WHAT IS THE ROLE OF ECONOMICS IN THE WFD PROCESS? A selection of key economic inputs

THE KEY ECONOMIC INPUTS 1- Recovery of costs 2- Cost-effectiveness analysis 3- Cost-benefit analysis 4- Water pricing policies 2/12

THE RECOVERY OF COSTS What is "recovery of costs"?  The extent to which the costs associated to water uses are borne by those who generate them Why do we care about recovery of costs?  it brings transparency on financial flows associated to water uses and services:  who bears / will bear costs and damages associated to water uses?  who pays for these costs?  who bears the difference between prices and costs?... How to implement recovery of costs?  Under WFD, it refers to "water services" and "water uses"  identification at the characterisation stage (2004) 3/12

ACTIVITIES Activities with no significant impact on water status EXAMPLES E.g. navigation E.g. diffuse pollution E.g. fishing... THE RECOVERY OF COSTS IN PRACTICE 1- IDENTIFY WATER USES AND SERVICES WATER USES Activities with significant impact on water status EXAMPLES E.g. navigation E.g. diffuse pollution E.g. fishing... scale high low EXAMPLES E.g. drinking water supply E.g. wastewater treatment E.g. irrigation... WATER SERVICES Mainly water uses for the purpose of which water is diverted from its natural cycle by a work or an equipment 4/

5/12 Task for 2004: description of the situation THE RECOVERY OF COSTS IN PRACTICE 2- ASSESS THE LEVEL OF RECOVERY WATER USES IndustryHouseholdsAgriculture Identification of financial flows in the district through prices, subsidies, transfers... WATER SERVICES Financial costs Environmental costs Resource costs 2004

Not necessarily full cost recovery WATER USES IndustryHouseholdsAgriculture Adequate contribution to the recovery of the costs of water services WATER SERVICES Financial costs Environmental costs Resource costs Take account of social, environmental and economic effects Funding of preventive or remedial measures in order to achieve WFD objectives is possible. 6/12 THE RECOVERY OF COSTS IN PRACTICE 3- COMBINE THE LEVEL OF RECOVERY WITH WFD'S GOALS 2010

When do we implement CEA?  when potential measures are identified based on the outcomes of the characterisation (2004) COST-EFFECTIVENESS ANALYSIS (CEA) Why do we care about cost-effectiveness?  To identify the (sets of) measure(s) that will best achieve the compliance with the goal at the lowest cost  To rank (sets of) measures that allow to reach the goal 7/12 In some cases, it may be useful to take account of benefits, at least to identify them Ensure fruitful co-operation between water professionals (effectiveness) and economists (costs)

Assess the cost-effectiveness of individual measures  direct / indirect costs and benefits  economic and non-economic impacts… Compare (sets of) measures targeting the same goal Combine the selected best measures to construct the programme of measures COST-EFFECTIVENESS IN PRACTICE E.g. goal: improve the quality of water  M1- Restoration of wetlands  1ha treats 21,7kg BOD5/day  restoration/maintenance costs?  M2- Wastewater treatment plant  depollution cost of 1kg BOD5~0,45€  M3-...  Set 1- Improve water flow by reducing water demand, importing water...  Set 2- Restore wetlands, promote individual treatment systems…  benefits generated by wetlands vs. wastewater treatment plant: 9700€/ha  Set basic measure supplement. measure 8/

Why do we use CBA  to compare variations of quantifiable costs and benefits, caused by the activities, for people affected by the policy under consideration COST-BENEFIT ANALYSIS (CBA) When do we use CBA?  when potential measures to reach the objective have disproportionate costs: need to identify the least costly measures 9/

Includes all types of costs and benefits:  qualitative and quantitative  financial and environmental  direct and indirect; present and future... COST-BENEFIT ANALYSIS IN PRACTICE Take account of uncertainty  due to methods implemented: (dis)aggregation, use of proxies…  due to lack of data: unavailable, unreliable… Decision makers will have to cope with these constraints  clear information on these aspects is needed from experts 10/

Why do we care about pricing?  the level of price has a direct impact on water demand and water uses  pricing policies may play as a measure contributing to the achievement of the environmental objective by enhancing efficient use of water resources  the more external costs are internalised, the more prices show the real cost of water uses and services WATER PRICING POLICIES 11/

Take account of elasticity and affordability  e.g. very limited for domestic uses (~0,2-0,3)  e.g. in industrialised countries, water is considered "expensive" when it weights more than 1,5% of households' income Keep the objective in mind  e.g. to ensure sustainability, progressive tariffs are more efficient, although marginal cost decreases Specific aspects with WFD  take account of established practices  take account of social, environmental… aspects WATER PRICING POLICIES IN PRACTICE Water pricing policy is one type of measure  potential impact to be assessed in combination with other planned measures' 12/