Impacts of a Reduction in Water Availability for Agriculture in Brazil

Abstract

This paper develops a CGE model to assess the economic impact of possible reductions in water availability on agriculture. To build the model various methodological tools were required. Translog production functions for the agricultural sector and the Water & Sewer sector (WS) were all estimated based on the Brazilian 2006 Agricultural Census and the National Sanitation Information System (NSIS) respectively. The CGE model was calibrated using 2009 national input-output data and incorporating the estimated demand system and production functions parameters previously estimated. We simulated three scenarios involving exogenously restrictions of water availability for agricultural sectors by 10%, 20% and 30% thus yielding endogenous tariffs or willingness to pay (WTP) for water use in each of the agricultural sectors. The revenues of these rates remained under government domain in these three standard scenarios. In addition, two other scenarios were simulated with water restriction of 30%, but with the revenues from these tariffs passed on directly to the families or used to subsidize the WS sector. Among the various results, the reduction in the total demand for raw water was greater than the reduction for agriculture production, with the former reaching 18,44% under a water restriction of 30%. As for total production, the greater reduction was 0.39% under a water restriction of 30%. Tariffs on water use obtained endogenously were much higher than those currently leveled in some regions in Brazil. Conversely to what is presented here, the model can simulate various exogenously raw water tariffs for the two sectors (agricultural and WS) and measure the resulting economic impacts. To the best of our knowledge, this is the first CGE model developed for Brazil that both actually incorporate endogenous demand for water as part of agricultural production and does so by using econometric estimates of the parameters of that demand.