International Workshop on Hydro-Economic Modeling and Tools for Implementation of the European Water Framework Directive Valencia, Spain, 30 – 31 January 2006 The Economic Value of Water Ingo Heinz University of Dortmund, Germany

“Water industry – a business with increasing profits in future” (Pictet Fund Water) “Water resources – only to satisfy demands, not for sale” (Mohammed) “Water – has an economic value in all its competing uses and should be recognised as an economic good” (International Conference on Water and Environment, Dublin 1992)

Commence river basin plans 2009 Introduce water pricing and cost recovery 2010 Implement programmes of measures 2012 Achieve good water status in most waters 2015 Characterisation of the river basins2004 Commence monitoring programme 2006 EU Water Framework Directive (WFD)

Characterisation of the river basins 2004: 1.Analysis / review of water uses and impacts on water status 2. Economic analysis of water use including: Assessment of the current level of cost recovery

 The costs of water services (abstraction, supply, disposal) financial, environmental and resource costs are to be recovered by water pricing policy  Adequate contribution of water users to the costs of water services Cost recovery and water-pricing policy

Water abstraction  Water abstraction levy Water supply  Charge on water supply Wastewater disposal  Charge on wastewater disposal Wastewater discharge  Effluent levy Cost Recovery: Current water pricing

Effluent levy Examples: Denmark France Germany 36 Euro / damage unit Spain UK

Examples: Germany e.g Euro / m³ France The Netherlands Euro / m³ (UK) Water abstraction levy

Financial Costs Which water services? (costs of flood control, recreation and aquatic biotopes to be included?) Which values of assets for depreciation and interest calculation? (present or future values?) Which interest rates? (market or social discount rates?)

“Abatement costs” = financial costs ? “Costs of future regulations” = financial costs ? “Not internalised environmental costs” ? ! Environmental Costs Methods to evaluate environmental costs 1. Costs of preventing / mitigating / reducing damage 2.costs of averting / restoring measures 3.willingness to pay (contingent valuation method)

“Economic losses that suffer other water users due to over-exploitation” : Overlap with environmental costs Resource Costs “Economic losses due to  inefficient water allocation among 1.water users 2.regions 3.generations at a given set of environmental limit values for abstraction and pollution rights”

2004 Characterisation of river basins: Current Level of Cost Recovery Financial costsEnvironmental costs Resource costs No clear-cut between cash-flow and capital costs Public water services only not applied Cost Recovery (%) water supply 92 wastewater 84 ?? Example: Austria

Example: Germany Financial costsEnvironmental costs Resource costs Accounting includes always capital costs Public water services only Charge on water abstractions Charge on effluents Charge on water abstractions Charge on effluents Cost Recovery (%) water supply 100 wastewater 96 ??

Financial costsEnvironmental costs Resource costs Clear-cut against environmental costs Water services provided to business and households Not applied due to data problems Rough estimates available Not applied due to data problems Related to inefficient allocation of abstraction rights Cost Recovery (%) water supply 98 wastewater 100 ?? Example: UK

Austria:Currently no estimates of environmental and resource costs Germany:No differentiation between environmental and resource costs: roughly recovered by both charges on abstractions and effluents UK:Currently no estimates of environmental and resource costs. Clear-cut differentiation between all three cost categories Characterisation of river basins: Current Level of Cost Recovery

Key Question What is the  true economic value of water ? compared with the actual charges on water services?

Financial costs  Environmental costs  Resource costs  Costs of water infrastructure Costs of compliance with environmental regulations Non-regulated, not-internalised environmental damage (external costs) Inefficiencies in allocation of water resources for  abstractions  effluents Suggestion how to differentiate

Hydro-economic models can help to find out the To determine the true economic value of water  optimal allocation of water resources  appropriate charges on water abstraction, pollution  most cost-efficient properties of infrastructure  proper financial costs and charges  most efficient reduction of environmental costs  appropriate charges on non-internalised damage

Hydro-economic models: two examples AquatoolWaterStrategyMan Financial costs Environmental costs Resource costs Costs of infrastructure. Charges on using it. Future abatement costs. Shadow price of standards. Gap: current / optimal allocation. Shadow price of scarcity. Costs of infrastructure. Charges on using it. Not-internalised damage. Charges on abstraction / pollution. Economic losses or foregone economic benefits. Scarcity rents. Economic value of water  ?

Summary Divergent definitions and calculation methods in EU Countries  No comparison of cost recovery True economic value of water:  Economic benefits  financial + environmental + resource costs Water price = economic benefit per m³ at optimal allocation Resource costs per m³ = water price - unit financial costs - unit environmental costs

“Water industry – a business with increasing profits in future” (Pictet Fund Water) “Water resources – only to satisfy demands, not for sale ” (Mohammed) “Water – has an economic value in all its competing uses and should be recognised as an economic good” (International Conference on Water and Environment, Dublin 1992) WHO IS RIGHT ?