Hydro-Economic Modeling of Water Resources Management Challenges: Current Applications and Future Directions

Hydro-economic modeling (HEM) addresses research and policy questions from socioeconomic and biophysical perspectives under a broad range of water-related topics. Applications of HEM include economic evaluations of existing and new water projects, alternative water management actions or policies, risk assessments from hydro-climatic uncertainty (e.g., climate change), and the costs and benefits of mitigation and/or adaptation to such events. This paper reviews applications of HEM in five different categories: (1) climate change impacts and adaptation, (2) water–food–energy–ecosystems nexus management, (3) capability to link to other models, (4) innovative water management options, and (5) the ability to address and integrate uncertainty. We find that (i) the increasing complexity and heterogeneity of water resource management problems due to the growing demand and competition for water across economic sectors, (ii) limited availability and high costs of developing additional supplies, and (iii) emerging recognition and consideration of environmental water demands and value, have inspired new integrated hydro-economic problems and models to address issues of water–food–energy nexus sustainability, resilience, reliability through water (re)allocation based on the relative “value” of water uses. In the past decade, the field of HEM has improved the integration of ecosystem needs, but their representation is still insufficient and mostly ineffective. HEM studies address how to sustainably manage water resources, including groundwater which has become an area of particular interest in climate change adaptation. The current most used spatial and temporal resolutions (basin-scale and yearly time-step) are appropriate for planning but not for operational decisions and could be underestimating impacts from extreme events (e.g., flood risk) captured only by sub-monthly time scales. In addition, HEM primarily focuses on biophysical and economic indicators but often overlooks preferences and perspectives of stakeholders. Lastly, HEM has been widely used to analyze transboundary cooperation, showing benefits for increasing water security and economic development, particularly as climate change develops. We conclude that the field of HEM would benefit from developing more operational models and enhancing the integration of commonly neglected variables, such as social equity components, ecosystem requirements, and water quality.