Evaluating Economic Policy Instruments for Sustainable Water Management in Europe

The research leading to these results has received funding from the European Community’s Seventh Framework Programme (FP7/2007-2013) / grant agreement n° 265213 – project EPI-WATER “Evaluating Economic Policy Instrument for Sustainable Water Management in Europe”.

DorsetVoluntary Agreement

Berlin, 26th January 2012

Colin Green, Christophe Viavattene, Simon McCarthy, Joanna Pardoe

Flood Hazard Research Centre Middlesex University

“Voluntary” agreement - Dorset

Groundwater in England

• Groundwater limited resource in England• Current abstraction 7 million m3/day from groundwater• 9% total groundwater abstraction in SW region• 30% of supply in SW is from groundwater• Majority of boreholes that have been closed are because

of cryptosporidium• 146 sites closed since 1975; loss of 425,000 m3/day

(approx domestic consumption of 2.4 million households)• 15% monitoring sites nitrates exceed limits• Majority of nitrogen load is organic?• Annual capital expenditure to deal with groundwater

c£15 -36 million; all costs since 1975 c£40 million/year i.e. low compared to all water supply costs

Potential N load

Gross nutrient balance (N/ha)

-50

0

50

100

150

200

Gross nutrient balance Nkg/ha

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008

Poland

Switzerland

Czech Republic

Luxembourg

Germany (including former GDR from1991)

Région wallonne

United Kingdom

Denmark

Norway

Belgium

Vlaams Gewest

Netherlands

Fertiliser use in England and Wales

0

20

40

60

80

100

120

140

160

180

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

kg/h

a

Nitrogen Tillage

Nitrogen Grass

Phosphate Tillage

Phosphate Grass

Fertiliser use England & Wales 2010

0

5

10

15

20

25

30

35

40

Jan Feb Mar April May June July Aug Sept Oct Nov Dec

month

%

all fertilsers

straight K

Transaction costs

• Costs of ‘ex’change

• Costs of exchange are why individuals cannot optimise resources

• Costs of exchange are why markets are not resource efficient

• Attention is absolutely scarce

• Internal (cognitive) efficiency does not result in external (resource) efficiency

Exchange surplus

Quantity

Frictional cost

Surplus from exchanges that do

take place

Exchange surplus

Quantity

F1

Surplus from exchanges that do

take place

Frictional costs after innovation

Transaction costs

B

A

If A > B then change worthwhile

Q – quantity available

Surplus from exchange

Quantity

What is the ‘Surplus’ from the exchange?

Consumer Surplus + Producer Surplus

In a perfectly competitive market this reduces to the Consumer Surplus

Surplus from exchange

Quantity

Q – quantity available

Maximum it is worth spending to get

efficient allocation

What are these costs?

Institutions

• Rules are about power• “Rules over” define incentives• “Rules to” define action space• Institutional mapping• Privatisation carried out without concern for

economic efficiency• Companies lack incentives to promote demand

management, SUDS, etc• Have incentives to install ‘end of pipe’ solutions

Policy issues

• Priorities

• Difficulty of change – dependency on Primary Legislation

Characteristics

• “Voluntary” agreement is actually means of reducing information costs so that farmers can use resources efficiently

• Changes that cost farmers money require subsidy – paid under the table

• Intervention by water company and not by the regulator (Environment Agency)