ECONOMIC ANALYSIS OF WATER USES GESTÃO INTEGRADA DE BACIAS HIDROGRÁFICAS INSTITUTO SUPERIOR TÉCNICO

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1 Purposes of water pricing to ensure efficient use of water. to ensure equity among water users. to ensure the recovery and prevention of degradation of water quality and aquatic ecosystems. to prevent and mitigate the effects of floods, droughts and pollution accidents. Henriques 1 WATER COSTS Environmental externalities Economic externalities Oportunity costs Capital costs Operation and maintenance costs Service Costs Total economic costs Total Cost Henriques 9 Henriques 1

2 WATER VALUE Intrinsec value Adjustment for social objectives Net benefits of indirect uses Net benefits of return flows Economic value Total Value Benefits for water users Henriques 16 Water prices should ensure that: 1. the total cost is borne equally by the various users; 2. to reach the maximum total water value, which means that losses and waste are minimal. Henriques 17 Henriques 2

3 Water is an irreplaceable and indispensable for most uses. For quantities close to the minimum levels of operation of economic activities (or the minimum for survival and comfort, for human consumption), the price has no influence on the quantities consumed. Water can not be retained, on an exclusive basis, by a particular user or user group, and often serves multiple users in sequence, from upstream to downstream (which is why the water is designated as a fugitive resource). Henriques 18 Economic externalities are not usually borne by water users, except through the intervention of regulatory authorities outside the market. The hydraulic infrastructures generally have large economies of scale; in fact, for very wide range costs of water services are decreasing with the amount of water supplied, generally up until the system capacity. Rather, economic externalities and environmental externalities are generally increasing with the amount of water supplied (extracted from water bodies), so the total cost function is generally decreasing for low quantities supplied and may then increase if marginal costs of externalities are greater than the absolute marginal value of water services. Henriques 19 Henriques 3

4 It is not possible or practicable to maintain a large number of suppliers of water services so that users can not choose among different suppliers (in general water services are provided under monopoly). Henriques 20 From an operational perspective, the price of water should ensure the funding of: the infrastructures for abstraction, treatment, transportation and distribution of water, including capital costs and operating and maintenance costs (service costs); infrastructures for drainage, treatment and disposal of sewage and waste generated (eg sludge from wastewater treatment), including capital costs and operating and maintenance costs (service costs); Henriques 21 Henriques 4

5 The price of water should ensure the funding of: licensing of discharges - administrative costs - and monitoring and supervision of waste water discharges, given that some of these costs are borne directly by users when they have to follow procedures for selfcontrol (in this case the costs fall in operating costs, and therefore, the cost of services); monitoring and quality control of water bodies (environmental costs); recovery, prevent deterioration and maintenance of the environmental quality of water bodies, in part attributable to the effects caused by water uses (environmental costs); Henriques 22 The price of water should ensure the funding of: infrastructure for flood protection and flood risk insurance (service costs); infrastructure to protect against drought (including strategic reserves to ensure water) and insurance against the effects of drought (service costs); Infrastructure for protection against pollution and for insurance against risks of pollution accidents (economic externalities and environmental externalities). Henriques 23 Henriques 5

6 ECONOMIC ANALYSIS OF WATER USES PURPOSES OF THE ECONOMIC ANALYSIS: to survey the economic activities within the watershed. to assess trends (water needs, consumption, investments). to evaluate how to achieve environmental objectives at lower cost (cost effectiveness analysis). to assess the economic impact of proposed measures (who wins and who loses?) to assess water bodies for which lower objectives may apply, taking into account the economic and social costs (the balance between environment, economy and society). to support the development of financial and economic instruments to achieve the objectives. Henriques 24 ECONOMIC ANALYSIS OF WATER USES PURPOSES OF THE ECONOMIC ANALYSIS: to identify water bodies with species with economic interest (protected areas). to identify heavily modified water bodies. to assess the status of cost recovery. to evaluate the exception to the objective of no deterioration of water bodies to allow the development of new activities. Henriques 25 Henriques 6

7 ECONOMIC ANALYSIS OF WATER USES Economic analysis of water uses to assess the actual level of cost recovery to assess the costs of measures 1. to estimate volumes, costs and prices of water. 2. to estimate present and future investments. 3. to assess the environmental, economic and social effects of cost recovery. to select the most effective combination of measures Report on the measures to apply for the recovery of costs. Application of programmes of measures Henriques 26 ECONOMIC ANALYSIS OF WATER USES Set penalties for not achievement of the objectives Evaluate the impacts of the programmes of measures Analysis of water uses, pressures and impacts Economic analysis of water uses. Assess the level of cost recovery of water services. Assess trends of water supply and water demand. Implement programmes of measures Identify programmes of measutes ENVIRONMENTAL OBJECTIVES Justify derrogations Identify feasible measures Estimate the costs of measures Assess the effectiveness of the measures. Identify the best effective set of Evaluate the costs and the benefits of the measures. measures Designation of modified water bodies. Evaluate water pricing Justification of derrogations Henriques Justification of cost recovery level of water services 32 Henriques 7

8 WATER PRICES (Art 9º) 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. Henriques 33 WATER PRICING (Art 9º) 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 analysisconducted 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. Henriques 34 Henriques 8

9 WATER PRICING (Art 9º) 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 achieve the objectives of this Directive. Henriques 35 WATER PRICING (Art 9º) 4. Member States shall not be in breach of this Directive if they decide in accordance with established practices not to apply the provisions of paragraph 1, second sentence, and for that purpose the relevant provisions of paragraph 2, for a given water-use activity, where this does not compromise the purposes and the chievement of the objectives of this Directive. Member States shall report the reasons for not fully applying paragraph 1, second sentence, in the river basin management plans. Henriques 36 Henriques 9

10 WATER PRICING (Art 9º) Water services means all services which provide, for households, public institutions or any economic activity: (a) abstraction, impoundment, storage, treatment and distribution of surface water or groundwater, (b) waste-water collection and treatment facilities which subsequently discharge into surface water. Water use means water services together with any other activity identified under Article 5 and Annex II having a significant impact on the status of water. Henriques 37 WATER PRICING (Art. 9º) Water services Water uses activities with significant impact on water status Activities without significant impact on water status Henriques 38 Henriques 10