benefit analysis of waterreuse projects.docx

benefit analysis of waterreuse projects.docx

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benefitanalysisofwaterreuseprojects

Cost–benefitanalysisofwater-reuseprojectsforenvironmentalpurposes:

AcasestudyforSpanishwastewatertreatmentplants

M.Molinos-Senantea,

F.Hernández-Sanchoa,1,

R.Sala-Garridob,2,

a

DepartmentofAppliedEconomicsII,UniversitatdeValencia,CampusdelsTarongers,46022Valencia,Spain

b

DepartmentofMathematicsforEconomics,UniversitatdeValencia,CampusdelsTarongers,46022Valencia,Spain

Received1December2010;revised5July2011;Accepted22July2011.Availableonline18August2011.

Abstract

Waterreuseisanemergingandpromisingnon-conventionalwaterresource.Feasibilitystudiesareessentialtoolsinthedecisionmakingprocessfortheimplementationofwater-reuseprojects.However,themethodsusedtoassesseconomicfeasibilitytendtofocusoninternalcosts,whileexternalimpactsarerelegatedtounsubstantiatedstatementsabouttheadvantagesofwaterreuse.Usingtheconceptofshadowpricesforundesirableoutputsofwaterreclamation,thecurrentstudydevelopedatheoreticalmethodologytoassessinternalandexternaleconomicimpacts.Theproposedmethodologicalapproachisappliedto13wastewatertreatmentplantsintheValenciaregionofSpainthatreuseeffluentforenvironmentalpurposes.Internalbenefitanalysesindicatedthatonlyaproportionofprojectswereeconomicallyviable,whilewhenexternalbenefitsareincorporatedallprojectswereeconomicallyviable.Inconclusion,theeconomicfeasibilityassessmentsofwater-reuseprojectsshouldquantitativelyevaluateeconomic,environmentalandresourceavailability.

Highlights

►theshadowpricemethodologyisapioneeringapproachtoquantifytheenvironmentalbenefitassociatedwithavoidingthedischargeofpollutants.►Thisapproachisbasedonthedirectionaldistancefunctionsandrepresentsanalternativetoconventionalmethodsofeconomicvaluation.►Themethodologyproposedinthispaperallowstheassessmentofexternaleconomicimpactsofwater-reuseprojects.►Theeconomicvaluationofexternalitiesisaveryrelevantissueinordertocarryoutrealisticfeasibilitystudiesofwater-reuseprojects.

Keywords:

Directionaldistancefunction;Cost–benefitanalysis;Economicfeasibility;Environmentalbenefit;Shadowprices;Wastewaterreuse

ArticleOutline

∙1.Introduction

∙2.Methodologyforassessingthefeasibilityofwater-reuseprojects

∙

o2.1.Background

o2.2.Internalbenefit

o2.3.Externalbenefit

o2.4.Opportunitycost

∙3.Casestudy:

water-reuseprojectsintheValenciaRegion

∙4.Resultsanddiscussion

∙

o4.1.Internalbenefit

o4.2.Externalbenefit

o4.3.Totalbenefit

∙5.Conclusions

∙Acknowledgments

∙References

1.Introduction

Europehaswitnessedgrowinglevelsofwaterstress,bothintermsofscarcityandthedeteriorationofquality.Thissituationhaspromptedmanymunicipalitiestoidentifymoreefficientusesofwaterresources,includingmorewidespreadacceptanceoftheuseofnon-conventionalwatersources（Bixioetal.,2006）.Inthissense,waterreusehasemergedasthemostviablealternativesinceitperformstwokeyfunctions:

（i）increasingwatersupplyand（ii）reducingpollutionbydischarginglesswastewaterintotheenvironment（Hochstratetal.,2007）.Thesearethereasonsforrecognitionofthegrowingimportanceofwaterreuseinareasthataresubjecttoharshconditionswithrespecttowaterstressorseasonalwaterdemand（[Salgot,2008]and[Miller,2006]）.

Feasibilitystudiesareessentialtoolsinthedecisionmakingprocessfortheimplementationofwastewater-reuseprojects（AQUAREC,2006）.Themethodsthatarecommonlyappliedinthisareatypicallyshowsignificantbiastowardthestrictlytechnicalfield.Fortunately,inrecentdecadestherehasbeenrapidlyincreasingacknowledgmentintheneedtoimplement“sustainability”inwastewatermanagement（Limetal.,2008）.Accordingtotheconceptofsustainabledevelopment,awater-reuseprojectmustcomplywithenvironmental,socio-culturalandeconomicneedstobedeemedsustainable（Balkemaetal.,2002）.

Economicconsiderationsarethereforeofhighimportancewhenassessingthepotentialofwater-reuseprojects（[Asano,1998]and[Asano,2007]）.Furthermore,theWaterFrameworkDirective（WFD）assignssignificancetoeconomicanalysistoachievesuitablewaterresourcemanagement.However,economicfeasibilityofresearchonwastewaterregenerationandreuseremainstheleaststudiedcomponent.Inpart,thisisbecauseinternalandexternaleconomicimpactsofenvironmentalbasedprojectsshouldbeidentifiedandquantifiedwhenanalyzingeconomicfeasibility,suchasforwaterreuse（Molinos-Senanteetal.,2010）.Whileinternalimpactsmaybeeasilytranslatedintomonetaryunits,externaleffects（orexternalities）arenotconsideredbythemarket,thusrequiringeconomicvaluationmethodsfortheirquantification.Asaresult,aseriesofstatementsabouttheadvantagesofwastewaterregenerationandreuseareoftenpresented,withoutsupportingeconomicquantification.Consequently,thetruebenefitsandcostsofmanyprojectsarenotproperlyevaluated（Seguí,2004）.

Nevertheless,thereisgrowinginterestinthemonetaryvaluationoftheseexternalities.Forexample,thecost–benefitanalysis（CBA）ofGodfreyetal.（2009）withrespecttoasystemofgreywaterreuseinIndia.Themonetaryvaluesofexternalbenefitsandcosts,intermsoftheenvironmentandhealth,werederivedbyusingscientificreferences（[NorthandGriffin,1993],[HanleyandSpash,1993],[Field,1997],[CurryandWeiss,1993]and[HuttonandHaller,2004]）.Theauthorsusedconventionaleconomicmethods,suchashedonicvaluationandcontingentvaluation.Incomparison,Seguíetal.（2009）usedtravelcoststodeterminetheenvironmentalbenefitsarisingfromwastewaterreuseforawetlandrestorationproject.Furthermore,ChenandWang（2009）proposedanetbenefitvaluemodelforcost–benefitevaluationofwater-reuseprojectsinaresidentialareaofChina.ThebenefitsrelatingtotheenvironmentwerecalculatedbyapplyingamathematicalequationdevelopedbytheChineseMinistryofEnvironmentalProtection.

Theconceptofdirectionaldistancefunctionhasbeensuggested（[Färeetal.,1993],[Färeetal.,2001]and[Färeetal.,2006]）asanalternativetoconventionalmethodsofeconomicvaluation（statedpreferencemethods）.Thisconceptaimstocalculateshadowpricevalueofundesirableoutputsarisingfromproductiveactivitiesthathavenomarketvalue.Thismethodisderivedfroma“costsproductionperspective”,whichcontraststotheusualmethodsthatarelinkedtoa“demandperspective”（Diaz-BalteiroandRomero,2008）.

Theadvantagesofthedirectionaldistanceapproachincludethefollowing:

（i）shadowpricesmaybeusedtodeterminehowmuchincomewouldbegainedifsomeoftheresourceswereprivatized;（ii）authoritiesmayusetheinformationprovidedbyshadowpricestosetratesforusingenvironmentalservices,ortocomparecurrentrateswiththemarginalrevenuegenerated（Färeetal.,2001）;（iii）thismethodologymayhelpsocietyunderstandthebenefitsgeneratedasaresultofenvironmentalimprovementprograms;and（iv）shadowpricemodelsmayoffereconomistsfurtherinsightsintoestimatedmeasuresofwillingnesstopayproducedbyalternativemodelssuchasthecontingentvaluationmethod,orcapitalizationmethods（Färeetal.,2001）.Furthermore,shadowpricequantificationisrelativelyinexpensivewhencomparedtosurveyingprocesses.

Withtheaimtointegrateeconomicandenvironmentalaspectsinthedesignandimplementationofwastewater-reuseprojects,thecurrentstudypresentsamethodtoassesstheeconomicfeasibilityofwater-reuseprojectstakingbothinternalandexternalimpactsintoconsideration.Thiswasachievedbyusingtheconceptofshadowpricesofundesirableoutputsarisingfromthewaterregenerationprocess.Theproposedmethodologicalapproachissubsequentlyusedtoassesstheeconomicfeasibilityofvariouswastewater-reuseprojectsforenvironmentalpurposesintheValenciaregionontheMediterraneancoastofSpain.

2.Methodologyforassessingthefeasibilityofwater-reuseprojects

2.1.Background

Economicfeasibilitystudiesofwastewater-reuseprojectsshouldbecompletedbyusingconventionalmethodologiesofeconomicanalysis,suchascost–benefitanalysis（CBA）（vanderBruggenetal.,2009）.AccordingtoSeguí（2004）andHernándezetal.（2006）,totalbenefitiscalculatedbyconsideringinternalbenefit,externalbenefit,andopportunitycost,asshowninEquation

（1）.

（1）BT=BI+BE−OCwhereBTisthetotalbenefit（totalincomeminustotalcosts）;BIistheinternalbenefit（internalincomeminusinternalcosts）;BEistheexternalbenefit（positiveexternalitiesminusnegativeexternalities）;andOCistheopportunitycost.CBAoriginatesfromthepremisethataprojectisonlyeconomicallyfeasibleifallincomesexceedtheaggregatecosts.Inotherwords,accordingtoEquation

（1）iftheBT>0,wherebythebestoptionoffersthehighesttotalbenefit.

2.2.Internalbenefit

Internalimpactsaredirectlylinkedwiththeprocessofwastewaterregeneration,andsubsequentreuse.Theinternalbenefitrepresentsthedifferencebetweeninternalincomeandinternalcosts.Internalincomeincludesrevenuesfromthesaleofregeneratedwaterandotherrecoveredsub-products.Ifreclaimedwaterisusedinagriculture,thenitrogenandphosphoruscontentsinwaterofferasavinginfertilizercosts.Alternatively,ifreclaimedwaterisintendedforenvironmentalpurposes,thesenutrientsmayberecoveredduringwastewatertreatmentandsubsequentlysoldforotheruses.Internalcostsaretheresultofthesumofinves