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M2 ERNEAWater EconomicsAlban THOMASAcademic year 2005-2006

Course outline

- Water policies: the institutional framework- Industrial use- Agricultural use

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1. Water policies: the institutional framework

1.1 Some figures for mainland France

- Capacity of natural stock formation: reserves of about 1000 billion cubic meter (m3)

- Potential resource per head (annual average): 3 265 m3

- Average rainfall: 440 billion m3 per year

- Internal resources (rainfall - evapotranspiration + imports from foreign water streams): 170 billion m3 per year on average

- Gross water withdrawal : 33.1 billion m3 in 2002Of which 55 % for cooling of power plants 14 % for irrigation

19 % drinking water12 % for industry

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Surface water withdrawal : 80 % of total

Drinking water: 62 % from groundwaterPower plants: 99.9 % from surface waterIrrigation: 75 % from surface water

0

5

10

15

20

25

Energy Drinkingwater

Irrigation Industry

Withdrawals

Net consumption

Water withdrawal and use, mainland France (billion m3)

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- Net yearly consumption : 6 billion m3 (103 m3 per inhabitant per year)

- Billed consumption volumes : 4.5 billion m3

- Housings connected to wastewater treatment network: 81 %

- Housings with autonomous wastewater facilities: 10 %

- Average collection rate of wastewater in communities > 10 000 inhabitants (62 % of population) : 68 %

- Average return rate of wastewater treatment plants (abatement rate): 73 %

Pollution generated by an individual using 200 litres of water a day:70 - 90 gr. of Suspended Solids60 - 70 gr. of Organic Matters15 - 17 gr. of Nitrogen

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Water quality outlook early 2000s : - quality is increasing for surface water, - decreasing for every high quality water, - constantly deteriorating for groundwater (especially in Britanny).

1.2 The legal and institutional framework

1.2.1 Water legislation in France

Water Act of December 16, 1964

- First law in France aiming at better water management- Describe water property rights and pollution regulation schemes- Creates the 6 Water Agencies (one for each river basin)

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Water Act of January 3, 1992- Declares water as part of nation’s patrimony, its protection is

of general interest - Global water resource planning through the ‘‘Schémas Directeurs

d'Aménagement et de Gestion des Eaux (SDAGE)

The « Sapin » Act of January 29, 1993- Not water-specific, but major impact on water utilities- Toward more competition in water industry regarding public tenders- No more direct reconduction of water utility contracts between

private operators and the local community

The « Barnier » Act of February 2, 1995- New rules for water provision by private operators- Maximum contract length for water utility operation : 20 years- No more entry payments by private operators- Annual reports on water quality and price

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The « Voynet » Act of 1999 (dropped)- Transposes the October 23 2000 European Framework Directive

on Water into French law- Seeks more transparency, equity and solidarity

in water pricing and management

July 30, 2003 Act on ‘‘natural and technological risks’’ - To facilitate prevention of floods and promote safe management

of water resource, local communities can collaborate bycreating a ‘‘Etablissement Public Territorial de bassin’’

- These EPTB are now genuine actors in water policy at the riverbasin scale

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Why was another law needed for water ? - Downward trend in water quality- Significant increases in water bills (wastewater treatment in

particular), poor relationship between actual consumption and bill

- Strong social demand toward the government: more information, health risks

- Need for more consistency across many legislations, acts, directives,…

The new French Water Act (2006 ?)In discussion (May 2006), French Senate, see below

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1.2.2. Regulation authorities and water

Local level: - The mayor or President of the inter-community board

The « département » level: - The « préfet » coordinates implementation of national environmental policy

- Several authorities for Health, Agriculture, Forestry, Public Infrastructures (DDASS, DDAF, DDE) are in charge of controlling water quality, assisting local communities on water utility management, and construction projects.

The regional level:- Same authorities as above, duplicated for regions.

- Direction Régionale de l'environnement (DIREN): monitors implementation of French regulation and European Directives on environment and water

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- Direction Régionale de l'Industrie, de la Recherche et de l'Environnement (DRIRE) : important role in controlling industrial plants

The river basin level:- The «Basin Committee »:

Includes representatives of local communities, users and the administration. Purpose: a) Elaborate Water Management Plans (« Schémas Directeurs

d'Aménagement et de Gestion des Eaux, SDAGE) ; b) consultative body for water tax rates ; c) Elects members of the Water Agency Executive Board.

- The “Water Agency”:

Grants financial aids for public interest works and private quality- or quantity-improving projects;

Collects emission and water use taxes.

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- The EPTB (Etablissement Public Territorial de Bassin), since 1999 (and in the law since 2003)

Union or association on behalf of several local communities,At the river (or sub-river) basin scale

Can act to prevent floods, facilitate management of water resources,and conservation of wetlands.

Are consulted when SAGE and SDAGE are implemented or revised

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- The « Local Water Commission » (CLE) :

Includes representatives of the civil society and the administration.

Defines and monitors implementation of the SDAGE (see above).

The national level:- Inter-Ministry Committee for the Environnement

- Consultative bodies: National Water Committee, Higher Committee for the Environment, Higher Fishery Council.

The European level:European Commission Européenne (DG Environment): Defines water quality standards, regulation and wastewater standards.

Nine main Directives applicable to water and the environment

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76/160/CEE: Swimming water quality80/778/CEE: Dringing water (modified by 98/83/CE)86/278/CEE: Wastewater sludge91/271/CEE: Residential wastewater treatment91/676/CEE: Nitrates96/61/CE: Pollution prevention and clean technologies.

Until now, strict standards for natural resource conservation, without financial impact assessment.

The Directive 2000/60/CE: Framework for a European water policy

Deadline: no later than 15 years, with some exceptions: technical feasibility, local conditions, excessive costs.

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- Coordination of resource conservation and protection measures within river basins

- Consistent and exhaustive information and monitoring network for member states. Deadline: 6 years

- Frequency of physical and chemical components defining water quality: 3 months (1 month for more toxic substances) .

- Design of a management plan for each hydrological district

- Combination of environmental quality standards and maximum emission limits

- Prevention of further degradation of continental surface water, coastal water, groundwater

- Promoting sustainable water management, based on long-run protection of available water resources.

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- For each hydrographical district: analysis of local natural conditions and impact of human activities.

- Economic analysis of water use, creation of a list of protected areas.

- Principle of cost recovery applied to water use, according to Polluter-Payer Principle.

- « Cost-efficiency analysis »: assessment of the most efficient combination of measures with minimum cost

- Member states have to verify the incentive-driven feature of tariffs, for efficient resource use.

Deadline with respect to national legislations: implementation of legal, administrative and regulatory provisions no later than December 22, 2003.

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1.2.3. The French Water Agencies

- Autonomous environmental authorities, but with administrative supervision of the Ministry of the Environment.

- Goal: financial participation to water disposal and pollution reduction operations.

- Agencies also participate to common-interest operations: dams, water transfers, groundwater recharge, limitation of coastal water pollution.

- Financial instruments: subsidies, loans with/without interest.

- Within the 5-year working plan, which must be budget-balanced (through emission and water use tax receipts).

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Executive Board: President nominated by Ministerial decree ; 8 representatives of local communities, 8 representatives of users, 8 representatives of the administration, 1 representative of the staff.

The 6 Water Agencies (River Basins) are:Adour-Garonne (115,000 km2)Artois-Picardie (19,562 km2)Loire-Bretagne 155,000 km2)Rhin-Meuse (31,500 km2)Rhône-Méditerranée-Corse (130,000 km2)Seine-Normandie (100,000 km2)

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Mission: financial participation to investment in public (common interest) or private equipments and facilities, for emission control and improvement of resource sharing.

No direct initiative on private investments, but financial aid is crucial

Necessary funds: taxes collected from water users in river basin:- Emission tax (water pollution)- Water extraction and consumption taxes.

Funds are then redistributed in the form of direct subsidies or loans

Incentive role in reducing fixed costs and later, emission charges.

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The Water Agency tax scheme

Multi-year framework of the Working Plan:

Tax receipts must balance expenditures→ Consequence: total amount of tax receipts determined according

to expected expenses

The category of users to be taxed and the unit tax rates must be approved by the Water Agency Executive Board

Unit rates can be modulated geographically (coastal zones, wetlands, vulnerable areas)

Taxes are collected from each individual plant, with a minimum perception threshold

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Water pollution

charge Use charge Total User Share

Residential

Industry

Agriculture

35,614

5,437

554

6,361

1,910

269

41,975

7,347

823

83.7%

14.7%

1.6%

Total 41,605 8,540 50,145 100%

Revenues from Water Charges Collected by Water Agencies, VII Working Plan 1997 – 2001 (in million French Francs)

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IIIWorking Plan

1977-1981

IVWorking

Plan1982-1986

VWorking

Plan1987-1991

VIWorking

Plan1992-1996

VIIWorking

Plan1997-2001

Subsidies 14.3 16.3 22.3 40.7 57.0

Charges 14.3 14.6 21.1 40.1 50.9

Evolution of Charges Collected and Subsidies paid by Water Agencies, 1977-2001 (in billion French Francs)

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VI Working

Plan

% of total

subsidies

VII Working

Plan

% of total

subsidiesPercentchange

POLLUTIONTreatment plants in communitiesSewage networkIndustrial pollution controlWaste disposalTechnical AssistanceWater treatment premiumOperational costs subsidyAgricultural pollution controlOthers

10,86411,3925,9491,159

3704,730

614550

42

25271431

11110

12,91513,4246,0481,178

6317,9802,1892,682

169

23241121

14450

191822

7169

257388302

Total 35,652 83 47,216 83 32

RESOURCE AVAILABILITYWaterworksIrrigationGroundwaterRiver basin recoveryDrinkable waterResource management

815161726711

4,469393

2022

101

1,11425

6431,5485,520

892

2013

102

37-84-11118

24127

Total 7,275 17 9,742 17 34

Grand total 42,927 100 56,958 100 33

Subsidies by Type of Operation (in million French Francs)

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2. Industrial use

2.1 Regulation of industrial water pollution in France

New legal framework in the 1960s:

Harmonization of water policy with objectives of the « Plan », given strong economic development of the 1950s

Logic of recommendation and planning, given poor performance of pure command-and-control policies

Objective: Make stakeholders participate in water management within their own river basin.

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Mission: financial participation to investment in public (common interest)

or private equipments and facilities, for emission control and improvement of resource sharing.

2.2 The key role of Water Agencies

Role of Water Agencies reinforced by new Water Act in 1992

« Agences Financières de Bassin »:

- At the heart of water pollution regulation. - Initiate and monitor implementation of 5-year working plans

provisions regarding water quality and resource management issues.

No direct initiative on private investments, but financial aid is crucial

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Funds are then redistributed in the form of direct subsidies or loans

Incentive role in reducing fixed costs and later, emission charges.

Necessary funds: taxes collected from water users in river basin:- Emission tax (water pollution)- Water extraction and consumption taxes.

The Water Agency tax scheme

Multi-year framework of the Working Plan:

Tax receipts must balance expenditures→ Consequence: total amount of tax receipts determined

according to expected expenses

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The category of users to be taxed and the unit tax rates must be approved by the Water Agency Executive Board

Unit rates can be modulated geographically (coastal zones, wetlands, vulnerable areas)

Taxes are collected from each individual plant, with a minimum perception threshold

Two types of emission tax schemes: based on actual versus estimated emissions

Actual emissions: daily measured emissions (large plants) or average emission rate defined as:

“daily average emission level of month with highest activity”

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Estimated emissions: from yearly firm’s activity report by the manager

An input-output table production - emissions is used, based on average emission rates of industries.

Emissions are defined as a number of units per day (kg/day), not as a concentration (kg/day/litre).

Tax is then computed by applying a unit emission tax rate on a list of pollutants:

- Biological Oxygen Demand (BOD), - Suspended Solids (SS), - Nitrogen (N), - Phosphorus (P),- Inhibitory Matters (IM)

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If firm claims to be over-taxed or Water Agency believes reported or estimated emissions are below actual ones, plant inspection may be required

Industrial plants equipped with an abatement plant:

Emission charge is reduced in proportion of reduced (avoided) pollution

Abatement rate: as above, either measured or estimated

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Product Unit SS (gr.) BOD (gr.) IM (Equitox)

N (gr.) P (gr.)

Beer Litre 400 170 - 20 5

Wine 100 Litres

5 30 - 1 0.1

Refined Sugar

Kg 1.5 3.2 - 0.25 0.01

Emmental cheese

Litre 0.5 2.4 - 0.2 0.1

Kraft paper Kg 10 40 0.21 0.4 0.17

Viscose Kg 28 35 2.5 0.8 -

Fur Skin 270 360 3 20 2.5

Steel Ton 420 260 - - -

Coke Ton 200 2000 30 1100 1

Printed Circuit Board

Ton of copper

- - 18,000 - -

Example of input-output table (Production - Emissions)

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Water Agency Suspended Solids

BOD Nitrogen Phosphorus Water use

Adour-Garonne 158.30 254.96 226.27 106.76 [0.12 ; 0.18]

Artois-Picardie 126.00 252.00 143.00 675.00 [0.10 ; 0.31]

Loire-Bretagne 92.11 141.70 173.00 272.54 [0.16 ; 0.36]

Rhin-Meuse 103.19 206.37 141,59 235.53 [0.15 ; 0.30]

Rhône-Méd.-Corse 80.00 240.00 120 300.00 [0.05 ; 0.30]

Seine-Normandie 113.93 249.69 213.69 NA [0.09 ; 0.26]

Effluent emission and use charges, VI Working Plan

In French Francs per kilo-day for Suspended Solids, BOD, Nitrogen and Phosphorus, in French Francs per cubic meter for water use.

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What is going to change with the new water act proposal (2006) ?

In Title 3 ‘‘Governance and planning’’, Chapter III ‘‘Water Agencies’’

After 40 years of operation, the whole system needed to evolve, in the way of:

- A parliamentary control (missing in current situation, even if total tax receipts is about 2 billion Euros);

- An extension of Water Agency scope of action (the current one authorises Water Agencies only to financeactions related to the environment and uses, difficult to understandby the public and local decision-makers)

- A simplification of the tax system and more modulation of the tax rates (according to zoning and other local conditions), to establish

adequation between local tax level and local stakes regarding necessary investments

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- Necessary link between actions of Water Agencies and those of the ‘‘Water Police’’

- Facilitating the emergence of financial solidarity at the sub-river basin scale

In practice, main modifications are

- Subsidies granted by the WAs are conditional on compliancewith regulatory standards : stronger link between economicand regulatory approaches

- Stronger role of WAs in implementation of the SAGEs and actions of the EPTB, they are now in charge of the FNDAE programmesfor rural communities

- Maximum budget for the period 2007-2012: 12 billion Euros; the Parliament can modity this budget and the broad objectives of the future Working Programmes

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- But it is the Ministy of the Ecology and the Ministry of Finance thatset the maximum budget of each WA and their use (for differentintervention policies, e.g., pollution control, resource management)

- The rules for tax implementation and tax rate modulation are now part of the law

- A new tax on nonpoint source pollution; replaces the TGAP (General Tax on Polluting Activities), and is set on pesticide products.The tax is paid by resalers, and is based on the amount od activecomponents in pesticide products (list decided by the government).

- More incentives for collective management of water resource: tax rate for water withdrawal is higher in areas with gap betweendemand and supply; by this tax rate is reduced if collectivemanagement.

- Water tax rate depend on final use: domestic, cooling, industry,…

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- A new tax on obstacles on rivers and flows: to facilitate sediment and fishtransit; depends on river flow rate and upstream-downstream difference

- Overseas territories (French West Indies, etc.) already have river basin committeesbut they can now collect tax on effluent emissions and nonpoint sourcepollution

- Note: these territories already have water use tax since 2003 (Bill 2003-660)

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2.3 Command-and-control regulation

In parallel with the action of Water Agencies: The DRIRE (Direction Régionale de l'Industrie, la Recherche et la Technologie) - Designs emission standards for industrial plants, in terms of

maximum concentration of effluent emissions, by type of pollutant (March 3, 1993 decree)

- Delivers emission (in general once-and-for-all) permits to industrialists (« sites classés »).

- Emission standards are in practice modulated depending on localization

- Firms’ compliance with standards can be controlled (« Water Police »)

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2.4 Economic Analysis of Water Agency regulation Ideal ( ?) domain for application of environmental regulation theory:

- Point source pollution

- Economic instruments : « market-based » and « non-market-based »

- Asymmetric information between Water Agency and the industrial firm(abatement effort, technology, abatement cost,...)

Since 1992, plants subject to emission permits must be equiped with permanent measurement devices.

If an industrialist does not comply with a standard, the DRIRE imposes a 3-year rehabilitation plan (« mise en conformité »).

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Problems:

- Are economic instruments used by Water Agencies compatible with regulatory instruments described by the theory?

- Are those instruments set at optimal values ?

- Are instruments redundant ?

- How to evaluate damages due to emissions?

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2.4.1. Instruments used by Water Agencies:

Basic instrument: emission tax

Pigovian Tax if equal to consumer marginal damage from pollution

Problems in practice when considering a Pigovian tax:

-Necessary to know precisely the social damage function, to compute marginal damage and use it in designing the optimal tax rate

-Necessary to know the social damage due to pollution, for each geographical unit

- Uniform versus personalized tax?

- Consistency with government anti-inflation (or employment) policies ?

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Other (complementary) economic instrument: contracts(abatement subsidy, between Water Agency and the firm)

Justification of contract-based policy by an imperfect pollution tax system?

Type of contracts (specifying capital stock of abatement) motivated by simplicity and low control cost?

Asymmetric information on:- Technology- Abatement effort- Future activity

Strategic behaviour, e.g., if inverse relationship between gross pollution level and abatement rate.

Firms can ask for large capital stock of abatement, claiming future activity (output) will increase

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2.4.2. Incentive effect of emission tax

Does the level of the unit emission tax modify the behaviour of thepolluting firm ?

Emission tax can have an impact on

- The production level (specially in case of no abatement)- The net emission level(after abatement), given level of gross emission- The abatement rate, given level of gross emission.

Let : gross emission level (before abatement)

: net emission level (after abatement)

: abatement rate, =

: unit emission tax

B

N

B N

B

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How to construct a simple model for abatement rate ?

Assume abatement cost is ( , )c B A B

Firm's profit is ( ) ( , )

Because (1 ),

( ) (1 ) ( , ) ( ) ( , )

pq C q N c B

N B

pq C q B c B pq C q B B c B

Assumption here: production cost is separable from abatement cost

Hence, strategy of the firm in two steps:1/ Decide on optimal production level, q2/ Given q (and B), decide on optimal level of δ

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1

1/( 1)

( , )max 0

0

1log log log( ) log( )

1

1log log( ) log( ) (1 )log( )

1

c BB

B A B

BB

A

B A B

A B

If abatement cost is convex in abatement rate δ, β>1 and abatement rate is increasing in tax rate

If abatement cost is convex in gross emission B, α>1 and abatement rate is decreasing in gross emission level(provided β>1 )

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Nitrogenlog() = - 0.0269 log (B) + 0.0896 log ()

Suspended Solidslog() = 0.0630 log (B) + 0.2134 log ()

DBOlog() = 0.1443 log (B) + 0.1179 log ()

Data source: French agrofood industries, 1992-1998, all Water Agencies

Estimated abatement rate equations

log( ) log( ) log( )

log( ) 1 1with , ,

1 1 1

1, 1 , and exp

1

a b B c

Aa b c

c b c aA

c c c c

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Another application: 320 French plants in the Adour-Garonne and Seine-Normandie river basins

Variable Mean Std. Deviation

Minimum Maximum

B 3278.1 9962.1 4.00 112286

δ 0.5793 0.3023 0.0024 0.9960

τ 225.4 63.2 91.0097 561.06

B : BOD (Biological Oxygen Demand) emission level, in kg. / dayδ : BOD abatement rate (in percent)

τ : BOD emission tax (in French Francs)

Source: Lavergne and Thomas, J. Empirical Econ., 2005

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Estimated equation log( ) 0.0143 log( ) 0.5699 log( )

+ 0.0933 Food and drinks

+ 0.1634 Dair

B

y and milk products

+ 0.0233 Chemicals

- 0.4629 Iron and steel

- 0.6553 Paper and wood

+ 0.0422 Textile

0.9750 and 2.7547

Less efficient industries: ‘‘iron and steel’’ and ‘‘paper and wood’’Most efficient industries: ‘‘Dairy and milk products’’ and ‘‘food and drinks’’

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Intuition: Since environmental regulation important in decision to invest in abatement,

emission standards should play a limited role after investment has taken place.

Hyp. : Emission tax should play a greater role after the contract with the Agency (than before).

Empirical assessment of this assumption:

- Examine the impact of emission tax on gross emissions, before and after the contract;

- Examine the effect of emission tax on abatement rate before and after the contract, for plants engaged in abatement activity.

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Gross and Net Emission Model, Suspended Solids

Equation Gross emission Net emission

Variable Full sample Before contract

After contract

Full sample Before contract

After contract

Emission tax 0.0104 0.0154 -0.2057 -0.1694(**) 0.0517 -0.8670(**)

(0.32) (0.54) (-1.89) (-5.54) (1.76) (-10.09)

Gross emission

- - - 0.6076(**) 0.8324(**) 0.5058(**)

- - - (27.86) (25.31) (18.81)

Observations 1865 1001 864 1865 1001 864

Estimation method: Fixed Effects (Within). (*) and (**) respectively denote a significant parameter at the 5 and 1 percent level.t-statistics are in parentheses.

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2.4.3 Impact of contracts

First specification

0 1 2 3 4log log log logj j j jit it it i it itB K DIFF u

where firm i, year t, pollutant j

Ki : invested capital in abatement, as stated in contract,

DIFFit : Number of years since contract.

1 2

Elasticities: directly computed from log-log specification

log log, , etc.

log log

B

B B

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Effect of abatement capital investment on abatement rate, Suspended Solids

Model I Model II Model III

Variable Parameter t-stat Parameter t-stat Parameter t-stat

log() -0.0408 -1.51 0.0409(*) 2.01 -0.0511 -1.90

log(B) 0.0557 (**) 3.73 0.0579(**) 3.87 0.1075(**) 5.64

log(K) 0.0058 (**) 2.97 0.0102(**) 5.96 - -

DIFF 0.0207 (**) 4.62 - - 0.0266(**) 6.48

Estimation method: Fixed Effects (Within). (*) and (**) respectively denote a significant parameter at the 5 and 1 percent level.

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Second specificationAll pollutants considered, total tax payment: weighted average of emissions.

Variable Parameter t-stat Parameter t-stat Parameter t-stat

log (RB) 0.9088(**) 10.48 0.9856(**) 13.32 0.8761(**) 10.08

log (K) 0.0700(**) 6.34 0.0798(**) 8.47 - -

DIFF 0.0388 1.69 - - 0.1145(**) 5.84

Estimation method: Fixed Effects (Within). (*) and (**) respectively denote a significant parameter at the 5 and 1 percent level.

Impact of abatement capital investment on tax payments, all pollutants

0 1 2 3log log log

where and denote net and gross total tax payment.it it i it itRN RB K DIFF u

RN RB

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2.5 Industrial water demand

2.5.1. Multi-output Technology

Objective: describe technology of a multi-output firm, without specifying input use for each product (output).

Dual approach based on input prices and output levels

Allows to estimate total input demand, price elasticities and elasticities of substitution.

*1 2

Flexible form for variable production cost:

( , , ,..., ),

: unit price of input , 1,2,...,

: output

n

i

C C Y r r r

r i i n

Y

52

*0

Translog flexible form:

1log log log log log log .

2Y i i ij i j iYi j i

C Y r r r Y

with linear homogeneity (with respect to input prices) condition.

*logInput demand : log log ,

logi i i ij j iYji

Cx S r Y

r

where cost share of input i is .,...,2,1,

),...,,,( 21*

nirrrYC

xrS

n

iii

Shephard Lemma: allow to obtain total input demand:

53

Parametric representation of linear homogeneity and symmetry conditions:

i j

jiijiji i .,0,1

Computation of elasticities from estimated parameters:

Own-price elasticity: 1, .iiii i

i

S iS

Cross-price elasticity: , .jiij i

i

S i jS

Allen Elasticity of substitution: 1, .jiij

i j

i jS S

Morishima Elasticity of substitution: , , .ij ji ii ji ij jjM M i j

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2.5.2. Application : The Mexican industry

Parameter Estimate Std. Error

t-stat.

0 (Intercept) -0.8151 0.1935 -4.21

L (L) 0.2263 0.0057 39.40

W (W) 0.0288 0.0036 7.86

LL (LL) 0.0489 0.0026 18.38

WW (WW) 0.0087 0.0016 5.20

LW (LW) 0.0061 0.0030 2.03

Food -0.9463 0.2195 -4.31

Sugar -0.0233 0.3609 -0.06

Drinks -0.9021 0.2131 -4.23

Mines 0.3163 0.2866 1.10

Paper -0.5841 0.2516 -2.32

Chemicals -1.3630 0.3098 -4.40

506 observations.

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MAP 1: Availability Water Zones

Water Zones:

Cheapest one

More Expensive

MAP 1: Availability Water Zones

Water Zones:

Cheapest one

More Expensive

56

I Península de Baja CaliforniaII NoroesteIII Pacífico NorteIV BalsasV Pacífico SurVI Río BravoVII Cuencas Centrales del NorteVIII Lerma-Santiago-PacíficoIX Golfo NorteX Golfo CentroXI Frontera SurXII Península de YucatánXIII Valle de México

Source: Instituto Mexicano de Tecnología del Agua, 1999.

I

II

III

IV

V

VI

VII

VIII

IX

XXI

XII

XIII

MAP 2: CNA – Administrative Regions

I Península de Baja CaliforniaII NoroesteIII Pacífico NorteIV BalsasV Pacífico SurVI Río BravoVII Cuencas Centrales del NorteVIII Lerma-Santiago-PacíficoIX Golfo NorteX Golfo CentroXI Frontera SurXII Península de YucatánXIII Valle de México

I Península de Baja CaliforniaII NoroesteIII Pacífico NorteIV BalsasV Pacífico SurVI Río BravoVII Cuencas Centrales del NorteVIII Lerma-Santiago-PacíficoIX Golfo NorteX Golfo CentroXI Frontera SurXII Península de YucatánXIII Valle de México

Source: Instituto Mexicano de Tecnología del Agua, 1999.

I

II

III

IV

V

VI

VII

VIII

IX

XXI

XII

XIII

I

II

III

IV

V

VI

VII

VIII

IX

XXI

XII

XIII

MAP 2: CNA – Administrative Regions

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Water Fees, First quarter 2003

Availability Zone $/m3 *

Zone 1 14.1086Zone 2 11.2865Zone 3 9.4053Zone 4 7.7596Zone 5 6.1133Zone 6 5.5251Zone 7 4.1587Zone 8 1.4776Zone 9 1.1073

Note: reference 10.8213 $/USD first trimester averageSource: Comision Nacional del Agua–

(www.cna.gob.mx)Ley Federal de Derechos en Materia de Agua (LFDMA),

2003

58

Average Water Productivity for Industry

Type of Industry

Number of industries

% Water Used

Mean Water Price ($/m3)

WaterAv.Prod (Th. $/m3)

Mining 43 15.90% 0.81760 0.10735Food 126 5.86% 2.76578 0.93519Sugar 21 5.27% 0.45756 0.25587Beverage 151 18.74% 2.29228 0.48660Textile 59 5.14% 3.61129 0.80299Paper 64 37.29% 3.19733 0.13976Chemistry 32 7.67% 3.56662 0.28709Steel 4 4.13% 3.31115 0.22861

TOTAL 500 2.56892 0.30138

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Own and Cross-Price Elasticities of Demand, ij.

Labor Water MaterialLabor -0.3392 0.0230 0.3059

(-10.83) (1.43) (10.41)Water 0.2194 -0.2976 0.0618

(1.43) (-1.92) (0.33)Material 0.0819 0.0017 -0.0713

(10.41) (0.33) (-6.80)

t-statistics are in parentheses.

60

Labor Water MaterialLabor -1.6415

(-10.83)Water 1.0617 -13.6890

(1.43) (-1.92)Material 0.3965 0.0801 -0.0924

(10.41) (0.33) (-6.80)

Allen Elasticities of Substitution (AES) = ij.

Morishima Elasticities of Substitution (MES)= Mij.

Labor Water MaterialLabor 0.5587 0.4212

(3.40) (11.17)Water 0.3207 0.2993

(2.00) (1.89)Material 0.3772 0.1331

(10.02) (0.70)

61

2.5.3. An example: the Brazilian water policy

Federal Water law: January 1997

River basin chosen as basic administrative unit: decentralisation principle following the French experience

Brazil is a federal state, each state designs its own water policy, in compliance with the 1997 federal law

Pioneer implementation of the new policy framework: in theParaíba do Sul river basin

Southeast region of Brazil, across states of Minas Gerais (20,700 km2),Rio de Janeiro (20,900 km2) and São Paulo (13,900 km2)

5 million inhabitants, 8 500 industrial plants, and 10 percent of country’s GDP

62

Main problem in river basin: water pollution due to industrial and domesticeffluents

Rapid demographic growth of basin’s urban areas not accompanied byadequate planning and sanitation measures

Lack of sanitation infrastructure, indiscriminate occupation of riverbanks

About 69 percent of households connected to municipal sewage networkbut only 12 percent of collected domestic wastewater treatedbefore release in water bodies

Estimated domestic BOD discharge in river basin: 240 tons / dayEstimated industrial BOD ’’ ’’ ’’ ’’ : 40 tons / day

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1996-1997: Creation of the Paraiba do Sul River Basin Committee(CEIVAP)

2000 : Negotiations about water charge methodology, according to participation principle

2002 : Creation of the river basin Water Agency

The following principles were adopted during negotiation about water charges:

- Simplicity (conceptual and operational): water charges based ondirectly measurable parameters, for clear understanding by users

- Acceptability by all users, facilitated by participatory approach in theCEIVAP

- Signaling: water charges are expected to act as signals about economicvalue of water resources, and importance of sustainable use

- Minimisation of economic impacts, in terms of cost increases

64

Therefore, tradeoff between incentive nature of water charge and economic impacts (signaling vs. acceptability)

Hence, charges are set at very low levels during initial implementation period(2003-2006).

Industry and residential users:Water withdrawal charge: R$ 0.008 / m3Water net consumption charge: R$ 0.02 / m3Effluent emission charge: up to R$ 0.02 / m3

Agriculture:Water withdrawal charge: R$ 0.0002 / m3Total charges defined to be < 0.5 percent of rice and sugar production

production costs

Note: 1 R$ (Real) is about 0.38 Euros

65

IndustryWater demand

elasticity

Food and beverage -0,82

Clothing -0,31

Wood, rubber and plastics -0,40

Pulp and paper -0,76

Chemicals -0,71

Non-metal minerals -0,22

Iron and steel -0,48

Mechanical industry -0,31

Transport equipment -0,51

Others -0,33

How reactive is industrial water demand to water price ?

66

Simulation of the impact of water charge changes

ΔPW = 10 % ΔPW = 20 % ΔPW = 30 % ΔPW = 40 % ΔPW = 50 %

ΔXW - 3,23 % - 6, 38 % - 9,40 % -12, 28 % -14,99 %

ΔC 0,05 % 0,11 % 0,16 % 0,21 % 0,26 %

ΔPW : percent change in water charge

ΔXW : percent change in water demand

ΔC : Percent change in production cost

67

Simulation of the impact of changes in water charge (ΔPW) and production levels (ΔY)

ΔY

0 % 5 % 10 % 15 % 20 %

ΔPW

0 % - ΔW= 3.39 % ΔW= 6.66 % ΔW=9.81 %ΔW=12.86 %

10 % ΔW= -3.23 % ΔW= -0.12 % ΔW= 2.86 % ΔW=5.74 % ΔW=8.53 %

20 % ΔW= -6.38 % ΔW= -3.52 % ΔW= -0.77 % ΔW=1.89 % ΔW=4.46 %

30 % ΔW= -9.40 % ΔW= -6.75 % ΔW= -4.20 % ΔW=-1.73 % ΔW=0.65 %

40 % ΔW= -12.28 % ΔW= -9.80 % ΔW= -7.42 % ΔW=-5.12 % ΔW=-2.89 %

50 % ΔW= -14.99 % ΔW= -12.68 % ΔW= -10.44 % ΔW=-8.28 % ΔW=-6.19 %

68

3. Agricultural use

3.1. Recent situation in terms of quality - Impact of agricultural activity on the environment

Report from the « Cour des Comptes », February 2002:

Overall degradation of resource quality in France

Vulnerable areas with respect to nitrates expected to increase from 10 to 50 percent of total area

Alsatian groundwater: more than half of quality-monitoring points indicate nitrate concentrations greater than target of 25 mg/l, and 12 percent have a concentration greater than upper limit of 50 mg/l.

Generalized presence of pesticides (Atrazine and Gaucho, both recently banned)

69

Adour-Garonne river basin: majority of Gers, and Tarn-et-Garonne and Lot classified in vulnerable areas.

Majority of catchment points have maximum concentration (not always average) greater than upper limit of 50 mg/l.

According to IFEN (Institut Français de l’Environnement):

- 90 percent of French river streams carry pesticide molecules - 10 percent have pesticide concentration greater than

admissible standard for drinking water- Rivers carry on average 646 000 tons of nitrogen each year

(mostly from agriculture).

70

3.2 Water for irrigation

Worldwide: 18 % of arable (cultivated) land is irrigated (267 million hectare,World Bank, 2001)but contribute for 40 % of total agricultural production

In France: about 1.6 million ha irrigated in 2000 (out of 2.6 potential irrigated)

Between 1988 and 2000: 50 % of the increase in irrigated land has been dueto maize only

50 % for maize (corn, grain and seeds)18 % for horticulture, vineyards, fruit trees10 % for oilseed.

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Region Irrigation (million

m3)

Irrigated land(1000 ha)

Share of maize in irrigated land (%)

Share of horticulture, vineyards, fruit trees in irrigated land (%)

Poitou-Charentes 234.66 169.02 79 3

PACA 616.86 114.95 6 33

Aquitaine 408.96 278.69 74 17

Midi-Pyrénées 361.96 269.26 70 8

Languedoc-Roussillon

238.76 64.76 8 44

Regional statistics for irrigation, 2002

Source : French Agricultural Census, 2000.

72

Water withdrawal for irrigation in France:5.6 billion m3 each year (12 percent of total), of which 88 percent from surface water

Net consumption: 43 percent of the total

Irrigated areas have increased threefold from 1970 and 1995 (1.6 million hectare out of total agricultural land of 30 million hectare).

Input-Output process in the water cycle:

In OutRainfall PumpingRun-off (lessivage) EvaporationInfiltration TranspirationLeaching (percolation) Output to surface

waters

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Problem 1: Over-use of surface water for irrigation

- Minimum river flow for survival of downstream species

not guaranteed- Biodiversity and economic losses- Increase in pollutant concentration

Problem 2: Over-use of ground water

- Increased cost of pumping- Subsidence (affaissement de terrain)- Decrease in surface water flow, and lake water level- Decrease in groundwater recharge potential

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Technical Solutions

1/ Management of Available Volumes- Desalinization (costly, energy-intensive)- Dams and reservoirs (technical constraints due to

evaporation, difficulty to find new sites)

- Re-cycling :Drinking-direct: « toilet-to-tap » ; Non drinking- direct: Parallel network of wastewater ; Drinking and non-drinking-indirect: groundwater

recharge by injection.

2/ More efficient irrigation Sprinkler and low-flow rather than gravitation or flooding.

3/ Water-saving seedsAgronomic research

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Irrigation water pricing

► Demand for irrigation water

3

1

Let : water input for crop ;

: water price per m ;

: output price of crop

Production function of crop : ( )

Profit of producer , 1,2, , : ( ) ,

j

j

j j

m

i j j j jj

q j

w

p j

j f q

i i n p f q wq

Consider n producers, each growing m cropsFor each crop, a production function associating water input to crop yield

3.3 Economic solutions

76

1

1

1

Water demand from producer (across all crops) :

( ) , 1,2, , ,

Total water demand from all producers : ( ) ( ).

m

i ijj j

n

ii

i

wq w f i n

p

q w q w

1

( )( )

, 1,2, , .

j jj j j j

j

j jj

f qp p f q w w

q

wq f j m

p

Maximisation of profit with respect to qj :

Inverse of derivative of production function

77

Demand-side management of irrigation: through water pricing→ Performance of pricing policy depends on water demand elasticity

( ) log ( )Elasticity of water demand with respect to price:

( ) logi i

i

q w w q w

w q w w

Efficient water pricing: maximisation of total surplus

(farmers plus water producers)

For a water price w :

Users (farmers) :

Demand ( ) such that ,

Surplus is ( ) ( )

q w f q w p

pf q w wq w

78

Water supplier :

Operation profit is : ( ) ( )

where (.) : Variable Cost of producing water

wq w VC q w

VC

Total Surplus is : ( )

( ) ( )

V w V q w

pf q w wq w wq w VC q w

pf q w VC q w

Total profit of water supplier : ( ) ( )

: Total Cost =

wq w TC q w

TC VC FC

Fixed Cost

Operation worthwhile in the short run if operation profit > 0But fixed costs have to be covered in the longer run

79

► Only efficient pricing: MC pricing

Average Cost (AC) pricing : inefficient, - It increases producer’s surplus, but decreases farmers surplus- Fixed production costs can be covered by AC pricing

* *

( )0 ( ) ( ) 0

( ) ( ) ( )

( )

dV w dqpf q w MC q w

dw dwMC q w pf q w w

w MC q w

Maximise surplus with respect to water price w

80

Marginal or Average Cost pricing

Euros/m3

3m

AC

MC

Derived Demand

MCw

ACw

( )ACq w ( )MCq w

A

B

C

D E

Total Surplus under MC pricing : A + B + C + D + ETotal Surplus under AC pricing : A + B + D

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- Volumetric : direct measure (water meter)

- Input/output : water paid in proportion to production or input (tax)

- Area : payment according to irrigated area

- Block pricing : volumetric method with consumption thresholds

- Two-part tariff : fixed charge + constant marginal price

- Formal or informal water markets…

Available pricing methods

- NB 1 : Two-part tariff is often used when MC < AC- NB 2 : Area payment may depend on irrigation method, season, etc.

and sometimes also on non-irrigated area (if important investments)

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Why is (efficient) MC pricing not more widely used in practice?

► Implementation costs (metering, etc.)

Evidence by Bos and Wolters (1990 ) : out of 12.2 million irrigated hectares in the world

- 60 % concerned by area pricing- 25 % concerned by volumetric method

Tsur and Dinar (1997) : area pricing can be preferable if one integrates implementation costs

► Tariff proportional to output / input :Imperfect information on production technology

► The method to choose depends mostly on localimplementation costs (regional heterogeneity)

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Tariff Implementation Potential efficiency

Efficiency horizon

Demand control

Volumetric

(uniform rate)

Complicated First-best Short run Easy

Output/Input Less complicated Second-best Short run Fairly easy

Area Easy None - Through crop restrictions

Two-part Fairly complicated

First-best Long run Fairly easy

Water markets

Difficult First-best Short and long run

Depends on market’s type

Comparison of the different pricing methods

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To conclude on irrigation: water price should act as a signal on resource’s value

(Increasing) Block pricing  : Users with higher consumption (revenue ?) paymore in proportion (per cubic meter)

Efficiency principle : water should be paid at a price equal to marginal cost of provision

Efficient pricing : - A fixed fee for covering indirect costs (not related to

consumed volumes)- A volumetric price allowing to cover operation costs

Problem of observing consumption : all users should be paying for the volumes actually consumed

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3.4 Nitrogen and other inputs

Fertilizer used in agriculture:

- Chemical (industrial) and Organic (animal) sources- Chemical fertilizer: mostly a combination of Nitrogen (N), Phosphorus (P)

and Potash (K).

France: 2nd world user of fertilizer (3.6 million ton nitrogen in 1995, 37 % of animal origin)

63 percent of mainland in excess nitrogen areas (more than 170 kg N/ha)

Agriculture: Main nitrogen (65 %) and phosphorus (20 %) emission source

Intensive cattling (élevage): 50 % of hog and poultry production, and 40 % of beef production concentrated on 6 - 8 %of territory

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Pesticide: France 3rd world user (95 000 tons)

Nitrogen loss due to leaching and/or run-off: 25 percent (6.10 – 12.20 Euros / hectare)

Problem 3: Impact on the environment and health risk

Nitrates in rain and irrigation water carried into surface water (run-off) and groundwater (leaching):

- Eutrophisation of surface water (proliferation of algae, reduction of oxygen contained in water)

- Human health: nitrates convert into carcinogenic nitrosamines. Reduction of blood-carying capacity by haemoglobin.

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Other inputs:

- Accumulation of heavy metals from animal feed

- Pesticides in food and water: allergic reactions, may affect nervous system, kidney and liver functions

- Antibiotic residues

Technical solutions

- Better management of manure stocking and spreading

- Use intermediary crops to trap nitrogen (legumes)

- Better production risk management (hedging behaviour and self-insurance against crop yield uncertainty).

88