Meeting of the Strategic Coordination Group 7-8 May 2015
Agenda point 7.b: Working Group Economics
Title: Draft Guidance for assessing the recovery of Environmental and Resource Costs in the context of the Water Framework Directive
Date: 29 April 2015
Author(s): WG Economics (drafting group composed by volunteers from the WG)
History: The main elements of the present draft were agreed at the WG Economics in February and further developed in written procedure; changes have been drafted in accordance with that agreement and are visible in track mode.
This version of the guidance takes on board the majority of comments made by the WG Economics.
It has however not been possible to take on board, in the limited time available, some of the comments such as (a) those on the complexity of paragraphs dedicated to RC; (b) disagreement with the assumption that ERC are considered as marginal and close to zero when good status is reached for all water bodies (c) the need to further investigate what an “adequate” recovery of ERC means, and (d) the means and methods to ensure an “adequate” cost-recovery. Addressing these issues would require further work.
In addition further review is needed to improve the language and the consistency of references.
The SCG is invited to:
- Take note of the current state of the document
- Indicate how to take it forward
Contact: /
WG Economics / Document n°1
A guidance for assessing Environmental and Resource Costs and their recovery in the context of the Water Framework Directive
Date / 29/04/2015
Document status / Draft prepared by the ERC drafting group
The guidance aims at supporting the assessment of the Environment & Resource Costs (ERC) in the context of Article 9 of the European Union (EU) Water Framework Directive (WFD). It builds on and complements the earlier WATECO guidance document and the Information Sheet addressing the “Assessment of Environmental and Resource Costs in the Water Framework Directive” prepared by the Drafting Group ECO2 of Working Group 2B of the Common Implementation Strategy (CIS) and finalised in June 2004.This version of the ERC guidance builds on contributions by members of the ERC drafting group established to support the development of this guidance, as well as comments and contributions from WG Economics. Its structure follows a series of questions that experts performing assessments should address, in particular:
- Question 1 –Are thereERC?
- Question 2 – What is the monetary value of ERC?
- Question 3 – Who is responsible for pressures causing ERC?
- Question 4 – Who contributes financially to the recovery of ERC?
This sixth version of the guidance is submitted to the Strategic Coordination Group (SCG) for review and comments. The present version of the guidance takes the majority of comments made by the WG Economics on board, stressing whenever possible the flexibility in the proposed approaches that can be followed, along with challenges met when undertaking the assessments under real life situation.
Some comments have however not been taken on board in the present version. This includes comments on the complexity of paragraphs dedicated to RC (clearly a challenging issue) that have not been adapted, but kept as proposed by the ERC drafting group. It includes the assumption that there are marginal or no environmental costs once good status is reached, this seen as a too simplistic approach not in line with the principles of the WFD and that requires further work and justification.It includes also need to further investigate what an “adequate”(a comment made already to the previous version of the guidance) recovery of ERC means, as well as the means and methods to ensure an “adequate” cost-recovery. Addressing these issues would require further work.
The SCG is asked to take note of the current state of the document and indicate how to take it forward.
Foreword
Following a request by European Union (EU) Water Directors[1], the Working Group (WG) Economics of the Common Implementation Strategy (CIS) for the Water Framework Directive (2000/60/EC) (WFD) developed this Guidance for assessing Environmental and Resource Costs and their recovery in the context of the Water Framework Directive.
This guidance builds on existing CIS guidance document and Information sheets[2] developed since the adoption of the EU WFD that have addressed different elements and issues linked to the assessment ofthe recovery of Environmental and Resource Costs (ERC).Assessing ERC is considered challenging by many Member States (MS)[3], as illustrated by the limited information on ERC and their recovery reported in the first River Basin Management Plans (RBMP)[4].
The aim of this guidance document is to propose a logical series of questions that can guide the assessment of current ERC in line with the (cost-recovery) requirements of Article 9 of the WFD.[5] It provides guidance on how to perform the assessments that help answer these different questions. The guidance also presents illustrations which build on existing practical experiences of MSin the context of a range of approaches, water management issues and institutional contexts[6].
This document aims at guiding experts and economists undertaking cost recovery assessments in different MS and organisations. Furthermore, it offers a clear overview of the complex topic of ERC assessments that can be used by: technical experts contributing to these assessments with necessary (technical) data (e.g. on the current state of water bodies, on pressures and impacts…) and by competent authorities responsible for the implementation of the WFD(in particular the preparation of RBMPs, reporting and making decisions about future actions).
This guidance document may be used to support forthcoming assessments on the recovery of ERC, whether to refine assessments already carried out for the second RBMP cycle, or for performing new assessments that will be proposed under the third RBMP cycle.
What you will not find in this guidance
The guidance focuses on the assessment of current ERC in line with the cost-recovery focus of Article 9.
- It does not addressfully how the recovery of ERC is to be assessed, including how the “adequate recovery” of these costs is to be interpreted and implemented in practice;
- It does not addressother areas and WFD requirements where ERC assessment might be relevant, such as for supporting the selection of measures or justifying exemptions. However, these are briefly referred to in the final chapter of the guidance to highlight links and synergies between the different articles and requirements of the WFD;
- Focusing on current ERC, the guidance does not address the assessment of the recovery of pastERC linked to environmental problems that have already been addressed (e.g. by existing wastewater treatment plants, or enhanced practices that have already helped to reduce over-abstraction[7]);
- It does not address the assessments required for selecting and choosing mechanisms that will help improving water status and eliminating ERC(such as water use permits, support to enhanced practices, awareness raising that help changing behaviour, economic and financial instruments, etc.).
Table of content
Foreword
1.Introduction
2.What will you find in this guidance?
3.Going through the practical steps of the assessment process
Question 1 – Are there ERC?
Question 2 – What is the monetary value of ERC?
Question 3 – Which sectors are responsible for pressures causing ERC?
Question 4 – Which sectors contribute financially to the recovery of ERC?
4.How to use the results of the assessments?
Contributing to the assessment of cost-recovery as required under Article 9
Using ERC information for supporting the development of the Program of Measures
Contributing to WFD reporting
Using information for advocating better protection of aquatic ecosystems
Reviewing existing financing mechanisms of water policy
Links to other policy areas
5.List of references (listed in order of citation in the main text)
1.Introduction
The economic rationale underlying Environmental and Resource Costs(ERC) is:
- The concept of external effectsthat result from economic activities and that can impact on the status of (aquatic) ecosystems and potentially also on other economic activities, leading to costs to society; and,
- The search for mechanisms that can internalise these costsinto the decisions and practices of the sectors responsible for these (negative) effects.
Box 1 presents fictional examples of ERC, additional theoretical reference and explanations being available in existing documents produced in the context of the CIS[8].
Box 1. Fictional examples of Environmental Costs & Resource costs
Environmental costs - Lake Europa is a water body located in the foothills of a mountain range with a surface area of around 200 km². It is a major component of a river basin which drains from the mountain range through a flood plain to a coastal estuary some 50 km to the south. The ecological state of Lake Europa is currently degraded due to damage caused by a combination of point source and diffuse pressuresfrom abandoned industrial sites and agricultural activity.In addition to the negative impacts on the lake’s ecology, the pollution has negative impacts in two other respects: (a) drinking water service companies pumping water in the lake need to install costly additional treatment facilities for delivering water at set drinking water quality targets, these costs being transferred to the water bill of final consumers; (b) local fishermen who cannot always sell their fish catch on local markets because of concerns about the concentration of pollutants in fish.
Resource Costs
The Charlemagne River water body is one of several rivers composing a river basin which drains an intensively farmed coastal flood plain in which water is scarce. The Charlemagne River is currently facing water quantity issues due to abstraction and flow diversion for irrigationwhich is depleting the river beyond its natural rate of recovery, causing ecological problems. Resource costs arise because an electric power plant located downstream cannot use water for cooling and is obliged to use a non-water based cooling system due to the restricted availability of water that is more expensive than the water-based cooling. Also, neighbouring municipalities with increasing population requiring additional water abstraction are not allowed by the local environmental agency to pump additional water from the river. These municipalities are searching today for alternative sources of water that are however significantly more expensive.
Different mechanisms can internalise ERC into the decisions of water uses that put pressures on aquatic ecosystems. These include: imposing a limit (threshold) on pressures (abstraction or pollution) via regulation;or the establishment of water use permits coherent with water availability; implementing awareness raising campaigns that promote better water use practices that reduce pressures (e.g. farm practices that reduce diffuse pollution or water abstraction, or new industrial processes that reduce the use of polluting substances); or imposing a financial payment (environmental tax or charge that is linked to the pollution discharge or abstraction levels, or direct financial payment for the costs of measures implemented to reduce pressures). The mere existence of these mechanisms does not ensure that ERC are internalised. The level of internalisation will depend on the design of these mechanisms: ERC can be fully or partially internalised into water user’s decisions, and may (or maynot) lead to changes in pressure on water bodies.
ERC have been explicitly referred to in the European Union (EU) Water Framework Directive 2000/60/EC (WFD), and the different references to ERC are summarised in WATECO (2003). In particular, ERC are referred to under Article 9 of the WFD in relation to the recovery of the costs of water services (see Box 2 for the full text of Article 9). Therefore, the guidance focuses on the recovery of ERC in line with the focus of Article 9. Other potential uses of the results of ERC assessments are briefly presented in Chapter 4 of the present guidance.
Box 2. Article 9 of the WFD
1. Member States shall take account of the principle of recovery of the costs of water services, including
environmental and resource costs, having regard to the economic analysis conducted according to Annex III, and in accordance in particular with the polluter pays principle.
Member States shall ensure by 2010
- that water-pricing policies provide adequate incentives for users to use water resources efficiently, and thereby contribute to the environmental objectives of this Directive,
- an adequate contribution of the different water uses, disaggregated into at least industry, households and agriculture, to the recovery of the costs of water services, based on the economic analysis conducted according to Annex III and taking account of the polluter pays principle.
Member States may in so doing have regard to the social, environmental and economic effects of the recovery as well as the geographic and climatic conditions of the region or regions affected.
2. Member States shall report in the river basin management plans on the planned steps towards implementing paragraph 1 which will contribute to achieving the environmental objectives of this Directive and on the contribution made by the various water uses to the recovery of the costs of water services.
3. Nothing in this Article shall prevent the funding of particular preventive or remedial measures in order to achievethe objectives of this Directive.
4. Member States shall not be in breach of this Directive if they decide in accordance with established practices not toapply the provisions of paragraph 1, second sentence, and for that purpose the relevant provisions of paragraph 2, for agiven water-use activity, where this does not compromise the purposes and the achievement of the objectives of thisDirective. Member States shall report the reasons for not fullyapplying paragraph 1, second sentence, in the river basin management plans.
ERC have been defined in the WATECO (2003) guidance, as such definitions are not made explicit in the WFD. These have been further discussed and adapted in the ECO 2 Information Sheet[9]. Box 3 specifies the definitions that have been elaborated in these documents and that are considered as reference in the present document.
Box 3. The definitions of ERC
The WATECO Guidance[10] defined Environmental Costs (EC) and Resource Costs (RC) as follows:
Environmental costs - Environmental costs represent the costs of damage that water uses impose on the environment and ecosystems and those who use the environment (for example, a reduction in the ecological quality of aquatic ecosystems or the salinisation and degradation of productive soils).
Resource costs - Resource costs represent the costs of foregone opportunities that other uses suffer due to the depletion of the resource beyond its natural rate of recharge or recovery (e.g. costs related to groundwater over-abstraction).
Further work in the context of the ECO2 working group complemented the definition of RC, stressing that RC are not limited to water resource depletion but result also of inefficient economic allocation of water resources over time and over water users[11].
Resource costs are defined in this information sheet as the opportunity costs of using water as a scarceresource in a particular way (e.g. through abstraction or wastewater discharge) in time and space. They equalthe difference between the economic value in terms of net benefits of present or future water use (e.g.allocation of emission or water abstraction permits) and the economic value in terms of net benefits of thebest alternative water use (now or in the future). Resource costs only arise if alternative water use generates ahigher economic value than present or foreseen future water use (i.e. the difference between net benefits isnegative). There may be a variety of reasons why this is the case, including institutional ones (e.g. historicalwater abstraction rights or the current or future distribution of pollution permits).
Further guidance was also provided on the link between ERC and the environmental objectives of the WFD. In line with the requirements of the WFD, each water body is expected to reach Good Water Status (GS) including Good Ecological Status (GES[12]), Good Chemical Status, Good Quantitative Status (for groundwater bodies)or Good Ecological Potential (GEP)[13],meeting several criteria defined by the WFD. And the assumption was made that ERC are considered as marginal and close to 0 when GSis reachedfor all water bodies. In reality, ERC can exist at GS[14]. However, this simplification ensures an operational approach to ERC that facilitates their assessment and possible synergies with other economic assessments required under the directive. Estimates of ERC based on this simplification will however represent lower-bound estimates. With regards to Resource Costs (RC), the achievement of quantitative balances (i.e. achieving GS) will not be the sole condition for deciding whether RC exist or can be considered as equal to 0: the absence of unmet (additional) demands for water abstraction will be a second condition to be met for assuming RC can be considered as equal to 0.
Assessing ERC because of the current degradation of aquatic ecosystems can build on methods that focus on the assessment of foregonebenefits because of degraded ecosystems, or on the assessment of the costs of measures that would be required for removing the observed degradation and bringing ecosystems to a non-degraded state. Results from the assessment of the first RBMPs as well as a more in-depth assessment of cost recovery through water pricing in selected MS show that the assessment of ERC and of their recovery is complex and challenging. And few Member States have implemented a transparent recovery of ERC.[15]Methodologies for appraising ERC vary greatly, ranging from a qualitative description of ERC, to the analysis of current environmental taxes and charges expected to internalise (partly) these costs or the assessment of costs of measures already taken for reducing (past) pollution and pressures.There is room for improving the assessments of ERC that can support the implementation of Article 9, including by clarifying how issues addressed in existing guidance documents needs to be integrated in a step-wise process for assessing ERC and shedding light on their current recovery taking into account in particular the polluter pays principle.