MOOC: Auditing Water Management
3.4. Economic instruments
This paragraph is based on the INTOSAI WGEA research paper ‘Market Based Instruments for Environmental Protection and Management’. [] Economic instruments have gained particular attention in recent years as an important tool in environmental policy making, as they are capable of integrating environmental concerns in economic decision-making processes. Their advantages include the creation of incentives for behavioural change, the generation of revenue for financing further environmental investments, the promotion of technological innovation and additional effects such as the strengthening of institutional capacity and information availability.
Water prices and sewerage charges are common instruments. The adoption of adequate water pricing acts as an incentive for the sustainable use of water resources and is also a main requirement of the WFD. Member States are required to ensure that the price charged to water consumers – such as for the abstraction and distribution of freshwater and the collection and treatment of wastewater – reflects true costs. Whereas this principle has a long tradition in some countries, it is currently not the case in others. However, derogations are possible, e.g. in less-favoured areas or to provide basic services at an affordable price.
The systems of economic instruments differ in their main (political) objective: some effluent charges focus on incentives while others emphasize revenue-generating functions. The systems also differ in the calculation methods used and the substances included in the charge.
Taxes
Water withdrawal or abstraction taxes are levied on the direct abstraction of water from natural sources. This instrument can be used to address water scarcity problems and to internalize environmental and resource costs into the (economic) decisions of water users. It can combine revenue-raising purposes with an incentive function. The calculation of the tax can be either volumetric and based on metered abstraction or linked to abstraction permits.
Water and wastewater charges and prices
Depending on the system of water supply and wastewater disposal, either by communal/municipal or by private systems and facilities, charges or prices are set. The main function of charging/pricing is to finance infrastructure. Ideally, the prices may also aim at internalizing external environmental costs and providing an incentive to use water rationally. They are often composed of fixed (depending on the technical infrastructure) and volumetric (consumption-dependent) components. Generally, water pricing policies address three distinct sectors, namely households, industry and agriculture.
In general, all these systems should try to achieve full cost recovery in water services, although there is some debate as to whether or not subsidies should be integrated into these systems. Charges for water supply are predominantly based on metered water consumption. Excessive water use can be discouraged by the use of progressive charges (raising the charge rate as volume increases).
Sewerage charges are (mostly) levied on indirect discharges of used water to the sewer and mainly fulfil a financing function. They can be seen as an implementation of the polluter pays principle if they incorporate sewage treatment costs. The charge may be based on metered water consumption, although there are alternative systems (e.g. in Austria).
Effluent charges are based on the pollution load or on the volume of wastewater discharged into natural water bodies. The calculation of the charge rates requires adequate measurement of the quantity and quality of the discharged water. Effluent charges are a means of implementing the polluter pays principle. Revenues can be earmarked to finance measures to improve water quality or the restoration of polluted water bodies. The charge may be designed to provide incentives for pollution abatement.
AUDIT CASE: Quality of drinking water
Among other things, SAI of Turkey analysed water tariffs in the audit of drinking water.
SAI Turkey’s audit focused on activities related to
- supply of water,
- the water distribution network,
- controlling the compliance with water sanitary conditions and
- protecting water resources.
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Audit questions |
Criteria |
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Are the drinking water management activities planned in a healthy manner? |
a) Activities related to drinking water management should be planned countrywide with the contribution of all relevant institutions.
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Are the drinking water management activities being conducted in a cost-effective way and with the proper authorization? |
a) Duties and responsibilities in drinking water management should be:
b) In drinking water management:
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Has an effective control mechanism been established to maintain the quality of drinking water and protect the water resources? |
a) To ensure the conformity of drinking water with health and quality conditions:
b) In the protection of drinking water resources:
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The audit concluded that the current national water supply plan had not been prepared with the contribution of all relevant institutions. The information about the financing of water supply investments did not take place in the plan. The plan was not an obligatory document for the municipalities, which are of the most important actors in drinking water management.
The countrywide data such as that about water demand, water consumption and water pollution could not be regularly acquired. It is extremely difficult to make plans with the existing data.
Many institutions had duties and responsibilities in drinking water management, leading to mismanagement in issues like water supply to residential areas, usage of groundwater and protection of water resources.
Neither drinking water nor wastewater tariffs covered all the costs of water production processes (collection of water, treatment of raw water and distribution of treated water via the network of water pipelines) and the collection and treatment of wastewater.
The water loss rate in the drinking water distribution network reached 54% because of poor quality water pipelines. This significant loss in treated water increases both the pressure on water resources and the costs to acquire treated water.
Subsidies
Subsidies in water management come in a variety of shapes and forms. Subsidies are government interventions that can be direct, through monetary payments to certain user groups, or indirect in the form of tax concessions, discounts or preferential procurement policies. They may introduce distorted signals by favouring environmentally unfriendly choices over environmentally friendly ones.
Subsidies are also often directly related to water management, such as:
- financial support for the building and upgrading of water plants, and
- water price discounts.
Subsidies for building infrastructure may only include construction, not maintenance, which must be financed through upcoming charges to the consumer and establishment of prices. The upgrading of facilities either due to escalating demand (e.g. increasing population) or to a newly defined state-of-the-art or legal standards can also be supported.
Subsidies may also create incentives for users to behave in a more environmentally friendly way or to induce investment in environmentally friendly techniques. If subsidies are given in return for environmental benefits, they can be regarded as an internalization of external costs. There is also a distinction between subsidies for measures that are required by law and subsidies that promote measures which are not mandatory.
Many European countries also have subsidy programs that are related to environmentally friendly farming, e.g. payments made to farmers who are subject to restrictions in fertilizer use in water protection zones.
THINKING EXERCISE
What economic instruments are applied for water management in your country?
