1. Economic Instruments in Water Management
Global Experience and Relevance for Latin American and Caribbean Countries
R. Andreas Kraemer
Director - Ecologic
Britta Pielen - Ecologic

2. Preview Functions of economic instruments
Typology of economic instruments in water management
Water abstraction taxes
Water prices (and tariffs)
Sewerage charges (to sewers)
Effluent charges (to natural waters)
Subsidies (water sector, other sectors)
Tradable Permits (abstraction, discharge, resources)
Liability for (environmental) damage to waters
Contributions in Water User Associations
Economics in the (new) European Water Framework Directive
Relevance of EU and OECD experience for Latin America
Conclusions

3. Functions of Economic Instruments
Incentive Function
Financial function (cost recovery)
Fiscal function
(earmarking versus general taxation)
“Soft functions” (information, capacity)

4. Taxonomy Tradable Abstraction Permits Abstraction Taxes Water Prices
Taxes on Water Supply
Taxes on Sewerage
Effluent Charges
Public Water
Municipal Use
Sewerage Treatment
Industrial Use
Tradable Discharge Permits
Effluent Treatment
Sewerage Charges
Self-Supply
Subsidies for Water Saving Measures
Subsidies for Pollution Control

5. Water Abstraction Taxes
Levied on withdrawal of water from natural water bodies
Based on actual amount (volumetric) or linked to permit
May differentiate between ground and surface water (e.g. Netherlands), or good & bad water (e.g. Hamburg)
Fiscal function:
Part of green tax reform in the Netherlands & Denmark; Earmarked for env. subsidies in some German Länder
Denmark: tax led to decrease of total water consumption and of leakage from water works & pipes

6. Prices for Household Water Supply I
Rule: Municipalities are responsible for water supply
European Union and OECD countries tend towards:
Full cost-recovery (environmental and resource costs)
Volumetric pricing (metering; user-pays)
[Increasing block-tariff structures]
“High“ water prices (in international comparisons) are
not necessarily high in relation to per capita income

7. Prices for Household Water Supply II
In most cases: Combination of fixed and variable charges
France: many municipalities  Great variety of tariffs P
- Two-part tariffs with linear use rate
- Two-part tariffs with non-linear use rate
- Flat rate (not linked to use)
- Single linear tariff (linked to use)
consumption

8. Sewerage Charges Levied on discharge of used water into sewer systems
General aim: Cost Recovery for operation & maintenance
Calculation of charges
Most often based on metered water consumption
partly based on sealed surface (rainwater - Germany)
Non-recurring connection fees (France, Denmark)
Fixed components (two-part tariffs)
Higher charges for heavy polluters (“strength” - France, UK)

9. Annual Sewerage Charges & Water Prices [1992-2000]

10. Effluent Charges I
Levied on the discharge of effluent into natural waters.
In place in seven EU Member States.
General aim: Env. incentives & (earmarked) revenue
Based on pollution content of effluent
 Measuring and metering devices required.
Charge rates may differ among substances
(Denmark: Differentiated rates for N, P, and BOD)

11. Effluent Charges II Systems differ in
Functional focus (incentives or revenue raising)
Calculation methods and substances included
Actors liable to pay (addressee)
Exemptions and rate reductions
Use of revenue

12. Effluent Charges: 3 Textile Finishing Firms

13. Subsidies in Water Management I
Direct versus indirect subsidies
Compensation versus incentives
Positive versus negative environmental effects
Water subsidies
Some EU countries:
Subsidies for building and upgrading of water plants
Off-set in Denmark: Industrial water users can deduct water abstraction tax on their VAT-bills

14. Subsidies in Water Management II
Water-related subsidies to farmers:
As compensation for
Land-use restrictions in water protection zones (Germany)
Conversion of arable land to native species grassland (UK)
As incentives for
Cultivation of nitrogen-fixing crops (Sweden)
Conversion of acreage to organic production
New Zealand: Removal of agricultural subsidies (1984)

15. Tradable Permits I Allocation of shared resource among users
Tradable water abstraction rights
(trading water rights  trading water)
Tradable discharge permits (pollution permits)
Tradable permits to use water-borne resources
Requirements:
Well-defined property rights
Transparent initial allocation
Efficient administration (data requirements)

16. Tradable Permits II
Tradable water rights exist in e.g. Chile, US & Australia.
No application so far in Europe (unlikely, in fact).
Chile:
Existing water users are granted free property rights
Unallocated rights are sold by auction
Separate from land rights
Rights can be transferred at freely negotiated prices

17. Liability for Damage to Waters
Incentive for pollution prevention
Guarantee for compensation of victims
Proposal for EU Directive on Environmental Liability:
Based on public law
Covers damage to acquatic environment
Strict liability (most cases)
NGOs and (affected) parties can demand action

18. The European Water Framework Directive
One of the first to draw on economic instruments
Economic analysis of water uses (by 2004)
Sets up inventory of water uses
Determines whether cost-recovery is achieved
Indentify most cost-efficient combination of measures
Cost-covering water pricing should be in place by 2010

19. Water User Associations (Germany)
Good approach to integrated river basin management:
Association of those affected: “Interested parties”
Financed through members’ fees (contributions)
Scope of operation:
Allocation of services among users
Water supply, sewerage
Cooperation between agriculture and water management
Development and maintenance of waters

20. The Latin American Situation
Economic instruments for water management already in place
Design of charging systems has to be adapted to meet specific challenges in each case
Relevant factors:
Capacity building
Decentralization and participatory approaches
Integrated river basin management
Cost-recovery
Transparency

21. EU experience: benefits for Latin America?
Overview of options: variety of models for expansion and improvement of existing systems
Identification of instruments for application in other cases and suggestions of design
Information about effects
Institutional issues: Water User Associations as an option for Integrated River Basin Management

22. Conclusions
Wide range of opportunities to reproduce, develop and improve existing economic instruments, in
EU and OECD countries and in
Latin America
Permanent international cooperation desirable to
guarantee information exchange and to
offer opportunities for case-specific support

23. Selection of Relevant Studies
Ecotec 2001: Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States. London: Ecotec.
Kraemer, R. Andreas; Eduard Interwies and Eleftheria Kampa 2002: "Tradable Permits in Resource Protection and Management: A Review of Experience and Lessons Learned," in: OECD (ed.): Implementing Domestic Tradable Permits - Recent Developments and Future Challenges, Paris: OECD.
OECD 2000: Greening Tax Mixes in OECD Countries: A Preliminary Assessment. Paris: OECD.
OECD 2001a: Environmentally Related Taxes in OECD Countries. Paris: OECD.
OECD 2001b: Domestic Transferable Permits for Environmental Management - Design and Implementation. Paris: OECD.
OECD 2002: Environmentally Related Taxes Database. Paris: OECD.
Speck, Stephan 2000: The Eco-Tax Database of Forum for the Future - A Database of Environmental Taxes and Charges. London: Forum for the Future.

24. Economic Instruments in Water Management
Global Experience and Relevance for Latin American Countries
R. Andreas Kraemer
Director - Ecologic
Britta Pielen - Ecologic