109 Rosh 3005 Palmachim A c h i s e m e c h Samaria Shafdan Nesher Dead Sea SWD Mountain Sharon Haain 1214 3014 3012 Adolam Jerusalem Shfela 3114 Jerusalem 3112 3114 Ramle Jerusalem 1214 3013 Southern Coast Holda Modieen 3110 Dead Sea Central Coast A c h i s e m e c h Petah Tikva 3018 Lachish

3014 3112 3015 Adolam Central Mountain Ramle Granot 3111 3015 Southern Granot Coast GWD Tel Aviv Zohar Holda Southern Coast Brackish 1212 Southern Coast 3113 3019 Ramat Negev Negev Coastal Southern 3018 SWD GW Mountain Lachish Southern Coast 3115 3113 Ashkelon Rehovot Negav Zohar Brackish 1215 Negev Coast 3019 Negav GWD 3115 3117 3118 Ramat Negev Arava Ashkelon Negev Arava 3016 1216 Southern Western Negev 3016 3118 Negev Western Negev Mountain 1218 Arava GWD Eilat S/GWD Arava Arava Negev Aquifer Negev Coastal GW Negev Aquifer 3117 Negev

Arava 3021 3020 Brackish Arava 3021 3020 Eilat Arava Eilat Arava Demand

7 • Urban‐sector demand Constant‐elasticity demand functions based on Bar‐Shira et al., (2005) + calibration: u  pQ  • Agricultural‐sector demand Incorporates the substitution between freshwater, treated wastewater and brackish water Calibrated, using elasticity estimates (Bar‐Shira et al., 2006) and administrative conversion ratios:

a  pQQQ w    Demand and Supply

8

u u D p

S

Q Optimization

9 • Nationwide allocation – Optimal water production by sources and inter‐sector water allocation • Intra‐agricultural sector allocation – Optimal allocation of fresh, brackish and recycled water to the various agricultural regions • Exogenous factors – Costs (energy, operation, maintenance, capital), constraints (minimal stocks, sewage treatment). STAGE_W

10 • Based on STAGE (McDonald, 2007) – Single country, static CGE‐model • Multiple water resources, activities and commodities • Water taxation‐instruments on – Activities – Commodities – Users  Price discrimination (Luckmann & McDonald, 2014) Production structure Water commodities

11 Production structure Water commodities

12

potable water/ recycled wastewater/ brackish water

value added intermediary inputs

labour capital seawater/ int1 int2 intn wastewater/ brackish groundwater Production structure Non‐water commodities

13 STAGE_W ‐ Water taxation instruments

14 Database

15 • SAM based on Siddig et al. (2011) – Updated to depict the Israeli economy of 2010 – 205 accounts • 45 activities and commodities • 41 factors • 10 household‐groups Scenarios

16 • Optimization of water supply (Opt) – Adjustment of water policy instruments – Keeping government deficit constant

• Additional decrease of primary energy price (PElow) – 30% reduction of import price of primary energy

CRUDE OIL PRICE 100 80 60 40 USD/bbl 20 0 1990 1995 2000 2005 2010 2015 Source: World Bank, 2016 Modelling Setup Opt‐Scenario

17 Modelling Setup PElow‐Scenario

18

Change of regional Change of regional optimal potable water potable water supply potable water supply supply to different regions/sectorscostscosts

exogenous shock Change of regional optimal reclaimed water Change of regional potable water supply potable water supply supply to different change in primary regions/sectorscostscosts energy price

Change of regional Change of regional optimal brackish water potable water supply potable water supply supply to different regions/sectorscostscosts

STAGE_W MYWAS

change of domestic economy‐wide effects electricity price Closures I

19 • Water sector – Total natural freshwater water supply limited to average annual recharge rate – Water‐supply to different sectors fixed according to MYWAS‐ results – Endogenous adjustment of water taxation instruments – Water factors fixed unit value, flexible quantities • exception: wastewater linked to municipal potable water consumption Closures II

20 • Government – Fixed government deficit – Flexible household income tax • Non‐Water‐Factors – Labour, capital and land fully employed and mobile • Trade – World market prices fixed – Flexible exchange rate Water Sources

21 Base Opt PElow m³ %‐change Natural fresh water 1061 13% 13% Brackish water aquifers 179 ‐46% ‐46% Desalination 313 ‐43% ‐38% Wastewater treatment 425 10% 11% Total 1978 ‐2% ‐1% Water Sources

22 Base Opt PElow m³ %‐change Natural fresh water 1061 13% 13% Brackish water aquifers 179 ‐46% ‐46% Desalination 313 ‐43% ‐38% Wastewater treatment 425 10% 11% Total 1978 ‐2% ‐1%

Base Opt PElow Plant m³ %‐change Hadera 145 ‐92% ‐82% Palmachim 45 0% 0% Ashkelon 120 ‐2% 0% Eilat 3 0% 0% National Total 313 ‐43% ‐38% Water Sources

23 Base Opt PElow Plant Base Opt PElow m³ %‐change m³ %‐change Arava 89%9% Natural fresh water 1061 13% 13% Kineret 10 0% 0% Brackish water aquifers 179 ‐46% ‐46% Western Galilee 35 0% 0% Jordan Valley 11 0% 0% Desalination 313 ‐43% ‐38% North Coast 17 11% 11% Wastewater treatment 425 10% 11% Central Coast 37 36% 34% Total 1978 ‐2% ‐1% Shafdan 85 11% 13% South Coast 73%3% Kishon 43 18% 19% Dead Sea 20%0% Negev 38 0% 0% Golan 3 12% 12% Tzfat 10 22% 24% Beit Shean 30%0% JS Settlements 3 13% 8% Nesher 22 4% 4% Yarkon 14 ‐53% ‐47% Shfela 39 33% 33% Negev Coast 38 0% 0% National Total 425 10% 11% Water Prices

24

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Municipalities Industry Agriculture Base Opt PElow Water Consumption

25

Base Opt PElow Sector Water quality m³ %‐change Municipalities potable 752 11% 11% Industry potable 129 0.0% 0.3% Agriculture potable 493 ‐16.7% ‐13.9% recycled 390 19.9% 19.9% brackish 179 ‐46.3% ‐46.4% Water Consumption

26 Base Opt PElow Consumption regions m³ %‐change Sharon South 87 12% 12% Golan 5 12% 13% Eastern Galilee 79 12% 13% Western Galilee 126 11% 11% Carmel Coast 8 12% 12% Hadera 25 12% 13% Base Opt PElow Granot 71 12% 12% Sector Water quality m³ %‐change Jordan Valley 7 13% 14% Municipalities potable 752 11% 11% Jerusalem 62 9% 10% Industry potable 129 0.0% 0.3% Lachish 46 11% 11% Agriculture potable 493 ‐16.7% ‐13.9% Western Negev 28 11% 12% recycled 390 19.9% 19.9% Ramat Negev 5 10% 11% brackish 179 ‐46.3% ‐46.4% Arava 3 14% 14% Lower Jordan 7 10% 11% Judea and Samaria 15 13% 8% Tel Aviv 112 10% 10% Lod Lowland 37 11% 12% Modieen 15 11% 11% Adolam 1 10% 11% Dead Sea 6 9% 9% Eilat 7 11% 11% National Total 752 11% 11% Macro‐Results

27

Opt PElow real GDP +0.12% +0.21% Supply +0.05% +0.89% Absorption +0.12% +1.02% Imports +0.05% +2.33% Exports +0.06% +0.26% Households

28

6% 4% 2% 0% ‐2% ‐4% ‐6% ‐8% 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. Jewish Arab and others Income Equivalent variation as share of base HH‐expenditure tax Opt PElow Concluding remarks

29 • Flexible, generic modeling approach Depicts economy‐wide effects of changes in the water sector/regional water sector outcomes of exogenous shocks  Considers topography and infrastructural limitations of water supply Internalizes non‐water sector responses Applicable to a wide set of scenarios, studying the water‐ energy nexus and beyond Outlook

30 • Introduction of dynamics (infrastructure development) • Hard‐linking of models • Transboundary water management 31

Thank you for your attention!

luckmann@hu‐berlin.de Sources

32

Bar‐Shira, Z., Cohen, N. and Y. Kislev (2005): Residential Demand for Water in Israel. Working Paper, Hebrew University of Jerusalem, Rehovot, Israel.

Bar‐Shira, Z., Finkelshtain, I. and A. Simhon (2006): Block‐Rate versus Uniform Water Pricing in Agriculture: An Empirical Analysis. Amer. J. Agr. Econ. 88(4) (November 2006): 986–999.

Baum, Z., Palatnik, R.R., Kan, I. & M. Rappaport‐Rom, 2016. Economic Impacts of Water Scarcity Under Diverse Water Salinities. Water Economics and Policy, 2(1): 1550013. Fisher, F.M. & A.T. Huber‐Lee, 2011. The Value of Water: Optimizing Models for Sustainable Management, Infrastructure Planning, and Conflict Resolution. Desalination and Water Treatment 31: 1‐23.

Luckmann, J. & S. McDonald, 2014. STAGE_W: an applied general equilibrium model with multiple types of water; technical documentation. Working Paper. Kommunikations‐, Informations‐ und Medienzentrum der Universität Hohenheim Institute of Agricultural Policy and Agricultural Markets.

McDonald, S. (2007), A static applied general equilibrium model: Technical documentation STAGE version 1: July 2007 draft, Dep. of Econ.\‐Strat., Oxford Brookes Univ., Oxford, U. K.

Reznik, A., Huber‐Lee, A., Joyce, B., Feinerman, E., Finkelshtain, I., Kan I., & F. Fisher, 2014. Understanding the Economics of Water in Israel: the Multi‐Year Water Allocation System Model. Discussion Paper No. 11.14, The Hebrew University of Jerusalem.

Robinson, S., & A. Gueneau, 2013. CGE‐W: an Integrated Modeling Framework for Analyzing Water‐Economy Links Applied to Pakistan. Conference Paper presented at the 16th GTAP Conference, Shanghai, June 2013. Siddig, K., Flaig, D., Luckmann, J. and H. Grethe (2011): A 2004 Social Accounting Matrix for Israel, Documentation of an Economy‐Wide Database with a Focus on Agriculture, the Labour Market and Income Distribution. Hohenheim, Germany. Agricultural and Food Policy Group.