This chapter provides a deep dive into the specific case of the Piancó-Piranhas Açu River Basin as a testbed to address broader water governance and financing challenges in Brazil. Due to its economic and hydrological characteristics, the Piancó-Piranhas Açu River Basin is fragile in terms of securing present and future water supply. Despite a robust institutional and legal structure, implementation gaps remain in ensuring that governance arrangements fulfil water management functions. This chapter suggests options to improve multi-level governance at the basin level and economic instruments in view of the implementation of the São Francisco Integration Project (PISF), which will transfer water to the basin and bring substantial changes to the water management landscape.
Fostering Water Resilience in Brazil
2. Strengthening multi-level governance and the use of economic instruments in the Piancó-Piranhas Açu River Basin
Abstract
Hydrological features of the Piancó-Piranhas Açu basin
The Piancó-Piranhas Açu (PPA) Interstate River Basin covers 46 683 km2 of semi-arid territory in the Northeast region of Brazil (Figure 2.1). The PPA river basin hosts 1.4 million people on 43 000 km2, part of the states of Paraíba (60% of the basin) and Rio Grande do Norte (40%) (IBGE, 2011[1]).
Figure 2.1. The Piancó-Piranhas Açu River Basin
Source: ANA (2016[2]), “Plano de recursos hídricos da bacia hidrográfica do rio Piancó-Piranhas-Açu”, http://piranhasacu.ana.gov.br/produtos/PRH_PiancoPiranhasAcu_ResumoExecutivo_30062016.pdf.
Due to its socio-economic and hydrological characteristics, the basin is very fragile in terms of securing water supply now and in the future. The basin’s hydro-climatology is characterised by a rainy season that goes from January to June (yearly rainfall ranges from 440 to 1 050 mm) and the absence of rain during the rest of the year, combined with multi-year drought periods that occur periodically. From 2012 to 2020, the basin experienced one of its worst periods of severe multi-year drought (de Sousa Freitas, 2021[3]). Most rivers are intermittent, thus almost all water supply is provided by several reservoirs that total a storage capacity of 5 352 hm³. Some of these reservoirs operate to maintain river flow and serve as a source of water for irrigators, public water supply and others.
There are three major reservoirs in the PPA river basin, namely the Curema-Mãe d’Agua (CMA, 1 160 hm3), the Armando Ribeiro Gonçalves (ARG, 2 400 hm3) and the Engenheiro Ávidos (EA, 400 hm3), corresponding to 70% of the storage capacity of surface water in the basin (5 659 hm3) (Figure 2.2). The CMA provides water to the Várzea de Souza irrigation district (2 610 hectares in irrigated area plus water supply to two cities totalling 65 000 inhabitants) and regulates flow in a 165 km downstream river reach that serves as the water source to 465 000 inhabitants and more than 4 000 hectares that can be irrigated on 1 250 farms. The ARG is the direct water source for long pipeline systems that provide water to many cities totalling 400 000 inhabitants within and out of the basin. In addition, it regulates flow in the 70 km downstream reach, which provides water to the Baixo Açu irrigation district (2 400 hectares of irrigated area) and 3 766 hectares of irrigated farms taking water from the river, and several aquaculture farms (mainly producing shrimp) totalling 630 hectares in fish tank area. In 2012, there were 54.4 thousand hectares of irrigated land, corresponding to 1.3% of the river basin drainage area. The major temporary agriculture areas produce soybean and maize, while the permanent agriculture areas produce banana and coconuts (ANA, 2016[2]).
Figure 2.2. Reservoir systems in the Piancó-Piranhas Açu River Basin
Source: based on ANA (2016[2]), Plano de recursos hídricos da bacia hidrográfica do rio Piancó-Piranhas-Açu - Resumo executivo / Water resources plan of the Piancó- Piranhas-Açu basin – Executive Summary, http://piranhasacu.ana.gov.br/produtos/PRH_PiancoPiranhasAcu_ResumoExecutivo_30062016.pdf.
Despite the reservoirs, 60% (31 out of 52) of the hydrological planning units1 in the PPA river basin have a negative water supply/demand balance (ANA, 2016[2]). The water resource of the basin aquifers is limited (annual recharge of 458 hm3, equivalent to 8% of the water stored in reservoirs) and little used (93 hm3 or 20% of the annual recharge). Irrigation accounts for two thirds of water demand, fish farming 22%, public water supply 7%, industry and livestock share the remaining 4% (ANA, 2016[2]). There is a lack of investment in water security (e.g. dams, reservoirs, wastewater collection and treatment), due to the limited capacity to invest in the basin. Therefore, targeted measures are needed to enhance the basin’s resilience, cope with supply and pollution issues, and competition across water users.
Irrigated agriculture is one of the main economic activities and has been key to regional development since the 1970s. The irrigated area is about 81 000 hectares (IBGE, 2006[4]). Irrigators are the main water users (65.7%), followed by aquaculture (23.6%), human consumption (7.6%), industry (1.6%) and livestock (1.5%) (Figure 2.3).
Figure 2.3. Water use in the Piancó-Piranhas Açu River Basin, per sector
Source: ANA (2014[5]), Cadernos de Capacitação em Recursos Hídricos - Volume 07: Cobrança pelo uso de recursos hídricos, https://capacitacao.ana.gov.br/conhecerh/handle/ana/10 and CBH PPA (n.d.[6]), Relatorio, http://cbhpiancopiranhasacu.org.br/docs/relatorio/tdrplanopiranhasacu_final-1.pdf .
Water pollution is a significant challenge for the Piancó-Piranhas Açu river basin due to insufficient sewage treatment and fertiliser runoff (ANA, 2014[5]; ANA, 2016[7]; IBGE, 2006[4]; IBGE, 2011[1]). About 96% of the urban population has access to drinking water in the State of Paraíba and 92% in the State of Rio Grande do Norte. However, sewage collection rates are much lower in the State of Paraíba (2.46%) and the State of Rio Grande do Norte (13.95%) (ANA, 2014[5]) (CBH PPA, n.d.[6]). The main cause of polluted water in the area is lack of proper wastewater treatment, which comes under the responsibility of municipalities. The municipalities face constraints (human, technical and financial) and despite their important role in managing sanitation, including environmental licensing and solid waste management, they seldom participate in river basin committee meetings. The poor engagement of municipalities in water resources management, a common feature in Brazil, hinders any strategic vision for the basin. In addition, the basin culture enables the use of rivers for liquid and solid waste dumping. There are programmes at federal level to support municipalities in the sanitation sector, which is their responsibility.
Increasing water security through the São Francisco Integration Project
An ambitious infrastructure project
The São Francisco River transfer, known as the São Francisco Integration Project (PISF), will reduce uncertainty over water availability in the PPA. In 2007, Brazil launched the PISF and began building its infrastructure to boost economic development in the northeast of the country, including the PPA basin. The PISF is the most expensive Brazilian hydraulic infrastructure to date, expected to reach BRL 12 billion (USD 5.8 billion) (da Silva Santos, 2021[8]). Originally scheduled for completion by 2011, the project experienced several delays and cost overruns. Currently in the final phase of execution, the project aims to divert 1.4% of the largest river located exclusively in Brazil to the semi-arid zones of north-eastern Brazil, which are home to 29% of the Brazilian population but only have 3.3% of the country's water resources. It also aims to help the Northeast hydraulic network operate in a more synergistic way (hence the reference in the project name to integration rather than diversion).
The São Francisco River is set to provide water to some of the driest regions of its semi-arid Northeast region. Six river basins will benefit from the project: Jaguaribe (Ceará), Piranhas-Açu and Apodi (Rio Grande do Norte), and Paraíba, Moxotó and Brígida (Pernambuco). According to the Brazilian Ministry of Regional Development, the PISF will assure the supply needs of municipalities in the semi-arid Agreste Pernambucano and Fortaleza Metropolitan region, and would be the solution to the problems brought about by the scarcity of water and severe droughts.
The PISF consists of two independent systems of canals, pipelines and aqueducts (the north axis and the east axis) which extend for approximately 720 km (Figure 2.4). The north axis transfers the waters of the São Francisco River to the basins of the Jaguaribe (Ceara), Piranhas-Açu (Rio Grande do Norte) and Apodi-Mossoro (Rio Grande do Norte) rivers. The east axis connects to the basin of the Paraíba River (Paraíba) and to some basins of Pernambuco (via the Ramal do Agreste, the largest water infrastructure project in Pernambuco). The east axis was the first to come into service, in 2017, and currently supplies five reservoirs in the Paraíba River basin (de Lucena Barbosa et al., 2021[9]).
The project also creates momentum for taking action on pressing issues such as water pollution and freshwater contamination, to which water charges can contribute. The project is implemented by the Ministry of Regional Development with a USD 3 billion budget. Revenues from water charges could contribute to its operability and maintenance. However, with the progress of its implementation, addressing water governance issues in the PPARB becomes even more urgent as PISF will bring substantial changes in the water management landscape requiring the institutional development of government agencies, river basin organisms and operational institutions responsible for hydrologic monitoring, water use control and reservoir operations.
Figure 2.4. Northern and eastern routes of the São Francisco water transfer project
Source: Ministério da Integração Nacional, (2004[10]), Relatório de Impacto Ambiental da Transposição. Brasília .
Towards successful implementation of the São Francisco Integration Project
The first phase of the PISF is now in place and starting to highlight issues relating to the operation and maintenance (O&M) of major water infrastructure. The federal government was responsible for financing and delivering the construction phase, establishing the management system and defining the operator at federal level. The states are responsible for O&M and water use. The idea was that the states would charge beneficiaries and provide funds for the operator. Under a contractual arrangement, state water agencies (AESA and IGARN, which are state operators) in both Paraíba and Rio Grande do Norte should pay the PISF federal operator (CODEVASF, Development Company of the São Francisco and Parnaíba Valleys) to receive bulk water from PISF. However, there is no legal provision allowing AESA and IGARN to recover these costs from end users. For federal reservoirs, the federal government (DNOCS, National Department of Works Against Droughts of the Ministry of Regional Development) fully supports O&M costs. Moreover, energy costs are a major operational expense. They vary over the year, making tariff setting very challenging. There is a need to look for operational efficiencies and cheaper sources of energy.
The successful implementation of PISF requires an institutional arrangement that allows for the coordination of federal and state roles, the effective management of the transferred resource, and an efficient and secure financing system. Full commercial operation has not yet commenced, so the resolution of outstanding issues is urgently needed.
Following several best practices (Box 2.1), the following should be considered:
Formalising institutional arrangements for decision making for the regulation and management of the PISF scheme, so that roles and accountabilities are clear and changes in demand and water availability are managed sustainably. The design and operation of schemes requires coordination across all levels of government, and the involvement of beneficiaries and other stakeholders. The example of the Société du Canal de Provence (SCP) in France provides an inspirational example of a possible governance arrangement for the PISF. The SCP is a semi-public company created in 1957 as a Regional Development Company, benefiting from a stable shareholding structure, with over 80% of shares held by local authorities. In 1963, the SCP signed a 75-year concession to build and operate the Provence Canal. Within the framework of the concession awarded by the Région Sud Provence-Alpes-Côte d’Azur, the SCP’s primary task was to manage and ensure a secure water supply for Provence. To do so, it designed a state-of-the-art network to guarantees access to water for all customers and uses, and continues to develop and maintain this network today. The Canal de Provence system was conceived to allow adaptation to demand, thus keeping water withdrawals to a minimum.
Clarifying the aims and objectives for the PISF, and setting up a communications and engagement programme for beneficiaries so that the basis for operation and funding is clear to all. The project’s objective is regional development, so it should aim to increase welfare by making water available to support economic growth. The PISF helped bring the various states together and closer to ANA. There are regular discussions about the problems, but these have so far not been able to resolve them, which suggests that the current format for dialogue needs to be reconsidered, perhaps through a think tank. In particular, the aims for the PISF need to be agreed in terms of priority beneficiaries and strategic objectives for the region. Ultimately, the dialogue should lead to contribute to the financial sustainability of the project, sharing costs and benefits across beneficiaries. Experience from overseas has shown that the operation of transfer schemes needs to be considered dynamically, so that it can respond to changes in demand, climate change, extremes of weather and environmental impacts. These issues make it imperative that the objectives for PISF should be reviewed, and flexible operational rules established that do not lock the system into rigid processes that may not be sustainable. In Colombia, behavioural change campaigns in the Valle de Cauca contributed to doubling the number of downstream water users implementing conservation measures. Fourteen staff of the local environmental authority trained community leaders in natural resource management, social marketing and campaign planning, while also building their capacity to create trust among different types of stakeholders. As a result, about 1 700 ha of forest are now protected voluntarily by landowners in the region. Valle de Cauca exceeded its annual conservation goal, deforestation rates sank well below the national average and the watersheds see positive trends in the forest and water quality indices.
Testing the PISF for risk, resilience and uncertainties using scenarios for different levels of demand and water availability under climate change over timescales compatible with the expected life of water infrastructure (i.e., at least 50 years). Consider how a more integrated portfolio of options, such as greater use of demand management, leakage reduction, effluent reuse, desalination or groundwater, could help manage risk and uncertainty. Like the Canal de Provence and associated infrastructure, the focus is on supply, with investments planned decades (if not centuries) ago, rather than demand (water efficiency, water use reduction). However, given the technical solutions available now and the increasing awareness, including in the agricultural sector, a shift from supply to demand management should be considered.
Initiating a programme of engagement and awareness-raising so that good practice for rules of access and charges are in place when full operation starts. The PISF will not offer unlimited free water. Discussions about what a perfect tariff structure should look like risk preventing the implementation of some form of charging. There is a perception that the communities who stand to benefit believe that the water is available to them at zero cost because they have had no communication about the aims and operation of the scheme.
Establishing rules for access to the resource, supported by a system of permits and compliance monitoring to encourage users to operate efficiently and minimise wastage. These issues are interlinked, and it is essential that there is a dialogue with all stakeholders in order to reach a resolution on the arrangements for governance and funding. If these matters are not resolved the result will be lack of funds for O&M, deterioration in asset condition, and a failure to deliver the intended welfare and economic benefits of this major scheme.
Using water charges to demonstrate that the water has value and there is a cost to making it available and maintaining the assets that provide it. There are fixed costs with all major schemes, and variable ones relating to fluctuations in demand, which ultimately should be funded by those who benefit from an increased security of supply, or from a new supply. The priority beneficiaries are the water customers in the municipalities, who should pay a realistic charge for their water service, subject to safeguards for those for whom affordability is an issue. The PISF will need to operate at capacity to reach all areas with irrigation potential, and there is a belief that users will appear when the water is available. Improved governance arrangements and transparency in tariffs could achieve the original objective of PISF (see next section).
Developing a programme for the technical monitoring of the performance of the PISF and other major schemes to review control rules as necessary and inform schedules and budgets for routine and preventative maintenance, so that losses are minimised and all parts of the transfer system operate as designed. Monitor the system on an ongoing basis for impacts, including environmental, hydrological, socio-economic and regional, so that operating rules can be modified to reduce adverse and unforeseen impacts. With all major schemes, it is essential that there is ongoing monitoring of performance so that control rules can be reviewed and revised as necessary to ensure that they are operating as intended, and so that routine and preventative maintenance can be scheduled efficiently. The scheme was constructed in the hope that increasing the security of water supplies would materialise demand to take advantage of the additional resource. An average flow of up to 26.4 m³/second is guaranteed for human and animal supplies. If not all of this is used, it can be allocated for other purposes. Depending on the level in the Sobradinho dam, up to 127 m³/s can be available. The distribution of flows between different user sectors and states, and the charges to be levied, are specified in the Annual Management Plan, which is approved by ANA. Without tight controls and regulation of formal allocation, and enforcement to minimise unlawful use, there is a risk that uncontrolled expansion of use will impact on contracted and priority use. However, increased use brings with it the potential to earn more revenue to cover costs, although this will be offset by increased operational (primarily energy) costs. The example of the Tagus-Segura transfer in Spain demonstrates that environmental impacts might only become apparent over long timescales, so there needs to be a comprehensive, long-term monitoring commitment to understand the effect on flows, water quality and ecosystems.
Box 2.1. International experience of large water transfer schemes
Water transfers in Spain
The Tagus-Segura transfer is a scheme linking the Bolarque Reservoir on the Tagus River in central Spain with the Talave Reservoir on the Segura River in the dry southeast of the country. It is 292 km long and capable of transferring up to 33 m³/s. Its design was based upon the river flow series from 1958-79, which suggested that up to 1,000 hm³/annum was feasible. However, since 1979 flows in the donor basin have declined by 47% and the volume thought to be available for transfer was reduced to 600 hm³/a. In practice, transfers have averaged only 351 hm³/a. One third of the water is used for public supply and the remainder for irrigation. Evaporation and other losses account for about 20 hm³/a.
Despite its economic benefits in the Segura basin, the transfer resulted in significant adverse impacts in both donor and recipient basins. In the Tagus, there were major changes in the river dynamics, increased erosion and reduction of water quality. This deterioration sparked social and political concern. The Segura ecosystems were impacted by the introduction of non-native species of fish, which are dominating local fish populations. In addition, the increase in irrigation caused groundwater levels to rise and become increasingly polluted by nutrients. These impacts led to discussions about how best to manage large transfers, and the need for continuous adaptation.
This experience provides some useful lessons transferable to the PISF:
Feasibility should be tested under different rainfall and socio-economic scenarios.
Transfers can create a range of impacts in the affected basins, which should be identified as part of the environmental assessment for the scheme. If they materialise after construction and during operation, they must be addressed and minimised.
Transfers are very sensitive to climatic change and shifts in social dynamics.
Effective inter-administrative cooperation is key for sustainable operation of the transfer.
Large scale water infrastructure in the UK
In the UK, there are numerous water transfers in place, some dating from the late 19th Century and supplying cities in the north and west of the country. These assets were largely funded by the municipalities that commissioned the works, but operating and maintenance costs are now the responsibility of private water companies, which have taken over that responsibility from the public sector. Their costs are recovered fully from charges to their customers. In some cases, the water and environmental regulator, which has a similar role ANA, is responsible for the operation and maintenance where assets benefit multiple sectors. In these cases, costs are covered fully by charges levied on abstractors, who pay a premium for the benefit of abstracting water from a regulated river system.
No major water supply infrastructure was commissioned in the past 40 years; any proposals to do so were subject to strong opposition from local communities and green NGO’s. However, a severe drought in 2010-12, which threatened water security in London, led to recognition that investment was needed. Private water companies collaborated to develop a national water security plan for England. Regulators and government gave guidance that this must adopt a twin-track approach and combine demand management measures with resource development, and must take account of the potential impacts of climate change on water availability, as well as environmental flow needs and demands from other sectors. The plan includes ambitious programmes for water efficiency and leakage control, and a broad mix of schemes such as greater connectivity within and between companies, dams, transfers, effluent reuse, groundwater, and desalination.
In each region, a water resources group was established to bring together all sectors and stakeholders to address the economic, social and environmental challenges. In time, these may support the operational management of resources, in a similar way to a long-established Consultative Committee for the River Dee in North Wales. This group was established in legislation to oversee the operation of a series of dams that provide regulate flow on the River Dee, which supports abstraction for public water supply by three companies, as well as navigation, irrigation and industry. The river is also important for its ecology and fishery, and the operational rules ensure that environmental flow needs are considered as a priority. There are rules for the operation of the system during droughts, with the impact shared across different sectors. In the event of a more severe drought than planned, the Committee works to obtain consensus on how restrictions on abstraction should operate.
The River Dee and similar systems provide ideas about how new schemes should be charged and operated. The immediate challenge is how the construction of any new schemes should be funded. With a privatised water sector, it is unlikely that government funding would be available, so it would fall to the companies to raise capital or for a third-party investor to own the scheme and get a return from the beneficiaries. For either of these options, there needs to be the certainty of a stable and adequate income base to pay interest on loans and provide a return on capital. There also needs to be a stable regulatory regime operating with the explicit support of government to give confidence to potential investors. Conversely, operators will need flexibility to optimise the use of assets. Where schemes also provide an environmental benefit, as is likely to be the case in England, the environmental regulator might need to fund the proportion of the costs involved.
A strategy for the Danube River
The Danube is the second longest river in Europe, with a basin that includes 19 countries in Central and Eastern Europe, meaning that it is the most international river basin in the world. It is important for navigation and hydropower, and is a major source of drinking water. It is also home to a critically endangered species of sturgeon, which migrate upstream to spawn. Hydropower installations and other barriers, together with over-exploitation of the fishery, mean that populations have declined significantly.
The ecological impact of hydropower led to tensions between conflicting interests, and resulted in shifts in policy thinking about the use of dams for water supply and hydropower. The International Commission for the Protection of the Danube River (ICPDR) was contracted in 2000 for the implementation of all the transboundary aspects of the Water Framework Directive, and in 2007 for the Floods Directive. Its aim is to safeguard the water resources of the Danube for future generations, to protect its water quality and ecology, and to minimise the impact of floods.
The ICPDR initiated a dialogue to develop Guiding Principles for Sustainable Hydropower Development in the Danube Basin. These set out a strategy, which includes identifying stretches of the Danube that should be kept free from hydropower development, and those where it would be likely to have minimal impact. Where existing structures are adapted or upgraded, measures should allow the passage of fish.
Although water availability in the Danube Basin has so far not been heavily affected by climate change, it will likely have significant impacts on water availability and demand (and navigability) in the future. This will likely add to pressures from irrigation and public water supply on dams and reservoirs. In addition, there is a need to reduce abstraction rates to protect ecological flows. Leakage rates in some countries within the basin are as high as 75%, so addressing these losses and improving the efficiency of use in others sectors such as irrigation could significantly benefit the river.
The next River Basin Management Plan for the Danube (2021-2027) will have to address and reconcile issues of water scarcity and environmental impacts of dams and reservoirs.
Source: OECD-ANA (2019-21[11]), “Water Governance Workshops”.
Getting water governance right in the Piancó-Piranhas Açu River Basin
This section describes opportunities and recommendations based on normative OECD frameworks, studies and reviews on water governance and water management, and international best practices.
Adopting a governance arrangement that ensures water management at an appropriate scale and fosters coordination
The PPA river basin cuts across the States of Paraíba and Rio Grande do Norte. As of 2009, a single River Basin Committee (CBH) governs the PPA river basin, as agreed by the federal level and the two states. The states of Paraíba and Rio Grande do Norte have a Water Resources Councils (CERH), State Secretariats and water agencies – the Paraíba State Water Management Executive Agency (AESA) and the Rio Grande do Norte State Water Management Institute (IGARN). Mapping who does what is the first step in representing the allocation of roles and responsibilities at different levels of government and across functions for water resources management within the basin (Figure 2.5).
Roles and responsibilities across levels of government are allocated as follows:
Federal level
The National Water Resources Council (CNRH) has deliberative powers, and is responsible for approving the National Water Plan and defining general directives for water management instruments, including water permitting and water charges.
The National Water and Sanitation Agency (ANA) is responsible for issuing water permits regarding federal waters. It is also in charge of hydrologic and reservoir monitoring, water use monitoring, control and enforcement, and water management projects at the federal level.
The National Department of Works Against Droughts (DNOCS) is a Federal Government department that manages 321 reservoirs in the Northeast of Brazil. Some of those reservoirs are in the Piancó-Piranhas-Açu River Basin and provide 70% of the basin’s surface water.
The Ministry for Regional Development (MDR) is the major water infrastructure provider, responsible for policy formulation and implementation. It finances new water systems and dams.
The São Francisco and Parnaiba Valleys Development Company (CODEVASF) is the current federal operator of the PISF.
State level
The State Secretariats for the Environment, Water Resources and Science and Technology of Paraíba and Rio Grande do Norte are responsible for water policy formulation and implementation, and for major water project financing at the state level. These secretariats also own reservoirs built by the state.
The Executive Agency for Water Management of the State of Paraíba (AESA) and the Water Management Institute of the State of Rio Grande do Norte (IGARN) are responsible for issuing permits for state waters. They are also in charge of hydrologic and reservoir monitoring, water use monitoring, control and enforcement, and water management projects at the State level. AESA also operates state-owned water systems.
The Water Resources Councils of the States of Paraíba (CERH/PB) and Rio Grande do Norte (CERH/RN) have deliberative powers, and are responsible for approving the State Water Plans and defining general directives for water management instruments, including water permitting and water charges at state level.
Basin level
The Piancó-Piranhas-Açu River Basin Committee (PPA-RBC) was created in 2006 and started operating in 2009. The PPA-RBC is a water parliament gathering 40 representatives from water use sectors, governmental agencies and civil society. It is in charge of fostering discussion regarding water issues, approving the River Basin Management Plan, setting water use priorities, approving water charge methodologies and the implementation schedule.
Since the end of 2016, a Technical Office contracted by ANA was established in the PPARB as part of the implementation of the river basin plan. This Technical Office has been developing several operational functions to support water management and governmental agencies.
The Piancó-Piranhas-Açu River Basin Plan is a reference for the River Basin Committee and water resources management bodies of Federal and State rivers (see next section). Approved in 2016, the plan has a budget of BRL 150 million for the first five years and foresees three types of action – management, complementary studies, and projects – targeted at enhancing water security and quality due to the low level of sanitation infrastructure. Actions will be implemented by the River Basin Committee, ANA, AESA and IGARN. The PPA River Basin Plan was extended until 2021 and a basin plan revision is in preparation for the 5-year period from 2022. The main constraints that hinder the implementation of the PPA River Basin Plan are: (1) the ANA budget is the only source of funding for the CBH in the absence of a funding mechanism based on basin water users, and (2) PPA basin measures must be aligned with water policies at state and municipal levels.
In this context, roles and responsibilities need to be clearly defined and allocated, and strong coordination mechanisms put in place. Multi-level governance requires robust articulation between actors and objectives. It also requires strong participation mechanisms to ensure all entities are actively involved. The weak involvement of municipalities in water resource management, which derives primarily from the “double dominion” situation whereby the Brazilian Constitution divides ownership and competences over water resources between the Union (for rivers which cross state boundaries) and federal states, hinders a strategic vision for the PPA river basin.
In the PPA river basin, the choice between relying on existing state agencies and creating a new water management institution (i.e., a PPA Water Agency) is being discussed. To some extent, the problem is not about the institutional structure but rather about efficiently fulfilling water management functions (water quantity and drainage, water quality, flood defence, sewage management and wastewater treatment, and drinking water supply). Thus, it is important to ensure that the governance arrangement chosen bears the functions and powers to exercise its mission at the appropriate scale. As such:
Making use of existing structures could be more efficient. In France, when creating the Water Agencies in 1964, these faced problems to hire competent and adequate personnel, hampering their capacity to fulfil their missions. These difficulties in building a new institution are already present in the PPA river basin as the lack of personnel in state water management and environmental agencies hinders operational capacity for inspections in the field. Creating a new institution could aggravate this situation. Moreover, the institutions in charge of water management in both Paraíba and Rio Grande do Norte States provide many levels of accountability, which can be considered positive.
Finding the smallest appropriate scale to fulfil water management functions could be a guiding principle. Although each country has its own particularities, following the principle of subsidiarity could be a reference point.
Figure 2.5. Institutional mapping for water resources management in the Piancó-Piranhas Açu River Basin, Brazil
Source: Author’s elaboration based on OECD (2011[12]), Water Governance in OECD Countries: A Multi-level Approach, https://doi.org/10.1787/9789264119284-en.
Evaluating whether catchment-based institutions are delivering on their mandate could identify gaps and strategically plan measures to overcome them. An example is the self-assessment tool used in the United Republic of Tanzania to evaluate the performance of the nine basin water boards that implement IWRM at basin level. The basin water boards are decentralised administrative units, which together with catchment committees and water users’ associations make up the institutional framework for water resources management. The Performance Assessment Framework is a self-assessment tool that supports basin water boards to regularly assess their performance against their institutional mandate. The tool was developed by the Ministry of Water and Irrigation with the support of the German Society for International Co‑operation (Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ). The Ministry provides support to the boards when conducting the Performance Assessment Framework, which is also an excellent opportunity for the ministry to map the strengths and weaknesses of each (OECD, 2018[13]).
Strengthening stakeholder engagement
Strengthening stakeholder engagement at river basin level is key to fostering informed and outcome-oriented contributions to water policy design and implementation. Both formal and informal communications are important, and must occur regularly and consistently. In a tentative taxonomy, the OECD (2015[14]) describes some of the advantages and drawbacks that both formal and informal engagement mechanisms bring about (Box 2.2).
Formal mechanisms such as water associations and river basin organisations are based on the principle of representative democracy, which confers legitimacy. However, they can be perceived as single-minded when they focus solely on pushing the agenda of a single group of stakeholders. River basin organisations can present challenges in terms of lobbying and consultation capture when discussions and decisions are monopolised by the interests of certain groups. They can also generate principle-agent tensions by which the person sitting at the table voices his/her own concern rather than representing his/her broader constituency. This should be a concern when selecting stakeholders to participate in advisory boards, working groups or assemblies.
The informal nature of meetings and workshops can both foster deliberation and build a sense of community. They provide an open atmosphere that makes participants more willing to discuss issues and maximises dialogues that might not come to light through more structured mechanisms. For instance, meetings and workshops are flexible in timeframe and scale (from community meetings to international conferences) and can apply to a range of issues (e.g., from discussing a municipal sewer project to debating transboundary basin management agreements). They offer an opportunity for anyone to express concerns, access and share information, and gain better understanding. However, if tools to involve stakeholders do not have a minimum of structure and mediation, outcomes can be difficult to incorporate into decisions. Follow-up is also needed to turn views and concerns into contributions to decision-making beyond information sharing.
Box 2.2. OECD principles of stakeholder engagement for inclusive water governance
Critical aspects of governance should guide stakeholder engagement frameworks. Fair and equitable access to engagement opportunities is key to ensuring a balanced and representative process that takes account of diverse ideas and opinions. Being transparent and open about the ways to identify stakeholders, choose engagement mechanisms and define objectives can help raise interest among stakeholders and develop an understanding of and support for the final decisions. It is not sufficient to provide platforms for stakeholders to share their ideas; decision-makers must also demonstrate how these are taken into account. Procedural transparency and timely disclosure of information, including alternative solutions, are critical to ensuring the legitimacy of decision-making processes and their outcomes. Engagement can bring together groups with opposing views who fear that theirs will not be considered. Showing participants the intention of the process and how their input will be met is important to ensuring productive discussion and exchange of opinions. It is also important that decision-makers be able to trust the quality and value of input from non-technical experts (OECD, 2015[14]).
Table 2.1. OECD principles of stakeholder engagement for inclusive water governance
Source: OECD (2015[14]), Stakeholder Engagement for Inclusive Water Governance, http://dx.doi.org/10.1787/9789264231122-en.
Box 2.3. Cape Town’s strategy for building resilience through partnership and collaboration
The City of Cape Town recognises that collaborative relationships need to be built and maintained at many levels of the Cape Town water system, including between:
citizens and city government
customers and service providers
citizens and political leadership
officials and politicians
City of Cape Town departments
spheres of government
businesses and the City of Cape Town
the City of Cape Town and the scientific community
the City of Cape Town and other users of the WCWSS.
Collaborative relationships are based on trust, and trust is built where there is transparency and mutual accountability, and where the stated intentions of all partners consistently translate into action. Based on the intensive experiences of engagement during the drought, the City of Cape Town will promote and facilitate building trust in tangible ways:
Engaging citizens and civil society. The City of Cape Town will endeavour to create an enabling environment to be responsive to citizen-led water initiatives. The city will continue to work with social partners and collaborative intermediary organisations. It will undertake regular social surveys to better understand the needs and perceptions of citizens, and work with research institutions, NGOs and neighbourhood organisations that have established processes for documenting community water use and needs, perceptions and attitudes.
Engaging business. The City of Cape Town will continue to work with collaborative intermediary organisations such as GreenCape, Wesgro and the WWF to better understand business needs and perceptions, and improve communication.
Engaging government. The City of Cape Town will continue to work with collaborative intermediaries such as the Western Cape Economic Development Partnership (EDP) and the National Treasury’s City of Cape Town Support Programme to facilitate productive relationships with other spheres of government, including the Western Cape Government and various national government departments.
Engaging labour. The City of Cape Town will continue to work with organised labour as a key partner in service delivery to ensure that the rights of workers are protected.
Engaging researchers. The City of Cape Town will continue to engage with research working groups such as the Freshwater Forum, the Cape Higher Education Consortium, the Water Research Group, the Water Research Commission and the Water Hub to develop and pursue applied research and evidence-based decision-making to assist the City of Cape Town to better fulfil its mandate and implement this strategy. The City of Cape Town will also explore a transdisciplinary research approach and partner with researchers to co-design research agendas and projects for the city.
Engaging key customers. The City of Cape Town will set up a key-customers unit to be more responsive to their needs.
Engaging international expertise and experience. The City of Cape Town will enhance existing and develop new knowledge-sharing partnerships with national and international bodies able to share relevant knowledge and experience to enable more effective implementation of this strategy. Where appropriate, Cape Town will make use of collaborative intermediates to support this effort. In addition, the City is committed to sharing its own experiences with these institutions to contribute to the global community of practice.
Source: OECD (2021[15]), Water Governance in Cape Town, South Africa, https://doi.org/10.1787/a804bd7b-en; City of Cape Town (2019[16]), Cape Town Water Strategy, https://resource.capetown.gov.za/documentcentre/Documents/City%20strategies%2c%20plans%20and%20frameworks.
Involvement of underserved/disadvantaged communities requires and is receiving more attention. However, water management professionals need to do more outreach, especially regarding the historical and ecological knowledge of native communities that are sovereign, have rights, but are generally poorly consulted (Box 2.4).
Box 2.4. The Fitzroy River Declaration for greater stakeholder engagement
In the Fitzroy River basin (Australia), the OECD Principles are providing a tool for under-represented stakeholders to promote their engagement in water policy design and implementation. An indigenous community from Australia developed a political declaration aiming to protect the traditional and environmental values that underpin the Fitzroy River’s heritage. The aboriginal community has been the traditional guardian of the river for centuries, but increasing development in the watershed is jeopardising the future of the river and its people. The Fitzroy River Declaration, developed based on the OECD Principles, urges the government to set up a governance system in Western Australia that allows for greater stakeholder engagement and ultimately joint management of the river between the government and aboriginal communities.
Traditional Owners of the Kimberley region of Western Australia are concerned by the extensive development proposals facing the Fitzroy River and its catchment and the potential for cumulative impacts on its unique cultural and environmental values. The unique cultural and environmental values of the Fitzroy River and its catchment are of national and international significance. The Fitzroy River is a living ancestral being and has a right to life. It must be protected for current and future generations, and managed jointly by the Traditional Owners of the river.
Traditional Owners of the Fitzroy catchment agree to work together to:
1. Action a process for joint Prescribed Body Corporates decision making on activities in the Fitzroy catchment;
2. Reach a joint position on fracking in the Fitzroy catchment;
3. Create a buffer zone for no mining, oil, gas, irrigation and dams in the Fitzroy catchment;
4. Develop and agree a Management Plan for the entire Fitzroy Catchment, based on traditional and environmental values;
5. Develop a Fitzroy River Management Body for the Fitzroy Catchment, founded on cultural governance;
6. Complement these with a joint Indigenous Protected Area over the Fitzroy River;
7. Engage with shire and state government to communicate concerns and ensure they follow the agreed joint process;
8. Investigate legal options to support the above, including:
a. Strengthen protections under the Environment Protection and Biodiversity Conservation Act National Heritage Listing;
b. Strengthen protections under the Aboriginal Heritage Act; and
c. Legislation to protect the Fitzroy catchment and its unique cultural and natural values.
Source: OECD (2018[13]), Implementing the OECD Principles on Water Governance: Indicator Framework and Evolving Practices, https://doi.org/10.1787/9789264292659-en; Martuwarra Fitzroy River (2016[17]), Fitzroy River Declaration, https://martuwarrafitzroyriver.org/fitzroy-river-declaration.
Communication methods and tools are crucial to strengthen the dynamics of collectively agreed water management agreements. In Arizona, communication practices have improved over the last few years. A few years ago, meetings held at Central Arizona Project headquarters in North Phoenix started to be broadcast so that more stakeholders could watch and observe. The pandemic accelerated and improved this trend with the introduction of interactive and remote meetings. Most meetings are held by public bodies, which must share agendas, announce meetings, provide access to materials/resources, etc. Leadership is making much more of an effort to travel and talk to people. Good memos also proved important to convey and share information. It is important to have an accurate database to provide clear, harmonised data and information. Databases are useful especially when dealing with groundwater because modelling highlights evolutions that are otherwise invisible. Stakeholders can be sceptical, and it is important to be transparent about the models used.
Investing in monitoring and hydrology control
Regarding water use compliance, the Annual Declaration of Water Use (DAURH) is an important self-reporting instrument that requires major Brazilian water users to report their annual water volume consumption. DAURH is required in basins and systems where there is pressure on water resources, and has improved the monitoring of water use in many river basins in Brazil. In the PPA river basin, it was required from users representing 75% of water demand met from the six major reservoirs. Other water use monitoring methodologies have been implemented, such as remote sensing of irrigated areas, water use data telemetry, and water use self-reporting using mobile apps. Moreover, the technical office contracted in 2016 executed several activities to support water use compliance assessment in both federal and state waters. Those activities included identification and registration of water users, flow measurement, monitoring of reservoir operations, identification of obstructions in rivers, and technical visits to dams. From 2017 to 2020, more than two thousand technical visits were carried out to check water use status and verify compliance with the rules of uses. In addition, satellite imagery has been used to remotely identify and monitor agricultural areas in the region, as well as irregular uses for which ANA coordinated removal of water pumps and the closure of irregular canals. The combination of field activities with intelligent remote technologies improved water use compliance and helped control water demand through the severe drought from 2013 to 2019. However, further improvements in the monitoring and assessment of water use across the basin are needed and under discussion. Such improvements include operational water management functions to support the implementation of the water allocation rules, like hydrologic and water demand monitoring and control, river dredging, reservoir operations, dam maintenance and safety, water use efficiency, and pollution control. Box 2.5 provides international examples.
Box 2.5. Monitoring and hydrological control in Spain, France and California, US
Conditioning water rights on control and reporting
In the Júcar River Basin (JRB), Spain, when a water right is granted, it is mandatory for the holder to install a control system and report information to the Commission of Users. Water right can even be removed from holder in case of non-reporting. Nevertheless, this control system requires an important enforcement capacity due to the 4 000 wells installed in the JRB. Efforts have been made to better control water withdrawal, especially in areas where groundwater is over exploited. In the South of the JRB, control is performed by people on the ground. In the Mancha Oriental, control is performed using tele-detection. Nevertheless, the EU is urging Spain to increase control over water withdrawal and use. More and more stakeholder engagement is also required to improve hydrological control and monitoring. Sanctions and penalties are also considered to improve compliance with control and monitoring. To enhance water use reporting and compliance in the PPA river basin, the DAURH obligation could be tied to the removal of water rights in the case of repeated non-reporting or inaccurate reporting. This could increase water use reporting and compliance while enhancing water resource monitoring and water allocation enforcement. Nevertheless, sanctions should be preceded and supported by intensive stakeholder engagement processes.
More stringent assessment and management in areas of water stress
In France, water is generally abundant, although water stress is increasing in some regions and there are periodic episodes of scarcity. In areas of water stress, more detailed assessments of water availability and use are required. Laws related to management of water resources are stricter in these areas and the allocation regime is more rigorous. A mapping exercise has been undertaken to identify ground and surface water stressed areas. This is used to define water apportionment areas, where the water deficit is structural. These zones are the target of recent reforms to restore sustainable abstractable volumes as well as the creation of Single Collective Management Bodies (Organismes Uniques de Gestion Collective, OUGC) to provide an incentive for irrigators to allocate a set volume of water among themselves at catchment level.
Hydrology models to foster dialogue and support decision-making
Hydrology models are not only important tools to allocate water resources, they are also useful to foster dialogue among water stakeholders, and support informed decision-making. As such, they should be used early on. In California, hydrology modelling proved useful to provide a better understanding of the hydrological situation and its likely evolution, thus helping to make better decisions. Data accuracy problems can be important, underlining the need for a common and harmonised accounting system throughout a river basin. Models can also be useful to improve data. Based on the experience of California, it is recommended to build and use hydrology models early, and improve them along the way rather than collecting data for years before starting to build a model. In Spain, the evaluation of available resources and demands in each water resource system are carried out in the River Basin Management Plans. An inventory of available water resources is produced, and existing water uses and demands are identified. Water resource assessment methods have been developed for the whole national territory, as well as simulation water resource models that take into account conventional and non-conventional water resources, environmental flows, water demands, hydraulic infrastructure, water use priorities, and exploitation rules in order to establish water allocations and reserves.
Source: OECD/ANA (2021[18]), “Workshop on Strengthening River Basin Governance in the Piancó-Piranhas Açu River Basin (25-28 May 2021)”.
Improving water allocation mechanisms
The term “water allocation regime” is used to describe the process and tools involved in sharing water resources amongst different water users. This includes establishing water resource plans that define the availability of water and granting water permits to individual water users. It also includes allocating water resources over the long term, as well as seasonal adjustments to the amount of water available to different users, and the allocation of both surface water and groundwater. Several tools exist for translating allocation principles into concrete water management. They include water management plans, water permits, collective entitlements, and enforcement and monitoring tools.
OECD (2015[19]), shows that Brazil made remarkable progress in reforming its water sector since the National Water Law of 1997. However, economic, climatic and urbanisation drivers can increase tensions between water users in some regions and basins, such as the Piancó-Piranhas-Açu (PPA) river basin. The report recommends strengthening coordination between federal and state water policies and putting in place more robust water allocation regimes that can better cope with future risks of water shortage (Box 2.6).
Box 2.6. 2015 OECD assessment and recommendations for water allocation in Brazil
Three major weaknesses must be addressed
Water resources plans – at the federal, interstate, and relevant state, river basin or hydrological planning unit level – do not set priorities or criteria that can drive allocation decisions. Moreover, plans generally do not include cyclical events such as droughts and thus lack clarity in terms of priority of water use in times of crisis. Sectoral planning occurs largely in isolation (e.g., hydropower development, irrigation extension), frequently unconnected to the water resource planning process.
Responsibility for many allocation decisions is with river basin committees or state agencies – entities whose water allocation priorities may differ from those at the federal level. Potential tensions between federal and state priorities are exacerbated by challenges related to the “double dominion”: for rivers in the Union domain, the Constitution confers the criteria for granting permits for water withdrawal to the federal level (ANA) from the main channel, and to the states from the tributaries.
Implementation of water allocation policy remains the exception rather than the rule.
Suggestions for robust water allocation regimes in Brazil
A combination of three sets of measures can help address the identified weaknesses.
First, available water resources and the priorities for water use must be clearly defined:
Define reference flows that maximise the benefits and efficiency of water use; this could involve water use rights with different levels of reliability or allowing users to determine their own levels of risk.
Water resource plans must identify priorities and guide allocation decisions; plans should encourage the multi-purpose use of water from reservoirs.
Second, policy instruments must be designed to serve the objectives of the water allocation policy:
Define criteria for issuing water use permits that are consistent and increase flexibility for water users (e.g., collective rights to use irrigation water).
Design economic instruments that combine efficiency and flexibility, including pricing instruments to facilitate the reallocation of water between water users.
Third, define governance arrangements to ensure efficient allocation:
Set up mechanisms for monitoring and enforcing the water allocation regime.
Make institutional arrangements to strengthen the capacity of states to develop plans and define priorities, including coherence with the federal level for dual dominion watercourses.
Inform, build capacities and involve water users in decision-making.
Source: OECD (2015[19]), Water Resources Governance in Brazil, https://doi.org/10.1787/9789264238121-en.
All of Brazil’s water resources are in the public domain (federal or state). The National Water Act of 1997 stipulates that human consumption and livestock have priority over other uses in periods of water scarcity. Pursuant to Decree 3.692/2000, ANA should set minimum flows for state rivers that feed into federal rivers.
Depending on the estimated water supply/demand balance for the coming year, reservoirs and rivers can be subject to negotiated water allocations for that year (Alocação de Água, AA). A permanent water resource compact (Marco Regulatório, MR) is established for reservoirs and rivers with a chronic water deficit (having been the subject of several AAs). The aim is to set limits on the total volume of water available for allocation and establish rules for sharing water during periods of scarcity. Both instruments generally set out:
a quota for each use of water (human water supply, irrigation, etc.)
water use restrictions to preserve multiple uses in the event of water scarcity
Water allocation regimes in the PPA river basin were established through water agreements at local level. In 2018 and 2019, after an intensive discussion process, new MRs were discussed and implemented for the major reservoir systems of the river basin. In many cases, water allocation rules evolved into joint resolutions signed by ANA and state government agencies defining water use rule for both federal and state waters, thus addressing issues related to the double dominion. Such water allocation agreements usually establish a quota for each water use, considering water availability from the hydrologic system. There are also water use restriction rules associated with reservoir levels or river stream flows. However, further institutional development is needed to implement water allocation rules, both in local water systems and large river reaches.
Implementation of AAs and MRs in the PPA basin started in 2015. In 2021, seven (out of eleven) reservoirs located in the basin were under MR and two more are subject to an AA. In addition to AAs and MRs, compliance with the minimum levels of river flows and water in reservoirs set by the Water Act 1997 may lead to further restrictions on water use.
CBH leads the AA process. Ad hoc commissions ensure the proper implementation of the AAs and communicate on the state of water resources and the risks of water scarcity. MRs are enforceable by way of a resolution made by either the ANA or the relevant state water agency, or both. They comprise sets of rules defined in consultation with local governments and water users (e.g. reference flows at various points throughout the basin, as a basis for allocation decisions). Where they are in force, any water permits must include conditions requiring the water user to comply with the rules set by the MR.
Table 2.2 summarises the key features of Brazil’s water allocation regime.
Table 2.2. Brazil's water allocation regime
Source: Adapted from OECD (2015[20]), Water Resources Allocation: Sharing Risks and Opportunities, https://doi.org/10.1787/9789264229631-en.
However, the National Water Resources Policy (PNRH) does not provide clear guidance on how water allocation between sectors should be resolved in times of water scarcity. To manage the risk of scarcity, water allocation in the PPA basin is based mainly on agreements negotiated between users on an annual basis (AAs), which can turn into statutory regulation (MR) if the risk of water shortage in a river or reservoir persists.
Pricing instruments can allocate water among users more cost-effectively. This is the case with abstraction charges provided for in the National Water Law of 1997, as introduced to some extent in the state of Paraiba, provided that they reflect the risk of scarcity and that the rates are not differentiated between users. Cap-and-trade systems would be the most cost-effective by setting (1) an abstraction cap and (2) a price for the water permit, implicitly taxing the abstraction according to the water demand, thus improving water use efficiency. Abstraction charges and cap-and-trade systems (water markets) are discussed below, as well as the combination between them or with direct regulation.
Environmental Flows
Water allocation is, in essence, a means to manage the risk of shortage and to adjudicate between competing uses. When setting up water allocation regimes, reference flows should involve consideration of non-consumptive water demands, including environmental flows (e-flows), which indicate the flow regime required to sustain ecosystem services at the required level (Box 2.7).
Box 2.7. Options for treatment of in-stream flows within a water allocation regime
When designing an allocation regime and setting a long-term abstraction limit, it is important to decide whether to include some or all entitlements in this limit. The most common approach is to set aside the amount needed for environmental needs, non-consumptive uses, and transfers to other systems (including downstream obligations) as a prior right, then allocate the remainder for consumptive uses.
An alternative approach being tested in Australia is to assign some water to the environment as an entitlement to a share of all inflows and define this entitlement separately from the arrangements used to ensure that base flows, for example, are maintained. In the Murray-Darling Basin, a Commonwealth Environmental Water Holder was established and is expected to hold around one third of the basin’s water entitlements by 2019. Under this arrangement, the government cannot allocate water to consumptive users without a pro rata allocation to the Commonwealth Environmental Water Holder.
Australia is using this approach to put environmental water on the same footing as all other water users. Under this arrangement, allocations are made in proportion to the number of entitlements held in the interests of the environment, no matter how dry or wet it is. As a result, administrators are not able to transfer environmental water to other users.
In the United States, non-governmental groups have been buying water to ensure that the environment is looked after. A well-known example is the Oregon Water Trust, which became a programme of The Freshwater Trust in 2008.
Source: OECD (2015[20]), Water Resources Allocation: Sharing Risks and Opportunities, https://doi.org/10.1787/9789264229631-en.
Environmental flow is a very technical subject (with minimum rate, maximum rate, rate of flow over time). A large piece of the environmental flow determination focuses on minimum water flows in relation to water scarcity, with the objective to preserve ecosystems downstream (Box 2.7). Different methodologies can be used. One is based on historical data which are used to analyse historical minimum flows. Through historical data modelling, a minimum flow regulation is determined. Another method is using biological studies to determine the preferences of fish and the associated minimum flow requirements. This method is performed with the support of academics and researchers from universities. In addition, there is important hydrological work and planning done with electricity suppliers to adapt the flows.
In Spain, the vision of environmental requirements has changed a lot. In the past, the dominant vision was very much utilitarian with the purpose of using water and environment to create wealth. The focus started to change in the 1990s when an important drought compromised urban water provision. Later, the Water Framework Directive helped develop and strengthen the concept of ecological flow of rivers. There is still a need to increase these flows but it is sometimes difficult to make users understand that maintaining some ecological conditions is necessary. This will become more and more important in the future, especially to adapt to climate change with increasing water temperature becoming a problem. The importance of environmental flows is now widely recognised, and failure to provide adequate environmental flows can lead to a wide range of negative, and often unexpected, impacts (Box 2.8).
Box 2.8. Impacts of failing to consider environmental flows
Freshwater systems provide a wide range of ecosystem services. Changes to the natural flow regime can impact the ability of a river to provide these. Poor water allocation practices can mean that many of the services that rivers provide – for free – can be lost, with significant impact on dependent human communities. Examples from international experience include:
Heightened flood risk, such as in China’s Yellow River, where over-allocation resulted in the build-up of sediment and changes to river morphology. This led to the river being perched above the floodplain and a significant increase in the risk of flooding. Dedicated flows representing around 35% of the mean annual flow are now provided in the allocation regime to improve sediment movement as part of efforts to reduce the risk of flooding.
Saltwater encroachment and related environmental declines, such as in Pakistan’s Indus River, where over-allocation and massively reduced flows at the river mouth led to saltwater intruding 64 kilometres inland and the loss of approximately 1.2 million acres of farmland.
Declines in fish and other aquatic populations, such as in China's Yangtze River, where changes to the downstream flow regime because of construction of the Three Gorges Dam caused a decline of up to 95% in juvenile fish stocks of the four major carp species, with subsequent effects on fisheries production.
Source: Poff, L., R. Tharme and A. Arthington (2017[21]), “Evolution of environmental flows assessment science, principles, and methodologies”, http://dx.doi.org/10.1016/B978-0-12-803907-6.00011-5.
In the US, environmental needs and demands for water are decentralised and vary across jurisdictions. Dealing with environmental flow is key to keep the aquatic ecosystems in good state as this increases sustainability and improves water quality. Nevertheless, environmental flows and needs are hard to value.
Compensation mechanisms
The priority given by law to human consumption and livestock over other uses in times of water scarcity can lead (and has) to depriving farmers of their acquired rights to water, with economic consequences due to the absence of a financial compensation mechanism. To compensate farmers faced with this situation, or to prevent this situation from occurring, three options could be considered: (1) a federally guaranteed insurance or reinsurance scheme could be combined with the current AA/MR quota scheme, (2) the generalisation of abstraction charges could replace direct regulation (i.e., the AA/RM regime) with a system of cross-subsidisation in favour of farmers as described above, or (3) auctioning of AA/MR quotas could be allowed, but grandfathering the original rights of farmers.
In Brazil, the large public banks (Banco do Brasil, Banco de Amazonia) cover crop insurance premiums (to an extent) for poor farmers. There is no irrigation insurance. It is indeed more cost-effective to cover the risk of non-production instead of covering the risk of lack of irrigation water. The latter could be considered as a subsidy of agricultural inputs and fall under the subsidy discipline of the WTO.
Multi-risk insurance (pests, droughts, damage caused by wildlife to crops, etc.) would increase the basis for insurance premiums and reduce the rate. The same reasoning applies to insurance at the basin level to pool the risk between all the farmers in the basin. Multi-year insurance contracts would allow better recovery of premiums (by spreading the risk). Defining a drought risk threshold (an “acceptable” level of drought risk) would improve transparency in setting insurance premiums.
To avoid moral hazard, instead of subsidising the insurance premium of some (poor) farmers, it would be more cost-effective to apply a floor premium for all farmers, introduce an additional premium for the rich and redistribute income to the poorest to help them pay the floor premium.
Water pricing instruments could usefully complement crop insurance. In the event of drought, water markets compensate (in part) for the loss of agricultural production with a higher value of water rights, especially long-term entitlements (market adjustment). The generalisation of abstraction charges according to the risk of scarcity would require setting an acceptable scarcity risk threshold, thus improving the implementation of crop insurance. Box 2.9 provides an overview of the functioning of agricultural risk management instruments in OECD countries and emerging economies.
Box 2.9. Agricultural risk management instruments
A key role of government in agricultural risk management (ARM) is to facilitate the development of information about agricultural risks. Better ex ante risk assessment reduces adverse selection problems that arise because producers know more than insurers about the risks affecting their crop production.
Government support for ARM policies should be limited to providing protection against “catastrophic losses”, defined by the WTO as losses exceeding 30% of historical average production or income level. However, since the launch of agricultural policy reforms in the late 1980s aimed at phasing out border protection and guaranteed producer prices, governments of OECD countries and emerging economies nearly quadrupled spending on ARM policies, reaching USD 25 billion in 2019. This includes agricultural insurance (73% of spending in 2019), ex post disaster aid (20%), income stabilisation schemes (5%), and tax and savings measures (2%).
Agricultural insurance guarantees producers a level of yield or revenue in exchange for a premium paid based on an actuarial estimate of risk. It can offer protection against a single peril (such as crop insurance) or multiple perils. Claims are based on either actual loss of yield (indemnity-based contracts) or regional yield, weather or other variables (index-based contracts).
Ex post disaster aid compensates producers after a natural disaster. Most often, the decision by the government whether to intervene is taken after the fact, so that at the time of planting, producers do not know whether they will be protected in the event of a disaster.
Income stabilisation schemes aim to keep producers' income around the average of recent years, generally guaranteeing a minimum income. Unlike agricultural insurance, which targets individual crops, income stabilisation concerns the entire farm.
Tax and savings measures aim to smooth income variability through tax-deferred savings accounts where the government matches producer savings deposits up to a set amount and allows producers to opt out of the programme, often without penalty, in years when farm income falls below a set level.
Government spending on ARM policies can represent a significant share of producer support (PSE), estimated by the OECD as a % of gross farm receipts. In 2017-19, they accounted for 15% of PSE in Brazil, 22% in the United States, 30% in Canada and 50% in Australia, but only 3% in the EU-28.
ARM policies (agricultural insurance) distort production choices and the use of farm inputs, including irrigation water, and are therefore more likely to increase environmental pressure than ARM policies supporting income (income stabilisation schemes, tax and savings measures). The most effective way to manage the risk of irrigation water scarcity through income-supporting ARM policies would be to make the subsidy of insurance premiums conditional on environmental outcomes, such as the efficiency of irrigation water use.
A problem common to all ARM policies is that they create moral hazards – an insured has incentive to increase his exposure to risk because he does not bear the full costs of that risk. To minimise moral hazard, most ARM policies have either a deductible (i.e., the producer must pay for losses up to an agreed level at which the insurance begins to cover) and/or a co-payment where the insurer pays only part of the indemnity (the rest being absorbed by the insured). For example, under the United States crop insurance program, deductibles are often set at 25% or more for crops where actuarial experience may be limited
Source: Glauber, J. et al. (2021[22]), “Design principles for agricultural risk management policies”, https://doi.org/10.1787/1048819f-en.
International experience shows that information and stakeholder engagement are key to resolving conflicts in the absence of compensation mechanisms. In California, the role of the state is to create a common water accounting system so that all stakeholders have access to and use similar data and information. Having data and a common basis for technical understanding is crucial for agreement over time. State or local governments can then organise discussions on water allocation using the information from the water accounting system. This is commonly done in California around the issue of water rights. Discussions occur locally before the drought, as the pressure of emergency during the drought increases political sensitivity. Most water decisions are made locally where water demand lies and where land-use and other water demand drivers occur. In addition, this brings more direct accountability and power to water users. In Spain, urban water supply is considered a priority water use. Hence, there is normally no compensation of other users when water use is restricted or cut in case of droughts. However, during the 2005-2006 drought, a public offer was made to sell rights to groundwater use to maintain ecological flow. This successfully reduced pumping. Furthermore, in the Spanish Mediterranean coast, traditional tribunals are in charge of settling water use conflicts between irrigators (Box 2.10).
Box 2.10. Irrigators’ tribunals on the Spanish Mediterranean coast
The irrigators’ tribunals on the Spanish Mediterranean coast are traditional law courts for water management that date back to the Al-Andalus period (9th to 13th Centuries). The two main tribunals – the Council of Wise Men of the Plain of Murcia and the Water Tribunal of the Plain of Valencia – are recognised under Spanish law. Inspiring authority and respect, these two courts, whose members are elected democratically, settle disputes orally in a swift, transparent and impartial manner. The Council of Wise Men has seven geographically representative members and jurisdiction over a landowners’ assembly of 23 313 members. The Water Tribunal comprises eight elected administrators representing a total of 11 691 members from nine communities. In addition to their legal role, the irrigators’ tribunals are a key part of the communities of which they are a visible symbol, as apparent from the rites performed when judgments are handed down and the fact that the tribunals often feature in local iconography. They provide cohesion among traditional communities and synergy between occupations (wardens, inspectors, pruners, etc.), contribute to the oral transmission of knowledge derived from centuries-old cultural exchanges, and have their own specialist vocabulary peppered with Arabic borrowings. In short, the courts are long-standing repositories of local and regional identity and are of special significance to local inhabitants.
The Court of Waters of the valley of Valencia (Tribunal de las Aguas de la Vega de Valencia), is an institution of justice in charge of settling disputes arising from the use of irrigation water among farmers. It is the oldest existing institution of justice in Europe. The Court of Waters is a customary court made up of a representative from each of the eight Irrigation Communities, called Trustees. The Court President is elected among these Irrigation Communities for a renewable period of two years. Every Thursday of the week, the Court meets in a public session in the afternoon while an administrative session is held later in the day to discuss various matters, mainly the distribution of water.
Source: UNESCO (2021[23]), “Irrigators’ tribunals of the Spanish Mediterranean coast: the Council of Wise Men of the plain of Murcia and the Water Tribunal of the plain of Valencia”, https://ich.unesco.org/en/RL/irrigators-tribunals-of-the-spanish-mediterranean-coast-the-council-of-wise-men-of-the-plain-of-murcia-and-the-water-tribunal-of-the-plain-of-valencia-00171.
Strengthening economic instruments in the Piancó-Piranhas Açu river basin
Pricing and financing of integrated water resources management in the PPA basin
Three major economic challenges arise in the PPA basin. The first is O&M funding for bulk water storage and transport infrastructure, which is critical to this semi-arid area. It is even more important given that the inter-basin transfer of the São Francisco River raises hopes for socio-economic development in the basin. The PPA basin is sorely lacking in money for O&M of the basin’s small reservoirs. There is seemingly no provision to cover the O&M of these infrastructures in the pricing of water and sanitation or irrigation water services. The second challenge is the implementation of the principle of water pays for water, consisting of allocating the proceeds of abstraction charges to IWRM (to CBH). The third challenge is water allocation and demand management to promote efficient water use and cost-effectively manage the risk of scarcity.
Pricing instruments (water charges, water markets) are relevant to address the three challenges. They create incentives to reduce water demand and allocate water costs effectively. They collect funds to finance infrastructure and integrated water resources management (IWRM). A conceptual framework is proposed to set up pricing and financing instruments in the PPA basin (Figure 2.6). User charges (known in Brazil as “serviço de adução de água bruta”) and abstraction charges (known in Brazil as "cobrança", as stated in the National Water Law of 1997) have different objectives. The first aims to recover the costs of water supply services (requited payment). The latter aims to manage water resources and should contribute to the general budget (unrequited payment). Although limiting flexibility in the use of public funds, but improving the public/political acceptability of abstraction charges, the application of the principle of water pays for water. The principle could also apply in the case of a cap-and-trade system of water use rights at auction, by allocating the proceeds of the auction to IWRM.
Bulk users must finance the O&M of storage and transport infrastructure (reservoirs and PISF) via user charges (serviço de adução de água bruta), according to the very definition of user charges (payment in return for services) (Figure 2.6). User charges can be passed on to the water bill of end users (i.e., water tariffs). As a rule of thumb, as with urban water supply infrastructure, any recourse to public funding for the O&M of bulk water infrastructure should be considered temporary, with user charges eventually recovering all costs to ensure the financial sustainability of infrastructure operators.
Figure 2.6. Conceptual framework for the pricing and financing of integrated water resources management in the PPA basin
Financing the operation and maintenance of water storage and transport infrastructure
Financing the O&M of large water storage and transport infrastructure (bulk water) is essential for the security of water supply in the PPA basin. The federal government bears the capital costs of all major federal bulk water infrastructure projects but is not expected to bear the O&M costs. In practice, however, payments from state water agencies (AESA and IGARN) to the operator of federal reservoirs (DNOCS) for bulk water only cover a portion of the O&M costs of federal reservoirs. DNOCS (that is, the federal public treasury) fills the gap. The Ministry of Regional Development (MDR) recently submitted a bill to Congress to require users to cover the costs of operating and maintaining federal reservoirs.
The same principle should apply to cover the O&M costs of the PISF as it goes into service. In other words, water users in the four states served by PISF (Ceará, Paraíba, Pernambuco and Rio Grande do Norte) should pay its federal operator (CODEVASF) enough to fully fund O&M. ANA (as regulator of water supply and sanitation since 2020) plans to revise the user charge structure to allow the recovery of the O&M costs of the PISF (estimated at USD 53 million per year for the four states served by the PISF). The new structure would consist of two components: a standing charge (USD 0.05/m3) to cover the fixed costs of O&M of the PISF and an additional volumetric charge (USD 0.09/m3) to recover the cost of pumping water from the PISF (mainly electricity costs). The same structure and charge rates would apply to the four states served by PISF. Financing of the O&M of other bulk water infrastructure (non-federal) is at the discretion of state water policy.
The lack of an explicit policy on cost recovery for the O&M of bulk water supply infrastructure threatens the sustainability of the bulk water supply. A simple solution is that wholesale water users pay the full cost of operating and maintaining the wholesale water supply infrastructure. In other words, AESA, IGARN and any other large water users (e.g., cities, irrigation associations) should pay a user charge to CODEVASF and DNOCS covering the costs of O&M of reservoirs and PISF. Likewise, for non-federal bulk water supply infrastructure, O&M costs should be fully recovered from users. In addition, user charges create an incentive to reduce water consumption (improve water use efficiency), encouraging behaviour change.
All large water users should share O&M costs equally (similar volumetric rates for all) to improve feasibility (e.g., public acceptability) and send the same water conservation signal to all. To maintain the conservation signal for all, any cross-subsidy between bulk water sectors (e.g., between cities and irrigation associations) should be sought separately, for example by introducing an additional levy on the user charge of cities whose revenues would be redistributed to irrigation associations.
Public financial support for collective irrigated perimeters amounts to subsidising the costs of providing water for irrigation in agricultural production, which is subject to the subsidy discipline of the World Trade Organization (WTO) (Kibel, 2014[24]). It distorts water use by encouraging irrigation at the expense of other water uses. Managing irrigation water resources would be more cost-effective by directing public money to direct payments that help farmers purchase on-farm water-saving technologies (e.g., drip irrigation).
An argument in favour of public financing for the O&M of storage and transport the infrastructures for bulk water is their public benefits, such regulation of the flow of rivers, supplement of water to natural environments, etc. Debate over the impacts and benefits of bulk water supply infrastructure should be documented with technical and scientific arguments to inform policy making. If such public benefits are demonstrated, this could justify the coverage of O&M costs by the CBH, as part of its role as IWRM authority for the PPA basin. This involves financing the CBH by allocating revenue from abstraction charges in accordance with the principle of water pays for water implemented in Brazil. In France, for example, in 2021, the Adour-Garonne water agency earmarked EUR 4 million to support local communities in bringing their dams into compliance with the objective of "restoring the volumes initially available and improving their management for the benefit of natural environments". Typically, the CBH could provide financial assistance for O&M if the infrastructure has an environmental benefit and not just an economic benefit. By enhancing their environmental benefits, the “greening” of bulk water infrastructure (for example by seeking biodiversity or climate co-benefits with the planting of trees along canals or upstream of reservoirs) would increase eligibility for CBH support.
Making more room for green water infrastructure would allow the beneficiary-pays principle to be applied. This would involve asking the beneficiaries (cities, economic activities) of the PPA basin to remunerate the services of regulating the flow of rivers provided by ecosystems. The CBH could still provide financial assistance to O&M of green water infrastructure (e.g., wetlands, floodplains, alluvial forests) as they provide environmental benefits. The U.S. Army Corps of Engineers created Engineering with Nature: An Atlas, a compilation of 118 constructed projects around the world that show the benefits and diversity of nature-based solutions and how they can be implemented.
Floating solar panels are developing rapidly and massively in the PPA basin (in the state of Paraiba), impacting water resources. Possible effects of covering a reservoir with floating solar panels include, but are not limited to: reduced mixing by wind of the reservoirs, and changes in flora, fauna and related organisms (birds, fish, aquatic plants, mussels, insects, algae, bacteria, viruses, etc.) present in or around the reservoir (Mathijssen et al., 2020[25]). The solar panel operator should provide financial compensation to the water infrastructure operator for side effects on aquatic life and water quality. The amount of compensation should be used to protect and restore aquatic life and water quality. However, part could be allocated to financing the O&M of bulk water infrastructure, which would amount to applying a kind of “electricity pays for water” principle.
Even if it has been used mainly to promote urban development (the “city pays for the city” principle), value capture could be considered as a tool for financing bulk water infrastructure (Inter-American Development Bank, 2016[26]). In other words, the increase in the value of land served by bulk water infrastructure could be taxed over a specified period and the tax proceeds allocated to the O&M of such infrastructure (principle of “land pays for water”). Brazil has a tax system linked to the value of land, both in urban areas (Building and Urban Territorial Tax, IPTU) and in rural areas (Rural Territorial Tax, ITR). These taxes can partially capture the increase in land and property value resulting from the building of water infrastructure. However, the allocation of revenue is not earmarked and depends on the local executive. The collection competence is municipal (IPTU) and federal delegated to municipalities (ITR).
All these sources of financing could be mobilised to facilitate the transition to full recovery of O&M costs through bulk user charges and, for green infrastructure, payments for ecosystem services (Figure 2.7).
Figure 2.7. Financing O&M of bulk water infrastructure in the PPA basin
Notes: Bulk water infrastructure = reservoirs and PISF; PFS = public financial support (federal, state); User charges = charges for bulk water supply; CBH = PPA River Basin Committee (part of the revenue from abstraction charges); Value capture = tax on the price increase of land served by bulk hydraulic infrastructure; PES = payment for ecosystem services (applies to green infrastructure).
Financing the O&M of bulk water supply infrastructure through user charges applied to large water users, as required by the "principle of user-pays", raises the issue of water pricing for the end users to whom these charges will be passed. Tariffs alone should be sufficient to recover the costs of operating and maintaining retail water infrastructure. Relying on the public budget to supplement tariff revenues would make it easier to obtain repayable aid (loans, bonds, shares). However, this “sustainable cost recovery” approach should be seen as an intermediate step towards the ultimate goal of “full cost recovery” (Cox and Börkey, 2015[27]).
The 2006 agreement (Termo de Compromisso) between the Federal and States Government established that the States would cover the PISF operational and maintenance costs. While the States agreed to establish water tariffs, the agreement does not specify that only households would pay. Two States in the PISF region (Ceará and Paraíba) already charge for water use and that affects all sectors including irrigation. Nevertheless, revenues are not enough to cover PISF O&M costs. Beyond the PISF case, irrigators in collective, public irrigated districts can pay a water tariffs to cover irrigation O&M costs. In those cases, water tariffs are an obligation set by the irrigation district operator, the public company CODEVASF, but they would not cover the additional costs related to PISF.
By setting a low-rate consumption cap, increasing block tariffs (IBT) send a stronger conservation signal than simple volumetric tariffs, but they entail higher administrative costs. User charges that cover the full costs of operating and maintaining bulk water (reservoirs and PISF) will increase the water bill for end users. Affordability issues need to be addressed. Social pricing of retail water could be considered by differentiating volumetric tariff or first block size (cheap block), or both, with lower tariff/larger block size for poorer households (e.g. those who have access to social benefits). The water conservation signal would however be better preserved by setting the same volumetric tariff/block size for all, but adding an additional levy on the water bill of the rich and redistributing the income to the poorest to help them pay the water bill (cross subsidy between rich and poor). The same reasoning applies to irrigators.
The low standard of living (in GDP per capita) in the PPA basin should not be an obstacle to recovering the costs of operating and maintaining bulk water infrastructure through user charges (and ultimately, water bills) considering the benefits of a well-maintained water infrastructure on the well-being of the population of the basin, such as increased irrigated area or productivity gains from improved health. The risk of power outage that Brazil has experienced in past years due to insufficient water levels in hydropower dams should sensitise stakeholders in the PPA basin to the need to ensure adequate O&M for bulk water infrastructure in the basin.
Implementing the principle of water pays for water
The principle of water pays for water consists of allocating the proceeds of abstraction charges collected in the PPA basin to PPA basin management. OECD (2017[28]) assesses the system of water abstraction charges in Brazil and suggests possible improvements (Box 2.11). OECD (2017[28]) also provides a checklist to help Brazil implement water charges (Box 2.12).
Box 2.11. 2017 OECD assessment and recommendations on water abstraction charges in Brazil
The state of play of water charges in Brazil
Five interstate river basins (federal waters) and six states (state waters) implement water charges (cobrança), including the state of Paraíba since 2015. The PPA river basin and the state of Rio Grande do Norte are only beginning to discuss the feasibility of water charges.
However, experience with abstraction charges suffers from several limitations:
First, charges are too low and not designed to influence the behaviour of water users.
Second, the existing charges do not consider the risk of scarcity or drought at the local level - their structure and level are similar across the country - nor do they reflect the opportunity costs of water use in the basin where they are levied.
Third, the charge rate is designed primarily to criteria of affordability and competitiveness, which should be better assessed and not hinder the incentive to address the risk of scarcity or drought.
Fourth, the setting of the charge rate by river basin committees creates tensions between government and users, and makes any rate increase difficult. Decision-making based on the individual risks of users would help manage trade-offs between stakeholders in the basin and make better use of charge revenues (based on a risk-benefit analysis of the projects proposed for the basin).
Ways forward
Charges should be designed to reduce water risks in the basin where they are levied and provide visible benefits to increase the willingness to pay of users. Pragmatically, the priority at first could be to target those with the largest water withdrawals to maximise the benefits in terms of managing the risk of scarcity and raising revenues, and to minimise the transaction cost of implementing charges. Likewise, the structure and rate of the charges could be roughly designed as a first step to start the process and send incentive signals to large water users.
To be more cost-effective, charges should be combined with other instruments such as water allocation regimes and minimum ecological river flows (direct regulation) and the promotion of best available technologies (information measures). Charges and their revenues should be an integral part of water resource plans that set priorities and ambition levels for scarcity risk management and guide project financing strategies. Projects should be commensurate with revenue raising capacity and provide visible benefits to water users in the basin; the principle of ‘water pays for water’ should be introduced so that the river basin agencies can effectively spend the money collected through water charges.
The effect of charges on the affordability of water bills (to which they are passed on) and the competitiveness of water users needs to be documented. Affordability and competitiveness issues should be addressed through targeted accompanying measures rather than exemption or reduction of charges. Reallocation of part of the charge revenues to charge payers would improve acceptability.
The National Water Resources Council (CNRH) created in 1997 at the federal level and State Water Resources Councils (CERHs) should provide clear guidance/criteria on the setting of charge rates and on the use of charge revenues. This should include rate bounds, monitoring and enforcement requirements, assessing side effects such as turning to uncharged water sources, ex ante assessment of costs and benefits of expenditure and publication of accounts. These criteria should aim to set prices according to local risks of scarcity.
Basin states should follow the recommendations of the river basin committee and coordinate on the setting of water charges. To do this, and more generally for better integrated management of the basin's water resources, a single water agency should be created in the interstate basins.
Source: OECD (2017[28]), Water Charges in Brazil: The Ways Forward, https://doi.org/10.1787/9789264285712-en.
Box 2.12. Charging for water abstraction and discharges: A checklist
How will the charges scheme link with permitting systems?
How will your charging scheme fit in with other mechanisms to manage water resources, in particular the use of permits to set limits and conditions on abstraction and discharges? And will your permitting and compliance monitoring systems ensure that charges are calculated fairly and accurately?
Ideally, the locations of all abstractions and discharges (or nearly all, if a risk-based approach is taken) would be identified and controlled through permits backed by routine compliance monitoring and enforcement where necessary. The permits would then form the basis for the charging scheme and the specific charge related to each user. All abstractions would have a means of measurement designed to ensure compliance with volumetric limits. Other permit conditions, such as restrictions on abstraction at low flows, would also have a means of ensuring compliance. Discharges should also have a volumetric limit and means of measurement, as well as emission limits to protect the environment and human health for the parameters in the discharge. There should be an agreed basis for monitoring the quality of the discharge at a frequency that meant that the results were statistically significant, auditable and appropriate to the type of process involved.
Designing the charging scheme
How will you structure the charges so that they align with policy objectives? For both abstractions and discharges, will you use the volume authorised on the permit or the actual volumes abstracted or discharged? The latter requires more effort to oversee: the water user or your inspector will need to record and report the volumes, and there must be a means of measurement of certified accuracy in place (e.g., a calibrated meter) because otherwise, you could be over- or under-charging. Your billing system must also be capable of calculating different charges according to the volume at the billing frequency that you choose.
Do you want to impose a separate administrative charge to cover the costs of managing and carrying out the technical assessment of applications for new permits or revisions to existing ones?
Do you want your abstraction charges to send signals about the degree of water stress and incentivise reduced consumption? And what do you mean by “water stress” or “water scarcity”? If it is stress because of excessive abstraction, will you rely on charges alone to achieve a sustainable balance with the available resource or will you also take other measures to reduce abstraction (e.g. by buying out entitlements or by forcible reductions in authorised volumes)? If scarcity is more dynamic, such as from low rainfall and the risk of drought, what will trigger the charging response? And how will you ensure that charge payers are aware of what is happening on a dynamic basis and, where possible, have access to advice about how to reduce their consumption?
For discharges, what signals do you want to send to polluters and how costly do you want to make the act of pollution? If you want to incentivise a reduction in pollution load from toxic substances, do the permits specify limits on, for example, pesticides, hydrocarbons, metals, cyanides etc.? And how will you reflect this in the charges scheme through a sliding scale from cooling water through to discharges from chemical works and mining operations? If you want to see improved water quality to protect human health and support target ecosystems, can you use charges to help achieve this faster than with progressively tighter limits for environmental-quality-standards-based permits?
Do you want to send signals about the value of effluent as a resource? In other words, where, when and in what volumes effluent discharges are made is important to other water users (providing that the quality is within permitted limits) and, although these matters can be specified in permits, do you want to reward discharges that benefit resources? Similarly, do you want to penalise abstractions through higher charges where the net return is low because the water has evaporated, been incorporated in a product, lost through leakage or taken up by growing crops?
How will you ensure that your charging schemes are flexible and adaptable to changes in water demand, environmental stress, climate change and drought? And what feedback mechanism will you build in to allow for periodic reviews of its effectiveness?
Source: OECD (2017[28]), Water Charges in Brazil: The Ways Forward, https://doi.org/10.1787/9789264285712-en.
The National Water Law of 1997 introduced charging for water abstractions (cobrança) and provided for the allocation of revenue from charges to water management projects in the basin where they were collected.2 But feasibility issues (public/political acceptability) have slowed the introduction of abstraction charges in Brazil. Only some states apply them, such as Ceara and Paraiba.
Since 2015, three river basins in the state of Paraíba have introduced abstraction charges (cobrança). However, their implementation is slow, with a recovery rate of less than 10% in 2017 (OECD, 2017[28]). AESA collected USD 890 000 in “cobrança” in 2020. This amount was entirely allocated to projects for the reuse of wastewater in agriculture in the three basins and for the O&M of state reservoirs. In the State of Rio Grande do Norte, drought has made it politically difficult to introduce such abstraction charges (OECD, 2017[28]).
Discussions are underway to introduce abstraction charges in the PPA basin and allocate a portion of the revenues to finance the O&M of the PISF. This could be justified if the public benefits of PISF were demonstrated. In the meantime, the absence of abstraction charges in the PPA basin seriously compromises the financing of the river basin plan (assuming implementation of the water pays for water principle). Indeed, the financial sustainability of CBH is essential in the search for synergies between the allocation of water and integrated water resource management (IWRM) (Figure 2.8).
Figure 2.8. Abstraction charges, water allocation and IWRM: a multifaceted interface
Note: In contrast to pure public goods, “merit goods” are provided through the market, but not necessarily in sufficient quantities to maximise social welfare.
Source: Adapted from Massarutto, A. (2007[29]), “Abstraction charges: How can the theory guide us?”, https://www.oecd.org/env/resources/40014641.pdf.
Abstraction charges aim to protect waterbodies from which the water was withdrawn against the risk of scarcity. In France, for example, the Adour-Garonne water agency has different abstraction charge rates depending on the nature and fragility of the water resource withdrawn. Likewise, the allocation of the charge revenues to CBH (in application of the principle of water pays for water) must firstly aim to prevent the risks of water shortage through IWRM.
The charge rate should not vary according to the category of user, as is often the case in OECD countries, where farmers and sometimes industry benefit from preferential rates. As is the case with water tariffs, the water conservation signal would be better preserved by setting the same floor rate for all abstractors, but adding an additional levy on rich abstractors and redistributing income for the poorest to help them pay the floor rate (cross-subsidy between abstractors). Another way to cross-subsidise between rich and poor abstractors without compromising incentives to save water would be to allocate more charge revenues to the poor than they pay out. This is what the Adour Garonne water agency does for the agricultural sector (“principle of solidarity”).
Rather than a simple volumetric charge, as put in place by the Adour-Garonne water agency, abstraction charges with an increased block structure could be considered, with a reduced first block size for the water bodies with a high risk of shortage. Any electricity subsidy to abstractors must be removed before introducing an abstraction charge. Box 2.13 provides an overview of the functioning of abstraction charges in France.
Box 2.13. Water abstraction charges in France
Water abstraction charges were introduced in France in 1964, when the six Water Agencies were created. Revenue from charges is collected and redistributed by the Agencies for investments to protect and improve water resources in their respective basins. The charge must be paid by all those who abstract water above a threshold set by each agency (which cannot be more than 10 000 m3 per year, or 7 000 m3 in areas with water scarcity). Abstraction at sea, aquaculture-related abstractions, and abstractions outside the low-water period and intended for the restoration of natural areas are exempt.
Water Agencies grant subsidies to water users (farmers, municipalities and industries) funded by abstraction and pollution charges paid by all water users with differentiated rates in each River Basin. For municipalities and domestic users, these charges are collected by water and sanitation services and then transferred to the Water Agency. These charges correspond to a certain extent to resource costs, defined as the opportunity costs of using water as a scarce resource in a particular way (e.g., through abstraction or wastewater discharge) in time and space. Resource costs equal the difference between the economic value in terms of net benefits of present or future water use (e.g., allocation of emission or water abstraction permits) and the economic value in terms of net benefits of the best alternative water use (now or in the future). Resource costs only arise if alternative water use generates a higher economic value than present or foreseen future water use (i.e., the difference between net benefits is negative). Resource costs are therefore not necessarily confined to water resource depletion (in terms of quantity or quality). They arise because of an inefficient allocation (in economic terms) of water and/or pollution over time and across different water users. Normally, environmental and resource costs are partly recovered through environmental taxes and charges (abstraction and pollution charges).
The highest rates are for water used as drinking water. In addition, the rates are differentiated by source (groundwater or surface water) and by zone, to take into account the relative scarcity of water and the pressure that withdrawal exerts on available water resources. As a result, the rate per m3 of water withdrawn can differ considerably. For example, the rates applied by the Adour-Garonne water agency in 2019-24 range from EUR cent 0.03/m3 for the filling of canals in an area without water deficit to EUR cent 5.8/m3 for potable water abstraction in deficit areas (Table 2.3).
The water abstraction charge reflects the “water pays for water” principle and is generally accepted as fair payment for the use of a scarce resource. However, the rates are too low to have a significant impact on water consumption, making the instrument more of a revenue-raising tool than an economic incentive.
Table 2.3. Water abstraction rates in the Adour-Garonne basin
Source: Notice of deliberation of the Board of Directors of the Adour-Garonne water agency of 19 September 2018.
Another issue is the distribution of the burden between users on the basis of a downstream/upstream and urban/rural "solidarity principle", with households paying much more than agriculture and industry. The related rate differentiation contradicts the polluter pays principle. For example, at the Adour-Garonne water agency, 65% of the revenue from abstraction charges is paid by drinking water companies (and passed on to the water bill), much more than their 11% share of the use of water resources (Table 2.4).
Table 2.4. Volume abstracted and charging of abstractions in the Adour-Garonne basin
Note: - = non-consumptive use.
Source: Adour-Garonne Water Agency (2021[30]), Homepage, https://www.eau-grandsudouest.fr/ (accessed December 2021).
In the PPA river basin, there are major water quality problems. In some planning units within the basin, about 85% of sewage is not treated. Municipalities oversee sanitation, but they have limited financial resources to set up proper sanitation. This issue is common to many countries throughout the world, and aggregation of services can be a way forward. In Spain, sanitation is generally done at inter-municipal level thus allowing for a financial solidarity mechanism between large and small municipalities. Small villages that are not able to afford the cost of treatment take part in the planning and water management at inter-municipal level. Some municipalities work with private operators through public-private partnerships for concession or lease contract (for example, in Valencia). In France, water pollution charges are differentiated according to water users, such as households, agriculture and industry – although they can be the same between users. Charges for pollution with domestic origin are based on the water consumption of the household. Table 2.5 compiles the pollution charge for domestic users for the Adour-Garonne River Basin (one of the six river basins in France) and Table 2.6 those for non-domestic users. These charges contrast with those for livestock and pollution with non-domestic origin in agriculture and industry, which are based respectively on number of livestock (above a certain level) and discharged pollutants.
Table 2.5. Pollution charge for domestic users in the Adour-Garonne River Basin, France
Table 2.6. Pollution charge for non-domestic users in the Adour-Garonne River Basin, France
Source: OECD (2017[28]), Water Charges in Brazil: The Ways Forward, https://doi.org/10.1787/9789264285712-en.
Promoting efficient water use
Tradable permit systems can cost-effectively manage the risk of water scarcity. Water trading refers to the process of buying and selling water rights. The terms of the trade can be either permanent or temporary, depending on the legal status of the water rights. Some economists argue that water trading can promote more efficient water allocation because a market-based price acts as an incentive for users to allocate resources from low-value activities to high-value activities. There are debates about the extent to which water markets operate efficiently in practice, what the social and environmental outcomes of water trading schemes are, and the ethics of applying economic principles to a resource such as water. Water trading markets have been set up in a few countries around the world, including Australia, Chile or the United States. In Arizona and California, these markets are used to re-allocate water rights between farmers and municipalities especially during droughts. These markets provide farmers with revenues while it is cheaper for municipalities to pay farmers not to use water rather than building expensive new water assets.
A bill to introduce water markets was submitted to Congress in 2017, but the text has not been examined yet. In Brazil, rights to use water can be granted to both public and private parties. Water rights do not transfer ownership of water, but allow the use of water for a specific period of time, under specific conditions (OECD, 2017[28]).
Establishing a water market requires setting an abstraction cap that is acceptable to all stakeholders, including the environment and local communities. The most cost-effective approach to do this is to build a “risk matrix” that helps manage trade-offs between water uses while protecting the integrity of the water resource. It is also the best way to avoid conflicts of use and to develop a “water culture”. The first step is to identify and define (on a scientific basis) the pool of water resources. Second, the risks to water-dependent environmental, cultural and social values (“in situ values”) must be assessed as well as the opportunity cost of not taking water for economic development (“development risk”). Third, the acceptable level of water abstraction is set by weighting in situ risks against development risks (the risk matrix). The sophistication of this approach depends on the level of risks incurred (value of the investments envisaged, number of populations dependent on water resources, presence of protected natural areas, etc.).
The geographic scope of a water market should ideally be at the scale of the PPA basin, with the basin being the natural hydrologic unit. However, it is common to organise water markets at the sub-basin (catchment) level, as in Australia, or even at the irrigation district level, as in Chile, for practical (presence of gauges) or administrative feasibility reasons. The greater the number of market participants, the more cost-effective the market is in allocating water. Ideally, all the water in the basin should be involved in the market to preserve the hydrological logic.
The period of validity of water rights should be differentiated according to the risk of water scarcity, as mapped in the PPA basin, with annual allocations for areas at risk and longer-term entitlements for areas well provided with water. The latter would obtain higher quotations on the markets because they offer greater security of supply.
Part of the proceeds from the auction of water rights would cover the operating costs of the market (brokers, etc.) but the majority would be allocated to financing IWRM. Public funds for the rural development policy could partially offset the impact on local communities of permanent transfers of water rights to another region. However, if unregulated permanent transfers would be allowed, there is a risk of concentrating water in the hands of a few wealthy water users, who could buy off all the water from numerous small water users. This can have consequences on the local and regional social dynamics, unemployment rates and demographic migrations. Therefore, a proper framework to access the costs and benefits of water market is recommended, as proposed by Wheeler et al. and Grafton (2017[31]; 2019[32]). According to that framework, the existing governance and institutional arrangements and the costs and benefits from trade should be evaluated before the water market implementation. Then, institutional and policy changes should be implemented, including water rights registration and monitoring and enforcement capabilities. Finally, externalities should be continuously monitored and market changes should be implemented as required.
Arrangements should be made to prevent hoarding – such as through 'use it or lose it' policy – and regulatory capture by the market operator. Satellite monitoring combined with modelling of stream flow could help monitor and enforce water rights to surface waters. Boxes Box 2.14and 2.15 provide an overview of the functioning of water markets in the western United States and in the Murray-Darling Basin, Australia.
Box 2.14. Water markets in the western United States
Property right to water
Since 1850, California applies riparian rights for water. The right entitles a landowner to use water on land that he owns adjacent to a stream (“riparian” land). The landowner is allowed to make “reasonable use” of the water if this does not impact the rights of other riparian owners. However, no specific quantity attaches to a riparian right, which is de facto subject to imprecise sharing in the event of a shortage.
This arrangement may work in a region with abundant surface water but not in an arid region, which is why California introduced appropriative water rights in 1855 (while retaining riparian rights). Colorado introduced prior appropriation in 1876 and repealed its riparian doctrine in 1882. Appropriative rights differ fundamentally from riparian rights. They are based on the time and the quantity of the initial diversion (first in time, first in right). In case of water shortage, priority ranking is based on seniority.
However, the transfer of an appropriative right is not a simple transaction between two parties. All the western states of the United States have a legacy of unreliable records due to the slapdash way many appropriative rights were created in the 19th Century. This is an impediment to transferring water rights to another party. Another is the no-injury rule. The rule stipulates that changes in a water right shall not adversely impact the water right of any third party, whether junior or senior. If harm is claimed, the onus is on the transferor, not the challenger, to prove no third-party injury. In Colorado, for example, any impact from a transfer, no matter how small or far in the future, constitutes an injury.
Besides these two impediments to the transferability of appropriative water rights, most western states declare in their constitution that their waters belong to the people of the state. It does give the state an interest in how the water is used and transferred for the public benefit. The distinctive public interest in the use of water also means that all water use must be “reasonable”. This renders all water rights fragile. A water right that was reasonable when first recognised may become unreasonable as hydrologic conditions change. For example, in 1983, the California Supreme Court made the landmark ruling that a 1940 appropriation right could be modified ex post because of harm now occurring to Mono Lake.
When do water markets occur?
Physical connectivity between seller and buyer is crucial for exchanging water. For example, in California’s southern San Joaquin Valley, the construction in 1975 of a canal connecting the aqueducts of the federal Central Valley Project (CVP) to the east and the State Water Project (SWP) to the west generated a cascade of water exchanges. Another example is the trans-mountain tunnel that conveys Colorado River water from western to eastern Colorado. By special legal treatment, the no-injury rule does not apply to the transferred waters, which are no longer subject to prior appropriation once transferred to the east (more precisely the Colorado-Big Thompson project, C-BT). C-BT contracts make all units of water equal and transferable. While data is incomplete, it appears that most of the surface water transferred in the US West was “contract water” moving within supply system boundaries, for example, in the C-BT system in Colorado and the SWP/CVP systems in California.
It is widely held that there needs to be significant re-allocation of water use in the US West. However, over the period 1990-2010, most surface water transferred involved one-year leases, providing short-term flexibility, not long-term re-allocation (only about 5-10% of the amount transferred annually was transferred long-term or permanently). Modification of the property right to water is essential if there is to be more significant long-run reallocation of water use given the complexities in existing water rights.
Source: Hanemann, M. and M. Young (2020[33]), “Water rights reform and water marketing: Australia vs the US West”, https://doi.org/10.1093/oxrep/grz037.
Box 2.15. Box 2.15. Water markets in the Murray–Darling Basin, Australia
The Murray-Darling Basin (MDB) covers 14% of mainland Australia. The volume of water demand from cities and for energy production is minor compared with the requirements for environmental flows and irrigation. Three quarters of Australia's irrigated crops and pastures are grown in the Basin.
The MDB is characterised by an extreme variability of river inflows. The risks of irrigation water shortage resulting from over-allocation of irrigation water led authorities to close the allocation of new water entitlements. In addition, a cap on water use was introduced in 1995 to limit extraction of water from the MDB to 1993-94 levels. This was the first step to introducing water trading into the MDB. Unbundling water entitlements from the right to use and own land was instrumental in the development of a functioning water market in the MDB, which took more than a decade between 1994 and 2006. Unbundling allows water to be transferred independently of land between users, without the need to consider land use requirements.
The establishment of water markets also provides a mechanism to address the risks of environmental water shortage through reallocating water between irrigators and the environment. In 2002, a first step was taken in reallocating water to the environment, through the Living Murray Initiative. The Water Act (2007) went further by providing for a sustainable diversion limit (SDL) for each river and groundwater management area in the MDB, for implementation in 2019.
The Basin Plan (2012) sets the amount of environmental water that needs to be recovered to meet SDLs. In 2008 nearly AUD 9 (USD 7.5) billion had been provided to recover water for the environment through increased irrigation efficiency such as on-farm irrigation upgrades, upgraded water delivery infrastructure and metering (65%), and buybacks of water entitlements (35%). In 2012, the federal government committed a further AUD 1.8 (USD 1.8) billion to address operational constraints restricting the regulated delivery of environmental water throughout the MDB. Around 4 000 GL/year should be recovered by 2025, 55% via water buybacks and 45% via savings and infrastructure, compared to the long-term average water use in irrigation of 11 000 GL/year.
In this way, the management of environmental flows in the MDB shifted from direct regulation to a combination of direct regulation and tradable permit system (buybacks of water entitlements), introducing more flexibility. On the other hand, subsidising irrigation infrastructure to increase environmental flows is not cost-effective; the average cost per litre of environmental water has been estimated up to six times that of direct purchases of water entitlements.
There are two types of water entitlements in the MDB depending on their level of security. The availability of water for holders of "general security" entitlements is announced as a proportion of entitlement, commonly referred to as an "allocation". The announced allocation depends on the resources currently available in storage and the resources expected to be available during the season. “High security” water entitlements generally have their allocated water delivered each year even though they are also subject to announced allocations. Allowing for two types of water entitlements with varying levels of security allow users to express different risk preferences reflected in the price of entitlements.
Source: Grafton, Q. and J. Horne (2014[34]), “Water markets in the Murray-Darling Basin”, http://dx.doi.org/10.22459/GW.05.2014.08.
Source:
Combining policy instruments
Instrument combinations may increase cost-effectiveness and public acceptability against the use of an economic instrument alone in meeting PPA basin management objectives. Here, we look at three combinations of instruments: (1) abstraction charges and water markets; (2) abstraction charges and direct regulation; and (3) water markets and direct regulation.
Abstraction charges and water markets
Applied to the same target group, the effect of introducing abstraction charges in the presence of a water market (cap-and-trade of water permits) differs according to the rate of the charges. Charges set at a rate lower than the initial market price do not change the overall level of abstraction set by the cap but reduce the demand for water permits; the market price will gradually align with the charge rate (if all abstractors are obligated under both instruments). If the charge rate is higher than the market price, the incentive for marginal abatement (water saving) is increased, the abatement then exceeding the cap set by the water market. The demand for water permits, and therefore their price, would then drop to zero, with abstraction charges being the only active instrument.
Despite such apparent incompatibility in terms of effectiveness, the combination of instruments could improve cost-efficiency when abstraction charges are used to secure a minimum market price ("floor price"), again if all abstractors are obligated under both instruments (i.e., if the two instruments apply to the same abstraction units). While a floor price can reduce static efficiency in situations where the water market would otherwise produce permit prices below the floor value, such an effect, as well as the relative price certainty it engenders, usually increases dynamic cost-efficiency compared to a "pure" tradable permit system (TPS). The use of a floor price would also help capture windfall rents created by free permit allocation. Abstraction charges could also be used to secure a “ceiling price” (or “safety valve price”) by allowing abstractors to withdraw water for which they do not hold a permit in return for an abstraction charge at a ceiling rate. However, if a ceiling price provides TPS participants with certainty about the costs of compliance, it reduces certainty about the environmental outcome and can reduce dynamic incentives.
Abstraction charges and water markets can lead to creating water scarcity geographically, sectorally and temporally (i.e., creating a “hot spot” of scarcity). Applying an additional charge to participants in a water market located in a sub-basin where withdrawal creates higher marginal scarcity than in other sub-basins can resolve this problem. Figure 2.9 illustrates this concept. Abstractor B, whose abstraction produces much higher marginal damage to water scarcity than other abstractors, is subject to both the water market and the abstraction charge, which increases its incentive to save water. If the charge rate is equal to the differential between the permit price and the total marginal damages on water scarcity of the abstraction concerned, as illustrated, then total static cost-efficiency is maintained and the overall efficiency is increased (although the prices of the permits decrease if the water market cap is not adjusted to compensate).
Although the combination of price and quantity-based instruments may produce greater welfare than either one alone, very few of these combinations have been used in practice. Applying an abstraction charge alongside a water market increases the administrative burden on participants and relevant authorities. The transaction costs associated with implementing and administering a water market increase with the use of price floors and ceilings. However, hybrid price-quantity instruments improve flexibility to deal with uncertainties. A floor price in a cap-and-trade system provides a continued incentive to save water if the marginal costs of saving water are overestimated (as well as minimal revenue generation), while a price ceiling prevents excessive costs if the marginal costs of saving water are underestimated (along with maximum compliance cost certainty). Likewise, a cap provides the certainty of water saving that an abstraction charge alone cannot provide (thus reducing the aversion to the charge).
Figure 2.9. Combining an abstraction charge with a tradable permit system to address water scarcity hot spots
Source: Adapted from Drummond, M. et al. (2015[35]), Methods for the Economic Evaluation of Health Care Programmes, 4th ed., Oxford University Press.
Abstraction charges and direct regulation
When both instruments target the same abstractors, direct regulation helps overcome market failures (e.g. principal-agent problems) and information failures that hamper the effectiveness of pricing instruments. Conversely, abstraction charges can reduce the “rebound” effect that direct regulation can induce.3 Direct regulation combined with a pricing instrument can also reduce the occurrence of water scarcity hot spots; while pricing instruments influence total water withdrawal, direct regulation can influence the location of abstraction and its timing.
In terms of cost-efficiency, the addition of direct regulation to an abstraction charge would seem superfluous if the marginal cost of water savings implied by the regulation is lower than the value of the charge. Indeed, abstractors would have already complied with such regulation to achieve water savings at a cost lower than the charge. Figure 2.10 illustrates this for a given abstractor for which water savings are required or incentivised by regulation. But in the real world, static efficiency is increased if the regulation requires or induces water savings with marginal costs less than the value of the abstraction charge (e.g., stringency level A to level C in Figure 2.10) that would not have been achieved due to market failures. However, if the water savings levels required by regulation have a higher marginal cost than the value of the abstraction charge, then the charge will not result in any additional water saving (e.g., stringency levels D and E in Figure 2.10).
Generally, for a given level of water savings, combining a pricing instrument with direct regulation would often be more cost-efficient than using direct regulation alone, as the pricing instruments equalise the marginal incentive of water savings where direct regulation cannot. In addition, a predictable (pre-planned) increase in the stringency of regulatory requirements and abstraction charge rates increases dynamic cost-efficiency.
Figure 2.10. Cost-efficiency of a combination of abstraction charge and direct regulation
Source: Adapted from Drummond, M. et al. (2015[35]), Methods for the Economic Evaluation of Health Care Programmes, 4th ed., Oxford University Press.
By combining a pricing instrument and direct regulation to tackle the occurrence of scarcity hot spots, static cost-efficiency is maintained, with potential overall efficiency increased if the additional marginal cost of water savings from the secondary instrument is equal to the difference between the marginal cost of the primary instrument and the marginal damage to water scarcity.4 As discussed above, this is also the case with the combination of an abstraction charge and a TPS (Figure 2.9).
A well-designed combination of direct regulation and abstraction charges would be more publicly and politically acceptable than resorting to a high charge rate or stringent regulation to achieve a given level of water savings. Using regulation to supplement an abstraction charge can reduce uncertainty about short-term and longer-term actions to save water, especially if the charge rate is set too low (compared to water saving costs).5 However, the flexibility of this combination is likely to decrease as the stringency of regulation increases.
Water markets and direct regulation
Direct regulation can be used to supplement a water market to prevent water scarcity hot spots. However, supplementing a water market with direct regulation of any design, scope and level of stringency will not reduce the total volume of water abstracted, which, ceteris paribus, will remain on aggregate at the level of the cap. Likewise, the use of water markets to support direct regulation does not reduce the aggregate water savings beyond what would be expected from the use of regulation alone (because once each abstractor meets its regulatory requirements, the demand for and the price of water permits drops to zero).
A water market (an aggregate limit imposed by a cap-and-trade system) can be used to increase flexibility and reduce the cost of complying with regulation specific to subgroups (e.g. sector, irrigation district, type of industry). Abstractors that outperform regulation can generate credits that the underperformers can buy to fill their deficit. This is the essence of a baseline-and-credit system.
Using direct regulation to supplement a water market has a positive impact on static and dynamic cost-efficiency if regulation reduces market and information failures that limit the influence of the price signal produced by the water market. However, the regulation must require or incentivise the use of technologies or behaviours with a marginal cost of water savings below that of the permit price to maintain static cost-efficiency. Otherwise, total compliance costs are increased with permit demand and prices likely reducing in response, diminishing the efficiency benefits of a water market.
An exception to this is when a direct regulation attempts to address water scarcity hotspots, with marginal costs of water savings imposed that are equal to the difference between the permit price and the total marginal damages on water scarcity of the abstraction concerned. In such cases, static cost-efficiency is maintained, and overall economic efficiency is increased.
Using a water market in addition to regulation can achieve a given level of water savings more cost-efficiently (both statically and dynamically) than using direct regulation alone. This is because pricing instruments equalise the marginal incentive to save water when direct regulation cannot. However, to maintain cost-efficiency the cap or baseline of the TPS must be set considering the water savings expected from the regulation.
Political acceptability is likely to differ depending on which instrument is primary and which is secondary. Using direct regulation to resolve hot spot issues in a water market is likely to increase the total costs of compliance, thereby reducing acceptability compared to a single water market. The same applies to more general regulations (e.g. broadly applicable minimum performance or technology standards), even if the measures or behaviours induced have marginal costs lower than that of the permit price, the reduction in flexibility that this represents may reduce acceptability. Additionally, the nature of a water market means that permit prices are likely to vary over time - perhaps substantially. While it can lead to inefficiencies and reduced feasibility, a supplementary direct regulation can help address uncertainties and ensure a minimum level of environmental effectiveness in the short (and potentially long) term. On the other hand, by adding a water market to a regulatory instrument, increasing flexibility and the possibility of reducing compliance costs, acceptability and the ability to deal with uncertainties can be increased.
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Annex 2.A. Action plan
The tables summarise the main actions presented in Chapter 2.
Annex Table 2.A.1. Strengthening multi-level governance and the use of economic instruments in the Piancó-Piranhas Açu River Basin
Notes
← 1. Homogeneity of geomorphological, hydrographic and hydrological factors characterises the Hydrological Planning Units (UPH). UPHs include subdivisions of the river basin, sub-basins of tributary rivers, or segments of main rivers with spatial continuity.
← 2. Article 22 of the water law caps administrative costs at 7.5% of the total collected.
← 3. The rebound effect occurs when increasing water use efficiency reduces the cost per unit of agricultural or industrial goods produced (or per unit of water supplied to end users), increasing water consumption according to the price elasticity of demand for those goods or services.
← 4. A ‘primary’ instrument provides the general incentive or requirement for water savings, with a broader scope than the 'secondary' instrument with which it is combined.
← 5. A regulation requiring the adoption of a given technology (e.g. drip irrigation) often induces a more permanent change than the water-saving incentives that a pricing instrument can induce, which can be reversed after the price signal is reduced or removed.