WATER SCARCITY AND THE IMPACT OF IMPROVED IRRIGATION MANAGEMENT: A CGE ANALYSIS Alvaro Calzadilla a,b , Katrin Rehdanz a,c,d and Richard S.J. Tol e,f,g,h a Research unit Sustainability and Global Change, Hamburg University and Centre for Marine and Atmospheric Science, Hamburg, Germany b International Max Planck Research School on Earth System Modelling, Hamburg, Germany c Christian-Albrechts-University of Kiel, Department of Economics, Kiel, Germany d Kiel Institute for the World Economy, Kiel, Germany e Economic and Social Research Institute, Dublin, Ireland f Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands g Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands h Engineering and Public Policy, Carnegie Mellon University, Pittsburgh, PA, USA Working Paper FNU-160 April, 2008 Abstract We use the new version of the GTAP-W model to analyze the economy-wide impacts of enhanced irrigation efficiency. The new production structure of the model, which introduces a differentiation between rainfed and irrigated crops, allows a better understanding of the use of water resources in agricultural sectors. The results indicate that a water policy directed to improvements in irrigation efficiency in water-stressed regions is not beneficial for all. For water-stressed regions the effects on welfare and demand for water are mostly positive. For non-water scarce regions the results are more mixed and mostly negative. Global water savings are achieved. Not only regions where irrigation efficiency changes are able to save water, but also other regions are pushed to conserve water. Keywords: Computable General Equilibrium, Irrigation, Water Policy, Water Scarcity, Irrigation efficiency JEL Classification: D58, Q17, Q25 1 Introduction Aristotle wondered why useless diamonds are expensive, while essential drinking water is free. Any economist since Jevons knows that this is because diamonds are scarce, while water is abundant – at least, when Aristotle lived. Nowadays, water is scarce and therefore should command a price. However, both water management and economics have been slow to adapt to this new reality. This paper contributes directly to the latter and indirectly to the former. Several factors contribute to water scarcity. Average annual precipitation may be low, or it may be highly variable. Moreover, population growth and an increasing consumption of water per capita have resulted in a rapid increase in the demand for water. This tendency is 1