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Regional and Sectoral Impacts of Water Redline Policy in China: Results from an Integrated Regional CGE Water Model

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Regional and Sectoral Impacts of Water Redline Policy in China: Results from an Integrated Regional CGE Water Model Regional and Sectoral Impacts of Water Redline Policy in China: Results from an Integrated Regional CGE Water Model Y. Zhang¹; K. Chen²; T. Zhu³ 1: Institute of Agricultural Economics and Development of Chinese Academy of Agricultural Sciences, , China, 2: International Food Policy Research Institute, Beijing Office, China, 3: International Food Policy Research Institute, , United States of A Corresponding author email: [email protected] Abstract: China has started to implement the most stringent of “Three Red Lines” water policy since 2012, which sets targets for total water use, water use efficiency, and water quality for a number of benchmark years to 2030 by province and prefecture. This paper aims to develop an integrated regional CGE and water resource model at river basin-provincial level for China and to quantify regional and sectoral economic impacts of three red lines. Five policy scenarios are constructed to assess the impacts of water red lines, including the red line of total water use cap, irrigation efficiency, industrial water use intensity, surface water pollution and all redlines combined. The red line of total water use cap will increase water shortage drastically, leading to considerable negative impacts on the economic growth of East, South Central and Southwest. The sectors with the higher water use intensity such as machinery and equipment, metal and metal products, chemical products and non-metal products are affected most. Other two red lines need to go hand in hand to minimize water shortage and mitigate potentially negative economic impacts. Establishing regional water use right market and promoting economic restructuring are two policy options to cope with water scarcity challenge. Acknowledegment: We would like to acknowledge Winston Yu from the World Bank for the guidance and Shuzhong Gu from Development Research Center of the State Council (DRC) for his valuable comments in the early stage of the research. We are grateful to Xinshen Diao and James Thurlow from International Food Policy Research Institute for their guidance on developing regional CGE model. We acknowledge funding support by the World bank through the project “Mind the Gap: Balancing Growth and Water Security in China”, and the National Natural Science Foundation of China (NSFC) (Grant No.71761147004) ,the Agricultural Science and Technology Innovation Program (ASTIP-IAED-2017-04 ） JEL Codes: C68, O25 #1290 Regional and Sectoral Impacts of Water Redline Policy in China: Results from an Integrated Regional CGE Water Model Abstract China has started to implement the most stringent of “Three Red Lines” water policy since 2012, which sets targets for total water use, water use efficiency, and water quality for a number of benchmark years to 2030 by province and prefecture. This paper aims to develop an integrated regional CGE and water resource model at river basin-provincial level for China and to quantify regional and sectoral economic impacts of three red lines. Five policy scenarios are constructed to assess the impacts of water red lines, including total water use cap, irrigation efficiency redline, industrial water use intensity redline, surface water pollution redline and all redlines combined. The red line of total water use cap will increase water shortage drastically, leading to considerable negative impacts on the economic growth of East, South Central and Southwest. The sectors with the higher water use intensity such as machinery and equipment, metal and metal products, chemical products and non-metal products are affected most. Other two red lines need to go hand in hand to minimize water shortage and mitigate potentially negative regional and sectoral economic impacts. Establishing regional water use right market and promoting economic restructuring are the two policy options to cope with water scarcity challenge in China. Key words: water policy, water shortage, economy impacts, CGE model, water resource model, China 1 I. Introduction China faces increasing challenges of water shortage and the mismatch of regional water demand and supply. China is trying to feed 22% of the world’s population with 7% of the world’s arable land and 6% of global fresh water resources. Per capita water resources are only 2,039 m3 in 2015, which is equivalent to a quarter of the world’s average. Especially in North China, per capita water availability is only 1/4 of the national average level. There is a huge discrepancy between the spatial distribution of water resources and the spatial distribution of population and economic development. For example, in 2014 the North, Northeast and Northwest1 of China account for 57% of land area, 27.8% population, but only 15.6% fresh water resources. The East, Central areas2, with 45.65% of fresh water resources, have 57.38% of China's population and contribute to 66% of GDP (NBS, 2015). Water is as a primary input to all goods and services either directly or indirectly, available water quantity and quality can affect the production of goods and services and thus influences the level of economic activities especially in rapidly transforming societies. Many worries that limited water resources could become a bottleneck of China’s future economic development, especially in regions with severe water shortage. In the recent years, Chinese government has made significant efforts to address the issue of water scarcity through improving water resource management. The most significant policy is the “Opinions of the State Council on the Implementation of the Most Stringent Water Resources Management” in 2012 (the State Council, 2012). In particular, the Opinions established the three “red lines” to control water supply, uses and pollution: 1) controlling the total amount of water use, 2) increasing water use efficiency, and 3) controlling the total amount of pollutant discharge into rivers. Several specific targets have been set for 2030: the national total water use should not exceed 700 billion m3; water use intensity defined as water use per CNY10,000 of industrial value-added (at 2000 constant price) should be reduced to less than 40 m3, and effective irrigative water utilization coefficient should increase to 0.6; and total major pollutants into rivers and lakes will be controlled within the pollutant discharge capacity in the water function zones with water quality compliance rate in the water function zone at 95%. Undoubtedly, an implementation of the most stringent water policy will have substantial impacts on China’s water use in the next decades. Few studies assess the economy impacts of red lines policy quantitatively. Many questions remain unanswered. How much water shortage will it bring? Whether the new water shortage due to the most stringent water policy will have an impact on the economic development? What is the potential impacts of the water shortage on the regional economy? Which regions and which sectors will be affected most? An objective of this paper is to estimate the water shortage constraints under the red lines water policy and further evaluate its impacts on regional economies. To achieve the above objective, an integrated China multi-regional CGE and water resource management model based on river basin-provincial unit is developed to understand the relationship of water and regional economic growth. China water resource 1 North of China refers to provinces of Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia; Northeast refers to Liaoning, Jilin, Heilongjiang; Northwest refers to Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang; 2 East area refers to Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi, Shandong; Central area refers to Henan, Hubei, Hunan, Guangdong, Guangxi, Hainan. 2 model is developed to estimate the water shortage under the constrained water supply and optimize water allocation among different sectors, while multi-regional CGE model is developed to access the regional economic impacts. The integrated regional model has the advantages of reflecting both the characteristics of regional water and the economic systems. The remaining of this paper is organized as follows. Section II describes a construction of an integrated multi-region CGE model with a river basin-provincial water model in China. Section III presents policy scenarios and the model results. Major conclusions and policy recommendations are drawn in the final section. II. Methodology The integrated China multi-regional CGE and water resource model is developed for the paper, which links regional CGE model with China water resource model at river basin- provincial level. This model is used to simulate watershed water dispatch and optimize the allocation of water consumption of each sector, and evaluate the impacts of water shortage on regional economy. The integrated model takes into account both the characteristics of the water system and the economic system, and draw on the strengths of the two models. The basin-provincial water resource model is better to capture the regional heterogeneity than the national model, which is also in line with the characteristics of uneven distribution of water resources and regional economic development. The CGE models build the interrelationship between production activities, factors of production, households and government, which can capture both the direct and indirect effects of policy change. This study develop a multi-regional dynamic CGE model for China to estimate the value of water to the economy, and tracks how water resources contribute to economic outputs
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