Achieving Sustainable Development Goals on Socially Inclusive and Sustainable Water Through Fiscal and Pricing Reforms in Uruguay

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Achieving Sustainable Development Goals on Socially Inclusive and Sustainable Water Through Fiscal and Pricing Reforms in Uruguay United Nations Environment Programme Resources and Markets Branch Achieving Sustainable Development Goals on Socially Inclusive and Sustainable Water through Fiscal and Pricing Reforms in Uruguay Working Paper December 2017 Acknowledgements This study was commissioned by the United Nations Environment Programme (UN Environment) under the “Fiscal Policy Reforms for Inclusive Green Economies” project. The study was prepared by Miguel Carriquiry (Instituto de Economía – IEcon, Facultad de Ciencias Económicas y de Administración, Universidad de la República, Uruguay), Matías Piaggio (IEcon and the Environment for Development – EfD, Tropical Agricultural and Higher Education Centre – CATIE, Costa Rica), Felipe Bertamini (IEcon), Gabriela Pérez Quesada (Facultad de Agronomía, Universidad de la República, Uruguay), and Guillermo Sena (Instituto Sudamericano para Estudios de Resiliencia y Sostenibilidad – SARAS2). Fernanda Milans provided assistance with Chapters 1 and 2. It was undertaken under the overall supervision of Joy Kim, Senior Economic Affairs Officer of the Resources and Markets Branch, Economy Division, UN Environment. UN Environment would like to thank the Government of Uruguay for its warm cooperation and support at the various stages of the development of this study. In particular, Daniel Greif and Paula Pellegrino of the Dirección Nacional de Aguas (DINAGUA) of the Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente (MVOTMA), Virginia Chiesa and Santiago Guerrero of the Dirección Nacional de Medio Ambiente (DINAMA) of the MVOTMA, provided valuable support during the drafting of this study. Within UN Environment, Jose Dallo, Natalia Zaldúa, Ronal Gainza, David Goodman and Sirini Withana provided useful guidance, feedback, and support. Administrative support was provided by Fatma Pandey, Desiree Leon and Rahila Somra. UN Environment gratefully acknowledges the financial support of the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH for this study. The study was undertaken in the context of the project “Enhancing low-carbon development by greening the economy in cooperation with the Partnership for Action on Green Economy (PAGE)” funded by the International Climate Initiative (IKI) of the Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB). ii Table of contents List of acronyms v List of tables vi List of figures vii 1. Introduction 1 1.1 Background on SDGs 1 1.2 Evaluation of the role of fiscal instruments and pricing policies for water management 4 1.3 Economic instruments applied in water management 7 1.4 National context of policy and challenges in the water sector 10 1.5 Socioeconomic characterization of the agricultural sector 15 2. Analysis of the current framework of fiscal and pricing policy in the case of water 22 2.1 Description of the application of fiscal instruments and pricing policies related to water consumption for agricultural irrigation and hydroelectricity in Uruguay 22 2.2 Estimation of collection and costs of existing measures and programmes 26 2.3 Summary of background to the impact of various fiscal policies related to the use of water in the agricultural sector and its effects on different variables such as employment, competitiveness, added value and water use 30 2.4 Systematization of the current situation of the proposed royalty for water use. 31 3. Design of a baseline for the ex-post evaluation of implementing the royalty on water use in the agricultural sector 32 3.1 Measurement of the impact of the implementation of the royalty in the agricultural sector for the fulfilment of the objectives of the PNA 33 3.2 Methods for the design of ex-post evaluation of the implementation of the royalty for the use of water in the agricultural sector 35 3.3 Randomisation method 37 3.4 Construction of the counterfactual based on information on the performance of agricultural producers in other countries 38 3.5 Synthetic control method 41 3.6 Other objective variables, heterogeneous effects, spillover effects, and unintended effects 47 3.7 Evaluation of projects implemented with the collection of the royalty 49 4. Systematization of the different methodologies and identification of the necessary information for the ex-ante evaluation of the introduction of a royalty for water use 52 4.1 Brief introduction to the conceptual framework: Theory of Production 53 4.2 Methods of economic valuation of water 54 4.3 Identification of the main agricultural sectors where irrigation represents a fundamental input for production 57 4.4 Compilation of existing information 57 iii 4.5 Proposed methodology for the estimation of the ex-ante impact of the royalty for the use of water and on production in the agricultural sector 59 4.6 Empirical Implementation and Results 62 4.7 Model with restriction on the availability of land resources 63 4.8 Extended model with restriction on the availability of land and water resources 71 5. Final Considerations 76 Annex I. Bibliography 81 Annex 2: Statistical forms 84 iv List of acronyms BCU Central Bank of Uruguay WB World Bank ECLAC Economic Commission for Latin America and the Caribbean COMAP Implementation Comission DGI General Tax Directorate DINAGUA National Water Directorate DNE National Energy Directorate ECH Continuous Household Survey FAO Food and Agriculture Organization GEF Global Environment Facility IMESI Internal Specific Tax INAC National Meat Institute INE National Institute of Statistics IRAE Income Tax on Economic Activities VAT Value Added Tax MGAP Ministry of Livestock, Agriculture and Fisheries MIEM Ministry of Industry, Energy and Mining MVOTMA Ministry of Housing, Territorial Planning and the Environment OECD Organization for Economic Co-operation and Development MDG Millennium Development Goals SDG Sustainable Development Goals UN United Nations OPYPA Office of Programming and Agricultural Policy OSE Sanitary Works of the State GDP Gross Domestic Product PNA National Water Policy UNEP United Nations Environment Programme PPR Responsible Production Project PRENADER Natural Resources Management and Irrigation Development Program PUMS Land Use and Management Plan RPI Investment Promotion Regime SADI Industrial drains TNC The Nature Conservancy UNASEP Private Sector Support Unit UTE National Administration of Power Plants and Power Transmissions v List of tables Table 1: Description of SDG 6, its targets and respective indicators………………………………………2 Table 2: Summary of targets and indicators for Uruguay SDG 6............................................... 3 Table 3: Classification of instruments in the policy matrix ....................................................... 5 Table 4: Fiscal instruments for the control of water use in Latin America ............................... 9 Table 5: Projects recommended by the MGAP according to type of investment (2008 - set 2016) ........................................................................................................................................ 25 Table 6: CP indicator (January 2013 - October 2014 period) .................................................. 26 Table 7: Information and data sources for each country ........................................................ 38 Table 8: Comparison of DIEA, IBGE and DCEA surveys............................................................ 40 Table 9: Variables considered for Synthetic Control and their data sources .......................... 42 Table 10: Average value of the control variables: current vs Synthetic Uruguay ................... 44 Table 11: Countries that constitute the synthetic counterfactual .......................................... 46 Table 12: Water valuation methods ........................................................................................ 56 Table 13: Changes in land use at the aggregate level ............................................................. 64 Table 14: Change in the number of hectares dedicated to the different activities as a result of the introduction of royalty 1 (0.0045 USD/m3) for water use ............................................ 64 Table 15: Percentage change in the number of hectares dedicated to the different activities as a result of the introduction of royalty 1 (0.0045 USD/m3) for water use ........................... 65 Table 16: Change in the net benefits expected by the producers of each department for the three royalty levels evaluated ................................................................................................. 68 Table 17: Expected collection for water use for irrigation in rice and irrigated extensive crops 70 Table 18: Water available in the scenario and base and changes in the different scenarios of water restrictions for agriculture ............................................................................................ 72 Table 19: Changes in the area dedicated to agricultural activities in relation to the base scenario (%) ............................................................................................................................. 73 Table 20: Changes in expected net benefits (% in relation to the baseline scenario) at basin level according to different scenarios and implicit water value for each scenario ................. 75 vi List of figures Figure 1: Agricultural and Livestock GDP evolution index ...................................................... 17 Figure 2: Production of the main crops of the country ..........................................................
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