Designing Optimum Water-Saving Policy in China Using Quantity and Price Control Mechanisms

Abstract

In an attempt to alleviate water scarcity, the government of China has introduced a water plan for the year 2030. Based on a dynamic computable general equilibrium model, this paper investigates how conservation of irrigation water, grain production, and the welfare of rural households will be affected by planned reductions to the irrigation water subsidy between 2018 and 2030. Four policy instruments, namely quantitative control (QC), quantitative control with a subsidy reduction (QC-SR), price control (PC), and price control with a subsidy reduction (PC-SR) are employed in the model. Most existing research has found that reducing the irrigation subsidy will lead to significant negative impacts to the agricultural economy, and especially to rural households. These predicted negative impacts are a barrier to agricultural water policy pricing reform. However, the results of this research show that a provincial subsidy reduction to 1% between 2018 and 2030 will have an insignificant impact on agricultural production as well as rural household incomes and welfare, despite the subsidy rate currently accounting for more than 90% of the total irrigation value at the macro level in most provinces. Furthermore, PC will create a demand for irrigation water, which is predicted to rise to more than five times the agricultural water planning level currently set for 2030, and PC-SR will not achieve the agricultural water planning goal.