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Virtual water trade and its implications - Kristina Kirfel - Seminararbeit - VWL the water resources literature as a policy tool serving to enhance global water use.
Table of contents

• The concept of virtual water as a policy tool?
• Executive summary
• Trade Articles - Global Banking & Finance Review

Following this relationship between international trade and world water resources, virtual water trade is strongly promoted in the water resources literature as a tool supporting regional water security on the one hand, and global water use efficiency on the other hand. Regional water security can be enhanced in a water-poor country if it imports water-intensive products from a water-abundant country instead of producing them domestically, and thus can save some of its scarce water resources. The resulting water savings can be calculated by multiplying the quantity of imports by their consumption-site specific virtual water content.

According to the advocates of virtual water trade, import of water-intensive food crops will firstly reduce domestic water demand and thereby alleviate water stress in water-scarce regions, and secondly increase food security for those countries where water resources for food production are limited see ROTH AND WARNER, , p. Globally, physical water savings are realized, if products are traded from a place with high water productivity to places where water productivity is low.

The differential between the production-site specific virtual water content and the consumption-site specific virtual water content of all traded products reveals the global saving or loss of water resulting from international trade. The analysis of international virtual water flows shows that the direction of flow is primarily from countries with high water productivity to countries with low water productivity see YANG ET AL. On average, 1. Applied to water as a factor of production, water-intensive products should be produced at places well-endowed with water resources, and imported, where water resources are scarce.

SINGH, , p. Figure 1 illustrates that a correlation can not be confirmed when plotting renewable water resources against net export:. Figure 1: Net virtual water exports and renewable water resources. Observations above the zero line reflect net virtual water exports, while observations below the zero line reflect net imports adopted from WICHELNS, , p. For some countries very high water scarcity is the driving force behind import of water-intensive goods, e. Some countries are well-endowed with water and are still net importers of virtual water, while other countries with rather scarce water resources decide to export food and hence, virtual water.

Of the total net virtual water trade volume, For the latter, limitations in the availability of water will hardly be the reason for agricultural imports. The concept of virtual water as a policy tool? Virtual water trade and its implications Seminararbeit, 15 Seiten, Note: 1,3. K K Kristina Kirfel Autor.

In den Warenkorb. Table of contents 1. Introduction Water is distributed unevenly over the globe, making it scarce in many regions of the world. Professor Jennifer McKay has suggested that management of real and virtual water are both relevant when addressing the issue of poverty alleviation and has advocated establishing a 'virtual water trading council':. The main aim of this council would be to ensure that the water replaced when food, electricity or industrial goods are imported is used to achieve sanitation outcomes in the importing country.

The council would also ensure that the exporting country does not endanger the health of its citizens by exporting. The concept of the water footprint has also been cited as a measure of the environmental impact of water use. For example, the World Water Council suggests that:. The virtual water content of a product tells us something about the environmental impact of consuming this product.

Knowing the virtual water content of products creates awareness of the water volumes needed to produce the various goods, thus providing an idea of which goods impact most on the water system and where water savings best could be made… The water footprint can be a strong tool to show people their impact on the natural resources.

Conscious people might vote for more environment friendly imports [of] goods and services. The merits of some of these arguments are discussed further in section 4. These examples do, however, highlight the increasing use of the virtual water concept in public policy debate and the use of the concept to support some major policy changes. This highlights the need for a critical review of the concept and its ability to contribute to sound public policy formulation. To do so, there is a need to establish some key concepts of efficient resource allocation and the value of products and for greater clarity on the underling policy objectives that are being targeted, and the key prerequisites for achieving these targets.

The preceding quotes suggest that there is a failure to account properly for the value of water used in the production of agricultural outputs.

The implication is that some water intensive forms of production, such as rice or beef, are wasteful, and furthermore that Australia is losing scarce water resources by exporting these products. Before analysing the application of the concept of virtual water in more detail it is helpful to understand the factors that determine the price or value of a good or service. There are two key concepts that are particularly relevant to this discussion - the concept of opportunity cost, and the observation that the value of a good is determined by the demand for its properties or characteristics.

The proposition that goods are not valued for themselves, but instead are valued according to the properties or characteristics of the goods was first developed by Lancaster Characteristics of goods include the dimensions of space, form and time. For example, location is a powerful determinant of real estate values.

As Lancaster points out, houses are generally more expensive the closer they are to a city's CDB. Similarly the time and form dimensions of a resource, good or service also influences its value, particularly for production processes that critically depend on these parameters. For example, a contract for the delivery of iron ore into a foundry will specify the timing of deliveries and the ore specification, both of which are critical in maintaining efficient throughput through the firm's furnaces.

The relevance of Lancaster's observation for the idea of virtual water is to highlight the importance of the characteristics of water involved in producing agricultural output. Estimates of virtual water sum all water inputs to generate a total water measure.

1. Virtual water (C) - GWP;
2. Secret Agent X #28 October 1936.
3. Hittel on Gold Mines and Mining.

Comparisons of relative water efficiency as evidenced by virtual water measures implicitly assume that each litre of water is equivalent and therefore direct comparisons between different outputs can be made, such as the 1, litres used to produce 1 kg of rice can be compared with 15, litres of water used to produce 1 kg of beef. However, as we discuss later, not all water inputs are identical.

Consequently, drawing conclusions based on comparisons of water totals is likely to lead to spurious results. There are numerous sources of water involved in agricultural production systems. Some of this water may fall as rain, whereas water may be provided through irrigation or groundwater. Moreover, the time when rainfall is received within the production cycle is an important determinant of the value of the water.

Rainfall that occurs when water is already plentiful, for example, followup rain after previous good falls is less valuable than rainfall that occurs after a prolonged dry spell. In some cases, rainfall can actually be detrimental, for example rainfall that occurs close to harvest, in which case counting this particular volume of water as equivalent to water that is available during critical times during the growing season overlooks the fact that the value of water may vary markedly through time. The point being made here is that it is misleading to simply sum water inputs to impute the total value of water resources used to produce a product.

We enlarge upon this observation in the following section. The second and related concept that is relevant in assessing the concept of virtual water is opportunity cost. In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity foregone and the benefits which could be received from that opportunity.

For example, the economic cost of a decision to plant a paddock to wheat would be the returns that would otherwise be available to planting the paddock to barley, or leaving the paddock in pasture, whatever is the next best alternative. The relevance of the concept of opportunity cost for the analysis of virtual water is that the virtual water concept implicitly assumes that if the water is not used for, say rice production, that it would be available for some other activity, whether that is an input into an alternative crop or some other use.

That is, the implicit assumption in the virtual water comparisons is that the water used in the production of one commodity could be used to produce something else. That is that this water has a high opportunity cost. However, as we discuss in the following section, this may not be the case. Water is heavy and costly to transport and therefore opportunities to shift water around in response to changes in production patterns, although important in some circumstances, is not unlimited, and in some cases is completely infeasible.

Water that is available to rangeland agriculture would not generally be available to be used to support other production systems since there is no infrastructure to capture and transport this water. The implication is that this water will have little or no alternative use, or in the language of economics, this water has a low opportunity cost.

Executive summary

As we discuss in the following section it therefore makes no sense to make a direct comparison between this water and water that has a multitude of possible uses. Overall, it should be remembered that the underlying policy objective of water management is to the maximise value of scarce water resources - including their value to the environment - and not to minimise use of water resources per se. This has been clearly set out in Victorian policy documents with stated objectives such as to 'manage the water allocation to find the right balance between its economic, environmental and social values' DSE Ultimately, the test of the virtual water concept is whether its application contributes to these policy objectives.

In assessing the merits of the application of the virtual water concept as a tool for economic and public policy analysis, two broad sets of issues can be identified:. As noted in section 2, the virtual water content of a product is typically expressed in terms of the volume of water of water to produce a given quantity e. The 'currency' of this expression in itself imposes a number of limitations on the measure. While it is possible to compare the virtual water content measure of producing the same product e.

For example, the observation that it takes substantially more water to produce a kilogram of beef than it does a kilogram of wheat implicitly assumes that a kilogram of beef is directly substitutable in some sense for a kilogram of wheat. Such comparisons become even more problematic when considering products other than food e. Some attempts have been made to facilitate such comparisons by adjusting the virtual water measure to reflect the nutritional value of foods or to convert to a measure of water usage per dollar of end product value.

For example, the ABS uses water use intensities Lenzen and Foran to describe the amount of water needed throughout the whole economy in order to provide final consumers with one dollar's worth of various goods or services, or in other words, the amount of water embodied in that one dollar's worth of quantity. Exercises in attempting to measure the virtual water content of different products in different regions and aggregating these to virtual water trade flows have revealed a range of data and related issues that seriously question on the application of the concept.

As noted by Yang et al , p. Given the crudeness of the available data and the complexity of cropping systems in different countries, errors are inevitable in the estimation. In light of these data issues, discussion of virtual water often use an assumed average technology in the calculations and this implies fixed water intensities for given products regardless of location or technology.

However, different production systems and even different farms use different water volumes and sources of this water. For example, dairying in Australia is not like the Northern Hemisphere because it is grazing based all year round and even then is based on a mixture of natural rainfall and irrigation, including irrigation water from regulated rivers and supplementary irrigation from farm dams.

Grain feeding also takes place but in varying proportions, and this grain can be sourced from either dryland or irrigated cropping systems. Using one number for the virtual water content of dairy products from all these production systems is therefore misleading. Despite this, a number of studies of virtual water appear to have done precisely this. For example, Foran discusses the Victorian dairy industry without mentioning that Victoria has a mixture of irrigated and high rainfall dairy farming.

However, reflecting actual farm level local or even regional use of water accurately would be very costly and would lead to a plethora of virtual water measures which would be difficult to interpret and apply. This in turn raises the question whether the costs of undertaking such exercises would generate sufficient benefits to justify the effort?

In general, the boundary of 'water use' in the virtual water concept is limited to the farm gate. For example, in the case of dairy products, it does not include all the water required to put a litre of milk in the fridge - such as in pasteurisation, the water used to produce the steel for the dairy, or virtual water contributions from trucks and supermarkets. However, choosing the farm gate as the boundary of analysis is an arbitrary decision, and excludes some significant elements of water used in overall production and consumption.

There is no uniform methodology for calculating virtual water estimates. In the various studies available, little convergence exists with respect to the general approach taken. Differences occur in the treatment of several issues including Hoekstra :. Recognition of the wide range of different methodological approaches and assumptions that have been adopted in the virtual water literature to date has led to calls for these to be standardised and further refined in some areas.

Some commentators World Water Council , p. Governments and international organisations should include 'virtual water' accounts as an instrument in any national or regional water and agriculture policy analysis. Common procedures and standards should be developed and determined. To enable introduction of virtual water as an instrument, virtual water accounts should be developed to support any national or regional water and agricultural policy analysis…. There is a very real need for more research on the prescriptive potential of the virtual water theory and on the potential of virtual water trade to relieve pressure on the globe's water resources and to achieve food security in the world's water scarce regions.