Working Group Economics First Meeting

Working Group Economics – First Meeting

Synthesis of the WG Economics Meeting - Brussels, March 20th-21st, 2014

Working Group Economics – First Meeting

Synthesis of the WG Economics Meeting

Brussels, March 20th-21st, 2014

Table of Contents

1.Introduction

1.1.The context

1.2.The WG Economics meeting

2.Assessment of Environmental and Resource Costs (ERCs)

2.1.Overview on the assessment of ERC at the EU and MS level

2.2.The EU resource document on the assessment of ERCs

2.Disproportionate costs and affordability

2.3.Background

2.4.Affordability and disproportionate costs: some examples from MS

2.5.An EU resource document on affordability: what should be in?

3.How to integrate financing (EU and MS funding) for the purpose of cost-recovery calculation

4.Economic reporting in the WFD

4.1.Reporting the costs of PoM

4.2.Reporting cost recovery and incentive pricing

5.Economic Policy Instruments (EPI) for water management

6.Concluding session: next steps of the WG Economics work plan

Annex I – Workshop Agenda

Annex II – List of participants

1.Introduction

1.1.The context

The European Union (EU) Water Framework Directive (WFD) adopted in 2000 promotes the application of economic principles, methods and instruments in the field of water policy and management.

Article 5, in particular, requires that an economic analysis of water uses is carried out. According to Article 9, MS must take account of the principle of recovery of the costs of water services, including environmental and resource costs, ensuring an adequate contribution by different uses to this cost recovery. At the same time, water pricing must provide adequate incentives for users to use water resources efficiently. Furthermore, economic assessments, such as cost-effectiveness (referred to in Annex III) and/or cost-benefit analyses, play a major role when selecting measures for achieving good ecological status, or justifying less ambitious objectives (Article 4).

Because of the novelty of the thematic area and the economic components of the WFD, many efforts have taken place at the EU and MS levels at the early stages of the WFD implementation to develop guidance to support the implementation of these components in the context of the first RBMP cycle.

Nowadays, MS are currently reviewing these first efforts and are involved in the preparation of the second RBMPs (to be adopted in 2015). Thus, it is the right time to review the results obtained (in terms of completeness, soundness, relevance...), the information reported to the European Commission (EC) and the challenges faced by MS when implementing the economic components of the WFD. This will help identify the need for (new) initiatives in the field of guidance, knowledge sharing and reporting.

The activities of the new CIS Working Group (WG) on Economics were launched through the first workshop organised in Brussels, October 1st-2nd2013, by the EC, France and the UK. The mandate of the new WG Economics includes the following elements:

To ensure an increasingly thorough economic analysis of the pressures on the water systems in the 2nd and 3rd RBMPs;

To support the development and application of transparent methodologies.

Achieving these two objectives is crucial to enhance the relevance of the economic assessment for water and non-water policy making.

Based on experiences from river basins authorities and MS in the field of economics during the first RBMP cycle, MS agreed on a short list of urgent issues requiring specific attention within the context of the CIS.

1.2.The WG Economics meeting

The present document provides a synthesis of the first meeting of the CIS Economics WG, organized in Brussels on March 20th-21st 2014[1].

This meeting followed up discussions held during the October workshop, and brought forward the objectives of the mandate of the new WG Economics. In particular, the objectives of the meetingwere to:

Identify the needs for guidance on the assessment of ERC, needs to be met by the upcoming EU resource document on this topic. The discussion built on: (i) experiences with ERC assessment in Latvia, Cyprus and Lower Saxony (DE); and (ii) the presentation of the draft resource document including experiences from France, Spain and the Netherlands with the assessment of ERC in the second WFD management cycle;

Identify the needs for guidance on the assessment of affordability and disproportionate costs, needs which are to be met by the upcoming EU resource document on these topics. The discussion built on the presentation of experiences from MS, as well as approaches applied in the research domain;

Collect MS’ feedback on the draft reporting sheets on costs, cost recovery and incentive pricing that must be filled in by MS to report on the second WFD management cycle

Discussing thenext stepsof thework programme of the CIS WG on economics.

The agenda of the meeting More in detail, each core thematic session included:

A series of presentations, illustrating experiences from MS; and,

A discussion aimed at identifying main recommendations and priorities with respect to the specific theme.

2.Assessment of Environmental and Resource Costs (ERCs)

Contributions
Setting the scene

Assessing Environmental and Resource costs – What does the history tell us? Pierre Strosser, COM consultant (ACTeon)

Experiences from MS

Approach to assessing the cost-recovery and environmental and resource costs in Latvia – Kristine Pakalniete, AKTiiVS Ltd.
Assessment of environmental and resource costs in Cyprus – Agathi Hadjipanteli, Cyprus
The challenge of the internalization of external costs: procedure in Lower Saxony – Ann Kathrin Buchs, Germany

Presentation of a draft resource document on the application of cost-based methods for assessing ERCs, based on experiences from NL, FR and ES

Environmental Costs Assessment: the case of France – Blandine Boeuf, France
Environmental and Resource costs: the Dutch case –Xander Keijser, The Netherlands

2.1.Overview on the assessment of ERC at the EU and MS level

Setting the scene

The WFD Article 9 requires that MS consider ERC in the assessment of cost recovery and in the implementation of the polluter-pays principle (PPP). However, this has raised some questions in MS: what are these costs? How to assess them? And how should they be factored in to support water policy and management?

To address these questions, in the first WFD management cycle definitions and first indications on how to estimate ERC were provided by the WATECO Guidance (2002). However, such indications can be considered an unfinished business, as the Guidance mainly remained on the surface of the issue, providing some initial thoughts rather than an actual guidance to the assessment.

Therefore, a specific Information Sheet was produced in 2004, which further clarified definitions (e.g. resource costs are to be considered as a separate cost category or a sub-cost category?) as well as logical steps in the assessment. In particular, two (mutually non-exclusive) methods were suggested, namely:

the benefit-based approach, which translates gaps in water status into monetary values, in terms of benefits to society of reaching good status and thus filling these gaps; and

the cost-based approach, which involves the assessment of the costs of measures which would be required to reach good environmental status.

The selection of one of these methods may depend on context, culture and available information.

However, the Information Sheet left some open issues:

The estimation of ERC is linked to the assessment of pressures and impacts (the so-called “gap”) – how easy is it to use the information obtained from the Article 5 report for support the ERC assessment?
How to establish the “reference status” (e.g. good, high) against which environmental & resource costs are determined?
At which scale, and with which disaggregation (distinguishing between sectors, for example) should ERC be assessed?
How to deal with already internalized (or partly internalized) ERC? Some MS, for example, have already implemented economic instruments to internalize (partly) ERC, without actually assessing them.

Assessment of Environmental and Resource Costs: some examples

Contributions from LV, CY and DE (Lower Saxony) provided some illustrations on how ERC have been assessed in practicefollowing the guidance provided in the 2004 Information Sheet, as summarized in the table below.

Table 1. ERC assessment – Synthesis of the presentations from LV, CY, DE (Lower Saxony)

MS / Overall approach in a nutshell / ERCs assessment / Main results / Internalization of ERCs
LV / ERC were assessed in the context of Article 9 implementation (cost-recovery and PPP).
The assessment is based on the following steps:

Identification of water services (WS) and significant water uses (SWU) causing significant pressures

Assessment of the cost-recovery of WS, including: financial costs, ERC, pricing mechanisms for covering the costs-(including subsidies and cross subsidies)

Assessment of the contribution of SWU to the cost recovery of water uses

/ No resource costs were identified in Latvia, but rather only environmental costs (EC) due to WS and SWU.
Quantitative estimates of EC were not provided in the 1st RBMP cycle. / Emphasis on pricing mechanisms/instruments, the EC level and proposals for improving it in the future / Current economic instruments internalizing EC were analysed.
Additional economic instruments (or improvement of existing ones), as well as other ensuing measures, were then proposed to internalize those EC , which are not yet internalized as today.
CY / ERC included in the cost recovery calculation undertaken for Article 9.
Cost components included:
Financial costs
Environmental costs
Resource costs / Environmental Cost
Environmental damage: the deviation of the WB from the good ecological status (qualitative and quantitative status). This brings to the following point:
Environmental cost: the expression of environmental damage in terms of economic cost.
Environmental benefit: the total value for upgrading WB condition.
Resource cost
The cost of water body restoration in cases where the natural recharge rate is exceeded
For Cyprus it refers mainly for GW Bodies over abstraction, leading to quantitative as well as qualitative effects.
Restoration is achieved by recharging with water volumes coming from alternative water resources available: desalination and recycling. / Environmental and Resource Costs were allocated to the water services and their uses, based on the share of each one to the pollution (i.e. according to the uses’ consumption).
Environmental and Resource costs were calculated per cubic meter of water – Different values for different water uses (Drinking water from government project and groundwater, irrigation water from government projects and groundwater) / ERC included in the final water price paid by water users.
DE Lower Saxony / The study is divided into two sections:
1.State-wide approach: identification of all ERC in Lower Saxony based on the information on pressures from the RBMP
2.Approach from water service providers: identification of ERC that occur from the provision of water services and how the provision of water services is effected by other activities / Steps that are followed in both approaches:
1.Systematic identification of pressures (based on RBMP)
2.Monetarization is performed based on the pressures identified in the first step – cost-based approach based on existing studies (no primary data were collated)
3.Polluter-related internalisation: analysis of existing instruments and further ideas / State-wide approach:
ERC occur not only based on the provision of water services but also (and to a large extent) on water uses. These costs have to be included.
•The level of ERC is only known for some pollution loads, e.g. nitrate
•Asthe approximation of ERC is based on cost-based approaches, the costs for measures are the lower bound- the actual ERC may be much higher
Water services providers approach:
The topic of WFD and ERC is hardly known; therefore no estimations of these costs exist
Costs for the prevention of pollution that arise for the water service provider can be estimated through cost-based approaches, but are merely a minimum level
Agriculture plays the major role with respect to occurring pressures and ERC
Results from both approaches - ERC:
Known ERC only stemfrom partial analysis based on cost-based approaches / State-wide approach:
•Parts of ERC are already being internalized through obligations and other instruments.
•With the narrow interpretation of Art. 9 the major part of ERC is not considered.
Water services providers approach:
Abstraction charges serve as partial internalization: with these financial resources the drinking water operators are being paid to reduce the pollution from nitrate

2.2.TheEU resource document on the assessment of ERCs

Presentation of a draft resource document on the application of cost-based methods for assessing ERC, based on experiences from NL, FR and ES

As previously mentioned, a resource document on the assessment of ERC will be produced in the context of the WG Economics.Such document will address the need for guidance as expressed by some MS during the October workshop.

So far, a draft version was produced and circulated to participants prior to the meeting. This preliminary version illustrates applications of the cost-based approach for assessing ERC in the Netherlands, France and Spain. France and the Netherlands presented their experiences at the meeting, and these are summarized in the table below.

Table 2 Applications of the cost-based method for assessing ERC in France and the Netherlands

MS / Definition of ERCs / ERCs assessment / How are ERCs dealt with?
FR / Two types of ERC were considered:
Compensatory costs:
Costs borne by a water user due to the aquatic environment / water resource degradation caused by another water user.
Example: Agricultural effluents lead to water eutrophication  Drinking water services have to apply additional treatments to eutrophicated waters  The additional costs borne by the water utilitydue to agricultural effluents are considered as compensatory costs.
Other environmental costs:
Costs of damages caused to water resources with no impact on other activities.
These types of costs are zero when the good status is reached. / Compensatory costs:
Definition of nature and perimeter (list of costs)
Real-size tests
In association with local and thematic experts
Relatively easy to assess and reliable (financial costs)
Other environmental costs:
Approximated by the costs of reaching good status by 2027 (cost of PoM). Although it is an approximation, there are some advantages:
Concrete and realistic estimate
Indicator of the effort remaining to achieve good status
Good communication tool / In France, water agencies apply the polluter-pays principle through two instruments:
Water use charges (diffuse and point-source water pollution, flow obstacles, water abstractions...)
Aidmeasures of general interest on water resources
Aid and taxes are defined in the intervention programme, which is modified in light of the cost-recovery assessment. Taxes and aid on water uses reduce environmental costs (finance PoM), and alsofinancial transfersbetween users.
Integration of ERCs in cost-recovery assessments:
Compensatory costs: look at financial transfers between user categories
Other environmental costs:look at the polluter-pays principle implementation
NL / The optimal level of environmental protection is established so that
marginal costs of protection (supply curve) = marginal benefits (demand curve)
In general, the costs of environmental measures are reasonably well known, so that supply curve can be drawn
The demand curve is usually not known. Standards are often used as a proxy for the demand for environmental protection: 100% cost recovery for the various water services and environmental and resource costs are fully internalized
Cost-based approach: Costs of actually implemented environmental measures are the lower bound for environmental costs.
Resource costs: as water scarcity is not an issue in NL, these costs are not considered / ERCs= costs of measures planned in the RBMPs
Abatement costs are at least as large as the damage foregone: otherwise you would not have taken the relevant measures.
Data on current abatement costs are largely available.
At least more readily available than numbers on ‘lost benefits of not being in a sustainable situation.’
Example:
The water service ‘wastewater treatment’ can be seen as the implementation of measures with the sole purpose of reducing damage to the (aquatic) environment up to the level of prevailing water quality objectives. Therefore, all costs for wastewater treatment are seen as environmental and resource costs. / As environmental costs are considered withinthe total costs of measures, there is no need to take further financial measures to internalize such costs

What should be included in a resource document on ERC? Feedback from MS

The discussion among participants, which followed presentations from FR and NL, focused on MS expectations and needs with respect to an EU resource document on the assessment of ERC. Furthermore, participants identified the type of contents and structure they would like to see in the resource document, thus outlining the next steps that need to be taken.

As a result of the discussion, the resource document will include:

A reminder of the overall cost-based method, as it has been applied so far by all MS who undertook an assessment of ERC. As the benefit-based approach has not been used so far, this will not be included in the resource document: it is in fact seen as more efficient to build on practical efforts already made.

Sources of inspiration, i.e. a collection of existing applications of the cost-based methods in MS.

However, a simple collection of case studies would not be useful as guidance: too many differences exist among MS (also in terms of governance structures), so that an approach used in one country cannot be simply transferred to another. The document will thus highlight similarities and differences with the overall cost-based approach. Furthermore, the document will provide an analysis of the issues reported by countries in applying this method, focusing in particular on the following aspects:

Which reference standards should be applied?

Which measures should be considered? Measures already implemented, or measures which will be implemented in the future?

Which costs should be considered?

How to share the costs between sectors?

Which scale should be used for the assessment?

The way forward: where do we want to be in five years with the assessment of ERCs? How can assessment be used to support the policy process?