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
Date: 2000-07-26
Institutions: European Commission
Subjects: environmental protection, prices, water, water resources

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 26.07.2000
COM(2000) 477 final

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

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

PREFACE

Water is a major concern for environmental policies in the European Community and is one
of the environmental priorities of the European Commission. The main pillar of water policies
during the coming decades will be the proposed Directive establishing a framework for
Community action in the field of water policy (or Water Framework Directive). In line with
recent initiatives to give more weight to economic instruments in environmental policies, the
proposed Water Framework Directive promotes the use of water charging to act as an
incentive for the sustainable use of water resources and to recover the costs of water services
by economic sector. This will contribute to meeting the environmental objectives of this
directive in a cost-effective way.

Against this background, the Commission presents this Communication with the following
objectives:

(1)

(2)

(3)

To clarify the main issues related to the use of water pricing for enhancing the
sustainability of water resources;

To present the rationale behind the Commission's preference for a strict application of
sound economic and environmental principles in water pricing policies;

To propose a set of guiding principles that will support the implementation of the
proposed Water Framework Directive and more specifically its water pricing article.

The key messages put forward by the Communication are as follows.

(1)

(2)

(3)

The sustainability of water resources is at stake in many river basins in Europe, from
both a quantitative and qualitative point of view. Appropriate water pricing has a key
role to play in the development of sustainable water policies.

To play an effective role in enhancing the sustainability of water resources, water
pricing policies need to be based on the assessment of costs and benefits of water use
and to consider both the financial costs of providing services as well as environmental
and resource costs. A price directly linked to the water quantities used or pollution
produced can ensure that pricing has a clear incentive function for consumers to
improve water use efficiency and reduce pollution.

The integration of economic and environmental objectives into Member States water
pricing policies is highly diverse at present. Overall, the full recovery of financial
costs is only partly achieved, and environmental and resource costs are rarely
considered. The inadequacy of water pricing policies is striking for the agricultural

2

sector, especially in Southern European countries where it
consumer of water and where scarcity problems are the greatest.

is by far the largest

(4) Water pricing policies in countries where the EU has a particularly strong involvement
rarely integrate economic efficiency and environmental objectives. This is true for
accession countries, where pricing is an important issue in the context of enlargement.
It is even more valid for developing countries, where the application of economic
principles in water policies is in its infancy.

(5)

(6)

Efficient water pricing policies have a demonstrable impact on the water demand of
different uses. As a result of changes in water demand, efficient water pricing reduces
the pressure on water resources. This is particularly true for the agricultural sector.
The available evidence suggest that farming communities can be expected to adapt to
certain price increases that would result from a stricter recovery of the costs of water
services. Different levels of cost recovery among countries and economic sectors such
as agriculture and industry, are likely to influence the competitiveness of these sectors
both in the internal market and international trade.

Pricing policies that better account for the environment will build on: (i) a firmer
application of the principle of recovery of costs; (ii) a wider application of pricing
structures that provide incentives and the promotion of metering devices; (iii) the
assessment of major environmental costs and, where feasible, the internalisation of
these costs into prices; (iv) a transparent policy development process with the
participation of users/consumers; and, (v) a phased implementation of pricing policies
that better integrate sound economic and environmental principles.

(7) Water pricing will need to be integrated with other measures to ensure environmental,
economic and social objectives are met cost-effectively. The proposed Water
Framework Directive offers the right framework to do so in the context of the
preparation of the river basin management plans.

(8)

Other sector, structural and cohesion policies need to be designed and implemented so
as to ensure consistency and coherence with, and effectiveness of, water pricing
policies. As far as agriculture is concerned, reconciling water and agriculture remains
a key priority for the Common Agricultural Policy (CAP) and existing policy
instruments (e.g. agri-environmental measures in rural development programmes). The
CAP should support the sustainable use of water resources in line with the economic
and environmental principles promoted in the proposed Water Framework Directive
and in this Communication.

The Commission fully recognises the sensitivity of the pricing issues discussed in this
Communication for a wide range of stakeholders and Member States. This sensitivity should
not be reason for misreading the Commission's message as an advocacy for a "pricing alone"
policy. Clearly, pricing is not the sole instrument that can (and will) solve water resources
problems in Europe and elsewhere. However, pricing should be given due consideration to
ensure it promotes more efficient and less polluting use of our scarce water resources.

Overall, the Communication aims at provoking a fruitful political debate and sharing of views
that will lead to the identification of practical steps and development of guidelines for the
implementation of the water pricing article of the proposed Water Framework Directive. And
the Communication is hoped to play an information role for stakeholders who will actively
participate in the preparation of the river basin management plans and programmes of

3

measures provided for by the Water Framework Directive. In this context, the European
institutions and Member States are invited to give full consideration to this Communication
and to build on its key messages to ensure future water pricing policies fully contribute to
meeting the environmental objectives of this Directive in a cost-effective way.

The Communication will also support the assessment of the role water pricing may play in the
context of enlargement and the implementation of the environmental acquis in accession
countries. Finally, it will supplement the EU guidelines for development policy entitled
Towards Sustainable Water Resources Management by stressing the key components of
sustainable water pricing policies.

4

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

TABLE OF CONTENTS

Preface................................................................................................................................... 2

1.

Introduction ................................................................................................................. 7

1.1.

Sustainability of water resources ............................................................................ 7

1.2. Economic instruments and the environment ........................................................... 7

1.3. Water pricing and the sustainability of water resources .......................................... 8

1.4. The objectives of the Communication .................................................................... 8

2.

Water pricing policies in theory and in practice.......................................................... 10

2.1. Basic concepts and theory .................................................................................... 10

2.2. Water pricing policies in the EU Member States .................................................. 10

2.3. Water pricing policies in non-EU countries .......................................................... 11

2.4. How can water pricing policies impact on economics, environment and society... 11

Moving towards water pricing policies that enhance the sustainability of water
3.
resources.............................................................................................................................. 13

3.1.

Improving the knowledge and information base ................................................... 13

3.1.1.

Estimating the demand for water ................................................................ 13

3.1.2.

Estimating the costs of water services and use ............................................ 14

3.2.

Setting the right water prices................................................................................ 15

3.3.

Pricing policies and spatial scale .......................................................................... 17

5

3.4. The role for users and consumers ......................................................................... 18

3.5. Communication and information .......................................................................... 19

3.6.

Integrating water pricing into river basin management plans ................................ 19

3.7. Water pricing and other policy initiatives of the European Union ......................... 20

3.7.1.

Agricultural policies ................................................................................... 20

3.7.2.

Horizontal policies ..................................................................................... 21

3.7.3.

Research and demonstration ....................................................................... 22

4.

Conclusion................................................................................................................. 24

6

1.

INTRODUCTION

1.1.

Sustainability of water resources

A close look at the state of water resources at present reveals that the sustainability of
the water system is at stake in many areas of Europe. Although several indicators
show an apparent stability or reduction in water stress1 at the European Union scale2,
these indicators hide significant spatial and temporal differences and alarming local
situations. For example:

(1)

(2)

(3)

(4)

Over-abstraction of water has put the sustainability of many aquifers at stake.
As a result, the salinisation of aquifers through seawater intrusion remains
critical in many coastal areas. Also, 50% of wetlands have “endangered
status” due to groundwater over-exploitation. Problems of over-exploitation
are common in Southern Europe, but are also present in Northern Europe.

Reductions in river flow resulting from over-abstraction have led to the
degradation of the ecological status of some rivers. Water quantity problems
often amplify existing problems of water quality and pollution.

The number of heavily polluted rivers has decreased over the past 20 years.
However, quality improvement is mainly recorded in large rivers and diffuse
pollution from agriculture remains problematic. Thus, nitrate concentrations
in rivers remain high leading to eutrophication of coastal areas.

Nitrate concentrations higher than the 50 mg/l limit set by the Drinking Water
Directive are still recorded in private and small communal supplies from
shallow aquifers, and in areas with intensive agricultural and livestock
production. These high concentrations pose a health risk to affected
populations.

limited incentives to reduce water use,

Factors that explain this situation include barriers to the adoption of more efficient
technologies,
inadequate institutional
frameworks, gaps in the integration of environmental concerns into sector policies,
and
Increasingly,
investigations of current policies and their impact underline the part play by existing
water pricing policies that do not give the “right” signal for using water in a
sustainable manner.

or poorly implemented

environmental policies.

lacking

1.2.

Economic instruments and the environment

The 1990s have seen an increasing emphasis on the use of economic instruments,
e.g. taxes, charges, subsidies or tradable permits, for enhancing the sustainability of
the environment. Economic instruments and the economic value of natural resources
legitimacy in the Rio Declaration on Environment and
have found their full
Development of the United Nations in 1992. And their importance has been regularly

1

2

Water stress occurs when the demand for water exceeds the available amount during a certain period or
when poor quality restricts its use (Environment in the European Union at the turn of the century,
European Environment Agency (EEA), 1999).
Environment in the European Union at the turn of the century, EEA, 1999.

7

stressed since, as illustrated by the Ministerial Declaration of the Second World
Water Forum (Den Haag, March 2000).

In the EU, economic principles and the use of economic instruments have been
gradually but clearly embedded into environmental policies. The Treaty now
integrates the Polluter Pays Principle as a foundation of all European environmental
policies3. The Fifth Environmental Action Programme of the European Commission
ending in 2000 has the broadening of the range of policy instruments as one of its top
priorities. However, progress in the actual application of economic instruments
remains limited so far.

1.3.

Water pricing and the sustainability of water resources

The Commission has advocated an increased role for pricing in enhancing the
sustainability of water resources in the context of the proposed Directive establishing
a framework for Community action in the field of water policy (or Water Framework
Directive).

(1)

(2)

(3)

Efficient water pricing acts as an incentive to reduce pollution and improve
the efficiency of water use. Thus, it reduces the pressure on water resources
and the environment, and it ensures available resources are efficiently
allocated between water uses.

As a result, water supply and treatment infrastructure can be more adequately
sized. This means providing water services and protecting the environment
more cost-effectively.

It mobilises financial resources to ensure the financial sustainability of water
infrastructure and service suppliers, and to pay for environmental protection.

It is argued that the lack of importance given to economic and environmental issues
in designing existing water pricing policies, as opposed to more general social or
development objectives, has led to current situations of inefficient use, over-
exploitation and degradation of surface and groundwater resources.

1.4.

The objectives of the Communication

The main objective of the Communication by the Commission is to present the
issues surrounding, and options for, the development of water pricing policies
that enhance the sustainability of water resources.

The term water price is used here in its very general sense and defined as the
marginal or overall monetary amount paid by users for all the water services they
receive (e.g. water distribution, wastewater treatment), including the environment.
Thus, it encompasses elements linked to the quantity of water extracted from the
environment and to the pollution emitted to the environment.

3

Article 174.2 of the Treaty, paragraph 2, states that It (Community policy on the environment) shall be
based on the precautionary principle and on the principle that preventive action should be taken, that
environmental damage should as a priority be rectified at source and that the polluter should pay.

8

The Communication builds on a presentation of theoretical concepts and issues, a
review of existing water pricing policies in the EU Member States and other
countries of direct relevance to EU policies, and on the assessment of the impact of
these policies (see Section 2 and the accompanying Working Document by the
Commission services entitled Water pricing policies in theory and practice –
SEC(2000)1238). Finally, it proposes guiding principles for the implementation of
water pricing policies that better account for environmental protection and economic
efficiency (Section 3). The Communication reflects the current state of theoretical
and empirical analysis, and has been developed with input and feedback from a wide
range of stakeholders4.

4

The key activity in this exchange of information and views is the organisation of a Conference in Sintra,
Portugal in September 1999. Entitled Pricing Water - Economics, Environment and Society, the
Conference was organised in collaboration with the Portuguese Instituto da Agua. Around 30 speakers
and 200 participants representing a wide range of stakeholders from the European Union, Central and
Eastern European countries and Mediterranean countries participated in this Conference.

9

2.

WATER PRICING POLICIES IN THEORY AND IN PRACTICE

2.1.

Basic concepts and theory

The main uses of water resources include economic sectors such as agriculture,
households, energy,
industry and tourism, but also environmental uses such as
providing natural wastewater treatment or habitat for wildlife. For most uses, a large
variety of water services are developed, from the abstraction, storage and distribution
of water to the collection and treatment of wastewater.

To play an effective role in enhancing the sustainability of water resources, water
pricing policies need to reflect different cost types:

(1)

(2)

(3)

Financial costs of water services, that include the costs of providing and
administering these services. They include all operation and maintenance
costs, and capital costs (principal and interest payment, and return on equity
where appropriate).

Environmental costs, that represent the costs of damage that water uses
impose on the environment and ecosystems and those who use the
environment (e.g. a reduction in the ecological quality of aquatic ecosystems
or the salinisation and degradation of productive soils).

Resource costs, that represent the costs of foregone opportunities which
other uses suffer due to the depletion of the resource beyond its natural rate of
recharge or recovery (e.g. linked to the over-abstraction of groundwater).

Overall, each user should pay for the costs resulting from its use of water resources,
including environmental and resource costs. Moreover, prices should be directly
linked to the water quantity used or the pollution produced5. This ensures that prices
have a clear incentive function for users to improve water use efficiency and reduce
pollution.

2.2.

Water pricing policies in the EU Member States

The integration of economic and environmental objectives into water pricing policies
is highly variable among Member States of the EU, within Member States and
between economic sectors. Overall, the full recovery of financial costs is only partly
achieved. This is particularly valid for sewerage services and for the agricultural
sector, especially in Southern European countries where this sector is by far the
largest and least efficient consumer of water and where scarcity problems are
greatest. Agriculture pays much lower prices than other sectors, as a result of both
direct subsidies and cross-subsidies with financial transfers from the household and
industrial sectors to agriculture.

5

The overall price P paid by a given user can be computed as F + a.Q + b.Y, with F: an element related
to fixed costs, general taxes, etc; a: a charge per unit of water used; b: a charge per unit of pollution
produced; Q: the total quantity of water used; Y: the total pollution produced. A reduction in the
quantity of water used (Q) and/or the pollution produced (Y) will then lead to a reduction in the overall
water price P paid by the user. Thus, it provides an incentive for users to increase water use efficiency
and reduce pollution.

10

Environmental and resource costs are rarely considered in pricing policies. In most
cases where countries have established abstraction and discharge charges, they are
mainly aimed at revenue collection, that can then be used for financing activities that
enhance the quality of water bodies and related ecosystems.

Although most of water price structures for domestic water supply include fixed and
variable elements and have an incentive role, flat (lump sum) water charges
independent of use or pollution are still in use. Most irrigation charges are area-
based, leading to low water use efficiency especially in surface gravity irrigation
systems. Conversely, farmers that pump water directly from underground aquifers
pay the full financial costs of their water supply and face a strong incentive to use
water efficiently. However,
they are never charged for the environmental and
resource costs resulting from their (over-) abstractions.

The recent years have recorded an increasing role given to pricing in water policies
in many Member States. Increasingly, the objectives of water pricing policies include
the full recovery of financial costs and the integration of environmental concerns.
However, the strict implementation of these principles remains to be seen.

2.3.

Water pricing policies in non-EU countries

Water pricing policies in countries where the EU has a particularly strong
involvement rarely integrate economic and environmental efficiency objectives. This
is true for accession countries, where the potential role of efficient price structures is
often countered by price levels that are too low to give a clear signal to users. In the
context of the enlargement of the EU, i.e. the very high costs foreseen for compliance
with the environmental acquis and more particularly water legislation as compared to
the limited financial resources that can be mobilised, pricing will play a key role in
future water policies of these countries.

The application of sound economic and environmental principles in water pricing
policies is even more limited for developing countries, mainly as a result of
affordability6 and social concerns. In these countries, the application of stricter
economic principles is in its infancy, and is driven by an increased involvement of
the private sector in urban water services and by the donor community as illustrated
by the EU guidelines Towards Sustainable Water Resources Management. Irrigation
that is the largest user remains highly subsidised, and financial revenues are often
insufficient to recover even operation and maintenance costs of irrigation systems.

As safe sanitation and water supply is not ensured for large parts of the population of
these countries, affordability issues will remain significant and will require a careful
design of pricing policies that balances economic and environmental objectives with
social objectives.

2.4.

How can water pricing policies impact on economics, environment and society

Efficient water pricing policies have a demonstrable impact on the water demand of
different uses. This is particularly true for the agricultural sector, but remains valid
for industrial uses and for domestic outdoor uses. As a result of the direct impact of

6

Affordability is defined as the relative importance of water service costs in users' disposable income,
either on average of for low-income users only.

11

pricing on water use and pollution, the pressure on water resources is reduced. This
can lead to the reduction of over-abstraction of groundwater resources and the
recharge of aquifers, the increase of flows in rivers and the restoration of the
ecological status of rivers or adjacent wetlands. Precise information on the impact of
pricing on the physical environment remains, however, limited.

Efficient water pricing also ensures that water
infrastructures are adequately
designed and that sufficient financial resources are collected to properly maintain,
operate and renew infrastructures.

The production costs of different sectors (e.g. agriculture, industry) are currently
influenced by the varying application of the cost recovery principle within the EU.
This is likely to influence the competitiveness of the concerned sectors both within
and outside the EU. Thus, it calls attention to the need for a harmonised approach to
pricing within the EU.

A stricter recovery of the costs would impact on the affordability of water services,
especially for low-income groups and some rural and farming communities that pay
little of the total water service costs. However, the increase in the percentage of
disposable income allocated to water services for domestic users would remain
limited on average. And the existing significant range of prices for irrigation water
shows that farming communities are likely to adapt to a certain level of price
increase.

12

3.

MOVING TOWARDS WATER PRICING POLICIES THAT ENHANCE THE SUSTAINABILITY
OF WATER RESOURCES

This section proposes guidelines to policy makers and stakeholders to develop water
pricing policies that enhance the sustainability of water resources. It does not
advocate for a uniform price of water or for replacing regulation by economic
instruments and pricing. However, water pricing that builds on these principles and
thus that accounts for local environmental and socio-economic conditions can
provide strong incentives for a more sustainable use of water resources and ensure
that environmental objectives are met more cost-effectively.

Many of the elements described below are already applied for some uses, and in
some countries. Their application is by no means uniform, but current trends in water
pricing policies show that many stakeholders are already aware of the need to make
further progress in integrating environmental and economic objectives in this field.

3.1.

Improving the knowledge and information base

The successful development of water pricing policies that account for economic and
environmental objectives is highly information-dependent. Sound estimates of key
variables and relationships, e.g. concerning current demand, benefits and costs
functions, are needed to ensure that appropriate price structure and level can be
identified, and that its impact on water demand, cost recovery and the environment
can be assessed.7

3.1.1.

Estimating the demand for water

Assessing water use and pollution

is important for proper pricing policies that polluters and users are clearly
It
identified and that consumption and contribution to pollution are known. Today,
relatively little is known about water use in the agricultural sector. And the existing
pollution load of water emission to natural water bodies is also rarely measured apart
from those by large industrial installations. Thus, the installation of metering devices
should be actively promoted as it supports the implementation of volumetric pricing
structures and enables a better knowledge of particular uses.8

However, measurement programmes providing precise data on all users could be
very costly and therefore unrealistic9. Where meters are not a practical or economic
option, alternative technologies are required for assessing current use and pollution.
The use of satellite imagery is one example of innovation that can be used for
assessing agricultural water demand. It is important to identify, test and make

7

8

9

High information costs are often mentioned as constraint to the development of water pricing policies
that better account for economic and environmental objectives. It is important to stress, however, that
water demand and supply information is also required for the definition of water policies in general, e.g.
the development of River Basin Management Plans as provided for by the proposed Water Framework
Directive.
In many countries, the installation of water meters is currently promoted and financially supported e.g.
in the UK for domestic users and new dwellings. In France, the 1992 water law obliges irrigators to
install meters.
Thus, their costs outweighing the potential benefits from improved water use efficiency.

13

operational data collection methodologies (i.e. which data collection technology,
at which spatial scale, with which temporal frequency) that provide a useful
estimate at reasonable cost of current pollution and use.10

Linking water prices and water demand

Estimates of the price elasticity of demand are needed to predict the change in water
demand that would result from amending existing water pricing policies, price
structure and level as well as extending metering. Similarly, the identification of the
optimum level of any pollution charge requires the assessment of the elasticity of
damage costs arising from pollution.

The analysis of the impact of existing water pricing policies demonstrates the wide
range of price elasticity of water demand. A systematic assessment of the price
elasticity of demand and of damage costs of pollution is needed for the main
economic sectors under different hydrological and socio-economic conditions11.

3.1.2.

Estimating the costs of water services and use

Financial costs

Accurate water supply information is needed to assess the long-run marginal costs of
supply and develop relationships between water supply levels and costs. This is
particularly true if water supplies are highly variable and unreliable.

The main costs to be considered include operation and maintenance costs, and capital
costs (principal and interest repayment and return on equity where appropriate)12.
Today, the existing accounting rules used by Member States imply different ways of
calculating costs13. Also, the costs of different services can be included into water
prices14. As a result, comparisons between the costs of water supply and treatment
services, water prices and existing levels of cost recovery are often misleading.

The adoption of common definitions for key cost variables would facilitate the
comparison between costs and prices and benchmarking15 for different water
services, uses and countries.

10

11

12

13

14

15

Differences in the level of aggregation at which use and pollution are estimated are likely to arise for
different types of use and pollution (e.g. point-source pollution versus diffuse pollution).
Available methodologies for estimating the price elasticity of demand include econometric and
statistical approaches of time series or cross section data, modelling the economic behaviour of sectors,
or assessing users' reactions to changes in prices through direct interviews.
While the estimation of water service costs is relatively straightforward, the allocation of these costs to
specific uses may be more problematic in some cases, e.g. multi-purpose storage dams that supply
water simultaneously to agriculture, municipalities and the environment. Simple cost allocation rules
(based on the volumes supplied or pollution produced) can be used and are generally accepted by users.
In the Netherlands, for example, the depreciation of capital investments in domestic water supply is
calculated based on capital costs minus subsidies. This has led to a situation where there are insufficient
financial resources for the renewal of existing infrastructure.
Household water supply and waste-water treatment costs, for example, are always included into water
prices, apart from Ireland that finances these services through the general taxation system. There is no
systematic rule, however, for the inclusion of the costs of storm-water management and flood protection
that are often financed directly through the general taxation system.
Benchmarking is a tool that aims at improving the environmental performance by identifying the gap
between a given performance and the "best practice" and the main causes for this gap.

14

Assessing environmental and resource costs

Despite significant progress in recent years, the assessment of environmental and
resource costs (and benefits) remains a challenge. It requires a good understanding of
the functioning of the hydrological cycle within the river basin16, and the ability to
assess the impact of particular uses on other uses and water bodies. This requires
expertise and tools that are not always available or operational, but that constitute the
basis for any sound decision made with respect to water resources management.
Existing methodologies for the monetary valuation of environmental and resource
costs, and more particularly ecology-related environmental costs, are often not
sufficiently robust. These methodologies, which are mainly used by researchers, need
to be further developed and made operational in the context of water policy planning.

However, taking account of these costs while designing new water policies is
urgently needed. Furthermore, and as illustrated in Box 1, methodologies to assess
the costs of mitigation measures for restoring the environment are robust enough to
assess and allocate major environmental and resource costs to the uses responsible
for these costs.17 It is important to move forwards through a systematic
integration of environmental and resource costs into the development of pricing
policies18. Efforts are needed to ensure that assessment and valuation methods
are made easily available and understood fully in their strengths and
limitations.

Box 1. Integrating environmental costs into water pricing policies: the first steps

A wide range of methodologies has been developed to assess and evaluate environmental costs and
benefits related to water use. Where mitigation measures to restore water quality or quantity can be
identified, a practical way of incorporating environmental and resource costs into prices is to estimate
the costs of mitigation measures and then adapt water prices and charges accordingly.
• Allocation of investment and operation costs of a dam built to restore low river flows, resulting
from over-abstraction of adjacent aquifers, can be made to the uses responsible for over-abstraction
• Costs arising from the higher treatment level and increased treatment capacity required because of

uncontrolled pollution levels can be allocated to the users responsible for the pollution.

3.2.

Setting the right water prices

The water supply, demand, benefits and cost information provides a solid basis for
defining water pricing policies that promote an efficient use of water resources and
limit pollution by different economic sectors. 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.

16

17

18

Including linked ecosystems and habitats, e.g. the buffer function of marginal wetlands for pollutants.
In some cases, in order to reduce assessment costs, it is possible to use valuation results obtained from
sites with similar characteristics. This benefits transfer, however, is still a major research issue.
Environmental benefits may also arise from specific uses, e.g. the water buffering capacity of some
agricultural land. These benefits require also due consideration and assessment.

15

Pricing structures should include a variable element19 (i.e. volumetric rate,
pollution rate) to ensure they serve an incentive function to water conservation20
and reduction of pollution. However, the weight of the variable element needs to be
balanced against the need to ensure the recovery of financial costs and thus the
sustainability of water services and infrastructure. This particularly applies in
situations with highly uncertain water supplies21, or where prices lead to an effective
reduction in consumption and pollution, and thence of financial receipts.

Water prices should be set at a level that ensure the recovery of costs22 for each
sector (i.e. agriculture, households, industry). Overall, it is important to ensure
that the most polluting and least efficient sectors pay for their pollution and use. A
significant reduction in existing pressures on water resources can be expected
through a sectoral recovery of costs of water services.

Water pricing policies should consider both surface water and groundwater.
This will limit possible negative induced effects the development of more efficient
pricing for one source of water could have on the other source of water23. However,
this does not necessarily mean the same price of water for both sources. For example,
in situations with very limited good quality groundwater, lower prices for surface
water can encourage the use of surface water for economic sectors, keeping good
quality groundwater for household needs and human consumption.

Assessment of the administrative costs of new pricing policies is necessary to
the predicted gains in efficiency out-weigh the costs of
guarantee that
establishing and managing the new system. Such costs may be particularly high
when complex policies are established, which involve detailed monitoring and
metering or the evaluation of a large range of environmental and resource costs.

should also include an implementation plan. The
Water pricing policies
introduction of water pricing that better account
economic and
environmental principles will need to be phased in for reasons of both
affordability and political acceptability. This is particularly true for users and
sectors that do not currently pay for the full financial costs of services (e.g.
agriculture) or that may already face problems of affordability (e.g. some social
groups). Phased implementation gives users time to adjust to new conditions and
thereby minimise the burden on any affected group.
It also increases the
predictability of that system for both users and suppliers.

for

The provision of water at artificially low prices to account for social and affordability
objectives is a crude instrument for pursuing equity objectives. This form of subsidy
encourages inefficient use and pollution. Thus, in situation of unsustainable water
use, social concerns should not be the main objective of water pricing policies,

19

20

21

22

23

This variable element may vary for different locations and periods of the year to account for differences
in water scarcity and water stress problems.
While improvements in water use efficiency are the most common target for pricing policies, overuse of
water in agriculture may be environmentally beneficial under specific soil and water salinity conditions.
This should be taken into account in designing pricing policies.
It is important that the recovery of financial costs of services is ensured during periods of droughts
when supplies may be very low.
Including environmental and resource costs
For example, a stricter application of economic and environmental principles in pricing for surface
water may lead to significant increases in groundwater uses and over-abstraction.

16

although they need to be taken into account while designing new pricing
policies. And social concerns are better dealt with through accompanying social
measures.

For some sectors or users, specific pricing schemes can be proposed such as rising
block pricing that combine affordability and economic efficiency objectives, e.g. the
combination of a free basic water allowance with high unit prices as an incentive to
reduce excessive and non-basic water uses whilst keeping the revenue collection to
the level needed to finance water services. Nonetheless, a clear ex-ante and ex-post
assessment of both the social welfare effects and impacts on household water
demand of such pricing policies is necessary to ensure that both social and
environmental objectives can be and have been met.

Overall,
the application of economic and environmental principles into pricing
policies and the level of application of the cost recovery principle are likely to vary
according to specific socio-economic conditions. In regions with currently low levels
of basic water services and where social and economic development are key
objectives (e.g. developing countries, regions of accession countries), subsidies to
support large investments can be required. And past (sunk) investment costs may not
be recovered from users. However, water pricing should keep its incentive element
and account for depreciation and replacement costs to ensure the renewal of the
infrastructure and therefore the sustainability of the basic water services provided.

3.3.

Pricing policies and spatial scale

With the increasing importance given to the river basin, as illustrated by the
proposed Water Framework Directive, scale issues have gained some importance in
water policies. Clearly, the river basin scale is not applicable to the assessment,
collection and use of revenue to cover financial costs. Financial costs are better
assessed and managed at the scale of the water service suppliers.

However,
the river basin scale (or sub-basin scales according to the
environmental issues considered) is the basis for assessing environmental and
resource costs and benefits as it represents the level at which environmental
externalities take place. This assessment may require a new organisation or the
assignment of this task to an existing organisation, a particularly sensitive issue for
transboundary river basins where the assessment of environmental costs, and their
financial implications, will need to be accepted by stakeholders and administrations
from different countries.24

For the collection of environmental charges one may favour their inclusion in a
single "water bill" to minimise administration costs. This is already practised in
several EU Member States. As a result, financial transfers are required, between the
supplier of water services collecting the water charges and the organisation that will
draw on financial receipts from environmental charges to address environmental or
resource damage issues.

24

For example, the dumping of polluting substances into the Rhine River in France will induce pollution
and costs for all domestic users of downstream countries. An analysis at the scale of the Rhine River
basin is then required to estimate associated environmental and resource costs.

17

Options that can be envisaged for the use of environmental and resource charges
include their allocation to the central budget of a country, or to the budget of a
specific regional or river basin organisation that will allocate these financial
resources to water protection and water supply and wastewater improvement
for
activities. Overall,
environmentally-friendly investments and practices has often proven very effective
in tackling environmental problems25.

combination of water

and subsidies

charges

the

3.4.

The role for users and consumers

Adaptation in the existing institutional framework may be required to support the
move to incentive pricing reflecting the environmental costs of water use. In
particular, consumers and users need to be involved in and informed of price policy
decisions. Bottom-up approaches to water pricing achieved through public
participation and transparency are essential in (i) contributing to the definition of
water pricing policies, (ii) increasing the chances of successful implementation, and
(iii) making these policies socially and politically acceptable. Consultation of
stakeholders also provides water service suppliers with valuable information on the
potential impact of price changes and on how to design their services in the most
efficient way.

The involvement of users and stakeholders can take varying forms (see Box 2). The
objectives of users' associations participating in price policy development will vary
they represent. Purely domestic water consumers’
depending on the users
associations and irrigators’ associations are more likely to aim for a decrease in water
price combined with improvements in the quality of water services, and may not
consider larger environmental issues that may be better defended by environmental
Non-Governmental Organisations. A broad stakeholder consultation involving all
users concerned, is key to the development and acceptability of pricing policies
with clear environmental goals.

Box 2. Users and stakeholders involvement in water policies

Users and stakeholders involvement can take various forms. In France, all stakeholders are represented
in the Comités de Bassin (river basin committees) and discuss future levels of pollution and
abstraction charges for different sectors. In the UK, regional consumer services committees ensure
consumers' involvement in water pricing policies for piped services. In some countries, general
consumers associations are involved in the setting of water prices or in raising citizens' awareness of
environmental problems linked to current water uses. However, their involvement in water policy
discussions is often sporadic.

As a result of the quasi-monopoly situation of most water suppliers (whether
public or private), control of the water prices charged to consumers is necessary
to ensure that prices adequately reflect existing costs and do not hide
inefficiency. Different price control mechanisms have already been developed in
Member States26. However, these control mechanisms concentrate mainly on the
financial cost dimension of water prices. And there is a need to ensure that the

25

26

Also, it facilitates the acceptance by users of new charging systems.
For example, ex-ante compulsory control is performed by OFWAT in the UK, and an ex-post control is
performed upon consumer request in Germany. Of interest also are the recent attempts to introduce
competition between private water suppliers in the UK as a means to increase efficiency in delivering
services and limit increases in consumer prices.

18

financial revenue from the recovery of environmental and resource costs is used
efficiently in case of earmarking.

3.5.

Communication and information

its

incentive effect can adequately play its role.

Water pricing policy should be transparent and easily understandable to ensure
that
Information and
communication are therefore key elements of pricing policies. There is a need to
explain to consumers and users how water prices and water bills are formed (see Box
3), to justify changes in water price structures and levels, and to link general
environmental awareness with prices and consumption.

Box 3. The observatory of water prices in the Artois-Picardie basin (France)

Since 1994, the Artois Picardie Basin water agency has undertaken an annual survey of price and
costs of local authorities involved in water and sewerage services. Its results are fed-back to local
authorities. Information from consecutive surveys is used for monitoring trends in costs and prices.
Since 1997, this survey is complemented by opinion polls to capture the perceptions of domestic
users towards water services (quality, price, etc). The information is widely disseminated to
consumers and local authorities. The pools highlighted more information on the functioning of the
water cycle was necessary if price increases were to be understood and accepted by consumers.

Consumers and stakeholders also need to be better informed about the functioning of
the hydrological water cycle and how their use negatively influences the environment
and other competing uses. Tailored education programmes are needed for different
age groups.

Benchmarking that compares the quality of water services, costs and prices, whether
at the scale of the water supplier, river basin or country27, is another key element of a
communication strategy that supports consumers and decision-makers in their
assessment of the quality and cost-effectiveness of water services. It has the dual role
of comparison and improvement of definitions and computation methods for
assessing given variables such as costs or prices. In monopoly situations with no
possibility of choosing between alternative water service suppliers, benchmarking
and comparison of the suppliers’ performance can act as an incentive for them to
improve their efficiency and quality of services and reduce their costs and prices.

However, current benchmarking of water services falls short of assessing the
impact of existing practices on the environment and need to be adapted to
reflect more general environmental concerns.

3.6.

Integrating water pricing into river basin management plans

Recent developments in water policies in the EU (i.e.
the proposed Water
Framework Directive) and elsewhere have stressed the importance of river basin
management plans for achieving environmental objectives28. Water pricing is a key

27

28

At the national scale, Eurostat has planned pilot studies for assessing current cost and price levels in
selected EU Members. So far, pilot studies have been undertaken in two countries, Luxembourg and
Spain.
Overall, river basin management plans are intended to set out measures for reaching well-defined
objectives and targets in the most cost-effective manner.

19

instrument of the river basin management plan to achieve economic and
environmental objectives in a cost-effective way.

However, water pricing needs to be complemented by other measures to tackle
both water quantity and water quality issues (see Box 4). The challenge is the
identification of an agreed set of measures that will ensure economic, environmental
and other objectives, such as financial sustainability, fairness or affordability, are
achievable (and achieved) simultaneously.

Box 4. Water pricing and River Basin Management Plans in the proposed Water Framework
Directive

Management plans will be developed for each river basin to set out a programme of measures for
achieving the environmental objectives of the proposed Water Framework Directive. This programme
will include: (i) basic measures (including emission and abstraction controls) required to implement
Community, national or local legislation; (ii) water pricing policies that better account for the
environment; and, (iii) supplementary measures such as new legislative and voluntary instruments,
codes of good practices, re-use measures, and educational, research and demonstration projects.

Covering environmental costs might not be always practically feasible because of the
site-specific environmental impact of abstraction or discharge points. To achieve
environmental objectives through pricing only may imply setting different prices for
each and every abstraction point. In such situations, it may be more appropriate to
judiciously combine site-specific regulatory tools (e.g. abstraction and discharge
licensing) with charging that should at least cover the costs of effective monitoring
and regulation,
supporting
environmentally beneficial projects (e.g. wetland restoration).

and that may provide

additional

income

for

In the case of diffuse pollution from agriculture, the scale at which pollution charges
are estimated and established is key to their effectiveness. A price linked to the
average pollution at the scale of the river basin might not yield significant pollution
reductions, as a result of the diversity of farming systems and the absence of a direct
incentive (price reduction)
individuals engaged into pollution reduction
strategies. At the opposite, prices linked to the pollution produced by each individual
farmer are likely to be more effective. However, the costs of collecting pollution
information to estimate individual prices might outweigh the benefits resulting from
pollution level reductions.

for

3.7.

Water pricing and other policy initiatives of the European Union

Co-ordination and synergy between water pricing and other policy domains of the
European Union are key elements for economic and environmental effectiveness.
Several policy areas are clearly relevant in this regard.

3.7.1.

Agricultural policies

Through their impact on production and economic development, sector policies
influence, whether directly or indirectly, the use of water. Thus, they affect the
effectiveness of pricing policies with regards to their impact on the environment.

Current trends in irrigation water use clearly stress the importance of the Common
Agricultural Policy in promoting irrigated crops whether through price support or
direct subsidies for irrigated crops. This trend is particularly alarming in areas with

20

high water scarcity and intense competition between uses such as in the South of
Europe, but also concerns regions of Northern Europe29. More importantly, current
agricultural market policies do not promote improvements in water use efficiency,
which remains low in agriculture particularly in large-scale surface irrigation
systems.

Water pricing can play a key role in giving incentive to make water use in agriculture
more efficient, thereby reducing pressure on the environment and freeing resources
for other competing uses. As an illustration, an effective way to start introducing
water pricing to the sector might be to calculate, at the appropriate geographical
scale, a water quota per hectare and per crop grown based on the best practice in
water use. Farmers using more than the determined quota would be penalised by
sharply increased water prices. While this would not end the production of crops
unsuitable to specific regions with regards to their water requirements, this practice
would ensure a more rational use of water.

The recent reform of the Common Agricultural Policy (CAP) gives Member States
the opportunity for the first time to take action on water use, by allowing them to
ascribe environmental conditions to some CAP payments allocated to farmers30.
France has already taken up such (cross-compliance) conditions and other Member
States have also shown interest. The opportunities brought about by this new
instrument are indeed very significant31. However, using the opportunity provided
by the CAP will need to be pursued to ensure that the potential impact of water
pricing policies is fully exerted. Also, efficient water pricing should not be
countered by agricultural product price policies and subsidies for irrigation and
irrigated crops that negatively impact on the sustainability of water resources.

3.7.2. Horizontal policies

The recent revision of the regulations governing the Structural and Cohesion policies
have seen a reinforcement of the role of key environmental and economic principles.
Guidelines recently prepared on the application of the Structural and Cohesion funds
identify how they should be used to strengthen the application of the Polluter Pays
Principle.

Although the guidelines promote a stricter application of economic principles in
projects supported by these funds, the present financial incentive remains limited and
its impact is unlikely to be large. However, the reform is an important shift in
philosophy. Further progress is needed for Member States and applicant
countries to integrate economic efficiency and environmental principles into
water charging schemes for investments supported by the structural and
cohesion funds32, the Instrument for Structural Policies for pre-Accession

29

30

31

32

Agriculture, Environment, Rural Development: Facts and Figures - A Challenge for Agriculture.
European Commission/Eurostat, 1999.
Regulation 1259/1999, article 3 on ‘environmental protection requirements’.
With the 1259/1999 regulation, Member States have a tool to make respected the environmental
regulation. However, with the existing environmental regulation in place, it is likely that Member States
will address mainly water quality, and not water quantity, problems.
In 1996, cohesion funds for water supply and wastewater treatment projects represented 848 millions
Euro (approximately two third of the total envelop for the environment).

21

(ISPA)33 and the Special Accession Programme for Agriculture and Rural
Development (SAPARD) for Accession countries34. Overall, funding accompanied
by water pricing with no incentive to promote efficient water use should be phased
out. Member States should give priority to sustainable water use and to investment
that supports it (e.g. the installation of meters for different uses).

3.7.3.

Research and demonstration

The 5th EU Framework Programme for Research and Technological Development
and Demonstration of the European Commission, and in particular the generic
activity of socio-economic research and its key action on "sustainable management
and quality of water" that foresees research on pricing within its sub-area dedicated
to socio-economic aspects of sustainable water use, provide the means for improving
the knowledge base on water pricing policies and their impact and support the
development of future water pricing policies. It will build-on and strengthen research
in the area of water pricing that was already supported by the 4th EU Framework
Programme as illustrated in Box 5.

Box 5. Water pricing and the Metron project
The objective of the Metron project (ENV4-CT97-0565), funded by DG Research within its 4th
Framework Programme, is to identify and evaluate alternative policies and policy instruments for
the sustainable use of water in European metropolitan areas. The project has investigated existing
water pricing policies in metropolitan areas in OECD countries, observed trends in these policies,
and progress being achieved and still being required for integrating efficiency, effectiveness and
equity objectives into pricing policies. The project also contains the detailed analysis of pricing
policies and their combination with other measures, e.g. conservation measures and awareness
campaigns, for 5 cities.

More particularly, efforts should be targeted towards the development of knowledge
and methodologies for: (i) the assessment of environmental costs and damage, the
assessment of elasticity for given sectors (e.g. agriculture); (ii) the analysis of the
role water pricing policies may play to integrate sustainable water use and tourism
development; (iii) the assessment of the environmental impact of existing water
pricing policies; (iv) the analysis of the potential for using new information
technologies to assess specific water/economic variables (e.g. use of satellite imagery
for assessing irrigation water demand and use); (v) the development and application
of methodologies (e.g. cost-benefit assessment) and tools for supporting policy
choices on water pricing at the river basin scale; and, (vi) the analysis of the nature of
water (e.g. economic good or basic right) and of consumers' social perception of
water.

In some cases, the application of existing principles and methodologies (e.g. for the
evaluation of environmental and resource costs) remains the principal challenge.
Further efforts for the implementation and dissemination of existing approaches are
required. Pilot programmes used as demonstrations to stakeholders to assess the

33

34

For the period 2000-2006, 520 million Euro will be allocated to environmental projects. Drinking water
supply and the treatment of wastewater will represent the bulk of these projects.
As indicated in the new orientations for the use of structural and cohesion funds for the period 2000-
2006, the challenge is to find the right balance between social and economic objectives and the
protection of the environment. Concurrently, charging systems should also ensure sufficient financial
resources are collected for the renewal of the infrastructure and the sustainability of water services.

22

potential benefits and costs of new water pricing policies have a key role to play.
The Life programmes of the European Commission offer opportunities to test and
demonstrate the role efficient water pricing can play to enhance the sustainability of
water resources, as illustrated in Box 6.

Box 6. Demonstrating the potential use of water pricing in LIFE projects

the Non-Governmental Organisation WWF-Spain/ADENA initiated a project

in the
In 1998,
to reduce water abstraction and enhance the
municipality of Alcobendas, North of Madrid,
conservation of water resources. This project, supported by the European Union LIFE programme, is
designed to illustrate the feasibility of demand management measures for domestic uses at the
municipal level. It involves a range of stakeholders and includes information and promotional
campaigns to increase consumers' awareness of water issues. The project includes activities to
evaluate the current decreasing block-rate tariff system that favours high consumption, and will
propose new tariff structures to promote water saving and to achieve full recovery of financial costs.

23

4.

CONCLUSION

As a result of the absence of clear economic and environmental objectives, current
water pricing policies do not always send the right signals to consumers and users to
ensure that water resources are used efficiently. Overall, while there is a general
recognition of the need to recover financial costs through charging, environmental
and resource costs are rarely considered in pricing policies. This is particularly true
for the agricultural sector, the largest use in Southern European countries. But it is
also valid for some domestic users, and for the industrial sector.

The analysis of existing water pricing policies and of their economic, social and
environmental impact suggest areas for the development of pricing policies that
better account for environmental concerns. More specifically, pricing that better
accounts for the environment will build on: a firmer application of the principle of
recovery of cost with efficient targeting based on costs and benefits of water use; a
wider application of pricing structures providing incentives and the promotion of
metering devises; the assessment of major environmental costs and, where feasible,
the internalisation of these costs into prices; a transparent policy development
process that involves users and consumers; and, the implementation of new pricing
policies in a phased manner to ensure acceptability and stability.

Future national policy initiatives will have to ensure that water pricing (and full cost
recovery) is not the only instrument used. A sustainable demand-based strategy
implies the combination of pricing with other means, e.g. promotion of water saving
devices and practices, reduction of water
leakage’s in the production-supply-
distribution systems, or education and public information campaigns that are
supplementary to water pricing35. Also,
the coherence between water pricing
policies, structural and cohesion policies and sector policies will need to be
strengthened to ensure that the potential impact of pricing policies can be felt to the
full.

The forthcoming implementation of the proposed Water Framework Directive will
provide the right impetus to build on the elements of the present Communication.
The Council and Parliament are invited to take note and discuss the present
Communication and encourage national and regional authorities to pursue water
pricing policies along the lines set out
the
environmental objectives of this Directive in a cost-effective way.

in this document, so as to meet

The Commission also invites Member States to participate in the preparation of
practical guidelines for the implementation of the article on water pricing of the
proposed Water Framework Directive. The development of these guidelines will
build on the review of existing practices in water pricing policy development in
Member States and on the outcome of the discussions of the present Communication.

35

is increasingly
The trading of water rights or permits is another demand-management
discussed in the field of water management in Europe and elsewhere. In the EU, only Spain has taken
clear legislative steps for the introduction of such trading mechanisms. Today, research is required to
investigate the potential use of such mechanisms in future European water policies.

tool

that

24

The availability of information will be key to the development and use of these
guidelines. Thus, Eurostat and the Commission will pursue their efforts to assess the
availability, in Member States and also in applicant countries, of statistics pertaining
to costs of water services and water prices. This assessment will feed into the
identification of robust and cost-effective methodologies for collecting cost, benefit
and price information as requested in the proposed Water Framework Directive.

25