Opinion of the Economic and Social Committee on the "Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee - Pricing policies for enhancing the sustainability of water resources"

(2001/C 123/15)

On 27 July 2000 the Commission decided to consult the Economic and Social Committee, under Article 175 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Agriculture, Rural Development and the Environment, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 20 December 2000. The rapporteur was Mrs Sánchez Miguel.

At its 378th plenary session (meeting of 24 January 2001), the Economic and Social Committee adopted the following opinion by 82 votes with three abstentions.

1. Introduction

1.1. The broad debate within the EU on water policy, encompassing the scientific community, environmental organisations, consumer representatives and the main economic sectors affected, agriculture and industry, has resulted in the draft Water Framework Directive(1) (WFD), which offers a framework for a sustainable water resource policy.

1.2. The ESC welcomed both the Communication on European Community water policy(2) and the draft WFD(3). It did however comment on the need to lay down rules on pricing to make sustainable use of water resources possible.

1.3. Similarly, the ESC acknowledges how important the draft Parliament and Council decision establishing the list of priority substances in the field of water policy(4) is for the application of the WFD.

2. The objectives of the communication

2.1. The main objective in formulating a water pricing policy is to enhance the sustainability of water resources by encompassing all those elements relating to the quantity of water extracted and the pollution emitted into the environment.

2.2. It is important to clarify the concepts on which pricing theory and practice are based, particularly the different cost types to be applied with a view to achieving sustainable water use:

- Financial costs of water services, including the costs of providing and administering these services, operation and maintenance costs, and capital costs.

- Environmental costs that represent damage to the environment, ecosystems and users themselves.

- Resource costs, covering those caused by losses for other users, particularly through depletion of water resources.

2.3. The guiding principles in implementing water pricing policies which take account of environmental protection and economic efficiency focus on:

- Improving the knowledge and information base, taking into consideration the estimated demand for water and costs of water services and use.

- Setting the right water prices, at a level that ensures cost recovery for each sector (agriculture, households and industry), taking account not only of surface water but also groundwater.

- The river basin as the basic scale for assessing environmental and economic costs, since it represents the level at which environmental externalities take place.

3. General comments

3.1. The WFD believes that pricing has a key role to play in encouraging sustainable water use, recovering the costs of the associated services and achieving the objectives set in a cost-effective way.

3.2. The ESC acknowledges and fully supports the idea that prices should clearly convey that water is a scarce resource in order to encourage users to reduce consumption and pollution. At the same time, it would make the following comments.

3.2.1. While acknowledging that a large proportion of water use is accounted for by productive activities (agriculture, industry, tourism, etc.) of huge economic significance, it must be borne in mind that water is more than just an economic asset: it is a basic entitlement of human beings, and is essential to ecosystems. The link between these aspects must be made clear, so that in practice it is not purely economic factors alone which are considered, contrary to the Commission's intention. Essential water supplies to all - even those unable to pay for them - must therefore be guaranteed.

3.2.2. If pricing is to play this important role, a real link between sustainable use and cost recovery must be established, as set out in Article 9 of the framework directive. Variables which go unmentioned in the communication, such as ownership of water resources (since existing ownership and user rights must be maintained), public or private management etc., may put these two elements at odds with each other.

3.3. A shift away from obsolete management and consumption patterns towards a sustainable model is currently under way. The framing of demand management policies is hampered not only by the difficulties affecting any change of direction, but also by unawareness of these traditional methods and customs.

3.4. This lack of knowledge can result in some measures, which ought to trigger change, not having the expected effects; in the case of water, introducing economic principles and instruments may generate speculative prices, non-sustainable changes in use, etc. The traditional cost-benefit analysis is incomplete insofar as the market fails to recognise these elements.

3.5. The second section of the communication reviews the main features of pricing policies in the Member States, the accession countries and developing countries, and considers the possible impact of pricing on economics, environment and society.

3.5.1. The ESC fully agrees with the analysis that within the European Union, the greatest price imbalances concern urban waste water treatment and agriculture in the southern countries. It also endorses the reference to difficulties in matching price with the need for major infrastructure investment. At the same time, affordability (the relative proportion of water service costs to users' disposable income) is seen as the major problem in developing countries.

3.5.2. However, other potential negative effects, touched upon in the general part of this document, need to be examined further. These include possible changes in "ownership of water resources" contrary to the objectives of the WFD and price speculation or excessive development or scale of infrastructure in Member States, applicant states or developing countries, sometimes combined with illicit or unlawful practices. The aim here is to be able to anticipate the impact of economic activity and provide for measures to adjust public and private administrations to the new situation.

4. Specific comments

4.1. Water pricing policy should be coordinated with other Community policies, particularly the CAP as amended by Agenda 2000, social cohesion, regional development and environmental policy, etc. in order to reinforce the relevant instruments.

4.2. Point 1.3 of the communication states that efficient pricing ensures that available resources are efficiently allocated between different water uses. This idea should be defined more clearly, for which purpose the following is necessary.

4.2.1. Balanced prioritisation of uses should be introduced in keeping with social and environmental criteria, so that sustainable use is not defined exclusively by price, or in other words by users' economic means. In areas suffering shortages, for example, fierce competition for use of water resources can arise between well-established, sustainable traditional agriculture and the leisure and tourism industries (golf courses, theme parks, etc.) which can pay more and recover costs by passing them on to consumers. Traditional farmers can only do this in part.

4.2.2. In accordance with the ESC's earlier views in this area(5), uses should be prioritised as follows:

- supplies for human consumption,

- guarantee of ecological requirements,

- agricultural and industrial use,

- leisure and other non-essential uses.

4.2.3 Prioritisation and weighting of uses should be integrated as another element in boosting sustainable use. The way this information is reflected in pricing needs to be studied before drawing up a series of helpful recommendations for water resource managers.

4.3. Point 2.1 lists the different types of water use and introduces the concept of environmental use. To define an "environmental use" of water and, in particular, to compare it with other water uses, seems inappropriate. Conserving the environmental characteristics of water in terms of quality (a key objective of the WFD) and quantity, in order to safeguard ecosystems and fulfil regulatory functions, is a prerequisite for any other possible uses.

4.3.1. The communication should expand upon this aspect to prevent misinterpretation of the function of water and the way it is used. As the communication points out, the natural water cycle needs to be considered as a basic element which limits the possible uses of water resources, as a guarantee of sustainability.

4.4. The third section of the communication lays down the requirements for moving towards water pricing policies that enhance sustainable use. It opens with two statements which deserve our full support: firstly, there is no intention of seeking a uniform price, since this will depend on local environmental and socio-economic conditions; and secondly, the necessary regulation cannot be replaced with economic instruments and pricing.

4.4.1. In implementing all the requirements of the WFD, pricing must not be allowed to become the main priority for the relevant authorities, to the detriment of other priorities which are mostly expensive and not immediately cost-effective in economic terms, such as data collection, analysis of uses, preparation of management plans, etc.

4.5. Point 3.1 of the communication argues that knowledge about demand for water and the pollution load generated by users is necessary: such data generally lack sufficient reliability. The Commission advocates progress towards installing metering devices and testing of methods for validating the collection of important data.

4.5.1. The need for this knowledge should be highlighted but, most importantly, metering devices must be introduced across the board, particularly in agriculture and industry. This is because consumption for domestic purposes is generally under closer observation. Such a measure obviously poses technical difficulties, not because of any lack of suitable devices, but on account of the problems arising from selection of sampling points, the way farming has historically been organised, the lack of transparency among industries - especially those of greatest environmental impact - and organisational changes in the supervisory authorities.

4.6. Estimation of the cost of use and services is divided into financial costs, environmental costs and opportunity costs.

4.6.1 Two questions arise in relation to financial costs. The first is the reference to forward assessment of situations in which, under exceptional circumstances - such as droughts or other obstacles to normal service - pricing does not enable these costs to be recovered. This is a highly sensitive issue, particularly where private operators are involved. There have already been cases where consumption has fallen in reaction to a rise in the price of supply and treatment, lowering business forecasts and triggering a further price rise. The message to society is negative: water saving and recycling push prices up rather than down (Eurowasser, Germany, 1994).

4.6.1.1. It must be borne in mind that one of the defects of the market system is that in the case of certain resources such as water, what is good for society - water saving - is bad for the private interests which draw their profits from selling larger quantities.

4.6.2. The second question also concerns cost recovery by private operators. The communication considers that the financial cost structure should also cover return on equity (including profits) "where appropriate". The Commission's future recommendations must include the responsibility on the part of the relevant authorities to supervise such returns in order to safeguard the essential objectives of the WFD.

4.6.3. With regard to environmental costs and resource costs, the communication simply describes the difficulties in integrating them into pricing and the lack of calculation models beyond economic research. It is, however, essential for a harmonised structure and criteria to be available in order to evaluate such costs accurately. Otherwise, the WFD might be understood to have recovery of financial costs as its sole objective in this area.

4.6.3.1. Steps must therefore be taken to produce relevant guidelines and criteria for action reasonably soon, by analysing and reconciling the various schools of thought concerned: these range from evaluation of assets and opportunities in monetary terms to support for multi-criteria methodologies based on an understanding of sustainability which embraces environmental and social objectives.

4.6.4. The ESC believes that a code of good practice on how to calculate the various use and service costs should be compiled in order to prevent any interpretation or application of concepts contained in the communication which might nullify the objectives based on the principle of full recovery of costs.

4.7. The communication's definition of the "right price" starts with the claim that "in theory, the overall optimum of water use is reached where the marginal benefits from water use match the marginal costs, including environmental and resource costs". The approach is based on a dual price structure: a variable element (volume, level of pollution, time of year, location), and a fixed element, in order to allow financial costs to be recovered under all circumstances.

4.7.1. The communication proposes a phased implementation plan for reasons of affordability, political acceptability and adaptability, and is of the view that in situations of unsustainable water use, social concerns must be taken into consideration but must not be the main objective of pricing policy.

4.7.2. Although this approach should be supported, it must be ensured that the accompanying social measures are shaped in tandem with pricing policy, that they are closely linked to it and do not disturb the sustainability not only of water resources, but also of the rest of the system, channelling investment to other activities of similar or greater impact.

4.8. The communication acknowledges the importance, as an economic instrument, of combining water charges and subsidies in order to point investment and economic activity in the right direction. For example, the duties, taxes or charges incorporated into water prices must be earmarked for specific purposes, so that a significant proportion of them is ploughed back into the sectors most affected by any restructuring. In this way, any loss of profit or income which might be caused by higher water prices would be partly or fully offset by investment, aid, subsidies or other instruments, such as modernisation of urban supply networks, irrigation systems, treatment plants, etc.

4.9. Such steps must be backed by initiatives to educate and instruct the general public so that the new water culture, particularly in its anti-pollution and water saving aspects, becomes firmly entrenched in European society.

4.10. Particular importance is attached to the involvement of users and consumers and the existence of transparent information on the part of the operators concerned, to help frame appropriate prices, increase social acceptability and ensure successful implementation.

4.10.1. The user and consumer concept needs to be broadened. Water issues have traditionally been seen as the preserve of operators, administrative authorities and technical experts; in some countries, this extends to electricity generating and construction companies and in others, especially in southern Europe, to farmers "and irrigators" associations. This community of interests, with its deeply rooted traditional water culture, is in the process of taking on board the new social and environmental demands which are shaping a new water culture. Water management must be opened up to the guiding ideas and concepts of this culture: water saving, non-pollution, re-use, etc.

4.10.2. New social entities must be brought in who can bring innovation and change to bear on the shift to a new water culture. In particular, environmental NGOs, business associations and trade unions have a crucial role in keeping watch over environmental protection, water saving and the reduction of industrial pollution. These bodies also have the degree of organisation and social authority required to launch campaigns mobilising and boosting public awareness to strengthen pricing policy.

4.10.3. To this end, changes must be made to the institutional framework enabling users and consumers to contribute as described in Article 9(1) of the framework directive, and rights must be introduced in law. Without these, it will be difficult to monitor operators, especially in the quasi-monopoly situations the communication refers to. Official machinery allowing for independent monitoring of public - and private - sector operators must therefore be provided.

4.11. Community research and development programmes must specifically include objectives contributing to proper application of these economic recommendations both directly (research into methods for calculating environmental costs, resource costs, etc.) and indirectly, in order to cushion the socioeconomic effects of implementation (research into plant species with low water consumption; water-saving techniques in industry, agriculture and domestic supplies; how to reduce leakage losses in distribution networks, etc.).

4.12. The communication refers in several places to agricultural sectors experiencing severe difficulties in achieving appropriate pricing: difficulty in estimating sustainable demand and consumption, heavily subsidised crops, measurement of the diffuse pollution caused by nitrates and pesticides, the CAP and the lack of a methodology for reliable evaluation of the environmental costs and benefits. Water pricing for agriculture requires a separate document and process of consideration. Account should be taken, for example, of the beneficial aspects of cereal irrigation in preserving threatened species or improving soil characteristics, or agriculture's contribution to the CO2 sink effect in relation to climate change.

Brussels, 24 January 2001.

The President

of the Economic and Social Committee

Göke Frerichs

(1) OJ L 327, 22.12.2000.

(2) OJ C 30, 30.1.1997.

(3) OJ C 355, 21.11.1997.

(4) OJ C 268, 19.9.2000.

(5) OJ C 30, 30.1.1997.