Friday, November 25, 2016

Water regulation in times of climate change

I participated yesterday in Madrid in a very interesting forum about the economics of water. The keynote speech was given by Gro Harlem Brundtland, former prime minister of Norway and UN leader on a number of initiatives related to public health, development and climate change. There were also several experts from a diversity of countries and perspectives. In the roundtable in which I participated I argued that a key issue was to have a robust system of regulation with the optimal degree of independence. I tried to explain that the ideas of authors such as Ostrom, Spiller and Akerloff are important in the field, for different reasons. Elinor Ostrom emphasized in her work the need for community owned solutions that are taylored to the specific problems, and one of the historical examples he gave was that of the river basin organizations in Spain. Pablo Spiller stressed the importance of mechanisms that are well adapted to the instititutional endowment (which is different for different times and places) that facilitate credible regulatory commitments that make sunk investments posible. Akerloff in his recent books on behavioral economics argues that narratives that convince the public of what is in their common interest must play an important role in public policies. In water, in these times of climate change where there will be geographically localized shocks in water supply and demand, it is more important than ever to have regulatory packages that are well adapted to the physical and geographic nature of the resource, taking into account the whole water cycle. Tayloring to geographic characteristics and to local preferences may be an argument in favor of functional jurisdictions similar to the water districts in the USA, but being aware that citizens face a fixed cost of monitoring and following the realities of too many authorities. Water is a typical sector in which several levels of government will need to intervene and do intervene, but must do so in a common framework and in a spirit of cooperative federalism. Agencies with a degree of independence are a key input in a robust regulatory system, taking into account the advantages (credible commitment, expert knowledge) but also the disadvantages (lack of coordination and political leadership) of expert insulated agencies. Independent regulators do not fully solve, but relocate, the commitment problem, which with independent agencies becomes a problem of the government and the political "principals" to commit to respect the independence of the regulator. There is no shortcut to the need to engage citizen/voters and their political representatives and convince them that water is a resource that must be managed efficiently and shared (while the effort is coordinated with efforts to fight poverty and environmental challenges) if we want to preserve life in our planet.

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