International Workshop on Hydro-Economic Modeling and Tools for Implementation of the European Water Framework Directive

Valencia, Spain, 30 – 31 January 2006

The Economic Value of Water

Ingo Heinz

University of Dortmund, Germany

“Water industry – a business with increasing profits in future”(Pictet Fund Water)

“Water resources – only to satisfy demands, not for sale” (Mohammed)

“Water – has an economic value in all its competing uses and should be recognised as an economic good” (International Conference on Water and Environment, Dublin 1992)

• Commence river basin plans 2009

• Introduce water pricing and cost recovery 2010

• Implement programmes of measures 2012

• Achieve good water status in most waters 2015

• Characterisation of the river basins 2004

• Commence monitoring programme 2006

EU Water Framework Directive (WFD)

EU Water Framework Directive (WFD)

Characterisation of the river basins 2004:

1. Analysis / review of water uses and impacts on water status

2. Economic analysis of water use including:

Assessment of the current level of cost recovery

The costs of water services (abstraction, supply, disposal)

financial, environmental and resource costs

are to be recovered by water pricing policy

Adequate contribution of water users to the costs of water services

Cost recovery and water-pricing policy

Water abstraction Water abstraction levy

Water supply Charge on water supply

Wastewater disposal Charge on wastewater disposal

Wastewater discharge Effluent levy

Cost Recovery: Current water pricing

Effluent levy

Examples:

• Denmark

• France• Germany 36 Euro / damage unit

• Spain

• UK

Examples:

• Germany e.g. 0.05 Euro / m³

• France• The Netherlands 0.1785 Euro /

m³

• (UK)

Water abstraction levy

Financial Costs

• Which water services? (costs of flood control, recreation and aquatic biotopes to be included?)

• Which values of assets for depreciation and interest calculation? (present or future values?)

• Which interest rates? (market or social discount rates?)

• “Abatement costs” = financial costs ?• “Costs of future regulations” = financial costs ?• “Not internalised environmental costs” ? !

Environmental Costs

Methods to evaluate environmental costs

1. Costs of preventing / mitigating / reducing damage

2. costs of averting / restoring measures

3. willingness to pay (contingent valuation method)

• “Economic losses that suffer other water users due to over-exploitation” : Overlap with environmental costs

Resource Costs

• “Economic losses due to

inefficient water allocation among

1. water users

2. regions

3. generations

at a given set of environmental limit values for abstraction and pollution rights”

2004 Characterisation of river basins:Current Level of Cost Recovery

Financial costs Environmental costs

Resource costs

• No clear-cut between cash-flow and capital costs

• Public water services only

not applied not applied

Cost Recovery (%) water supply 92

wastewater 84? ?

• Example: Austria

• Example: Germany

Financial costs Environmental costs

Resource costs

• Accounting includes always capital costs

• Public water services only

• Charge on water

abstractions

• Charge on effluents

• Charge on water

abstractions

• Charge on effluents

Cost Recovery (%)

water supply 100

wastewater 96

? ?

Financial costs Environmental costs

Resource costs

• Clear-cut against environmental costs

• Water services provided to business and households

• Not applied due to data problems

• Rough estimates available

• Not applied due to data problems

• Related to inefficient allocation of abstraction rights

Cost Recovery (%) water supply 98

wastewater 100

? ?

• Example: UK

Austria: Currently no estimates of environmental and resource costs

Germany: No differentiation between environmental and resource costs:roughly recovered by both charges on abstractions and effluents

UK: Currently no estimates of environmental and resource costs.Clear-cut differentiation betweenall three cost categories.

2004 Characterisation of river basins: Current Level of Cost Recovery

Key Question

• What is the

true economic value of water ?

compared with the actual charges on water services?

Financial costs

Environmental costs

Resource costs

• Costs of water infrastructure

• Costs of compliance with environmental regulations

• Non-regulated,not-internalisedenvironmental damage (external costs)

• Inefficiencies in allocation of water resources for

abstractions

effluents

Suggestion how to differentiate

Hydro-economic models can help to find out the

To determine the true economic value of water

optimal allocation of water resources

appropriate charges on water abstraction,pollution

most cost-efficient properties of infrastructure

proper financial costs and charges

most efficient reduction of environmental costs

appropriate charges on non-internalised damage

Hydro-economic models: two examples

Aquatool WaterStrategyMan

•Financial costs

•Environmental costs

•Resource costs

Costs of infrastructure. Charges on using it.

Future abatement costs. Shadow price of standards.

Gap: current / optimal allocation. Shadow price of scarcity.

Costs of infrastructure. Charges on using it.

Not-internalised damage. Charges on abstraction / pollution.

Economic losses or foregone economic benefits. Scarcity rents.

Economic value of water

? ?

Summary

• Divergent definitions and calculation methods in EU Countries No comparison of cost recovery

• True economic value of water: Economic benefits financial + environmental

+ resource costs

• Water price = economic benefit per m³ at optimal allocation

• Resource costs per m³ = water price - unit financial costs - unit environmental costs

“Water industry – a business with increasing profits in future”(Pictet Fund Water)

“Water resources – only to satisfy demands, not for sale” (Mohammed)

“Water – has an economic value in all its competing uses and

should be recognised as an economic good” (International Conference on Water and Environment, Dublin 1992)

WHO IS RIGHT ?