Implementing Water Economics in the EU Water Framework Directive

Cross-cutting issues

Lack of or patchy data, discomfort with methodologies have been recurrently mentioned as obstacles to robust decision-making. While some participants questioned the extent to which actual decisions are informed by the (mandatory) economic analysis and data, there was an agreement that the implementation of the WFD would benefit from improvements in these domains. Of note: participants deliberately stayed away from issues with definitions, are these are best addressed in other fora.

Methods and tools for economic assessment and investment planning

Economic assessments are required to support robust and effective investment planning. Participants note that a lot of money is going into the water sector, but it is not always sure whether it is best used to the benefit of the water uses and, more generally, communities.

Typically, investment planning still builds on previous experience and years, a backward-looking approach increasingly at odds with the imminent challenges to and policy demands on the water sector. This is unlikely to lead to robust decisions as i) we do not know whether past investment levels and strategies were appropriate and up to the already fully defined challenges; and ii) a new context has emerged: it is characterised by more uncertainties about water availability and demand, increased water-related risks, increased costs triggered by more stringent environmental policies, the need to adapt to climate change, and most recently a more challenging economic context. It follows that relying on past experience is unlikely to inform robust investment decisions. The workshop revealed a great interest in a better use of scenario-analysis to take account of the prevalent uncertainties, namely multiple scenarios.

Valuable economic assessments would benefit from methods and tools to characterise good adaptation to climate change and resilient policies and infrastructures. A first step is to develop robust water balances in order to understand how much water is available and can be allocated to competing uses (including the environment). The WFD (Annex III) requires a long-term projection of both water supply and demand as the basis of the economic analysis. Consequently, some guidance on water allocation regimes and e-flows has been developed under the Common Implementation Strategy (CIS), but more work is required to overcome ambiguities and support implementation. Future work under the Working Group on Water Scarcity and Droughts is topical and timely.

Moreover, a challenge is to combine more robust scenarios about climate change and its impacts on water availability and use, with the appropriate level of disaggregation of data to support action. On-going and future work of DG CLIMA is topical here. Risks of maladaptation are significant and can derive from poorly designed CBAs and high discount rates.

Planning and investment are also hampered by the transboundary nature of quite a few water bodies and the need to coordinate action across administrative borders. The workshops have touched on the issue occasionally, and it needs to be more systematically factored in. The transboundary nature of water flows affects the capacity to derive robust economic analyses: the costs and benefits of a programme of measures often do not stop at administrative boundaries and should be assessed at basin or aquifer level. It follows that CBAs (Cost-Benefits-Analyses) usually fail to satisfactorily account for physical and ecosystem reality. Moreover, different countries value water differently; and use different economic policy instruments for water management and related issues.

Different EU member states have different experience with a variety of policy instruments. As regards economic policy instruments, for instance, experience varies in relation to access and use of EU Funding instruments; the number, level and structure of charges collected by water agencies; how water, soil and biodiversity are connected in institutions and policies. A lot could be gained by more systematically sharing about the multiple instruments, the details of fees and taxes, methods and ways in which economic assessments are developed1.

The ambivalence of prevalent economic assumptions – the case of water-use efficiency and increasing block tariffs

The case of water use efficiency illustrates some of the limitations of prevalent economic analyses when applied to water. Another illustration derives from the analyses of tariff structures for water supply and sanitation services.

Issues with water use efficiency as a response to water scarcity

Water use efficiency seems to be an obvious response to water scarcity and contribution to good status of water bodies (both surface and groundwater). In Europe, policy efforts seem to bear fruit as the overall water use efficiency is increasing: for instance, total water abstraction for agriculture is going down and water use per hectare has decreased from 557mm to 382mm, driven by precision irrigation, higher costs of using water, water quotas and other measures.

In practice, the situation is more complex. First, experience shows that, if not properly captured in water allocation regimes, water saved through efficiency measures rarely benefit the environment and communities downstream. Quite on the contrary, efficiency measures can lead to an extension of irrigated area and / or a shift towards more water-intensive uses (including more thirsty crops). Such rebound effects can enhance the dependence on stable water flows and reduce / weaken the resilience of water systems to climate risks. It needs to be controlled, through the definition of return flows, curtailing water rights (to reflect efficiency gains), or limits to the surface of land that can be irrigated. In addition, the use of pricing and alternative sources of supply in times of scarcity contribute to stabilising the water demand over time in an efficient manner.

In Europe, while water abstraction for agriculture is going down, overall water consumption remains stable. And energy use increases. This aggregate vision masks huge discrepancies at across countries.

Limitations of increasing block tariffs

During the workshops, several countries have shared their experience with increasing block tariffs to manage demand for water and to generate revenues to cover the costs of service provision. Increasing-block tariffs provide water for basic needs at a lower price. They can be progressive when they meet two conditions:

• highest tariff blocks are set well above the average cost of service provision and income generated serves to cover the costs of the subsidised lower block; and

• they take into consideration that poor households can actually consume more water than wealthy ones (because they have larger families, or less water-efficient networks or appliances).

In practice, well-targeted tariff structures are complicated and may be perceived as opaque. They require information on water use and household features (for instance on the size of households, age and physical conditions of individuals) that are usually not accessible to service providers. This explains why sophisticated tariff structures can fail to target the households most in need: while authorities and service providers allocate considerable amounts of time and efforts to designing and adjusting tariff structures to accommodate multiple policy objectives, they usually fail to combine efficiency and equity objectives.

Moreover, the efficiency of tariffs as instruments to manage domestic water demand depends on households’ response to price signals. The literature suggests that this response is usually limited, in particular in the short term. Accompanying measures, such as transparent water bills and nudging, can enhance the elasticity of domestic water demand to price.

Equity and Environmental justice in the context of the WFD

Environmental justice and equity emerged several times in the course of the workshops. As the point above suggests, poorly designed tariffs for water services – most frequently in the case of sophisticated tariff structures – may trigger equity issues when poor households still face affordability issues for what constitutes an essential service. This problem may exacerbate with increasing water stress and resulting higher water tariffs. Persistent large gaps in the price of water services across the broad water user sectors (households, industry, agriculture), even when allowed by policy-makers for a long time, may at some point trigger equity questions in the political domain. Similarly, policymakers may also be increasingly confronted with equity arguments as regards the divergence in water price across regions, that follows from persistent differences in water availability. Finally, any investment backlog or failure to properly operate and maintain existing assets transfers risks and financial burden to the next generation(s), raising intergenerational equity issues.

It follows that decisions on the level and structure of tariffs for water services should reflect thorough analyses of distributional issues and also consider the use of flanking policy instruments outside of the water policy domain. For instance, rather than moving to more uniform water prices over regions differing in the degree of water scarcity, policy makers could consider countervailing financial transfers in the form of investments in water efficiency.

Discussions at the workshops also reported situations where financing stringent environmental policies through water bills can disproportionately affect small communities, who contribute relatively modestly to overall water pollution. One option to address this issue, is to consider financing arrangements that provide targeted support to small communities’ investments in abatement and prevention, in particular in view of the usually relatively difficult access and expertise of private finance. Aggregating water services at a larger geographical scale or affecting fiscal revenues to wastewater collection and treatment can be parts of the solution.

More generally, it is not clear how the WFD and its core principles take into account unequal exposure and vulnerability to risks of poor status of water bodies. Urban and rural communities, upstream and downstream areas will be affected in different ways. In the new context sketched above, a thorough assessment of how these discrepancies are factored in the WFD would seem relevant.

Note

← 1.  France has developed a methodology for the economic analysis of disproportionate cost, based on a tool that facilitates the use of economic analysis at sub-sovereign level. Water agencies use it when preparing the Programme of Measures. The tool is being updated for the fourth River Basin Management Plans by a group of practitioners and environmental economists. The main goals are to update values for existing benefits and new monetised benefits, make the assessment more robust, and make the tool more user friendly (see the highlight of the workshop on the Polluter Pays principle for more information).