Climate Change Economic Impacts on Supply of Water for the M & I Sector in the Metropolitan Region of Chile

With regards to the impacts of climate change on water resources, snowmelt dominated basins have been recognized as one of the most vulnerable regions throughout the world. The main reasons are that these basins are prone to be affected by both temperature and precipitation changes. The Metropolitan Region in Chile is located in one of these basins, the Maipo basin. This Region holds more than 40% of the population of the country and a comparable number in terms of contribution to the country's Gross Domestic Product (GDP). Projections of future climate conditions present a dire future for this basin. Precipitation levels are projected to decrease by around 20% by mid 21st century and temperature levels in the mountains are expected to increase by around 3–4 °C (DGF-CONAMA, 2007). These changes affect the Maipo river discharges, decreasing its magnitudes and even affecting its seasonality. These new hydroclimatologic conditions would affect the supply of water for both the residential and industrial sectors in the Region. Because this sector has the highest priority and water must be secured, utility companies use a very high exceedance probability (98%) for its operation. This paper shows how climate change impacts on the hydrological regime of the Maipo river have a direct economic impact on the cost of operation of the utility companies and thus has a negative effect on the consumer surplus of both residential and industrial water users. The economic impacts assessment is carried out by first establishing the change in hydrologic conditions in the natural water supplies in the basin and then relating these changes with changes in economic conditions by two of the main sectors using the water in the basin modeling their current and future probability density functions. We used a water market transaction methodology to determine these economic impacts.