Manual for the implementation of the economic aspects of the Water Framework
Directive
Introduction
Water resources for human consumption, agricultural production and environmental
needs are very limited. The world is enduring a serious water crisis with far-reaching
economic and social implications. Its cause is essentially the unsustainable
management of water resources, and not primarily the water scarcity as such. Current
calls for efficient use of those resources recognize the need to manage world’s scarce
water resources carefully to ensure their continued availability and high quality.
Given the numerous and increasing pressures on water resources, due to
over-
exploitation of existing aquifers ,insufficient recharge due diminishing precipitation ,
excessive and inadequate use through agricultural activities or tourism and conflicting
interests between various users it is vital that effective economic instruments clearly
address the problems and help secure these resources for future generations. The need
for economic analysis is explicitly manifested in the recently adopted EU Water
Framework Directive (2000/60/EC) which calls for the application of economic
principles, economic methods and economic instruments for achieving good water
status for all EU waters in the most effective manner.
Economic issues are mainly dealt with in Article 5 (Characteristics of the river basin
district, review of environmental impact of human activity and economic analysis of
water use), Annex III (Economic analysis) and in Article 9 (Recovery of costs for
water services) of the Directive (WATECO 2002). However, economic elements are
found in other parts of the Directive’s text. Overall, the implementation of an
integrated water management framework from an economic perspective can be
described in a three step approach consisting of:
The economic analysis of water uses in each River Basin District
(RBD) (article 5)
The assessment of current levels of cost-recovery of water services
including environmental and resource costs (article 9)
The selection of the programme of measures on the basis of costeffectiveness criteria to reach the environmental objectives of the water
framework directive (article 11)
Therefore, the economic analysis of water use must contain information in sufficient
detail for the calculation of the recovery of costs of water services1, the contribution
of each water use to the total cost of water services and information to make
judgements on the cost effective combination of measures in the programme of
measures in 2009 (Annex III). This manual intends to develop guidelines and
practical recommendations for undertaking the economic analysis required under
Water Framework Directive. In this respect it provides methodological guidance and
tools and approaches for the implementation of the above functions of the analysis
and highlights how economics can be integrated in sustainable water management and
water policy decision-making.
The economic analysis of water uses
According to article 5 a first step in the implementation of the economic elements of
the Directive is the identification of the main activities, water uses, which cause
significant impacts and pressures on the status of surface water and groundwater in
each river basin. The Directive does not specify a list of water uses to be considered
but states that the analysis should at least consider industry, households and
agriculture. This involves an assessment of the residential, industrial, agricultural and
tourism water needs in the area. This will include information on the population
connected to public water supply system and those with self-supply, the total cropped
area, cropping patterns, gross production and income of the farming population for the
1
According to the Directive
‘water services’ means all services which provide, for households, public institutions or any economic
activity: (a) abstraction, impoundment, storage, treatment and distribution of surface water or
groundwater, (b) waste-water collection and treatment facilities which subsequently discharge into
surface water. (article 2) and
‘water uses’ means water services together with any other activity identified under Article 5 and Annex
II(where it is stated that water uses should be at least disaggregated into households, industry and
agriculture) having a significant impact on the status of water. (article 2)
agricultural sector, and the total number of tourist days and employment and turnover
in the tourism sector. The key economic drivers influencing pressures and water uses
need to be determined including (a) the general socio-economic indicators such as
population growth, income, and employment and (b) the key sector policies that
significantly influence water use (e.g., agricultural and environmental policies)
Foreseen trends in key water uses up to 2015 should also be defined with the
final aim to develop a baseline scenario. Long-term forecasts are needed according to
article 5 to identify whether there is a gap in water status between the projected
situation and the Directive’s objectives by 2015. Besides to trends in physical
parameters and key socioeconomic drivers, trends in water policy variables (such as
planned investments in the water sector or development of new technologies) should
be also taken into account.
The assessment of the recovery of the costs of water services
Article 9 clearly states that Member States must ensure by 2010
That water pricing policies provide adequate incentive for users to use
water resource efficiently
An adequate contribution of the different water uses to the recovery of
the costs of water services.
In complying with this obligation, Member States may take account of the social,
environmental and economic effects of the recovery.
According the article, the full economic cost of water services includes the
financial cost of water companies, the environmental and natural resource costs.
Although environmental and resource costs are introduced in the article 9 of the
Directive they are only defined in the Wateco guidance document (WATECO 2002).
According to guidance’s glossary of terms:
Financial cost: includes capital, operation, maintenance and administrative cost for
the enterprises of water supply and sewerage including the irrigation water
companies for the agriculture sector.
Environmental cost represents the costs of damage that water uses impose on the
environment and ecosystems and those who use the environment (e.g. a reduction in
the ecological quality of aquatic ecosystems or the salinisation and degradation of productive
soils whereas
Resource cost represents the costs of foregone opportunities which other uses suffer
due to the depletion of the resource beyond its natural rate of recharge or recovery
(e.g. linked to the over-abstraction of groundwater).
Economic analysis must be performed for all water uses to assess the
contribution of the different water uses, to the recovery of the costs of water services.
Water services include abstraction, impoundment, storage, treatment and distribution
of surface water or groundwater, along with wastewater collection and treatment
facilities. Table 1, illustrates schematically the disaggregation of the total cost of
water services.
For the financial cost, typically, this type of information can be collected from the
provider’s annual production account or balance sheet.
Environmental Cost refers to the external social welfare loss resulting form the
degradation of water quality due to anthropogenic pressures to water resources. From
an economic perspective water resources (aquifers, wetlands, marine or coastal
ecosystems, river basins) if in good ecological status provide a diverse array of goods
and services that directly or indirectly translate to economic services and values to the
human population and thus contribute to the social well-being. Water-related goods
and services include irrigation for agriculture, domestic and industrial water supply,
recreation, nutrient retention, flood control and protection, biodiversity as well as
bequest, existence and altruistic among others (Birol et al. 2006b). However, many of
the values associated with functions performed by water resources are non-marketed
and hence do not have readily available monetary values attached to them. To capture
the economic value of environmental resources, and accordingly estimate the welfare
loss associated with ecosystem degradation, a variety of valuation techniques have
been developed. The dramatic increase in the publications using non-market
environmental valuation methods over the past decade, has led to the establishment of
numerous online databases2 to provide information and data contained in thousands of
primary environmental valuation studies conducted since the early 1980s. Since the
implementation of primary studies in each river basin is time demanding and
expensive valuation databases should be consulted to elicit estimations of the
environmental cost which can be transferred after the necessary adjustment from the
study site to policy site.
Resources cost is the cost imposed on society due to resource exploitation resulting in
its non-availability for future use. Resource cost therefore relates to the value of the
opportunity foregone by exploiting and using a water resource in the present period
rather than at some time in the future. It also incorporates increases in the costs of
future resource use and exploitation that occur as a consequence of current use and
exploitation. For example increases in costs of future groundwater pumping in
alternative, less easy accessible places. The Wateco guidance document (WATECO
2002) states that the resource cost can be calculated as the difference between the price
which clears the market (total demand equals total supply) under scarcity and the
normal price of water. In the literature resource cost is approximated by the price of
the backstop technology (desalination, wastewater or other) to cover the excess
demand (Koundouri 2004).
2
Four of the most popular online databases include the Environmental Valuation Reference Inventory
(EVRI), the Envalue, the Ecosystem Services Database (ESD) and the Review of Externality Database
(RED).
Once the total cost of water services is determined and the revenues of water
companies are calculated the cost- recovery level for each water use can be estimated
according to the formula:
total revenues − subsidies
total cos ts
to assess whether the cost-recovery objective of the Directive is met.
The economic assessment of potential measures for reaching good water status
The economic analysis according to the Directive should feedback in the
identification of a cost-effective set of measures to reach good water status and full
recovery of the cost of water services. The package of measures should intend to
assist policy makers in the preparation of river basin management plants that will
ensure sustainable, equitable and efficient water resources management. Thus cost
and benefits associated with the proposed measures as well as distributional and
equity effects should be assessed so that the least cost alternative for providing the
same beneficial objective is encouraged (WATECO 2002).
Economic instruments for efficient water pricing and optimal allocation of scarce
water resources among different uses include water abstraction taxes, subsidies to low
income households, pollution taxes, tradable permits and voluntary agreements (Birol
et al 2006a). Each measure and water policy is associated with each own costs and
benefits and should be judged in a long-run cost-effectiveness analysis basis to
identify the optimal set of measures adequate to creative incentives for sustainable
water resources use. (Koundouri 2009, Birol and Koundouri 2008, Koundouri 2007).
Equity considerations regarding the distribution of the financial impact among
different affected parties should also be taken into account. The WFD proposes
effective tools for water management and allocation (over space and time), however,
it may also lead to socially undesirable distributional effects in the society.
Policymakers should use economic and social policy to smooth the undesirable
distributional impacts.
Conclusions
The WFD stresses the need for economic instruments and measures to support policymaking towards full cost recovery of water services according to the polluter pays
principle. It is likely that a range of economic instruments are likely to be required as
part of the programmes of measures for the WFD. The selection of the final package
of measures and the subsequent development of river basin management plans should
be made on socio-economic and distributional grounds according to Costeffectiveness and cost-benefit analysis. However, economic analysis will not be able
to contribute meaningfully to decision-making unless it is based on and integrated
with good technical analysis. Besides integration with technical analysis, involvement
of stakeholders at all stages of the implementation is vital to ensure efficient,
equitable and sustainable allocation of water resources in Europe.
References
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