Hydroeconomic Evaluation of Projects and Policies in the Water-scarce and Polluted Haihe River basin, China

China has experienced rapid economic growth and an increasing population over the past half century, which has put enormous pressure on its natural resources. In many regions, the rising pressure on water resources poses considerable challenges to water management. China has a long tradition of large-scale water infrastructure projects, but not until recently has the government emphasized more ‘soft’ approaches to water resources management, such as economic incentives and institutional measures.

This transition has led to the formulation of several policy documents, which set new goals for capping water use and improving its quality. Among these documents is the Water Ten Plan, which identifies the Haihe River basin as one of the key regions for addressing water scarcity and pollution. The basin is one of the seven major river basins in China, and its plain area is part of the North China Plain, traditionally known as “the food basket of China”.

It is intensively cultivated, and agricultural irrigation demands compete with megacities and industries for scarce water resources. This has led to an overexploitation of the groundwater resources over the past decades. In addition to water scarcity, the Haihe River basin also presently has the overall worst water quality in the country.

Methods and concepts from the field of hydroeconomic analysis were applied to the complex water challenges of the Haihe River basin, and the fundamental view of water possessing an economic value was adopted in an optimization framework. By quantifying the value of water in terms of all of its uses, socio-economic optimal management was pursued.

Introducing environmental constraints to the optimization framework reflected the value of sustainable water management in economic trade-offs and shadow prices. The model representation of the Haihe River basin water management problem was intended to be as realistic and as recognizable to the water resources managers as possible.

The hydroeconomic optimization model was therefore formulated as one large linear optimization problem, assuming perfect foresight of all future hydrological events. This allowed the model to optimize numerous decision variables over a large number of time steps, without compromising system representation.

By incrementally constraining groundwater end-storage, the economic trade-offs from limiting the present groundwater overdraft to long-term sustainable groundwater abstractions was found. This revealed the significant socio-economic impacts of ending groundwater overdraft in the North China Plain. In addition to the groundwater overdraft, the issue of water pollution was also implemented in the model framework.

All possible water allocations from Haihe River basin water sources, such as surface water runoff, major groundwater aquifers and inter-basin transfers, were assigned their known water quality standard. Cleaning costs were imposed on water allocations from water sources inferior to downstream water user quality demands.

This ensured water allocations with fit-for-purpose quality while quantifying the economic impact of meeting downstream users’ requirements. The spatial variation of water availability shadow prices, as an effect of considering water quality, could be mapped out. The model setup was used further to evaluate project benefits from managed aquifer recharge in the plain area as well as improving water quality for inter-basin transfers from the South-to-North Water Transfer Project’s eastern line.

Under the assumption of perfect foresight, impacts of uncertain future hydrological events, such as droughts, cannot be analyzed. Furthermore, assuming perfect foresight might alter costs and estimated project benefits compared to a system facing uncertain future hydrology. This was addressed by wrapping a model predictive control (MPC)-inspired continuous re-optimization routine around the optimization model.

In this way, optimal water management with various levels of future foresight could be simulated. The impact of future foresight on agricultural yields was captured by representing yield response to water allocations. The model framework was used to evaluate the benefits of a proposed water infrastructure project allowing for additional inter-basin transfers from the Yellow River to flow to the plain area via the Guanting reservoir.

The estimated project benefits, however, were recognized as being underestimated under an assumption of perfect foresight, which highlights the importance of considering the impacts of assuming perfect foresight in a cost-benefit context. The proposed model framework was shown to provide valuable decision support for the major water challenges of the Haihe River basin: groundwater overdraft and water quality deterioration.

Present policies in China exhibit increased awareness of the need for sustainable management of river basin-scale water quantity and quality, and insights from hydroeconomic analyses can be a step towards reaching the political goals of sustainable water resources management. Moreover, experiences with the MPC framework can be transferred to any project benefit evaluation in which a dynamic system is evaluated under perfect foresight.