Integrated economic models to support decisions on water pricing in biofuel production river basins: three case studies from Brazil

Abstract Energy securities, increases in fossil fuel prices, and concern about climate change have been major causes of increased bioenergy production. Because biomass production is rural‐based and generally labor‐intensive, bioenergy development happens mainly in less developed countries. Comprehensive analysis is needed to develop appropriate policies to ensure the sustainability of resource use while promoting economic development. Given this, public policies must promote more efficient inter‐ and intra‐sector water allocation schemes. Economic instruments, such as water pricing and water markets, can be used to avoid transferring negative environmental and economic impacts of meeting global renewable energy targets to production regions. In Brazil, water markets are not allowed, but the law has established raw water charges as a management instrument at the river basin level. However, the majority of bulk water charge systems have been defined exclusively for raising revenue. Integrated economic modeling can be a useful tool to support the design of effective economic instruments. This paper describes the main features of two economic modeling approaches that can support effective water pricing decisions. Three case studies illustrate sugarcane ethanol production river basins in Brazil where water prices have already been established but fail to reflect the real scarcity value of water in the region. In addition, preliminary results of a national‐level economic model being built for Brazil show that increasing water charges for the agricultural sector can have significant effects on water demand and agriculture production. The potential benefits of water pricing policy decisions based on economic modeling results are assessed. © 2015 Society of Chemical Industry and John Wiley & Sons, Ltd