Macroeconomic modeling of water resources: Conceptual and methodological challenges in CGE frameworks

Water scarcity is increasingly recognized as a systemic economic constraint, with impacts that extend far beyond directly water-using sectors. Computable General Equilibrium (CGE) models constitute a powerful tool for capturing the indirect and structural effects of water scarcity across interconnected markets, yet their application to water resources poses distinctive conceptual, methodological, and data challenges. This paper reviews how water has been conceptualized and operationalized within CGE models, focusing on the treatment of water scarcity, allocation mechanisms, and economic valuation under conditions characterized by weak or missing price signals. Rather than providing an exhaustive catalogue of applications, the analysis compares alternative modelling strategies—embedding water in land, treating water as an independent production factor, representing water implicitly through productivity effects, and modelling water as a produced commodity—highlighting their respective advantages, limitations, and suitability for different policy questions. The review shows that no single approach dominates across contexts: implicit representations are often sufficient for climate-impact assessments, whereas explicit formulations are required to analyse water markets, allocation rules, and infrastructure investments. A central challenge across all approaches is the fundamentally non-market nature of water, which complicates calibration, pricing, and the interpretation of economic rents. Additional difficulties arise from spatial and temporal heterogeneity, basin-level constraints, return flows, and water quality differentiation, which standard CGE structures struggle to represent. The paper also shortly discusses recent advances in hybrid modelling frameworks that couple CGE models with hydro-economic models (HEMs). The paper concludes by outlining key directions for future research, emphasizing the need for improved water accounts, dynamic and seasonal modelling, and closer integration between economic and hydrological modelling communities.