WFD CIS Guidance Documents -Gd 1 - wateco -Annex d - methodological tools for undertaking the economic analysis -
- Annex d1 information sheets
This Annex contains a series of information sheets providing methodological Guidance for implementing the 3-step approach presented in the main part of this document. It is structured as follows:
Directive references: No specific reference in the Directive but many implicit references and key issues for making the economic analysis operational. This sheet underlies the overall (3
step) approach to the analysis.
This information sheet helps you understand at which geographical level you should carry out the economic analysis and report the results.
Scale issues are central to the development of integrated river basin management plans. They are key to the integration between different disciplines and expertise and to the development of activities aimed at informing, consulting and ensuring active participation of stakeholders and collecting information.
For the economic analysis, it is important to understand the level of efforts required in conducting the economic analysis in terms of:
Although mostly mentioned in the context of large river basins, identifying the right scale for the analysis is relevant to all river basins.
The Directive mentions a wide range of spatial or aggregation units (see Table 1). Overall, the Directive promotes the river basin as the basic hydrological system for characterising, analysing, defining and implementing programmes of measures. In some cases, however:
What does the Directive specify about data collection and analysis?
Reporting on the economic analysis of water uses (both the description of the existing situation and the analysis of the trends/baseline in key indicators and variables) has to be made at the river basin district scale (disaggregated into national portions of transboundary river basins whenever required).
However, lower spatial scales may be investigated according to:
Illustration 1
Defining the adequate scale of analysis by combining biophysical and economic information in the Scheldt river basin in Lille (France)
Source: G. Bouleau & A. Courtecuisse, Testing the WFD Guidance Document on groundwaters in the area of Lille. See Annex E.
Illustration 2
Identifying coherent areas in the Rhône-Méditerranée-Corse basin (France)
Source: P. Dupont & O. Gorin, Testing a pertinent scale for the economic analysis in the Rhône-Méditterrannée-Cors river basin. See Annex E.
Illustration 3
Matching biophysical and economic information with administrative boundaries in the Vouga River Basin (Portugal)
Source: P. Mendes. Scoping key elements of the economic analysis in the Vouga River Basin. See Annex E.
From an economic point of view, and to account for the inter-connection between all water bodies of a given river basin, cost-effectiveness analysis is best performed at the scale of the river basin. But to undertake the analysis at lower scales is likely to be more manageable in cases of large numbers of water bodies, pressures and environmental problems within the river basin.
Identifying the scale at which environmental problems take place
The analysis of the pressures and impacts, along with the identification of significant water management issues, shows that specific scales can be attached to various environmental problems:
Cost-effectiveness analysis should be performed at the scale at which environmental issues take place to ensure that the costs (especially other direct economic costs) and effectiveness of measures are fully accounted for in the analysis. In many river basins a range of environmental issues attached to different scales are likely be considered.
One pragmatic way to ensure some coherence between these analyses would be:
Dealing with different sub-basins of the same river basin
For large river basins, sub-river basins may be proposed for undertaking the economic analysis. It is then recommended to adopt a stepped approach that follows the hydrological cycle/structure to ensure separate measures that are cost-effective for each sub-basin are also cost-effective at the river basin scale. A pragmatic approach is given below for a situation where pressures have a downstream impact on (surface) water status:
Illustration 4
Cidacos (Spain): Investigating river basins and sub-basins
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
The cost-effectiveness analysis will not be able to deal with all measures targeted to individual users and related environmental impact. Thus, a certain level of aggregation is required for the analysis to remain pragmatic, and also to account for the scale at which some measures apply.
However, one cannot aggregate all information and analysis at the river basin scale as it eliminates the hydrological structure of the river basin and the links between uses, pressures, and water status of specific water bodies. Assessing the basic unit that should be investigated into the cost-effectiveness analysis requires considering:
Assessing spatial relevance vis-a-vis cost recovery appears rather straightforward:
Different aspects need to be considered here:
In addition to the River Basin Management Plans developed for each district, Member States may produce more detailed plans for specific sectors, issues or water types (Article 13), providing ample opportunities to focus on specific aggregation levels lower than the river basin. Such detailed plans may be identified in the context of consultation and participation of interested parties or directly result from the analysis of pressures, impacts and significant water management issues.
Table 2 summarises spatial and disaggregation scales that can be investigated at the different steps of the economic analysis.
Table 2 - Checklist
Directive references: Articles 4, 5 and 9 and Annex III
3-Step Approach: this information sheet underlies all key steps of the approach
See other information sheets: Reporting on Cost Recovery, Cost-effectiveness Analysis and Disproportionate Costs
This information sheet helps you understand how to estimate costs and benefits, which are seen as avoided costs.
Estimating costs is important for several parts of the economic analysis:
Note that the Directive defines costs as economic costs, which are the costs to society as a whole, as opposed to financial costs, which are the costs to particular economic agents. In the Directive (Article 9), economic costs are made up of three components (see also Box
1): financial costs, resource costs and environmental costs. This information sheet helps you analyse and estimate all of these cost categories.
The Table below proposes an approach for moving from financial to economic costs.
Box 1
What are the different types of costs mentioned in the Directive?
Step 1 - Estimating Financial Costs
Financial costs in this context are the costs of providing and administering water services. They can be broken down in a number of cost elements, presented below. The Table gives the definition of each cost element and warns you about potential traps and difficulties.
Box 2 - The Annual Equivalent Cost (AEC) method
Box 3 - Valuation of capital assets: Current vs. replacement value
Illustration 1 - Deriving financial costs for the appraisal of measures in the Cidacos river basin
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Step 2 - Making Transfers Explicit
As mentioned above, taxes and subsidies should usually be treated as transfers within society and should therefore be excluded from the estimation of economic costs. However, it is important to distinguish between general taxes and environmental taxes and subsidies:
Step 3 - Taking Account of Resource Costs
Resource costs represent the costs of foregone opportunities that other uses suffer due to the depletion of the resource beyond its natural rate of recharge or recovery (e.g. costs related to groundwater over-abstraction). These users can be either those of today, or those of tomorrow, who will also suffer if water resources are depleted in the future.
If markets function well, the opportunity costs of resources are reflected in the financial costs of resources. However, for environmental resources, these costs are often not included in market prices. Opportunity costs, the scarcity value of under-priced environmental resources like water, should therefore be included when estimating economic costs (see Box 4).
Step 4 - Including All Non-priced Environmental Costs
Environmental costs represent the costs of damage that water uses impose on the environment and ecosystems and those who use the environment (for example, a reduction in the ecological quality of aquatic ecosystems or the salinisation and degradation of productive soils). This loss in welfare may encompass lost production or consumption opportunities as well as non-use values (such as the value produced by contemplating a clean lake at dusk), which are harder to quantify. Environmental costs are not commonly estimated
steps and alternative methodologies for carrying out this estimation are therefore highlighted below.
In addition, as environmental costs can be seen as negative benefits and avoided costs (see Illustration 2), the following Section also discusses the estimation of environmental benefits, which will be useful for the cost and benefit assessment necessary to justifying derogation (see Information Sheet - Disproportionate Costs).
Box 4 - Calculating resource costs
What are environmental costs and benefits?
Society derives benefits (or costs, which are foregone benefits) from improved environmental quality in water bodies, which would arise from achieving the environmental objectives contained in the Directive. This value is made up of both use and non-use values (see Box
5 for examples and below for an explanation). Other and broader benefits may need to be assessed in some instances, such as an assessment of the broader economic benefits for example, for conducting the required analysis for proposed new modifications. These are not explicitly dealt with here, however.
What are use and non-use values/benefits?
Use values/benefits. Use values refers to the fact that economic agents currently use the environmental goods in question, either directly (by sailing on a lake for example) or indirectly (by watching a video of someone else sailing on that lake). Direct use values are the easiest ones to estimate, as they usually stem from products that can be traded in a market as entrants into a production process or final products (for example, water for food processing or fish).
Non-use values/benefits. Some benefits are not associated with any direct use, so called non-use values, but exist because individuals value an ecological resource without using or possibly even intending to use it, for example water quality and biodiversity in a lake.
Box 5 - Types of Environmental Benefits / Avoided costs
Sources: OECD (1999) and Timothy M. Swanson and Edward B. Barbier (1992).
Illustration 2 - Benefits defined as avoided costs: The Artois-Picardie basin
Source: Agence de lEau Artois-Picardie (1997), Qualité de leau, tourisme et activités récréatives: la recherche dun développement durable.
Methodologies for Estimating Environmental Values
Various techniques exist for the valuation of environmental costs and benefits, which are more or less practical, time-consuming and have different cost implications. Below, we outline four possible methodologies for estimating those costs. A rough guide to choosing between these methodologies is presented in Box 6 and an example of how stakeholders may be involved in the process is given in Illustration 3.
Box 6
A Rough Issues To Choosing a Methodology for Estimating Environmental Costs
Some benefits will not be quantifiable, either because of technical reasons (e.g. all impacts of achieving the environmental objectives cannot be foreseen, it is not possible to quantify all the benefits of improved water quality in a river stretch etc.) or lacking resources (e.g. there is insufficient time to carry out quantitative studies before the RBMP in 2009 or it is too costly). In these situations, benefits should be assessed and described qualitatively.
The Use of Value Transfer
An alternative option to direct valuation of environmental costs is the use of Value Transfer (more commonly known as benefit transfer in the case of benefits). This method uses information on environmental costs or benefits from existing studies and uses this information for the analysis in the river basin under consideration. As a result, a data set that has been developed for a unique purpose is being used in an application for a different purpose, i.e. it transfers values from a study site to a policy site, i.e. from the site where the study has been conducted to the site where the results are used.
Above all, benefit transfer is suitable when technical, financial or time resources are scarce. However, amongst other problems, it is important to note that since benefits have been estimated in a different context they are unlikely to be as accurate as primary research (see also Look out!). A step-wise approach should be developed in order to ensure that the transfer of values derived in other contexts can minimise the potential for estimation errors.
Box 7
Examples of Revealed and Stated Preference Methods
Illustration 3 - Integrating stakeholder analysis in non-market valuation of environmental assets: estimating the value of a wetland area in Kalloni Bay on Lesvos island (Greece)
Source: Skourtos, M.S., Kontogianni, A., Langford I.H., Bateman I.J. and S. Georgiou (2000).
The calculation of full economic costs requires that assumptions be made about the lifetime of investments, about discount rates, depreciation methods, costing methods, valuation methods etc. Besides, in adjusting financial cost data for taxes and subsidies and in estimating the environmental and resource costs of ensuring sustainable water use, assumptions will need to be made as well.
To ensure the cost analyses of the member states are comparable, all assumptions and costing methods used should be made explicit, stating clearly how the presented cost information has been derived.
Though different Member States apply different standards for estimating economic costs it would be desirable to resemble as much as possible the methods and standards used in the international guidelines of for example the European Commission or the European Environmental Agency (see Box 8), especially when international analyses are performed, for example in case of an international cost-effectiveness analysis. These guidelines may also help decide on issues such as which parameters and methods to include.
The general guideline is that when reporting on economic costs, all assumptions and costing methods should be clearly reported. Depending on the use of economic cost information, other requirements might apply. This is further elaborated in the information sheets Cost-effectiveness Analysis, Reporting on Cost-recovery and Disproportionate Costs.
Box 8 - Suggestions for Reporting on Cost Issues
Note that this does not necessarily apply directly to the economic assessment required for the Directive
these are guidelines from the EEA only. For example, whereas the EEA recommends to only incorporate direct costs (and not indirect costs), the incorporation of indirect costs in the economic assessment for the Directive would depend on the stage of that assessment, as specified above.
Directive references: Article 9 and Annex III
3-Step Approach: Step 1.3 and Step 3.3
See other information sheets: Estimating costs, Defining water services and uses, Baseline Scenarios, Pricing as an Economic Instrument
This Information Sheet helps you understand what and how you should report on the recovery of costs of water services by types of water users.
Article 9.1 of the Directive states that: 'Member states shall take account of the principle of recovery of the costs of water services, including environmental and resource costs, having regard to the economic analysis according to Annex III, and in accordance with the Polluter pays principle'.
This information sheet is a guide for reporting on cost recovery and is relevant for:
However; the information sheet focuses on the latter point (Annex III). A key objective of this initial analysis will be to improve transparency in order to understand which water services are actually paid for, to which extent, by whom and how. More specifically, this will entail identifying whether some external subsidies are provided to the water sector, or whether some cross-subsidies are paid between categories of water uses.
Finally, note that the objective of the Directive is not necessarily to move to 'full cost recovery' but to move to a situation where the 'polluter pays ' principle is adequately applied. The Directive allows Member States to take into account the social, environmental and economic effects of cost recovery. But it is only with maximum transparency that the extent of these secondary effects of cost-recovery can be understood.
The approach that is proposed here for analysing and reporting on cost recovery and assessing the extent to which polluters pay can be broken down into a number of tasks, as shown in Figure 1 of this information sheet. It is important to stress that this approach may need to be adapted to local and national situations and institutional setup for cost recovery.
Figure 1
Tasks and Key Questions in Analysing and Reporting on Cost-Recovery
Task 1 - Define the Water Services
The first task is to define water services (see Water Uses and Services Information sheet) and to determine the scale of the analysis (see Scale Issues Information Sheet). Particular attention should be paid to the geographical scope of the analysis (local, regional, river basin, national, international). Subject to data availability, the definition of water services may have to be at the administrative rather than the geographical level. Illustration 1 of this information sheet demonstrates how data were collated and adapted to RBD level in the Middle Rhine, however, in some cases, for lack of more disaggregated data, cost-recovery might need to be analysed at the national level (see Illustration 2 for an example).
Illustration 1
Cost recovery and data availability in the Middle Rhine, Germany
Illustration 1 (Continued)
Table 3
Illustration 2
Issue of Data Availability in the Netherlands
In addition, the scale at which the costs of water services are incurred might be different from one category of costs to the other (financial costs would usually be collected at the water service level, whilst environmental and resource costs would be at the level of the river basin, the scale at which water uses can be analysed). Ways to reconcile these different scales and to combine data should therefore be sought during that first task. This might require co
ordination between different administrations (for example, the economic regulator of water services who would normally have access to data on the financial costs of water services and the environmental regulator, who may have data on the environmental and resource costs in general, although not necessarily allocated to water services).
Task 2 - Identify the Providers, Users and Polluters
This task involves the identification of the actors involved in the generation of financial, resource and environmental costs. Water services are provided in different ways, e.g. on a communal or individual basis, by a public or a private company. The geographical scope of the analysis is determined by the level at which the responsible authority and the provider of the water service operate and the scale of the market served (see Illustrations 1 and 2 of this information sheet).
Normally, little information is available for individually provided water services (agricultural groundwater abstraction, industrial waste water treatment, septic tanks of households etc.) - see the Look out! Box below. Should this be the case, an estimation of the extent to which water services are provided on an individual basis, for example the percentage of households with septic tanks or percentage of industry not connected to the sewerage system, can be attempted. It is only where there are significant environmental problems linked to self-services (such as mining of an underground aquifer due to too many private wells) that an appropriate estimate of all costs related to self-provided services is key to transparency and better decision-making.
A specific case is that of diffuse pollution, which can be created by agricultural pollution but also industrial or household uses (such as urban run-off). Even though diffuse pollution is not a water service, the costs resulting from diffuse pollution, in so far as they have an impact on the costs of water services (through an increase in water treatment costs for example), should be covered by those who have generated this pollution. With the Water Framework Directive (Article 9) requiring an adequate contribution of the different water uses to the recovery of the costs of water services, it is important to ensure links can be made between water uses and related water services and costs.
Task 3 - Calculate the Financial Costs of the Water Service
To calculate the financial costs (see Estimating Costs Information Sheet), extensive information is needed regarding the various cost items involved in providing the water service. Typically, this type of information can be collected from the providers annual production account or balance sheet or, if there is more than one provider, from their aggregated production accounts or balance sheets (see Illustration 3 of this information sheet). Depending upon the relevant scale of analysis and the number of providers involved, this can be done at a local, regional, river basin or national level. Illustration 4 of this information sheet presents an easy-to use methodology for estimating financial costs.
Illustration 3
Estimating cost-recovery in the Netherlands
Table 1 below shows the aggregated costs water quality (and quantity) management, including both financial, internalised environmental, and remaining environmental costs. This is the case because the costs of mitigation measures to compensate for water pollution (e.g. cleaning of polluted river beds and water soils, monitoring of the water quality) are included in the financial costs and paid for by the users through the wastewater treatment charge. Also, since the wastewater charge paid is related to the pollution caused, the polluter pays principle applies. In total, costs add up EURO 1,030 million.
Total revenues for water quality management amount to EURO 1,035 million. Revenues include financial returns on assets and the revenues received from the wastewater pollution charge. This charge is set to recover the costs of wastewater treatment and mitigation measures. From these revenues, the subsidies received for operating the wastewater treatment installation need to be subtracted, resulting in a total of 1,021 million.
The cost-recovery rate can therefore be estimated as:
Total revenues-subsidies 1021
--------------------------------- = ------ = 99%
Total costs: 1030
Table 1 - Aggregated Balance Sheet of Water Boards in the Netherlands
Illustration 4
Estimating Financial Cost Recovery in the French West Indies
Two of the main features specific to water supply schemes are: (i) they incorporate assets with service lives of varying lengths, often extending beyond the life of the loans subscribed to finance them; and (ii) corresponding maintenance costs grow over time and are not easy to estimate.
In the French West Indies, a large, multi-purpose water scheme supplying raw water mainly for agriculture (52%) and domestic purposes (40%) provides the basis for a simplified case study on financial cost recovery to illustrate how these features should be taken into account. The scheme is publicly-owned (and as such, investments were funded by various local authorities from 1977 to 2000) but privately managed. From the scheme, 16.8 hm3 of raw water are sold every year and nearly 10,000 ha are irrigated.
Given the asset lives and a discount rate estimated at 3%, the annual capital costs were calculated to estimate whether the schemes financial costs are fully recovered. To calculate maintenance costs, an intermediate step in was made to estimate a maintenance rate for each type of asset, taking into account that these costs increase over time, and using lower and upper bound values derived from past experience (see Table 1 below).
Table 1: Capital and maintenance annual costs calculation (€ 2000)
The total financial cost was then calculated by adding this tables intermediate (total) costs to operation costs. These were derived from existing data provided by the private operator.
Table 2: Total financial annual costs and its components per cubic meter (€ 2000)
These total costs can be allocated between the different water users (irrigators and others) and compared with the price of water charged to those users. However, there are some clear limits to this approach: average costs calculated over a long period (75 years for some assets) are compared with fees charged in a given year. Thus, a comparison between average annual costs and current prices to estimate cost recovery only gives a rough estimate and should be interpreted with caution. In this case, water used for domestic purposes represented 40% of total volume used and 57% of total fees received, due to the lower price of irrigation water and to a different water pricing structure. For raw water, operation and maintenance costs were fully covered by users through tariffs but a large part of capital costs were covered through subsidies from the public authorities.
Based on several case studies conducted in France, this method for estimating financial costs appears relatively robust as it provides the means to estimate costs with assets of varying asset lifes. It can also be applied to external costs whenever it is possible to identify stakeholders who are affected by externalities and who have incurred expenses to avoid them or to remedy their effects. So far, however, this method has been applied solely to estimating financial costs.
Source: T. Rieu (2002, forthcoming).
Task 4
Identify and Estimate the Environmental and Resource Costs of Water Services
According to the Directives definition, environmental and resource costs should also be considered in order to take account of the principle of cost recovery. As mentioned in Estimating Costs (and Benefits), the estimation of environmental costs and resources might be difficult, due to methodology issues. Some environmental and resource costs are already internalised and as such, are included in the financial costs (see Illustration 5). Non-internalised environmental costs will prove most difficult to quantify and incorporate in the cost-recovery equation. For those, and for the sake of improving transparency, it might be sufficient to identify the costs and estimate them in a first instance.
Illustration 5
Introducing a Natural Resource Tax (NRT) in Latvia
The Natural Resource Tax (NRT) was introduced in Latvia in September 1995 as a means to incorporate environmental externalities into the cost of water and wastewater services. Groundwater and surface water abstractions are charged, together with discharges.
The NRT rates vary according to the type of water abstracted and the type of pollutants. The following table shows the NRT rates for both water extraction (ground or surface) and water pollution:
Source: Latvian Law on Natural Resource Tax adopted on 14 September 1995.
In the following table, the Latvian NRT rates for groundwater extraction and pollution with P and N are compared with NRT rates in other Central and Eastern European Countries and some EU Member States.
Source: REC (October, 2001)
This table shows that the NRT rate for groundwater extraction is generally lower in Latvia compared to other Central and Eastern Europe countries, and substantially lower than in EU Member States (it should be noted that GDP per capita in Latvia is only 29% of the average in the EU).
In addition to this relatively low NRT rate, it appears that the tax on water extraction and water pollution does not achieve its intended goal to achieve full cost-recovery while protecting the environment. The rates are relatively low and have remained unchanged since 1996, whilst the inflation between 1996-2001 was 43%. As such, the NRT rates probably do not cover environmental costs, at least from pollution (with respect to abstraction, given abundant groundwater resources and relatively low extraction rates, resource costs are close to zero). In order to prevent social problems, however, and given that water and sewerage tariffs are already relatively high, the NRT rates could only be increased in line with the expected economic growth in Latvia. Many small businesses have difficulties paying even the relatively small NRT and have little incentive to do so given that the monitoring mechanisms are deficient. From this case, it transpires that the NRT currently in place in Latvia largely represents a compromise between social, economic and environmental goals rather than a fully-blown economic instrument for recovering environmental costs.
Source: I. Kirhensteine (2000, forthcoming).
Task 5 - Identify the Cost Recovery Mechanism
This task involves identifying the mechanism currently used for recovering the costs of water services by water users. This would generally involve payment by users (through prices, charges, taxes) or alternative institutional mechanisms for recovering costs. This task should pay specific attention to the institutional mechanisms that are used in order to recover costs going beyond the mere pricing mechanisms. As shown in Illustration 6 below, water users may sign a specific agreement between themselves in order to share the costs of an improvement in water status, which might reflect more closely the way in which they are sharing the benefits than through relying on an administrative pricing mechanism.
If prices and charges are the main cost-recovery mechanism, it would be important to collect data on the tariff structure, including the price per unit of water service used (for instance, EURO per m3 or fixed charge per household etc.). If more than one user group is involved, the unit price may be aggregated and averaged across one or more user groups.
Illustration 6
Institutional mechanisms for cost recovery in Tarragona (Spain)
Source: M. Blanco (2002, forthcoming).
Task 6 - Calculate the Recovery Rate of the Economic Costs of Water Services
The next task involves calculating whether, at an aggregated level, the cost of water services is globally recovered via revenues from users of this water service. This will need to be carried out water service by water service. In order to do so, it will be important to assess the revenues received by the water service and to assess whether any external subsidies are paid in order to finance the costs of this water service.
As highlighted in Box 1 below, subsidies can be paid either directly or indirectly. In addition, they can be paid continuously or have been paid in the past (for example, a capital grant paid in the past to finance investments, or a write-off of capital asset value when transferring some assets in the private sector, as it was done in the United Kingdom at the time of privatisation). Therefore, it will be important to define clearly what is considered to be an external subsidy and when it was granted. An example of cost recovery and identification of subsidies in Hungary is given in Illustration 7.
Box 1
Cost recovery: The issue of subsidies
Once the external subsidies have been identified, the general formula for calculating the cost recovery rate for water services can be calculated as follows:
,
where CRR is the Cost Recovery Rate, TR the total revenues (depending on the cost recovery mechanism this figure could be based on either fixed or variable charges in EURO/year), Subsidy the total amount of subsidies paid to the water service, and TC the economic costs (in EURO/year) of the water service provided.
If the water service is provided free of charge, the CRR equals zero. The problem with assessing the full extent to which the PPP holds is that external resource and environmental costs must be calculated and added to the financial cost. This may be difficult due to data availability (e.g. cause and effect are not always clear and environmental costs are often incurred at a scale that is larger than the scale of analysis). In such a case, to make an estimation of the extent to which environmental and resource costs are recovered, aggregated data on the quantity of water used by the different sectors and the amount of pollution caused by water services may at least be sufficient to inform a general assessment of the most important pressures and pollutants. In combination with information on environmental charges and levies, they can provide sufficient information to give a qualitative estimation of the extent to which the polluter pays principle has been applied.
In addition, due to the difficulties of identifying and allocating environmental and resource costs, it is important to distinguish between financial cost-recovery and overall cost-recovery. Financial cost-recovery should be analysed in the first instance as a minimum, and then overall cost-recovery could be estimated on top of this, bearing in mind the difficulties of doing so.
Illustration 7 - Cost recovery in Hungary and the need to identify subsidies
To meet EU accession requirements, Hungary must comply with EU regulations concerning wastewater collection and treatment by 2015. As a result of accession negotiations, total wastewater collected must be 79.5%, and the level of treated sewage must be 90% (from 38.5% in 2002). The investment costs for this undertaking will total € 820 millions. Most of the necessary investments will be financed by State and EU subsidies, although the present level of these subsidies is already high with over 1/3 of the water services companies having negative earnings.
An assessment of cost-recovery in Hungary remains difficult: the water services sector is highly fragmented with companies using different accounting systems; data gathering and processing is costly, due to the number of companies and claims of data confidentiality; economic valuation of environmental costs is lacking.
An overhaul of the water services sector in 1990 led to increased decentralisation, with local control transferred to local and regional companies (with public ownership of assets), and the establishment of 5 regional, fully state-owned companies that handle bulk production and some supply. Regulatory responsibilities and ability to set prices for water and sewage were also transferred to local water authorities (except for the regional companies, whose prices are set by the Ministry of Transport, Telecommunication and Water Management
MoTTW). Local control over pricing means varied costs relative to production costs
areas with higher production costs must charge more for water than areas with lower production costs. Along with the transfer and loss of centralized control, the central government also decided to reduce subsidies for operation costs in the water sector, claiming that local water charges should recover the water sector operating costs. However, as illustrated in the following table, this is a difficult task.
Table 1: Characterisation of the Water Services Sector in Hungary
The subsidies that are provided by the central government are the responsibility of the MoTTW. Each year, the MoTTW sets threshold values for water and sewage unit costs and municipalities (local governments) with higher costs receive the difference as a subsidy. The charges paid by the household consumers in the subsidised settlements are then equal to the threshold level of costs.
In practice, the Ministry first decides on the aggregate amount of transfers in each year, and then determines threshold values. In 1998, 1999 and 2000, total subsidies amounted t to CHF 3.4, 3.8 and 4.1 billion (at current price) respectively. For 1998, this is less than 0,5% of the total costs of water and sewage services provided for households in the country. More than one third of the settlements in Hungary (usually smaller villages) receive this kind of subsidy.
With a relatively low level of forecasted household incomes, simply raising the water charges will not result in an improved water sector. Further, increased investments from the EU and the state alone will also not result in an improved water sector. Given the state of the sector, and the need for further investments and reform to meet the EU accession goals, a closer look at how the subsidy system operates, how these are implemented, and how they are measured to meet overall policy goals may be necessary. The situation in Hungary may also be relevant to accession countries facing similar challenges, and to some Member States.
Source: P. Krajner (2002, forthcoming).
Task 7 - Identify the Allocation of Costs to Users and Polluters
The allocation of costs to water users will require determining a number of cost drivers, which are proxy indicators for estimating the amount of costs that they generate. These cost drivers are likely to differ according to the type of costs that are at stake. For example, in the case of the provision of a water distribution service, 'volume of water used' might be an adequate driver for allocating operating costs whereas 'required pipe capacity' may be a more appropriate driver for allocating investment costs. Cost drivers for environmental costs might be linked to the quality of the water discharged into the environment or into the sewer.
Specific attention should be paid to the potential existence of cross-subsidies between users of the water services (see Box 1 of this information sheet). The availability of data will largely determine to what extend those cross-subsidies can be made explicit. Typically, the allocation of costs to different categories of water users can be a difficult exercise.
It follows from the tasks outlined above that information is needed on the specific water services involved, their costs (including possible environmental and resource costs) and the way they are paid for (or not), providers, users/polluters and possible subsidies/transfers is required to estimate the rate of cost recovery (see Illustration 8 of this information sheet for an example on how this may be achieved).
This information can usefully be compiled in a matrix, as shown in Table 1 of this information sheet. This structure makes the interactions between the economic system and the water basin explicit and combines all the necessary information in one general accounting matrix. In this structure, a distinction is made between the different water users (households, industry and agriculture) and providers of water services (communal and individual). A similar structure is currently used by the National Accounting Matrices, Water Accounts (NAMWA)1.
Illustration 8
Observatory for household water pricing (France)
Source: A. Courtecuisse
Artois Picardie River Basin Agency
See also: http://www.ifen.fr/pages/4eaulit.htm#65
Table 1 - General structure of information requirements with respect to reporting on cost recovery
Directive references: Article 5, Article 9 and Annex III, also implicit in Annex II
3-Step Approach: Task 1.2, Task 2, Task 1.3 and 3.3.
Information sheets: Recovery of Costs and Cost-effectiveness Analysis
This information sheet will help you develop one or several alternative baseline scenarios (or 'business-as-usual' (BAU) scenarios), and proposes an optional approach to complement the forecasting analysis (to define the BAU scenarios) with prospective analysis.
Article 5 requires that each Member State shall ensure that 'an economic analysis of water use is undertaken for each River Basin District' and Annex III further specifies that this analysis should 'take account of the long term forecasts of supply and demand for water in the RBD and where necessary: estimates of the volume, prices and costs associated with water services and estimates of relevant investment including forecasts of such investments'.
The construction of long-term forecasts (what is referred to as business-as-usual scenarios) during Step 1.2 of the 3-step economic approach is needed for:
Note that the business as usual scenario will only integrate what would happen in a given river basin district without the Water Framework Directive, due to changes in population, technologies, the implementation of water policies resulting from previous European directives, other sector policies, climate change, etc. During Step 1.2 of the economic assessment, it will be important to focus on the forecasting of pressures and of key socio-economic drivers that are likely to affect those pressures. It is only during Step 2 of the overall approach that these forecasts are translated into an assessment of their impact on water status.
Given the use of the baseline scenario, it is important to broaden the scope of the forecasting analysis suggested in Annex III in order to:
In order to build the baseline scenario, it will be necessary to forecast a set of variables before assessing the impact that these changes will have in terms of pressures and water status. It will be important to distinguish between three types of variables as presented in Table 1 below.
Trend variables: underlying (exogenous) trends, on which water policy has no direct influence;
Critical uncertainties: variables which are particularly difficult to predict, and might have a significant impact on the final result;
Water policy variables (see Table 1 below): variables linked to the underlying water policies, independently from the implementation of the Water Framework Directive (as the focus is on building a 'business as usual scenario')
Table 1
Categories of variables to be examined for the business as usual scenario
3. Practical Tasks for deriving the Baseline (Business-as-Usual) Scenario
The proposed approach for developing the Baseline Scenario is outlined in three tasks, as shown in Box 1 of this information sheet. This box serves as a visual aid throughout the process outlined below.
Box 1
Illustration of the General Method
Task 1 - Assess current trends in 'trend' variables (including physical parameters and socio-economic drivers)
The output of this task is a survey of past observations, historical data and a forecast of ongoing trends over a relatively short-term horizon. This work will be partly based on physical and ecological characterisation of the river basin and will build on technical and data handling/statistical expertise. The analysis of past evolution of water resources and physical parameters will mostly rely on technical expertise and on the analysis of trends in pressures, water uses, water services and impacts. The data to be gathered are summarised in Table 2 below.
The methodology for this task will be based on a comparison between the past and present status of trend variables in the river basin (including water uses, water services and physical parameters -as per Annex V of the Directive). This should enable:
Table 2 - Data to be gathered in Task 1
Illustration 1 - Oise river basin (France): case study of deriving a baseline scenario
As part of the Seine River District in France, the Oise River Basin suffers from high diffuse pollution from agricultural runoff, high urban water intensity, dense industrial concentration on main and smaller rivers, and overall poor water quality in the main river and some of its smaller tributaries. By identifying past trends and the present state of water policy, surface water quality and pollution (including sewage equipment and discharges), a baseline scenario was formulated to provide insight to policy makers for addressing present and future water resources management. The following maps highlight some of the studys results:
Task 1 - Evaluation of major past trends
Evolution of polluting activities 1990-1999:
+2.7% population increase (+0.3%/year)
+11% industry production growth (+1.3%/year)
Source: Agence de l'Eau Seine-Normandie, 2002 (provisional assessment).
Illustration 2
Issues with trend extrapolation: 'The past is not necessarily a good indicator of the future' (England and Wales)
In England and Wales, water demand rose steadily from 1960 to 1975. Applying an assumption that 'the past is a good indicator of the future', it would have been logical to apply a simple linear relationship to demand from 1975 onwards. However, a simple non-causal relationship ignores the real drivers affecting water use. It is therefore not surprising that this extrapolation technique often fails, as it would have done in this hypothetical example (see Figure 1).
Figure 1 Water supply in England and Wales, 1961-2000
For short-term forecasting a more refined approach using a multiple linear regression form of extrapolation of trends might be suitable. This might be dependent on variables such as temperature and rainfall but it is likely to be more effective if applied to specific elements of water demand rather than total water demand. Indeed, the problem with overall trend forecasting is that it fails to analyse causal relationships and as a result, lacks transparency. Therefore, a more disaggregated approach to demand forecasting might be preferable (see Illustration 3 of this information sheet).
Using simple trend projections might have benefits, as it is a low cost method and that it is quick and simple to derive a trend line. However such method has also many disadvantages, in the sense that it produces low quality forecasts and that it is reliant on good quality time series from which to derive statistical relationships. In sum, the past is not a reliable indicator of the future for anything other than possibly short-term forecasting.
Illustration 3
A disaggregated approach to demand forecasting (England and Wales)
A preferred approach to trend projection and an important building block of any demand forecasting exercise requires adopting a disaggregated approach to demand forecasting, in order to identify the key drivers of demand and in particular, the key sectors having an impact on demand. This illustration draws on water demand forecasting activity undertaken to develop a water resources strategy for England and Wales. Its purpose is to demonstrate the level of detail necessary to reasonably apply assumptions about future water use brought about by changes to the key drivers of demand. The approach is valid for different sized areas although in small river basins there may be local issues relating to robustness of sample sizes and data availability.
The causalities of short-term changes in water demand are likely to be different to those affecting the longer-term. In the case of the former, it may be sufficient to examine recent history to establish how existing pressures are likely to translate into total water demand. Since water demand within a river basin will fluctuate over the longer-term (+5 years) as individual water uses grow and/or decline, it is logical to estimate how total water demand may change by examining the drivers of demand and the consequences for each use. Table 1 summarises the breakdown of total water demand used in the case study referred to above.
Table 1 Elements of water use by sector
A similar level of disaggregation to that described is recommended as good practice in order to introduce sufficient confidence into the supply-demand balance assessments that are key to establishing a baseline water use estimation.
The benefits of such detailed disaggregation include:
The disadvantages of such disaggregation include:
Source: UK Water Industry Research Ltd / Environment Agency (1997). For enquiries relating to demand forecasting email: rob.westcott@environment-agency.gov.uk
Summary of the key drivers of demand for each sector
Task 2
Project certain changes in water policy variables and derive longer-term projections
Based on the previous task, key driving forces and drivers related to water and water policy (be they hydrological, socio-economic or policy/regulatory related) should be identified and analysed. In this task, it is proposed to concentrate on changes that are more certain and for these certain changes:
Task 1 will have given an estimation of the future increase in raw pollution from human activities (pressures analysis). This task will try to answer the following questions:
This task is central to the Water Framework Directive process and thus has to be steered by the district authority at high decision-making level. A 'strategic co-ordination group' will probably be needed to incorporate all expertise and interdisciplinary inputs in the process. Again, on these matters, it is recommended not to strive for describing one unique image of the future if not possible. When choices among different values are necessary for some variables (e.g. activities growth rates, technological changes, policy implementation rates), a series of alternative baseline scenarios can be prepared. The table below summarises the approach in Task 2.
Illustration 4 - A methodology for scenario building developed for the region of Sfax (Tunisia)
Figure 1: Example of assumptions formulation on the demographic evolution of the Sfax region
Source: Treyer, S. (2002, forthcoming).
Illustration 5 - Example output from a scenario building exercise in the Ribble (England)
Source: Integrated appraisal for river basin management plans. Environment Agency, Andrews et al(ii), extract: the Ribble case.
Task 3 - Integrate Changes in Uncertain Parameters (integration of critical uncertainties)
In this task, more uncertain changes that are likely to have significant impacts on the pressures and water status are integrated into the analysis for developing the final business-as-usual scenarios to be used for identifying the gap in water status.
At this stage, the possibility of uncertain events or 'what-if scenarios' will therefore be integrated into the 'business-as-usual' scenario with questions such as:
Of course, possibilities for such variations are infinite. However the first two tasks will have helped designating the key parameters on which uncertainty analysis is necessary (e.g. if diffuse pollution appear as a major issue in a district, analysis of uncertainty in that field is worthwhile, through the analysis of alternative agricultural policies for example). The Table below summarises the key issues that could be examined during that Task. Taking into account such changes will produce the Baseline scenarios for the district.
Illustration 6
The incorporation of critical uncertainties in the development of a Water Resources Strategy (England and Wales)
The choice of assumptions made while developing a business as usual scenario will require discussions with the public and stakeholders, and input from economists and technical experts.
The use of scenario building for public participation
One particular method of involving the public is to use scenario building (or foresight methodologies). This may usefully complement forecasting (i.e. the derivation of the business-as-usual scenarios) in order to structure policy discussion and public participation, and identifying key water management issues. Scenario building as an exercise is not so much carried out to produce one single image of the future, but it intends to foster the debate on present and immediate future policy options by exploring their possible future consequences. Prospective scenarios can provide colourful illustrations of the main issues for water management, give extended view of the ongoing policy debate on water (e.g. supply- or demand- management), illustrate the pros and cons of the possible solutions, reveal possible factors of change, and offer a possibility of a wide but formalised interdisciplinary discussion. Prospective scenario building is proved to be much less 'data-demanding' than forecasting a baseline.
Methods and practical tasks in this field are very diverse, with respect to:
The role of public participation in scenario building at river basin district level: A summary
Illustration 7 - The role of participation in four long-term thinking exercises in the field of water
Source: Van der Helm, R. & Kroll, A (2002, forthcoming).
The development of baseline or business-as-usual scenarios require a range of economic and technical expertise to account for, and investigate, trends and evolutions of a wide range of hydrological, technical, socio-economic and regulatory parameters. Methods that need to be mobilised include:
The development of the baseline scenarios investigates drivers and parameters at different scales:
Directive references: Articles 4 & 5 and Annex III
3-Step Approach: Step 3.2
See other information sheets: Baseline Scenario, Estimating Costs and Disproportionate Costs
This information sheet will help you carrying out a Cost-effectiveness Analysis (CEA). The CEA is used for assessing the cost-effectiveness of potential measures for achieving the environmental objectives set out by the Directive and construct a cost-effective Programme of Measures.
Cost-effectiveness analysis (CEA) is an appraisal technique that provides a ranking of alternative measures on the basis of their costs and effectiveness, where the most cost-effective has the highest ranking. The CEA proposed here takes an economic view of cost-effectiveness (see Estimating Costs Information Sheet for a definition of the term).
The CEA is used for assessing the cost-effectiveness of potential measures for achieving the environmental objectives set out in the Directive, and in particular for:
The focus of this information sheet is on the first component of this analysis. The sheet outlines issues relevant to estimating the effectiveness, costs and economic impacts of water improvement measures as well as the key tasks of the CEA.
Key issues to look out for when conducting the cost-effectiveness analysis include:
The key components of the CEA are the costs and effects on water of the measures. These and other tasks are outlined below. At times, this will save you doing the job twice, since most of the cost analysis for the cost and benefit assessment will have already been performed for the cost-effectiveness analysis. Some other key points to consider throughout the process include:
Figure 1
Tasks and Key Questions in Analysing and Reporting on Cost-Recovery
Task 1 - Define the Scale of the Analysis
Illustration 1
Determination of scale based on information in Cidacos (Spain)
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Task 2 - Define Time Horizons
Task 3 - Determine the Effects of Measures on Water
CEA requires comparable and if possible, quantitative information on the effects of measures.
Key issues to address include:
To make it easier, it would be important to identify the effect of the measures on each parameter as clearly as possible (see Illustration 3 of this information sheet).
Illustration 2 (below) demonstrates how the effectiveness of measures was assessed for the Ribble basin.
Illustration 2
Assessing the effectiveness of measures in the Ribble (UK)
This example illustrates how effectiveness of measures was assessed in the Ribble basin. It is assumed that an aggregate 50 percent reduction in nutrient levels would be needed to achieve the necessary reduction in the risks of not achieving good water status. However, it should be noted that, depending on the outcome of other research on the appropriate compliance assessment model, different formats for presenting risk reduction information might be more appropriate. In addition, precise estimates of the risk reduction may not be the most appropriate format for presentation. Broader categories of risk reduction (High-Medium-Low, or ranges) may be better. However, in order to make the analysis tractable, point estimates are used here.
The table presents estimates of the effectiveness of number of measures for the River Ribble. For example, STW optimisation may be judged to deliver a 20% risk reduction (+/- 5%, i.e. 15% to 25%). The measure can become operational immediately (i.e. no specific time lag).. This might be contrasted to the agricultural general binding rule measure, which might deliver the risk reduction, but entails considerable uncertainty about its effectiveness and would require a significant lead time. Full effectiveness of this measure would not be expected until the 2021 planning date. In addition, this measure is not currently available, as it would need to be negotiated at a national level.
Source: J. Fisher. Integrated appraisal for river basin management plans. See Annex E.
Illustration 3
Issues in conducting the cost-effectiveness analysis in Cidacos (Spain)
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Task 4 - Estimate the Costs of Proposed Measures
Analysing the costs and economic impacts consistently for distinctly different sectors is a major challenge. All costs should be measured in comparison with the business as usual situation that would arise in the absence of the option. Also, who pays for measures that have significant effects on particular parties (e.g. water customers in respect of water bills) and the scale of any such payments should be identified. Therefore the allocation of costs of the proposed measures is a key element of the analysis.
Illustration 4
Allocating costs of measures to water users in Cidacos (Spain)
In the Cidacos case study, the most cost-effective measures require many actions in the irrigation communities located upstream of the river and no action in those located downstream. The cost reduction gains that result from this approach far outweigh other more symmetric alternatives. However, the drawback is that measures must be funded and the target farmers cannot finance the programmes of measures by themselves. Therefore, they must rely on other farmers contributions, especially those whose irrigation districts will not be modernised or rehabilitated.
The consideration of institutional issues means that the costs and benefits for the six irrigation communities of the Cidacos River would have the following effects:
The numbers in the Table gives an idea of the winners and losers from the proposed programme of measures, which may stir conflicts amongst usually quite united stakeholders. Thus, measures will need to be taken to enhance the persuasiveness to gain the support for a cost- effective set of measures. While in the Cidacos project, it is assumed that all irrigators will be charged equal water rates, the net margins variation found in the study might support the option to implement differential rate schemes.
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Task 5
Assess Cost-effectiveness
The unit-cost effectiveness estimates from above analyses should form the main element of the appraisal of costs of measures. Cost-effectiveness can be presented in two ways: (i) costs divided by the effect, or (ii) effect divided by costs. For the selection of measures in the framework of the Directive, the former is used:
Costs per effect:
KEm = Km/BEm
KEm - cost-effectiveness of measure m (Euro/m3)
Km - economic costs of measure m (Euro)
BEm - the water quality improvement (= the effect) of the measure (say in km or m3 of improved water body)
The cost-effectiveness analysis itself can be broken down into a number of tasks:
Illustration 5
Ranking measures based on their cost-effectiveness
Different measures can be implemented to achieve an improvement in the water status for a specific parameter. In order to select an appropriate set of measures, these can be ranked according to technical efficiency (ability to obtain an X reduction of pollutants or increase in river flow) and associated costs.
In the Cidacos scoping study, a total of 26 policy measures for improving the water flow were identified initially. These measures involved reducing pressures on water abstraction by reducing the water demand, increasing the efficiency of the water distribution networks in urban and the rural areas, and importing water from another basin through existing infrastructure, and each of them was appraised according to effectiveness and cost. As shown in the diagram below, the cost and efficiency of each measure can be represented by marginal cost curves (see blue and green curves), indicating the cost in euro per unit of achieved flow increase (litre per second) and so provide a ranking. (The red curve shows the average cost of the resulting policy package.)
In the Cidacos river, an increase in the water flow of 50 litres per second is required to meet the objectives of the Directive. Following the ranking of measures (as shown in the diagram), it was shown that the most effective measure (i.e. the measure that could achieve the greatest increase in water flow at the lowest cost) was the implementation of a water saving programmes (WSP) in the agricultural sector (achieving 20% of the requirement, or 10 litres per second), mainly by reducing the demand and changing irrigation techniques for farms using more than 6.000 m3 per Ha, followed by WSP designed to reduce the demand in households and firms (urban uses), which achieved another 15 percent (or 7.5 litres per second) of the required flow increase.
However, note that the cost effectiveness (and ranking) of a measure is not always constant. For some measures, the marginal cost increases with the level of efficiency (see water recycling, blue curve). It is therefore important to carefully look into the behaviour of costs: assuming that costs are constant may lead to an inefficient selection of measures.
Illustration 6
Estimating the cost-effectiveness of proposed measures in the Ribble (UK)
Source: J. Fisher, Integrated appraisal for river basin management plans. See Annex E.
Illustration 6 (continued): Table 1 - Illustrative results for the option appraisal (costs and cost effectiveness)
Ribble
A key element will be to take into account uncertainty in all elements of the analysis, as it can significantly affect the results (see Illustration 7).
Illustration 7 - Addressing uncertainty in cost-effectiveness analysis: an example from the Scheldt estuary
Task 6 (Optional)
Estimate the Economic Impact of Measures
In addition to this process, it may be useful to estimate the economic impact of the proposed measures, although this would go strictly outside of the cost-effectiveness exercise. In addition to direct costs, such an analysis would account for induced costs (i.e. the costs on other economic sectors) and the environmental costs not linked to water (see Illustration 8 for an example).
Illustration 8
Impact of the incorporation of the economic impact of measures on the ranking of measures in Cidacos river basin (Spain)
Any change in the economic conditions affecting irrigated farms can potentially have other direct costs and also indirect costs. Costs that would need to be taken into account are those that affect land dedicated to agriculture and water consumption. 'Other direct costs' are likely to be small if farmers keep the same practices or cropping patterns that they used prior to the implementation of a given measure. But if farmers consumption is expected to fall, their output will change and their labour demand will also fall.
The Cidacos study considered (as in the Spanish Ministry Agriculture National Irrigation Plan) that 1 € of output produces 0.319 € of further added value. This is one measure of other direct costs (or benefits). The other is the impact in the labour market. The Cidacos case study makes the assumption that the loss of one hectare of irrigated land eliminates about 40 € of wages in addition to the losses of farmers income.
An application is shown for the measure 'restoration of the riverine forest'.
In addition, wider costs in the irrigation sector may be associated with those costs that are borne by stakeholders beyond the gates of the farms. In the Cidacos case study, it was assumed that attention should be given to those sectors linked to the agricultural sector, such as farm input suppliers and food processors. In addition, irrigated agriculture hires workers to perform various tasks, generating labour rents that are important in many agricultural areas. Impacts on the rural economy are thus integrated to the study, evaluating the other direct costs and labour market effects.
The Table below reports the selected programme of measures costs in terms of Euros per increased unit of river flow. The reported evaluations indicate that incorporating wider costs in the analyses provides a different picture than excluding them. These differences are amplified when the costs reported in the table are brought to the basin-wide analysis, where other sectors and the spatial dimensions of the measures are fully integrated. For instance, if a measure applied in a non-agricultural sector has a cost of 5000 Euros for each litre/second of additional flow, many measures will not be desirable if all costs are included, and others would be more cost-effective if those costs are not included.
Measures costs (expressed in Euros per increased flow of 1 litre per second)
Water body I = upstream; Water body II = middle stream; Water body III = downstream
As a general rule, if cost differences are not very significant, an evaluation focused on direct costs may provide a valid starting point. However, if wider costs are thought to be important and sensitive to the regional or local economies, then they should be taken into account at least in the sensitivity analysis.
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Illustration 9
Analysis of Alternative Agricultural Measures: the Wise Use of Floodplains Project in the Erne Catchment (Ireland)
In order to engage stakeholders in thinking about local sustainability and the effectiveness of alternative measures to reach quality objectives, the Wise Use of Floodplains project in the Erne Catchment in Ireland used a simple model for public participation entitled the Local Sustainability Model (LSM).
The basic model can be supported with more detailed analysis or sub-models on specific issues. The participative process of establishing the baseline and discussing predicted impacts is as valuable as the result itself. The model is a simple three by three matrix. The columns represent three aspects of local sustainability: the natural environment, the community and its culture, and the economy. These are ranked as being Robust, Stable or Fragile. Communities can use this framework to assess how their area performs, shading in the model to provide a 'picture' that local people can recognise.
The process of establishing the model leads a community through discussions on these three aspects using local knowledge and professional expertise. The example on the right shows an area which has a stable natural environment and community, but where the local economy is fragile. For potential catchment management options, or measures, arrows are drawn on the matrix reflecting the expected impacts. The model allows locals and professionals to share this qualitative impact assessment without the domination of one or the other.
Based on participatory work using tools such as the LSM, the Erne Wise Use of Floodplains Project developed options to restore water quality in the Erne catchment. An impact assessment study enabled comparison of their cost-effectiveness. Participatory work by the Erne project identified land management options and environmental impact criteria that were key to water quality in the catchment. These options included co-ordinated catchment-level changes to agricultural practices in the Erne, such as:
The economic, social and environmental impacts of these measures where analysed in a consultants study that used a set of financial indicators, and ten weighted environmental and social criteria. The effectiveness scores were inevitably subjective, and encountered problems of double counting. Practitioners can be wary of these issues, and should develop and verify effectiveness scores with as wide a range of stakeholders as possible.
The management options socio-environmental scores were compared to their predicted additional costs to taxpayers. The study revealed the current financial support for agriculture in the Erne catchment, and could be used to design more cost-effective policy modifications. The methodology developed in this project is interesting in the sense that it allows identification of cost-effective policies in relation to social and environmental objectives.
Source: I. Dickie (2002, forthcoming). See also the Royal Society for the Protection of Birds, www.rspb.org/economics/water
A broad-brush qualitative assessment provides a good foundation for the CEA. It can be used to identify the relevant costs, economic impacts and non-water environmental impacts of measures (see Tasks 4 and 5
see also the illustration on the methodology used in the Erne catchment in Ireland). However, a quantitative analysis is necessary on top of this, looking at (ranges of) estimates for the effects on water quality, and the financial costs of the main measures.
Where relevant, there should be a qualitative description of impacts over and above the direct costs already estimated. They may include:
As an option, the analysis can be taken further through the inclusion of the following actions:
Annex I (of this Information Sheet)
Illustration of Format for Presenting Costs
Note: Present Value of costs =Capex + (opex * discount multiplier). Equivalent annual cost = NPV/discount rate multiplier. Discount multiplier = 14.59 for a 30 year investment at 6%.
Source: Fisher, JCD, Holt, A, (2001).
Directive references: Article 9
3-Step Approach: Step 1.3 and 3.1, and potentially Step 3.2
See other information sheets: Estimating Costs, Reporting on Cost Recovery
This information sheet helps you assess the effectiveness of pricing as a measure to achieve the environmental objectives of the Directive.
The Directive recognises water charges and prices as basic measures for achieving its environmental objectives. This information sheet proposes and illustrates a range of methods for assessing whether pricing policies (actual or proposed) provide appropriate incentives for users to reduce their water uses and pollution. This is particularly relevant for two main purposes:
The price of water is an important variable that influences the amount of water used by users or the amount of pollution they discharge. As such, it can be a useful measure to introduce (amongst others) in order to meet the objectives of the Directive:
To yield such effects, however, pricing policies must be designed so that a reduction in the quantity of water used or pollution discharged would lead to a simultaneous reduction in the total bill for the particular user. This means that the price of water should be proportional to the quantity of water used or the pollution generated (see Box 1 of this Information Sheet).
Incentive-based pricing can be more or less effective depending on its design
Tariffs with a volumetric element are key to introducing incentives
and on user demand characteristics
for example, the impact of volumetric tariffs on demand might be negligible:
An important measure of whether or not pricing policies are likely to have an impact on water demand is the price elasticity of demand (see Box 2 of this Information Sheet).
Box 2
Estimating the Price Elasticity of Demand
To develop efficient incentive pricing policies and to assess the impact of these policies on water uses and pollution and on the state of the environment, it is important to answer the following questions:
Are prices paid proportional to water used or amount of pollution discharged (see Illustration 1 of this Information Sheet for an example of water pricing structures)?
How do changes in prices (for different starting points) lead to changes in the demand for water or the pollution discharged, i.e. depending on the price elasticity of demand?
How do changes in demand affect water status, in order to understand the effectiveness of pricing as a measure for reaching the environmental objectives of the Directive?
In addition, it is important to take into account other policies than those strictly related to water might affect demand (see Illustration 3 of this Information Sheet). The second point represents the main challenge from an economic point of view and is illustrated in Box 3 of this Information Sheet.
Illustration 1
Current water pricing in the Vouga river basin (Portugal)
In the Vouga River Basin, information on water pricing was sought during a scoping exercise for the implementation of the WFD. It was found that this information was available for only 18 out of 32 municipalities and for the two existing public irrigation facilities. The outstanding feature of the data was the wide disparity both in tariff structures and in actual tariff levels.
For the irrigation facilities, the users payments are unrelated to actual water consumption (in one case there are per ha charges and in another case per hour) so pricing has no incentive impact whatsoever.
As with municipal systems, all require a monthly fixed payment (which varies with the requested capacity) as well as a variable (per m3) charge. However, there are great disparities in the rates and in the structure of the variable part.
Such disparity is especially odd considering that many municipalities are connected to the same bulk supplier, who charges all municipalities the same price per m3. Moreover, there are a few cases where the rates charged by municipalities are lower than this bulk rate.
Source: P. Mendes. Scoping key elements of the economic analysis in the Vouga River Basin. See Annex E.
Box 3
The impact of price on demand
The approach promoted by the Directive in the use of pricing as an instrument (or as a measure) consists of defining an environmental goal and calculating the total amount to be paid by users (the tariff), by category of user, in order to achieve this goal. However, given that pricing is only one measure amongst a package of measures, this might be difficult.
Several approaches can be used to assess the relation between water prices and water demand/pollution discharged, as follows:
Interviewing key experts/stakeholders: ask people 'what if?' questions in order to assess how they would react to a proposed change in the tariff structure or level.
Reviewing existing literature. Several types of literature reviews can be performed:
Such models have mostly been developed for analysing price incentive issues for the household sector, as information on the volumes used and prices tends to be more readily available (see Illustration 2 of this Information sheet).
Developing behavioural models for specific sectors. Optimisation models can be developed for the various economic sectors to estimate the relationship between the price for water and the water demand/pollution discharged. Such models are formed by combinations of mathematical equations that attempt to reproduce real decision-making processes that aim at achieving given objectives (e.g. maximising the total income of a firm) taking account of key technical, legal and economic constraints faced by given economic sectors. Key tasks for carrying out behavioural modelling are outlined in Box 4, and an application is shown in Illustration 4 of this Information sheet.
Behavioural models can be built for an entire sector, i.e. accounting for all farmers of a given irrigation scheme, if the different users of this sector are homogeneous in terms of objectives, constraints, conditions. However, if different users in the sector face a wide variety of strategies and constraints, it is more appropriate to identify key types of users and develop models for each user type.
Illustration 2
An application of time series modelling: Did water pricing play a role in reducing household water consumption in Athens, Greece?
Box 4 - Key Tasks for developing behavioural models
Illustration 3
Taking account of broader policies to estimate the incentive properties of pricing policies: the impact of the CAP in Cidacos (Spain)
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Illustration 4
An application of behavioural modelling: Demand for irrigation water in Tarquinia (Lazio, Italy)
Water uses in the Marta River are characterised by a high number of users and a high degree of pollution. Keeping the river water flow above a minimum vital level is seen as a key target for both water management and sanitary authorities. However, this requires lower demand from some economic sectors during periods of significant water shortages. Therefore, to assess the role water pricing could play to reduce water demand from agriculture, an economic linear programming model was developed for the entire irrigation system.
Following a detailed analysis of the irrigation and farming systems, the model was developed as an aggregation of sub-models representative of the conditions faced by different farm types (facing a variety of land, labour, financial constraints) and for different districts of the irrigation systems with different water availability and distribution systems. The objective of the linear programming model was to maximise the gross income from agricultural activities, taking account of the key constraints faced by farmers in terms of labour availability, access to hired labour, land constraints, crop rotation constraints, and water availability. Built with a series of equations (equalities or inequalities) that link input (fertiliser, labour, water) and output (yield, gross margin) variables, and for a variety of crops, the model identifies the combination of crops that yields the highest farm income within the limits of the constraints set. By comparing the cropping pattern estimated by the model with real cropping pattern information for two different years, the model was calibrated and validated.
The model was then used to assess the changes in cropping patterns, farm income and water consumption that would result from changes in the price of irrigation water. The model was run several times with different price levels, and the water consumption resulting from each price level and computed by the model were recorded.
The results obtained from different model simulations, i.e. the water demand and the price elasticity of the water demand for different price levels, are presented in the table.
Note that the estimated values of water demand and elasticity are valid for conditions close to actual agricultural policies. Significant changes in these policies, for example a change in subsidies and agricultural product price support, would change the opportunities and constraints faced by farmers, and therefore also their responses to changes in the price level.
Each approach set out above has its strengths and weaknesses and is more or less suitable according to circumstances, as presented in the Table below.
The approach chosen to assess the relationship between the price and water use will also depend on the information, human and time resources available. For example, undertaking a literature review and discussing pricing policy changes with key stakeholders may be the only short-term possibility. However, in the long run, it is important to ensure that more robust and accurate results are achieved. It is also important to ensure that the analysis and level of details are appropriate for the issues of the river basin considered.
Clearly, the incentive dimension of pricing policies is key, but not the only measure to achieve the WFD objectives. The definition of new pricing policies also needs to consider cost recovery issues, as specified in Article 9 (see Reporting on Cost Recovery Information Sheet). In addition, other social, environmental and economic effects of proposed changes in water pricing policies must be taken into account when designing these new policies.
Directive references: Article 4 (Paragraphs 3-5 and 7)
3-Step Approach: Step 3.3
See other information sheets: Estimating Costs, Cost-effectiveness Analysis
This information sheet will help you assess whether the costs of the Programme of Measures are disproportionate and whether derogation from the Directives objectives could be justified following an assessment of costs and benefits.
This information sheet presents an approach for determining whether the total costs of the programme of measures are disproportionately costly or expensive and is relevant for justifying derogation. In particular, this approach is relevant for:
The analysis of whether costs are disproportionate or not will need to be initiated relatively early in the process, around 2006, in order to ensure that the public can be consulted on such a key element of the economic assessment (by 2008) and that work can be co-ordinated with other expertise, as this process will require a combination of technical and economic expertise. The precise tasks of the analysis are described in Box 5 at the end of this information sheet. If achievement of good quality status is only possible after 2015, an interim lower objective can be set for 2015 and a time derogation be registered in the RBMP. If in 2009 it is considered that good status cannot be achieved by 2027, less stringent objectives should be registered in the plan.
Illustration 1 - Disproportionate costs in the designation of Heavily Modified Water Bodies: An example from the Netherlands
For the designation of Heavily Modified Water Bodies (according to Article 4.3), alternatives for the beneficial objectives of a water body must be presented. These alternatives must be: 1) technically feasible, 2) a better environmental option and 3) not cause disproportionate costs. In the EU Heavily Modified Waters working group, four typical Dutch water bodies* were tested for designation as HMWB. A summary of the alternatives to maintain the beneficial objectives and the costs involved is presented in the table below.
This table shows that although the absolute costs (A) may seem high for the 1st case (1000 millions €), the relative costs as expressed per km2 of restored water body (B) show a different picture. There, the costs are still the highest for the first case (6000 €/km2), but they are much more of a similar order of magnitude than in the other cases. Another criteria presented is to scale the costs to the size of the catchment (C), which in this example reverses the conclusion drawn from approach A: now the costs for case 1 are the lowest (5 €/km2). The exercise presented illustrates how such benchmarking can present a framework to assess the disproportionality of costs. It should be kept in mind that in the final conclusion, issues such as the ability to pay and the (intrinsic) value of the type of ecosystem restored should also be considered.
* The waterbodies studied were: The Haringvliet Estuary (Dammed estuary; 1); the Hagmolenbeek (Lowland brook ; 2) and the Veluwerandmeren & Loosdrechtse Plassen (Shallow lakes; 3)
Source: M. van Wijngaarden (2002, forthcoming).
Illustration 2 - Considerations for time derogation in the Alsace (France)
Source: J.D. Rinaudo and C. Pelouin. Assessing disproportionate costs in the Alscae aquifer. See Annex E.
Disproportionate cost refers to beneficial objectives being achieved by other means in the context of designations, derogations and new modifications. Disproportionately expensive refers to measures for improving water quality (see Box 1 of this information sheet). This has two implications:
Box 1
Disproportionality and Derogation
Note that Annex D.2b of this Guidance Document goes into more details for explaining the procedure to follow for designating Heavily Modified Water Bodies (Article 4.3) and justifying a derogation based on Article 4.7 following new modification/activity.
How Should Alternatives be Compared?
When derogation relates to heavily modified water bodies, new modifications or less stringent environmental objectives, it must be ensured that the human activity affecting these waters, and the environmental and socio-economic benefits accruing from this activity cannot be achieved by other means not entailing disproportionate costs. If there is an alternative option to achieving the objectives, its costs must be assessed so that they are not disproportionate. Importantly, alternative means should be a significantly better environmental option, not restricted simply to water quality. Significant implies that the benefits from the alternative means should be appreciable compared to the original means.
What is Disproportionate?
Illustration 3 of this information sheet demonstrates in a simplified way what disproportionate cost means. Whether an improvement is found to be disproportionately expensive or other means disproportionately costly will be decided by individual Member States on a case-by-case basis (see Illustration 4 of this information sheet for an example on decision making). Ultimately, disproportionality is a political judgement informed by economic information. Given the uncertainty around estimates of costs and benefits, bear in mind that:
Illustration 3
The interpretation of the Directive on disproportionate costs
Source: J. Fisher. Integrated appraisal for river basin management plans. See Annex E.
Illustration 4 - Using an expert panel to assess disproportionate costs in the Scheldt estuary
Source: Beckers et al., Scheldt International River Basin: Testing elements of the 3-step approach. See Annex E.
Box 2
Issues to consider when assessing ability to pay
The analysis required for justifying derogation from the environmental objectives of the Directive is directly related to methodologies used for carrying out cost and benefit assessments. However, the approach proposed here is substantially different and reflects the requirements of the Directive.
The overall process for assessing disproportionality is presented in Box 3 below, showing a gradual deepening in the level of assessment.
Box 3
Assessing Disproportionality
Assessing disproportionality
As shown in Box 3, the assessment may be largely qualitative at the initial stages. Costs and benefits of the alternative programmes of measures for achieving different water quality states should be identified and listed, though not necessarily fully valued. The extent to which costs and benefits are valued will depend on the type of derogation:
Box 4
Example of AST Checklist
However, it is often very difficult to obtain (reliable) quantitative estimates for all costs and benefits, which are necessary for conducting a CBA. Therefore, the proposed disproportionality assessment should use quantified costs and benefits where possible, but it strongly emphasises the need to incorporate qualitative measures where quantitative ones are unavailable. The final output should look at developing a table where qualitative, quantitative and monetary information is presented so that trade-offs are transparent, e.g. when justifying derogation for a specific water body (see Illustration 5 of this information sheet).
Illustration 5
Assessing disproportionate costs in the Ribble (United Kingdom)
Source: J. Fisher. Integrated appraisal for river basin management plans. See Annex E.
Option 1
Undertaking STW Optimisation, Operational P Removal and Negotiated Agreement with Dairy Farmers
Option 2
Undertaking Operational P Removal and Negotiated Agreement with Dairy Farmers
The rest of this information sheet deals in more details with the process for carrying out the estimation of costs and benefits. Attempting to measure the net benefits for the whole economy would often prove impossible. For the assessment of costs and benefits, the assessment would therefore need to be limited to the parties directly concerned with the policy measures.
In fact, a derogation would often be sought for failing to meet the Directives objectives at the level of a particular water body and the definition of the appropriate scale of analysis would also have to do with the spatial and hydrological characteristics of the water body. For example, in order to reach the environmental objectives for a small, acidified lake, you may consider implementing a liming scheme. When looking at the costs and benefits you may want to restrict the impact assessment to the population of the one village immediately adjacent to that lake. However, if you are dealing with pollution of a complex groundwater system, the scale of impacts may necessitate the inclusion of neighbouring villages.
Tasks for assessing costs and benefits of reaching the environmental objectives of the Directive are presented in Figure 1 below and explained in the following Sections.
Figure 1
A Process for Assessing Costs and Benefits
Task 1 - Define the Key Groups Potentially Affected by the Measures Aimed at Achieving Good Water Status
Achieving the environmental objectives set out in the Directive will have varying impact on a large number of parties. However, all these groups will not be affected directly and, as mentioned above, it might be difficult to assess the induced costs and benefits and unnecessary or too difficult to assess the tertiary impacts. Remember that every assessment has finite resources. It is therefore important to concentrate on groups that are most affected.
Task 2
Identify the Types of Costs and Benefits Arising from the Measures and Focus on the Significant Ones
Once the user groups have been identified, the types of costs and benefits that are likely to arise must be determined. In Task 3.2 of the Guidance, the most cost-effective measures will need to be identified (see Estimating Costs Information Sheet and Task 4 of the Cost Effectiveness Analysis Information Sheet). Following this task, the direct and non-water related environmental costs of the programme of measures will be known.
It is important to evaluate and focus on the costs and benefits likely to have an important impact, for example those that appear to have a significant effect compared with the baseline (see Baseline Scenario Information Sheet) and, within them, identify the different types of benefits (requiring different methods of measurements).
As an option, a matrix can usefully be created to map and rank the different types and significance of benefits arising from achieving the objectives. This matrix/list should include both qualitative and quantitative benefits and address issues such as magnitude of benefits, importance in relation to decision-making and other criteria for selecting or deselecting different benefits.
Task 3
Choose Methodology for Estimating Costs and Benefits and Collect Data
Estimating Costs Information Sheet outlines the many ways of measuring environmental costs and benefits. Different methods can be used to estimate different types of benefits and are appropriate in different contexts. For example, direct market methods are applicable when environmental goods are factor inputs and changes in availability or quality affects production costs and a qualitative description is useful under some circumstances. Box 6 in Estimating Costs Information Sheet, which gives some guidance on when to choose what methodology.
Task 4 - Carry Out the Assessment of Costs and Benefits
It is important to assess all costs and benefits, including qualitative and quantitative (biophysical and monetary) items. By now, you will have estimated the cost of the measures (see Task 3.1 of the Guidance). Similarly, you will have assessed environmental impacts of the programmes of measures. You should describe these clearly.
If unit costs have been derived and will be applied to the environmental impacts, the number of units and cost or benefit per unit must be presented. This will facilitate the estimation of total effects: for unitary measures the unit environmental cost or benefits should be multiplied by the quantified biophysical impact.
Where qualitative values are minor, these shall at least be listed alongside the quantitative estimates of net benefits to support/contradict them. However, it is likely that qualitative values will play an important role. Look at each sector for costs and benefits, and present these in a way that aids decision-making. A tool could usefully be developed to achieve an efficient presentation. A rough example of such a presentation for reducing anthropogenic pressures (mainly nitrates) in agriculture is given in Illustration 6 of this information sheet.
Like the Cost Effectiveness Analysis, the Cost Benefit Assessment may be incremental. In initial stages, a large part of the assessment may be qualitative, this will help single out the key issues. Quantitative estimates (both monetary and biophysical) may be added over time and as more research is complete and data are available.
Neither point estimates nor simple qualitative descriptions will alone give the decision maker information on how changes to different variables may affect the results of the assessment. It is therefore important to address uncertainty in the information presented, whether quantitative or qualitative (see Illustration 6 - Figure 1 of this information sheet), to guard for different outcomes. Focus on the variables that are likely to have the greatest impact, and define how much these may change and would have to change in order to change the outcome of the whole assessment.
Illustration 6 - Improving the quality of water by reducing pressures from intensive agriculture by application of the proposed cost and benefit assessment methodology: An example
Objective: to improve the quality of water by reducing pressures from intensive agriculture. The assessment looks at the costs of investments and measures needed to improve water quality (and reduce the level of nitrates) and the expected benefits from these measures.
Task 1
Define the Key Groups for the Assessment. Intensive agriculture over a limited area gives rise to a high anthropogenic pressure on the natural environment. This pressure may manifest itself in a deteriorating quality of surface waters, and may have negative economic impacts on a wide range of users, the most significant impacts being on the immediate geographical area on agriculture, industry, households, shellfish fishery and some recreational activities.
Task 2
Identify the Types of Costs and Benefits. The programme of measures to restore water quality will affect users in the following ways:
Types of Costs
Types of Benefits
Task 3 - Choose Methodology and Collect Data. Once the types of benefits and costs have been identified, it is possible to select the appropriate methodologies for collecting data on benefits. Note that the costs will need to be assessed in the cost-effectiveness analysis required by Task 3.2. In this particular case, different methodologies are chosen for different benefit components.
Task 4
Assess Costs and Benefits. Quantitative estimates of costs and benefits are aggregated and qualitative estimates are listed alongside.
Choice of Methods
(Illustration 6 continued)
Figure 1- Assessing Costs and Benefits: Reducing the Anthropogenic Pressures (Mainly Nitrates) of Agriculture
Box 5
Decision Flowchart
1 This structure has been elaborated in the NAMEA (National Accounting Matrices-Environmental Accounts) and NAMWA (National Accounting Matrices- Water Accounts) by the Netherlands Statistical Bureau (CBS), and is now being reproduced in most EU member states and further elaborated by Eurostat.
2 The Department for Transport, Local Government and the Regions (DTLR) in the UK (2001), 'Multi Criteria Analysis: A Manual
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Scale issues: This information sheet helps you understand at which geographical level you should carry out the economic analysis and report the results;
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Estimating costs (and benefits): This information sheet helps you understand how to estimate costs and benefits, which are seen as avoided costs;
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Reporting on cost recovery: This information sheet helps you understand what and how you should report on the recovery of costs of water services;
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Baseline scenario: This information sheet will help you develop one or several alternative baseline scenarios (or 'business-as-usual' (BAU) scenarios). It proposes an optional approach to complement the forecasting analysis (to define the BAU scenarios) with prospective analysis;
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Cost-effectiveness analysis: This information sheet will help you carry out a Cost-effectiveness Analysis (CEA). The CEA is used for assessing the cost-effectiveness of potential measures for achieving the environmental objectives set out by the Directive and construct a cost-effective Programme of Measures;
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Pricing as an economic instrument: This information sheet helps you assess the effectiveness of pricing as a measure to achieve the environmental objectives of the Directive;
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Disproportionate costs: This information sheet will help you assess whether the costs of the Programme of Measures are disproportionate and whether derogation from the Directives objectives could be justified following an assessment of costs and benefits.
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SCALE ISSUES |
Directive references: No specific reference in the Directive but many implicit references and key issues for making the economic analysis operational. This sheet underlies the overall (3
step) approach to the analysis.
This information sheet helps you understand at which geographical level you should carry out the economic analysis and report the results.
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1. Objective |
Scale issues are central to the development of integrated river basin management plans. They are key to the integration between different disciplines and expertise and to the development of activities aimed at informing, consulting and ensuring active participation of stakeholders and collecting information.
For the economic analysis, it is important to understand the level of efforts required in conducting the economic analysis in terms of:
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The type of information to be collected;
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The spatial and temporal scale at which the information needs to be collected (coverage);
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The type and the level of disaggregation of the analysis that should (or can) be performed.
Although mostly mentioned in the context of large river basins, identifying the right scale for the analysis is relevant to all river basins.
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2. What spatial scales and levels of disaggregation are mentioned in the Directive? |
The Directive mentions a wide range of spatial or aggregation units (see Table 1). Overall, the Directive promotes the river basin as the basic hydrological system for characterising, analysing, defining and implementing programmes of measures. In some cases, however:
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Several river basins can be aggregated into river basin districts that are the basis for compliance checking and reporting by Member States. River basin districts combine hydrological and practical/administrative considerations (e.g. combining several small but similar river basins to limit planning and administrative burden). Hydrological considerations may be strengthened if river basins of a given district are inter-connected through water transfers;
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Large river basins can be sub-divided into smaller sub-basins to facilitate the process of developing management plans or when different countries share a river basin district that is then disaggregated into national sub-basins.
What does the Directive specify about data collection and analysis?
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Building block |
When is it a reference? |
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Hydrological/Ecological | |
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Water Body |
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Group of water bodies (grouping based on bio-physical & ecological criteria) |
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Protected Areas |
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River Basin |
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River Basin District |
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Sub-basin |
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Socio-Economic | |
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Water services |
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Economic sector |
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Water uses |
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Administrative | |
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State/Regional |
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European |
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3. At what scale should the economic analysis of water uses be conducted? |
Reporting on the economic analysis of water uses (both the description of the existing situation and the analysis of the trends/baseline in key indicators and variables) has to be made at the river basin district scale (disaggregated into national portions of transboundary river basins whenever required).
However, lower spatial scales may be investigated according to:
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The scale at which significant pressures and water uses take place (e.g. a sub-region of the river basin or a specific sub-economic sector);
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The decision making scale, e.g. at which scales and for which decisions is the analysis used. For example, if some measures are applied at specific disaggregated scales (e.g. a specific watershed or a given economic sector), providing information on the economic importance of water uses at that scales may be appropriate; and
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The scale required for information, consultation and participation. It is important to ensure key indicators are computed at scales that are relevant to consultation and participation. Such scales are likely to be lower (e.g. a watershed or specific economic sector) than the river basin or river basin district.
Illustration 1
Defining the adequate scale of analysis by combining biophysical and economic information in the Scheldt river basin in Lille (France)
The WFD quantitative objective for groundwater is to balance abstraction and recharge. For the chalk aquifer around Lille, the relevant level of disaggregation for the economic analysis corresponds to a set of groundwater units for which:
If all these conditions are met, the physical system can be considered as a pool and economic information can be gathered for abstractions from this pool. With respect to pressures, it is important to consider both abstractions registered by national offices or water agencies and self-service abstractions. The second type of information will be more difficult to collect as it is rarely collected by water service operators or public agencies in charge of monitoring water services. |
Illustration 2
Identifying coherent areas in the Rhône-Méditerranée-Corse basin (France)
A testing exercise in the Rhône-Méditerranée-Corse river basin in the South of France highlighted that defining the appropriate scale for the economic analysis has to take into account a variety of criteria:
As a result, the relevant scale for the socio-economic analysis, especially for large and heterogeneous river basins, is somewhere between the water body and the river basin levels. To subdivide the basin into coherent socio-economic areas, it was proposed to gather socio-economic, planning and land use information and adapt it from existing scales of analysis, such as hydrographic or administrative ones, to scales that meet the needs of the Water Framework Directive. One of the main interests of this approach is to integrate land planning and economic considerations into the analysis to facilitate information, consultation and participation of the public and stakeholders. |
Illustration 3
Matching biophysical and economic information with administrative boundaries in the Vouga River Basin (Portugal)
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The monitoring network in the Vouga River Basin in Portugal is not complete today for complying with the requirements of the Water Framework Directive. Thus, although it is possible to identify the existence of water quality problems and associated main pressures, the establishment of a clear link between pressures/discharges and water quality problems is not possible in most cases. The location of main polluting sources is known, but discharges are not fully characterized, and cause-effect relationships cannot be fully established. There is a need for the development and calibration of water quality models allowing for the establishment of such link, in the absence of a comprehensive monitoring network. This link is essential for the economic analysis, particularly for the cost effectiveness analysis of programmes of measures. Different elements of economic information in Portugal are currently disaggregated into different administrative boundaries. At best, the scale is municipal, and in some cases it is regional (there are five regions in the mainland, which cut across river basins). Since regional and municipal boundaries do not coincide with river basin boundaries, the compatibility of scales is a relevant issue. As it is unlikely that all economic information will become available at a scale smaller than the municipal level, consistent criteria must be developed to partition municipal values between river basins (possibly using available GIS information to pinpoint clusters of users). |
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4. At which scale should we undertake the cost-effectiveness analysis? |
From an economic point of view, and to account for the inter-connection between all water bodies of a given river basin, cost-effectiveness analysis is best performed at the scale of the river basin. But to undertake the analysis at lower scales is likely to be more manageable in cases of large numbers of water bodies, pressures and environmental problems within the river basin.
Identifying the scale at which environmental problems take place
The analysis of the pressures and impacts, along with the identification of significant water management issues, shows that specific scales can be attached to various environmental problems:
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Some pressures have an impact throughout the river basin, e.g. controlling flows in an upstream portion of a river basin will impact portions of downstream flows, while putting a dam downstream may stop migration of fish and thus impact the entire rivers ecology;
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Some pressures have a local impact, e.g. abstraction into a confined aquifer, or polluted discharge into a river that will then be naturally diluted; and
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Diffuse pressures often need to be accounted for at the river basin scale, as it is the addition of all pressures taking place within the river basin that is to be investigated.
Cost-effectiveness analysis should be performed at the scale at which environmental issues take place to ensure that the costs (especially other direct economic costs) and effectiveness of measures are fully accounted for in the analysis. In many river basins a range of environmental issues attached to different scales are likely be considered.
One pragmatic way to ensure some coherence between these analyses would be:
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Step 1 - To assess the scale at which environmental issues take place and classify these issues accordingly (from largest to lowest scale). This assessment is directly based on the analysis of pressures and impacts;
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Step 2
To undertake the cost-effectiveness analysis for the environmental issue that takes place at the river basin or largest scale considered, and select measures for solving this issue;
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Step 3
To assess the impact of these measures on other environmental issues, as it is likely that measures will impact on several issues. Identify the remaining environmental issues to be solved;
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Step 4
To undertake the cost-effectiveness analysis for the environmental issue that takes place at the next largest scale;
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The analysis continues as long as significant environmental issues remain. At the end of the process, add all the costs of the measures targeted to different environmental issues.
Dealing with different sub-basins of the same river basin
For large river basins, sub-river basins may be proposed for undertaking the economic analysis. It is then recommended to adopt a stepped approach that follows the hydrological cycle/structure to ensure separate measures that are cost-effective for each sub-basin are also cost-effective at the river basin scale. A pragmatic approach is given below for a situation where pressures have a downstream impact on (surface) water status:
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Step 1
Start the analysis with the most upstream sub-basin. Identify cost-effective measures for this sub-basin along with their total costs and their impact on the status of water bodies;
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Step 2
Assess the impact (if any) of these measures on the status of water bodies of the next downstream sub-basin; and
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Step 3 - If the predicted water status for the downstream sub-basin is below good water status for some/all water bodies, cost effectiveness analysis is then performed at the scale of this downstream sub-basin to identify new measures, their impact, their costs.
Illustration 4
Cidacos (Spain): Investigating river basins and sub-basins
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The Cidacos River is 44 km long, and drains a catchment of 500 km2. Except for its initial part, the river runs through a plain, which is mainly agricultural (225 km2). Animal farming is associated to farming with a total of 86 production facilities. Agricultural production is supplied with surface water and groundwater. The basin has 14 small population centres, with two small cities (Olite and Tafalla) and 17,000 domestic users. These are served by water from a small dam in the first stretch of the river, and also from two springs and some wells. These have water quality problems, from hard water and nitrates. The main industries are located in Olite and Tafalla, and industrial permits for water have been denied due to a shortage of good quality water supply. The Cidacos scoping study distinguished between three water sub-basins or reaches: upstream, downstream and a middle stretch. In order to achieve good ecological quality (GEQ) an improvement to the water flow was considered, increasing flows by 20, 80 and 100 litres per second in the upper, middle and lower sub-basins respectively. The total costs of achieving the objective for each sub-basin independently can be obtained simply by aggregating the costs of the measures for the three areas (areas A, B and C in the diagram), i.e. the programme would cost € 1.2 million in total. However, because the three sub-basins are connected, the cost of obtaining the GEQ in stretch II depends on the quantity of water it receives from the upstream basin (stretch I) and the cost of GEQ in the downstream basin (stretch III) depends on the ecological status of both stretches I and II. Therefore, the least cost programme of measures must take into account the externalities involved in the simultaneous improvement of the three interconnected sub-basins, as shown in the diagram below. By improving the water flow above the minimum standard, it was shown that the marginal cost of achieving the required increase in the water flow in the middle and downstream sub-basins could be avoided. The (avoided) costs of the measures that would have been needed for stretches II and III were shown to be higher than the cost of increasing the water flow in stretch I. In Cidacos, the overall cost of the action plan obtained this way would be €0.56 million (or less than 50 per cent of the total cost of treating the three water bodies as independent). Consequently, when considering the scale of the analysis the river basin as a whole must be used. The analysis cannot be done independently for each sub-basin, as it would exclude any shared benefits and costs of the programme of measures. |
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5. Which basic units should be considered in the cost-effectiveness analysis? |
The cost-effectiveness analysis will not be able to deal with all measures targeted to individual users and related environmental impact. Thus, a certain level of aggregation is required for the analysis to remain pragmatic, and also to account for the scale at which some measures apply.
However, one cannot aggregate all information and analysis at the river basin scale as it eliminates the hydrological structure of the river basin and the links between uses, pressures, and water status of specific water bodies. Assessing the basic unit that should be investigated into the cost-effectiveness analysis requires considering:
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The scale of water bodies themselves;
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The scale at which pressures and impacts take place (which areas need to be targeted by measures so as to restore good water status); and
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The scale at which measures will be implemented/will take place (see point below).
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Look out! Some measures for improving water status have an inherent scale of application/implementation that need to be considered for the cost-effectiveness analysis (e.g. environmental taxes are often national-based instruments). In other cases, the analysis of existing uses, pressures and impacts will lead to the identification of smaller geographical areas (e.g. a given watershed within a river basin), sub-sectors (e.g. a given chemical sector) or sub-uses (e.g. large users of water with swimming pools) that will be targeted by measures (e.g. the restoration of a specific wetland, or a change in water pricing for a specific urban area or irrigation scheme). |
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6. At which scale should we assess cost-recovery? |
Assessing spatial relevance vis-a-vis cost recovery appears rather straightforward:
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Information on pollution, uses, financial costs and existing prices are usually collected for water service (or combined water service) areas. This information needs then to be aggregated at the river basin scale that appears as adequate for discussing overall financial flows and recovery issues;
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Environmental and resource costs may relate to the sub-basin or entire river basin (e.g. if a pollution created in the upstream part of a river basin has negative impact in the estuary of the same river). Assessing these costs requires a good assessment of the scale at which environmental impact of existing water services and uses take place. Costs can then be computed for each water service at the scale of the river basin; and
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The assessment of the relative contribution to these costs of key water uses combines both water uses and related services aimed at removing environmental damages caused by these uses. The Water Framework Directive requests a minimum disaggregation into agriculture, households and industry. According to local circumstances and key water uses identified in the analysis of pressures and impacts, this disaggregation may be further refined.
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7. At which scale should reporting of information be carried out? |
Different aspects need to be considered here:
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Firstly, it is important to identify the geographical scale at which relevant information and expertise is available. The scale at which information is available today is likely to lead to the use of proxies, (statistical) extrapolation or interpolation techniques to obtain robust estimates of key variables at the desired scale. It will be important to ensure assumptions and approximation are made transparent and reported along with results of the analysis;
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Secondly, the scale at which information and results are to be reported for effective information and consultation of the public; and
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Thirdly, the scale for reporting to the EU: in such case, the coverage is clearly the river basin district, with the analysis being presented for key spatial and socio-economic/water uses aggregates.
In addition to the River Basin Management Plans developed for each district, Member States may produce more detailed plans for specific sectors, issues or water types (Article 13), providing ample opportunities to focus on specific aggregation levels lower than the river basin. Such detailed plans may be identified in the context of consultation and participation of interested parties or directly result from the analysis of pressures, impacts and significant water management issues.
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8. A checklist for a summary |
Table 2 summarises spatial and disaggregation scales that can be investigated at the different steps of the economic analysis.
Table 2 - Checklist
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Steps |
Analysis |
Reporting |
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Characterisation of the river basin |
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Assessing the gap/risk of non-compliance |
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Undertaking the cost-effectiveness analysis |
assess costs at the spatial or disaggregation scale at which the measure will apply
this depends on the pressures and impacts concerned and the type of measure considered (at which scale is the measure applied, and which part of pressures will be affected) => compute one effectiveness indicator for each measure
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linked to the spatial or disaggregation scale at which the measure will apply
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ESTIMATING COSTS (AND BENEFITS) |
Directive references: Articles 4, 5 and 9 and Annex III
3-Step Approach: this information sheet underlies all key steps of the approach
See other information sheets: Reporting on Cost Recovery, Cost-effectiveness Analysis and Disproportionate Costs
This information sheet helps you understand how to estimate costs and benefits, which are seen as avoided costs.
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1. When to Estimate Costs? |
Estimating costs is important for several parts of the economic analysis:
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Taking into account the principle of recovery of costs of water services, including environmental and resource costs, in order to ensure that an adequate contribution to the recovery of the costs of water services is made by the different water uses, disaggregated into at least industry, households and agriculture (Article 9, Annex III);
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Conducting a cost-effectiveness analysis of alternative policy measures or projects (Article 5, Annex III);
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Assessing the costs of alternative options in the designation of heavily modified water bodies (Article 4);
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Assessing the need for a derogation based on an economic appraisal of disproportionate costs (such as for the setting of less stringent objectives or time derogation
Article
4).
Note that the Directive defines costs as economic costs, which are the costs to society as a whole, as opposed to financial costs, which are the costs to particular economic agents. In the Directive (Article 9), economic costs are made up of three components (see also Box
1): financial costs, resource costs and environmental costs. This information sheet helps you analyse and estimate all of these cost categories.
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2. Moving from Financial to Economic Costs |
The Table below proposes an approach for moving from financial to economic costs.
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Steps |
Rationale |
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1. Estimate financial costs |
Financial information is often more readily available than estimates of economic costs: as a result, they form a good basis for the analysis. |
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2. Make transfers (such as taxes and subsidies) explicit |
Taxes only represent a transfer from societys point of view and should therefore be excluded from the economic analysis. However, environmentally related taxes might represent internalised environmental costs and should be accounted for as such. |
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3. In case of distorted markets and scarce resources: replace market prices by opportunity (or resource) costs |
Because of distorted markets, market prices may not reflect the opportunity cost of the resource used, and therefore the benefits that could be achieved if the resource was assigned to its best available alternative use. |
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4. Include all non-priced environmental costs |
For non-priced resources (and this is often the case for environmental resources), no price is paid as there is no market. To account for the total effect on welfare, these costs must be estimated and included. |
Box 1
What are the different types of costs mentioned in the Directive?
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Source: Rogers et al. (1997) |
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Look out! Treatment of indirect and induced costs Direct costs (made up of mainly financial costs and administrative costs) are included in all components of the economic assessment for the purposes of the Directive. The treatment of indirect and induced costs is likely to vary according to the step of the economic assessment:
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Look out! Focus on net costs When estimating economic costs, you should focus on the net costs, including any savings or financial benefits, also known as negative costs. An example of negative costs is income earned from selling sludge (fertiliser), which arises as a by-product of wastewater treatment. Since this activity brings in revenues, it should be subtracted from the costs of wastewater treatment. |
Step 1 - Estimating Financial Costs
Financial costs in this context are the costs of providing and administering water services. They can be broken down in a number of cost elements, presented below. The Table gives the definition of each cost element and warns you about potential traps and difficulties.
|
Cost element |
Definition |
Look out! |
|
Operating costs |
All costs incurred to keep an environmental facility running (e.g. material and staff costs). |
When projecting operating costs, make sure to take into account additional costs linked to new capital investments. |
|---|---|---|
|
Maintenance costs |
Costs for maintaining existing (or new) assets in good functioning order till the end of their useful life. |
As many water and wastewater assets are long-lived and buried under ground, it will be difficult to estimate the appropriate level of maintenance needed for exploiting the assets without leading to their deterioration. |
|
Capital costs:  New investments |
Cost of new investment expenditures and associated costs (e.g. site preparation costs, start-up costs, legal fees). |
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 Depreciation |
The depreciation allowance represents an annualised cost of replacing existing assets in future. Estimating depreciation requires defining the value of existing assets and a depreciation methodology. |
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 Cost of capital |
It is the opportunity cost of capital, i.e. an estimate of the rate of return that can be earned on alternative investments. The cost of capital applied to the asset base (new and existing) gives you the returns that investors are expecting to earn on their investments. |
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Administrative costs |
Administrative costs related to water resource management. |
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Other direct costs |
This mainly consists of the costs of productivity losses dues to restrictive measures. |
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Box 2 - The Annual Equivalent Cost (AEC) method
Box 3 - Valuation of capital assets: Current vs. replacement value
Depending on the accounting system in use, it is possible to use various types of valuation methods for existing capital assets:
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Illustration 1 - Deriving financial costs for the appraisal of measures in the Cidacos river basin
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Cidacos is located in the region of Navarra, in Northern Spain, and is a tributary to the Aragon River. When conducting an economic analysis, deriving financial costs was necessary to determine the costs and benefits of achieving different objectives for water status (good vs. moderate), measures such as demand management, increased efficiency and water imports were considered. The study calculated the annual equivalent costs (AEC) of each measure considered, assuming a discount rate of 2% and a time horizon of 30 years. This assumes that the costs of measures having a lifetime of more than 30 years have a lower effect on the AEC. The costs considered for the AEC calculation for each measure include:
To derive financial costs, capital and O&M costs were expressed in relation to a physical measure, such as per Sq Km, per Ha, per Litre and per m3. This provided a uniform scale through which different costs and measures could be analysed and compared effectively. An issue that emerged in this exercise was the increasing marginal costs of some measures relative to others over time. As the cost analysis progressed, the increasing marginal costs of some measures emerged, through expanded service coverage or possible marginal efficiency gains, such as those aimed at improving efficiency in water use; or with the constant costs of other measures (e.g., water transfers). This point has important implications for ranking measures and choosing a cost-effective combination of measures. It should also be noted that the cost-effectiveness of a measure is not constant over time in some cases. Some measures have increasing marginal costs as technical efficiency improves (as we reach the maximum potential of the measure). This is relevant since assuming constant costs may lead to an inefficient programme of measures. |
Step 2 - Making Transfers Explicit
As mentioned above, taxes and subsidies should usually be treated as transfers within society and should therefore be excluded from the estimation of economic costs. However, it is important to distinguish between general taxes and environmental taxes and subsidies:
-
General taxes need to be deducted from financial costs;
-
Environmental taxes and subsidies may represent internalised environmental costs and, as such, should not be deducted from financial costs.
Step 3 - Taking Account of Resource Costs
Resource costs represent the costs of foregone opportunities that other uses suffer due to the depletion of the resource beyond its natural rate of recharge or recovery (e.g. costs related to groundwater over-abstraction). These users can be either those of today, or those of tomorrow, who will also suffer if water resources are depleted in the future.
If markets function well, the opportunity costs of resources are reflected in the financial costs of resources. However, for environmental resources, these costs are often not included in market prices. Opportunity costs, the scarcity value of under-priced environmental resources like water, should therefore be included when estimating economic costs (see Box 4).
Step 4 - Including All Non-priced Environmental Costs
Environmental costs represent the costs of damage that water uses impose on the environment and ecosystems and those who use the environment (for example, a reduction in the ecological quality of aquatic ecosystems or the salinisation and degradation of productive soils). This loss in welfare may encompass lost production or consumption opportunities as well as non-use values (such as the value produced by contemplating a clean lake at dusk), which are harder to quantify. Environmental costs are not commonly estimated
steps and alternative methodologies for carrying out this estimation are therefore highlighted below.
In addition, as environmental costs can be seen as negative benefits and avoided costs (see Illustration 2), the following Section also discusses the estimation of environmental benefits, which will be useful for the cost and benefit assessment necessary to justifying derogation (see Information Sheet - Disproportionate Costs).
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Look out! Before estimating environmental costs, it is necessary to know the environmental impacts of the measures used to reach the objectives. This information will be available from the work carried out by other technical experts (such as experts investigating impacts and pressures - see Annex A for contact details) and environmental modelling might be required. When looking at environmental impacts, it is important to realise that measures taken to reach the objectives in one area will potentially have impacts downstream or on other parts of a river basin. In other words, linkages within a river basin district must be fully understood. Only once the magnitude of change in environmental quality has been measured, is it possible to link it to unitary costs and benefits estimated through different techniques or with the assessment of measures that would be required to prevent and mitigate etc. |
Box 4 - Calculating resource costs
|
There are no well-established methods for estimating resource costs, although some attempts have been made at estimating them. As resource costs are seldom incorporated into market prices, it will be necessarily to rely on estimates of foregone demands and economic values. The following example illustrates potential methods that would need to be developed:
|
What are environmental costs and benefits?
Society derives benefits (or costs, which are foregone benefits) from improved environmental quality in water bodies, which would arise from achieving the environmental objectives contained in the Directive. This value is made up of both use and non-use values (see Box
5 for examples and below for an explanation). Other and broader benefits may need to be assessed in some instances, such as an assessment of the broader economic benefits for example, for conducting the required analysis for proposed new modifications. These are not explicitly dealt with here, however.
What are use and non-use values/benefits?
Use values/benefits. Use values refers to the fact that economic agents currently use the environmental goods in question, either directly (by sailing on a lake for example) or indirectly (by watching a video of someone else sailing on that lake). Direct use values are the easiest ones to estimate, as they usually stem from products that can be traded in a market as entrants into a production process or final products (for example, water for food processing or fish).
Non-use values/benefits. Some benefits are not associated with any direct use, so called non-use values, but exist because individuals value an ecological resource without using or possibly even intending to use it, for example water quality and biodiversity in a lake.
Box 5 - Types of Environmental Benefits / Avoided costs
|
Benefit Class |
Benefit Category |
Types of benefits and examples | ||||||
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Use values |
Direct use |
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Market (Commercial: fishing, navigation, tourism) Non-market (Recreational: water skiing, fishing, swimming, boating, photography) | |||||
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Indirect use |
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Amenity value derived from a nice environment Benefit extracted from someone else using the environmental good (e.g. Reading a fishing magazine) General ecosystem support (preserving the food chain to support fishing) | ||||
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Option value |
Value derived from preserving potential direct or indirect use values in future, which depends on uncertainty over future demand and supply | |||||
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Non-use values |
Existence |
Biodiversity, heritage and cultural values | ||||||
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Bequest |
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Preservation of water quality for family and future generations | ||||
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Illustration 2 - Benefits defined as avoided costs: The Artois-Picardie basin
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Tourism is one of the main economic activities in the Artois-Picardie basin in the North of France. In particular, the Opal Coast benefits from beach-oriented tourism, which provides 40 percent of the basins turnover (around € 1 billion per year). Access to the regions beaches and the sea are critical factors for maintaining tourism. Hence, if the quality of water was sufficiently bad, the beaches of this coastal stretch would have to be closed for bathing activities: users would either go elsewhere, or not take part in bathing activities at all. Two studies were carried out by the Artois-Picardie Water Agency to assess the potential economic loss linked with such a scenario. The studies showed that between 30 to 50 percent of visitors to the area would cancel their trips, leading to economic losses ranging between € 300 million and € 500 million per year. These values can be seen as the benefits of providing bathing and other recreational facilities that are dependent on water quality. As a way of comparison, the money invested in sewage treatment for the basin totalled € 150 million over the last 10 last years. The magnitude of the benefits gained from good quality alone provides a compelling reason for continued investment in sewage treatment to avoid the potential cost of pollution. |
Methodologies for Estimating Environmental Values
Various techniques exist for the valuation of environmental costs and benefits, which are more or less practical, time-consuming and have different cost implications. Below, we outline four possible methodologies for estimating those costs. A rough guide to choosing between these methodologies is presented in Box 6 and an example of how stakeholders may be involved in the process is given in Illustration 3.
|
Method |
Definition |
Overall assessment |
|
Market Methods |
These methods use values from prevailing prices for goods and services traded in markets. Values of goods in direct markets are revealed by actual market transactions and reflect changes in environmental quality: for example, lower water quality affects the quality of shellfish negatively and hence its price in the market. |
Good method if market data exist but limited to direct use values for goods traded on a market. Since this is often not the case, other methods must be used. |
|
Cost-based valuation methods |
This method is based on the assumption that the cost of maintaining an environmental benefit is a reasonable estimate of its value. References for this type of valuation include the costs of preventative and/or mitigation measures. This assumption is not necessarily correct: all mitigation may not be possible, in which case actual mitigation costs would be an underestimate of true environmental costs. By contrast, mitigation measures might not be cost-effective and those costs might be an over-estimate of the environmental costs. A distinction needs to be made between:
|
Practical and relatively easy - a good starting point, although the costs of the environmental damage itself tends to be underestimated with this method. |
|---|---|---|
|
Revealed preference methods |
The underlying assumption is that the value of goods in a market reflects a set of environmental costs and benefits and that it is possible to isolate the value of the relevant environmental values. These methods include recreational demand models, hedonic pricing models and averting behaviour models (see Box 7 for a description). |
This set of techniques tends to be time-consuming and costly to use. The use of such techniques could be reserved to particular environmental issues that raise specific problems |
|
Stated preference methods |
These methods are based on measures of willingness to pay through directly eliciting consumer preferences (i.e. asking them!) on either hypothetical or experimental markets. For hypothetical markets, data are drawn from surveys presenting a hypothetical scenario to the respondents. The respondent makes a hypothetical choice, used to derive consumer preferences and values. Methods include contingent valuation (see Box 7) and contingent ranking. It is also possible to construct experimental markets where money changes hand, e.g. using simulated market models. In the questionnaire, it is possible to ask respondents how much they would pay for avoiding an environmental cost or how much they value a given environmental benefit. |
As above |
Box 6
A Rough Issues To Choosing a Methodology for Estimating Environmental Costs
|
Checkpoints |
Choice of method | |||
|
|
Direct market method |
Cost-based valuation |
Revealed preferences |
Stated preferences |
|
Are you measuring the value of the environmental cost before or after the environmental change? |
After |
Before or After |
Before |
Before |
|
Is the market for the environmental value you want to estimate hypothetical or real? |
Real |
Real |
Real |
Hypothetical |
|
Are markets directly or indirectly related to the environmental value you want to estimate? |
Directly related |
Directly Related |
Indirectly related |
Directly related |
|
Is it important that you can estimate demand/supply elasticity? |
Yes |
No |
Yes |
Yes |
|
Are (estimated) non-use values likely to be significant? |
No |
No |
Yes |
Yes |
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Does the method require significant time and financial resources? |
No |
No |
Not necessarily |
Yes |
Some benefits will not be quantifiable, either because of technical reasons (e.g. all impacts of achieving the environmental objectives cannot be foreseen, it is not possible to quantify all the benefits of improved water quality in a river stretch etc.) or lacking resources (e.g. there is insufficient time to carry out quantitative studies before the RBMP in 2009 or it is too costly). In these situations, benefits should be assessed and described qualitatively.
The Use of Value Transfer
An alternative option to direct valuation of environmental costs is the use of Value Transfer (more commonly known as benefit transfer in the case of benefits). This method uses information on environmental costs or benefits from existing studies and uses this information for the analysis in the river basin under consideration. As a result, a data set that has been developed for a unique purpose is being used in an application for a different purpose, i.e. it transfers values from a study site to a policy site, i.e. from the site where the study has been conducted to the site where the results are used.
Above all, benefit transfer is suitable when technical, financial or time resources are scarce. However, amongst other problems, it is important to note that since benefits have been estimated in a different context they are unlikely to be as accurate as primary research (see also Look out!). A step-wise approach should be developed in order to ensure that the transfer of values derived in other contexts can minimise the potential for estimation errors.
Box 7
Examples of Revealed and Stated Preference Methods
|
Revealed Preference Methods
Hedonic Pricing. 'Hedonic pricing methods explain variations in price [in the price of goods] using information on [qualitative and quantitative] attributes'. They are used in the context of the water to value how environmental attributes and changes affect property prices. In addition to structural features of the property, determinants of property prices may include proximity to, for example, a river or lake. The change in property price corresponding to an environmental degradation, for example the pollution of a river or lake, is the cost of this degradation.
Averting Behaviour. This method derives values from observations of how people change defensive behaviour adapt coping mechanisms - in response to changes in environmental quality. Defensive behaviour can be defined as measures taken to reduce the risk of suffering environmental damages and actions taken to mitigate the impact of environmental damages. An example of the former is the additional cost of having to filter or boil bad quality water before drinking it. The costs of mitigating the impact may entail expenditures on medical care needed as a consequence of drinking poor quality water. The expenditures produce a value of the risk associated with the environmental damage. Recreation Demand Models (RDM). Improvements or deterioration in the water quality may enhance or reduce recreation opportunities, for example swimming, in one or more sites in a region. However, markets rarely exist to measure the value of these changes. RDM focus on the choice of trips or visits to sites for recreational purposes and look specifically at the level of satisfaction, time and money spent in relation to the activity. By assuming that the consumer weighs time and money as if he/she were purchasing access to the goods, for example a river stretch, patterns of travel to particular sites can be used to analyse how individuals value the site and, for example, the water quality of the river stretch. Reductions in trips to a river stretch due to a deterioration in water quality, and associated changes in expenditures, reveal the cost of this deterioration. Stated Preference Methods Contingent Valuation. Contingent Valuation is based on survey results. A scenario including the good that would be delivered and how it would be paid for (e.g. through an increase of the water bill) is presented to the respondent. Respondents are asked for their willingness to pay (WTP) for the specified good, e.g. improvements to the groundwater status. The mean willingness to pay is calculated to give an estimated value of the good, in this case improved groundwater status, and these means can then be aggregated to establish the value to the relevant population. However, note that one of the difficulties with this approach lies in ensuring that respondents adequately understand the environmental change that is being valued, for example going from poor to good water status. |
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Look out! When using Benefit Transfer, you must
The methods used for transferring benefits include Meta-analysis, Benefit function, Bayesian techniques and Point estimate. To facilitate benefit transfers during the implementation of the Directive, it might be appropriate to build a trans-European database with references on benefits and costs. |
Illustration 3 - Integrating stakeholder analysis in non-market valuation of environmental assets: estimating the value of a wetland area in Kalloni Bay on Lesvos island (Greece)
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The study reviewed here sought to investigate the economic values placed on a wetland surrounding Kalloni Bay on the island of Lesvos and employed two types of methodology: Dynamics of the stakeholder focus groups Individual based methods are often criticised for failing to account for institutional structures. As a result, it appeared important to reflect the institutional and social structure of the island through the focus group method. The focus groups revealed important differences in the social constructions made by different stakeholders about the wetlands and its place in the culture and economy of the Kalloni area. The issue of local people having rights over local resources was an important theme, and participants thought that problems and conflicts should be resolved locally. However, different stakeholders were reluctant to enter into discussions with each other. There was, in general, a belief that all of the different activities involving the wetlands such as tourism, agriculture and fishing could co-exist: many local people combine occupations (e.g. being simultaneously farmers and hotel owners). However, the links between the consequences of different activities were not always accepted. For example, farmers refused to make the connection between their use of fertilisers and pesticides and pollution of the bay. The uncertainty over property rights and responsibility was also a major area of concern, and inappropriate uses of land on one property were acknowledged as having detrimental effects on adjacent properties. Economic valuation of the wetlands The study yielded interesting results in terms of economic valuation of the wetlands. First, it made clear that the local population is capable of expressing a variety of preferences for extension or reduction of the wetland in terms of economic values, which can be captured by contingent valuation. Further, the stakeholder groups discussed different options for the future based on their needs, hopes and fears as particular interest groups, which informed the development of the scenarios and the choice of payment vehicle. By using these scenarios and from the focus group discussions with relevant stakeholders, a rich diversity in the motivations of different individuals and groups was encountered. For example, the local mayors valued the wetlands as a tourist potential that should be managed as a park, with strictly defined boundaries and distinct uses. On the other hand, for construction companies, the wetland was a nuisance that hindered their plans for development. However, the latter recognised that to some extent, they might benefit from an increase in tourism from the well-managed wetlands so their position was not so clear-cut. It resulted that because of the highly complex social constructs, stakeholder participation is essential to address conflicting interests, power-and-equity issues, and the tension between local and more global needs (e.g., tourism). This study concluded that local people are quite capable of functioning as both citizens and consumers. As citizens, they feel responsible for their environment, though this is often expressed in very different ways, as the stakeholder focus groups demonstrated. However, they also feel responsible to themselves, as consumers of the wetlands economic potential. The conflicting issues that emerged through this study demonstrate the need for stakeholder communications in economic analysis, not only to characterize the social and political issues but also to establish a process through which participation by stakeholders creates ownership and self-determination for meeting environmental and economic objectives. |
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3. Reporting on Cost Issues |
The calculation of full economic costs requires that assumptions be made about the lifetime of investments, about discount rates, depreciation methods, costing methods, valuation methods etc. Besides, in adjusting financial cost data for taxes and subsidies and in estimating the environmental and resource costs of ensuring sustainable water use, assumptions will need to be made as well.
To ensure the cost analyses of the member states are comparable, all assumptions and costing methods used should be made explicit, stating clearly how the presented cost information has been derived.
Though different Member States apply different standards for estimating economic costs it would be desirable to resemble as much as possible the methods and standards used in the international guidelines of for example the European Commission or the European Environmental Agency (see Box 8), especially when international analyses are performed, for example in case of an international cost-effectiveness analysis. These guidelines may also help decide on issues such as which parameters and methods to include.
The general guideline is that when reporting on economic costs, all assumptions and costing methods should be clearly reported. Depending on the use of economic cost information, other requirements might apply. This is further elaborated in the information sheets Cost-effectiveness Analysis, Reporting on Cost-recovery and Disproportionate Costs.
Box 8 - Suggestions for Reporting on Cost Issues
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Minimum requirements for the presentation of cost information according to EEA (1999) 1.It is essential that reported costs are properly defined. As a minimum, the total investment expenditure and total annual operating/maintenance costs should be reported separately. 2. As far as possible, it is recommended that all cost data should be documented in full in the year in which the actual expenditure is incurred, even if the data are subsequently adjusted to take account of time (such as by using discount rates). 3. All costs in should be measured in relation to an alternative. The alternative most commonly employed is a projection of the existing situation, i.e. the situation in which the environmental protection measure has not been installed. Therefore, only additional costs actually incurred relative to the base case should be included in the reported cost data. 4. Where the costs associated with an environmental protection measure have been apportioned between two or more controlled pollutants, the method of apportionment should be described. 5. The reported cost data should only relate to direct costs; indirect costs should be excluded from the cost data. 6. Where environmental protection measures produce non-environmental benefits, revenues or avoided costs, these should be reported separately from investment expenditures and operating and maintenance costs. 7. It should be remembered that costs and prices are not fixed forever. For example, the unit price of a measure often falls as it changes from an experimental measure to a mass-produced measure. Therefore it is recommended to use the most recent valid data available. 8. It should be remembered that old equipment can sometimes have a lower efficiency and higher maintenance costs than new equipment. 9. As a minimum, any discount rate used should be recorded. 10. If cost data are adjusted for inflation or changes in price through time, then the method used should be recorded and any index used should be recorded and referenced. 11. If determining annual cost data, the approach that has been used to derive the annual costs should be recorded, along with all underlying assumptions. |
these are guidelines from the EEA only. For example, whereas the EEA recommends to only incorporate direct costs (and not indirect costs), the incorporation of indirect costs in the economic assessment for the Directive would depend on the stage of that assessment, as specified above.
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REPORTING ON COST RECOVERY |
Directive references: Article 9 and Annex III
3-Step Approach: Step 1.3 and Step 3.3
See other information sheets: Estimating costs, Defining water services and uses, Baseline Scenarios, Pricing as an Economic Instrument
This Information Sheet helps you understand what and how you should report on the recovery of costs of water services by types of water users.
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1. Why is it necessary to report on cost recovery? |
Article 9.1 of the Directive states that: 'Member states shall take account of the principle of recovery of the costs of water services, including environmental and resource costs, having regard to the economic analysis according to Annex III, and in accordance with the Polluter pays principle'.
This information sheet is a guide for reporting on cost recovery and is relevant for:
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Implementing the recovery of costs of water services and ensuring an adequate contribution of the different water uses to the recovery of costs of water services; (Article 9);
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Creating water pricing policies to provide adequate incentives for users to use the resources efficiently (Article 9); and
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Making the relevant calculations necessary for taking into account the principle of cost recovery in the economic analysis (Annex III) and making a first assessment of whether the cost-recovery objective of the Directive are currently met.
However; the information sheet focuses on the latter point (Annex III). A key objective of this initial analysis will be to improve transparency in order to understand which water services are actually paid for, to which extent, by whom and how. More specifically, this will entail identifying whether some external subsidies are provided to the water sector, or whether some cross-subsidies are paid between categories of water uses.
Finally, note that the objective of the Directive is not necessarily to move to 'full cost recovery' but to move to a situation where the 'polluter pays ' principle is adequately applied. The Directive allows Member States to take into account the social, environmental and economic effects of cost recovery. But it is only with maximum transparency that the extent of these secondary effects of cost-recovery can be understood.
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2. Approach to Analysing and Reporting on Cost Recovery |
The approach that is proposed here for analysing and reporting on cost recovery and assessing the extent to which polluters pay can be broken down into a number of tasks, as shown in Figure 1 of this information sheet. It is important to stress that this approach may need to be adapted to local and national situations and institutional setup for cost recovery.
Figure 1
Tasks and Key Questions in Analysing and Reporting on Cost-Recovery
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Key Tasks |
And Questions |
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|
Look out! The suggested steps to report on cost recovery do not include investigating issues dealing with price incentives (Article 9). This is treated as a separate issue in a different information sheet (see Pricing as an Economic Instrument). |
Task 1 - Define the Water Services
The first task is to define water services (see Water Uses and Services Information sheet) and to determine the scale of the analysis (see Scale Issues Information Sheet). Particular attention should be paid to the geographical scope of the analysis (local, regional, river basin, national, international). Subject to data availability, the definition of water services may have to be at the administrative rather than the geographical level. Illustration 1 of this information sheet demonstrates how data were collated and adapted to RBD level in the Middle Rhine, however, in some cases, for lack of more disaggregated data, cost-recovery might need to be analysed at the national level (see Illustration 2 for an example).
Illustration 1
Cost recovery and data availability in the Middle Rhine, Germany
|
The principal water services in the Middle Rhine are public water supply and local authority sewage disposal, and both types are highly decentralised with a large number of companies. In general, the existence of consistent data may be a problem for the assessment of cost-recovery levels and, potentially, a decentralised structure could complicate data collection further. However, in the Middle Rhine, statistics is collated and categorised so that information based on administrative area definitions can be related to geographical definitions based on river basins. As a result, the Middle-Rhine scoping study shows that existing secondary data can provide enough information for a good first assessment of the level of cost recovery. In order to assess the level of cost recovery of water services in the Middle Rhine, structural and output data were collated and processed. Essentially, the data collection was carried out in two stages (see Table 1): Table 1 | ||||||
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Type of data |
Data sources |
| |||
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Stage 1. Collection and evaluation of generally available data: information on the structure of water uses and water services and related economic characteristics (e.g. charges, subsidies, financial costs of water supply and sewage disposal) |
The Federal Statistical Office (censuses of all water supply companies, excluding publicly owned enterprises), regional statistical offices (environmental statistics form censuses of all water companies), and data and information from the technical and financial authorities of the Länder. |
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Stage 2. Collection and evaluation of third party data to supplement Stage 1. |
The Federal Gas and Water Management Association, joint authorities/associations surveys on public sewage disposal, and evaluation of special surveys and expert reports. |
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Surveys to collect primary data were planned for a third stage but were not undertaken as Stages 1 to 2 provided sufficient data to derive the current level of cost recovery. As an example, Table 3 contains a summary of data collected for public water supply in the region of Hessen. Table 2 (below) outlines the main results (financial statistics) for public water supply: Table 2 | ||||||
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Water service |
Rate of cost recovery |
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Public water supply Cost recovery from revenue excluding allocations and subsidies Cost recovery from revenue including allocations and subsidies |
83% 90% |
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Internalised environmental and resource costs (groundwater charge) are approximately DM 52.6 million in total, which significantly exceeds the sum of total subsidies (DM 3.4 million) and the cost recovery shortfall (DM 19.7 million). |
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It was found that the ability to adapt official statistics of the Federal Government and the Länder (administrative districts) to river basin district level (as required by the Directive) greatly improved the reliability of the estimates. In addition, to ensure the efficiency of supply, detection and evaluation of data, as well as comparability of the results, a central data pool will be set up to facilitate the availability and access to economic data. | ||||||
Illustration 1 (Continued)
Table 3
|
Revenue/Income and Cost/Expenditure |
Amount (DM) |
|
Number of companies |
132 |
|
|
|
|
TOTAL Revenue/income |
280,365,486 |
|
Fees/proceeds from sales |
244,471,830 |
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Allocations and subsidies for on-going purposes of which: |
3,404,471 |
|
Federal Government |
0 |
|
State of Hesse |
1,073,277 |
|
Local Authorities |
2,296,070 |
|
Other private sectors |
35,124 |
|
Other operating receipts |
12,235,053 |
|
Contributions |
8,773,279 |
|
Investment allocations and subsidies of which: |
10,952,929 |
|
Federal Government |
0 |
|
State of Hesse |
10,538,653 |
|
Local Authorities |
52,624 |
|
Private companies |
110,813 |
|
Other (private) sectors |
250,839 |
|
Other income |
527,924 |
|
TOTAL Cost/expenditures |
302,370,508 |
|
Personnel expenditures |
32,954,151 |
|
Imputed costs |
78,275,119 |
|
Interest |
29,383,892 |
|
Depreciation |
48,891,227 |
|
Operating expenditures |
149,450,933 |
|
Groundwater charges |
52,621,451 |
|
Other operating expenditures |
96,829,482 |
|
Aquisition of assets |
3,342,563 |
|
Structural measures |
35,854,654 |
|
Other expenditures |
2,493,088 |
|
Profits/Losses |
-22,005,022 |
|
Public investment allocations and subsidies |
10,702,090 |
Illustration 2
Issue of Data Availability in the Netherlands
|
In addition, the scale at which the costs of water services are incurred might be different from one category of costs to the other (financial costs would usually be collected at the water service level, whilst environmental and resource costs would be at the level of the river basin, the scale at which water uses can be analysed). Ways to reconcile these different scales and to combine data should therefore be sought during that first task. This might require co
ordination between different administrations (for example, the economic regulator of water services who would normally have access to data on the financial costs of water services and the environmental regulator, who may have data on the environmental and resource costs in general, although not necessarily allocated to water services).
Task 2 - Identify the Providers, Users and Polluters
This task involves the identification of the actors involved in the generation of financial, resource and environmental costs. Water services are provided in different ways, e.g. on a communal or individual basis, by a public or a private company. The geographical scope of the analysis is determined by the level at which the responsible authority and the provider of the water service operate and the scale of the market served (see Illustrations 1 and 2 of this information sheet).
Normally, little information is available for individually provided water services (agricultural groundwater abstraction, industrial waste water treatment, septic tanks of households etc.) - see the Look out! Box below. Should this be the case, an estimation of the extent to which water services are provided on an individual basis, for example the percentage of households with septic tanks or percentage of industry not connected to the sewerage system, can be attempted. It is only where there are significant environmental problems linked to self-services (such as mining of an underground aquifer due to too many private wells) that an appropriate estimate of all costs related to self-provided services is key to transparency and better decision-making.
A specific case is that of diffuse pollution, which can be created by agricultural pollution but also industrial or household uses (such as urban run-off). Even though diffuse pollution is not a water service, the costs resulting from diffuse pollution, in so far as they have an impact on the costs of water services (through an increase in water treatment costs for example), should be covered by those who have generated this pollution. With the Water Framework Directive (Article 9) requiring an adequate contribution of the different water uses to the recovery of the costs of water services, it is important to ensure links can be made between water uses and related water services and costs.
Task 3 - Calculate the Financial Costs of the Water Service
To calculate the financial costs (see Estimating Costs Information Sheet), extensive information is needed regarding the various cost items involved in providing the water service. Typically, this type of information can be collected from the providers annual production account or balance sheet or, if there is more than one provider, from their aggregated production accounts or balance sheets (see Illustration 3 of this information sheet). Depending upon the relevant scale of analysis and the number of providers involved, this can be done at a local, regional, river basin or national level. Illustration 4 of this information sheet presents an easy-to use methodology for estimating financial costs.
|
|
Look out! Cost-recovery of self-provided water services Water services can be provided either by third parties (e.g. communal water services) or on an individual basis (e.g. water treatment facilities of industry, agricultural water abstraction, septic tanks of households etc.). For the latter, the financial costs of water services are covered as the user will usually have financed these investments. Nevertheless, they can be included in the analysis, in order to fully account for the polluter pays principle. In addition, the environmental and resource costs for these services should also be estimated. |
Illustration 3
Estimating cost-recovery in the Netherlands
Table 1 below shows the aggregated costs water quality (and quantity) management, including both financial, internalised environmental, and remaining environmental costs. This is the case because the costs of mitigation measures to compensate for water pollution (e.g. cleaning of polluted river beds and water soils, monitoring of the water quality) are included in the financial costs and paid for by the users through the wastewater treatment charge. Also, since the wastewater charge paid is related to the pollution caused, the polluter pays principle applies. In total, costs add up EURO 1,030 million.
Total revenues for water quality management amount to EURO 1,035 million. Revenues include financial returns on assets and the revenues received from the wastewater pollution charge. This charge is set to recover the costs of wastewater treatment and mitigation measures. From these revenues, the subsidies received for operating the wastewater treatment installation need to be subtracted, resulting in a total of 1,021 million.
The cost-recovery rate can therefore be estimated as:
Total revenues-subsidies 1021
--------------------------------- = ------ = 99%
Total costs: 1030
Table 1 - Aggregated Balance Sheet of Water Boards in the Netherlands
|
Costs and revenues (in million euro) |
Water quantity management |
Water quality management |
| Total costs |
668 |
1,030 |
| Total revenues |
|
|
|
A received interest |
37 |
85 |
|
B received waste water treatment charges |
|
|
|
C received apportionments for water quantity management |
514 |
|
|
D sales, rents and other taxes |
14 |
17 |
|
E investment adjustments |
9 |
5 |
|
F subsidies |
46 |
14 |
|
G other income received from third parties |
18 |
5 |
|
H internal adjustments |
23 |
9 |
|
|
|
|
| Total revenues |
661 |
1,035 |
|
|
|
|
| Net revenues -/-costs |
-/-7 |
5 |
Illustration 4
Estimating Financial Cost Recovery in the French West Indies
Two of the main features specific to water supply schemes are: (i) they incorporate assets with service lives of varying lengths, often extending beyond the life of the loans subscribed to finance them; and (ii) corresponding maintenance costs grow over time and are not easy to estimate.
In the French West Indies, a large, multi-purpose water scheme supplying raw water mainly for agriculture (52%) and domestic purposes (40%) provides the basis for a simplified case study on financial cost recovery to illustrate how these features should be taken into account. The scheme is publicly-owned (and as such, investments were funded by various local authorities from 1977 to 2000) but privately managed. From the scheme, 16.8 hm3 of raw water are sold every year and nearly 10,000 ha are irrigated.
Given the asset lives and a discount rate estimated at 3%, the annual capital costs were calculated to estimate whether the schemes financial costs are fully recovered. To calculate maintenance costs, an intermediate step in was made to estimate a maintenance rate for each type of asset, taking into account that these costs increase over time, and using lower and upper bound values derived from past experience (see Table 1 below).
Table 1: Capital and maintenance annual costs calculation (€ 2000)
|
Asset life |
Maintenance rate |
Total investment per type of asset |
Annual capital cost |
Total maintenance cost |
Annual maintenance cost |
|
100 years |
1-2% |
504,184 |
12,092 |
148,883 |
4,712 |
|
100 years |
0.3-1% |
11,588,767 |
298,198 |
1,311,909 |
41,518 |
|
75 years |
0.3-1% |
132,573,805 |
3,586,153 |
14,776,679 |
495,893 |
|
50 years |
1.5-5% |
1,640,445 |
58,292 |
193,798 |
7,532 |
|
50 years |
1.5-5% |
210,592 |
6,124 |
101,797 |
3,956 |
|
40 years |
1.5-5% |
7,495,407 |
244,879 |
3,264,663 |
141,237 |
|
30 years |
1.5-5% |
561,173 |
22,856 |
234,025 |
11,940 |
|
25 years |
1.5-5% |
274,366 |
12,811 |
105,158 |
6,039 |
|
20 years |
1.5-5% |
34,811 |
1,903 |
11,584 |
779 |
|
10 years |
1.5-5% |
58,533 |
4,871 |
10,111 |
1,185 |
|
Total |
|
173,827,944 |
4,789,921 |
20,158,607 |
714,790 |
The total financial cost was then calculated by adding this tables intermediate (total) costs to operation costs. These were derived from existing data provided by the private operator.
Table 2: Total financial annual costs and its components per cubic meter (€ 2000)
|
Type of costs |
Total value |
Value per m3 |
|
Capital costs |
4,789,922 |
0.285 |
|
Maintenance costs |
714,790 |
0.043 |
|
Operation costs |
1,084,522 |
0.064 |
|
TOTAL |
6,589,234 |
0.392 |
These total costs can be allocated between the different water users (irrigators and others) and compared with the price of water charged to those users. However, there are some clear limits to this approach: average costs calculated over a long period (75 years for some assets) are compared with fees charged in a given year. Thus, a comparison between average annual costs and current prices to estimate cost recovery only gives a rough estimate and should be interpreted with caution. In this case, water used for domestic purposes represented 40% of total volume used and 57% of total fees received, due to the lower price of irrigation water and to a different water pricing structure. For raw water, operation and maintenance costs were fully covered by users through tariffs but a large part of capital costs were covered through subsidies from the public authorities.
Based on several case studies conducted in France, this method for estimating financial costs appears relatively robust as it provides the means to estimate costs with assets of varying asset lifes. It can also be applied to external costs whenever it is possible to identify stakeholders who are affected by externalities and who have incurred expenses to avoid them or to remedy their effects. So far, however, this method has been applied solely to estimating financial costs.
Source: T. Rieu (2002, forthcoming).
Task 4
Identify and Estimate the Environmental and Resource Costs of Water Services
According to the Directives definition, environmental and resource costs should also be considered in order to take account of the principle of cost recovery. As mentioned in Estimating Costs (and Benefits), the estimation of environmental costs and resources might be difficult, due to methodology issues. Some environmental and resource costs are already internalised and as such, are included in the financial costs (see Illustration 5). Non-internalised environmental costs will prove most difficult to quantify and incorporate in the cost-recovery equation. For those, and for the sake of improving transparency, it might be sufficient to identify the costs and estimate them in a first instance.
Illustration 5
Introducing a Natural Resource Tax (NRT) in Latvia
The Natural Resource Tax (NRT) was introduced in Latvia in September 1995 as a means to incorporate environmental externalities into the cost of water and wastewater services. Groundwater and surface water abstractions are charged, together with discharges.
The NRT rates vary according to the type of water abstracted and the type of pollutants. The following table shows the NRT rates for both water extraction (ground or surface) and water pollution:
|
|
Unit |
NRT-rate |
|
Ground water extraction |
€ / 1000 m3 |
17.7 |
|
Surface water extraction |
€ / 1000 m3 |
3.5 |
|
Water pollution with SS |
€ / tonne |
17.7 |
|
Water pollution with COD, P and N |
€ / tonne |
53.1 |
In the following table, the Latvian NRT rates for groundwater extraction and pollution with P and N are compared with NRT rates in other Central and Eastern European Countries and some EU Member States.
|
|
Ground water extraction (€ /1000 m3) |
Water pollution (P) (€ / tonne) |
Water pollution (N) (€ / tonne) |
|
Latvia |
17.7 |
53.6 |
53.6 |
|
Lithuania |
10 24 |
404.3 |
118.9 |
|
Romania |
7.3 8.4 |
43.6 |
43.6 |
|
Slovenia |
30 |
5783 |
694 |
|
Estonia |
16 48 |
216.6 |
130.3 |
|
Czech Republic |
56 |
1960 |
1120 |
|
Poland |
92.3 |
|
|
|
The Netherlands |
150 (1998) |
|
|
|
Denmark |
670 (1998) |
14,620 |
2,660 |
|
Germany |
|
46,000 |
1,900 |
This table shows that the NRT rate for groundwater extraction is generally lower in Latvia compared to other Central and Eastern Europe countries, and substantially lower than in EU Member States (it should be noted that GDP per capita in Latvia is only 29% of the average in the EU).
In addition to this relatively low NRT rate, it appears that the tax on water extraction and water pollution does not achieve its intended goal to achieve full cost-recovery while protecting the environment. The rates are relatively low and have remained unchanged since 1996, whilst the inflation between 1996-2001 was 43%. As such, the NRT rates probably do not cover environmental costs, at least from pollution (with respect to abstraction, given abundant groundwater resources and relatively low extraction rates, resource costs are close to zero). In order to prevent social problems, however, and given that water and sewerage tariffs are already relatively high, the NRT rates could only be increased in line with the expected economic growth in Latvia. Many small businesses have difficulties paying even the relatively small NRT and have little incentive to do so given that the monitoring mechanisms are deficient. From this case, it transpires that the NRT currently in place in Latvia largely represents a compromise between social, economic and environmental goals rather than a fully-blown economic instrument for recovering environmental costs.
Source: I. Kirhensteine (2000, forthcoming).
Task 5 - Identify the Cost Recovery Mechanism
This task involves identifying the mechanism currently used for recovering the costs of water services by water users. This would generally involve payment by users (through prices, charges, taxes) or alternative institutional mechanisms for recovering costs. This task should pay specific attention to the institutional mechanisms that are used in order to recover costs going beyond the mere pricing mechanisms. As shown in Illustration 6 below, water users may sign a specific agreement between themselves in order to share the costs of an improvement in water status, which might reflect more closely the way in which they are sharing the benefits than through relying on an administrative pricing mechanism.
If prices and charges are the main cost-recovery mechanism, it would be important to collect data on the tariff structure, including the price per unit of water service used (for instance, EURO per m3 or fixed charge per household etc.). If more than one user group is involved, the unit price may be aggregated and averaged across one or more user groups.
Illustration 6
Institutional mechanisms for cost recovery in Tarragona (Spain)
|
In Spain, as in other semi-arid regions around the Mediterranean, increasing pressures on available water resources requires improving the efficiency of existing water uses. A water user association in Tarragona came up with an innovative negotiated arrangement in order to increase its available water resources by financing improvements in irrigation water uses. Background. In Spain, irrigation is a key factor for agricultural production and the Government has played an important role in irrigation development. As a result, irrigated agriculture is by far the largest water consumer. Many irrigators have historical water rights and enjoy large water allotments, but they are faced with low guarantee levels, as allocation rules in times of scarcity give priority to urban uses. To regulate highly variable rainfall patterns, the Government invested in water system regulation infrastructure, with the construction of large water storage reservoirs. Growing water demand together with declining responsibilities for further reservoir building has resulted in increased resource scarcity and mounting competition amongst water users, focusing the debate in the water sector on conservation and reform. Financing the modernisation of irrigation systems. In some old irrigation districts, technological improvements on the irrigation networks could allow for water savings, especially in areas where possibilities for further reservoir building are limited. Irrigation modernisation programmes can be beneficial for farmers but also for domestic users and the environment, through the resulting water savings. In the region of Tarragona in the Ebro river basin in Spain, where beneficiaries were well defined and third party effects insignificant, private negotiation led to the implementation of irrigation modernisation programmes. A water user society (municipal and urban water users) agreed to pay for modernisation investment in two irrigation districts in the Ebro river basin. In turn, these irrigation districts agreed to reduce their water entitlements (by the amount of water saved through distribution system modernisation) in favour of the water user society. This direct negotiation between water users appears as an alternative to the use of pricing mechanisms for reaching the cost-recovery objectives. In practice, urban users agreed to pay the costs of additional supplies through the financing of irrigation improvements. However, the circumstances in which this kind of institutional solution can be used are relatively limited. In most cases beneficiaries include a large number of downstream users including the environment and public price setting and subsidy transfer would play a key role to give incentives for the adoption of water conservation measures in irrigation districts. |
Task 6 - Calculate the Recovery Rate of the Economic Costs of Water Services
The next task involves calculating whether, at an aggregated level, the cost of water services is globally recovered via revenues from users of this water service. This will need to be carried out water service by water service. In order to do so, it will be important to assess the revenues received by the water service and to assess whether any external subsidies are paid in order to finance the costs of this water service.
As highlighted in Box 1 below, subsidies can be paid either directly or indirectly. In addition, they can be paid continuously or have been paid in the past (for example, a capital grant paid in the past to finance investments, or a write-off of capital asset value when transferring some assets in the private sector, as it was done in the United Kingdom at the time of privatisation). Therefore, it will be important to define clearly what is considered to be an external subsidy and when it was granted. An example of cost recovery and identification of subsidies in Hungary is given in Illustration 7.
Box 1
Cost recovery: The issue of subsidies
|
The polluter pays principle (PPP) requires that users pay according to the costs they generate. However, subsidies reduce users contribution to the full cost of water services and disable price incentives to use resources in a sustainable manner both important objectives of Article 9. Subsidies are allocated to either providers, users or polluters in different ways. They can be paid directly by the (central or local) government:
In addition, subsidies can be paid indirectly by:
When user groups pay only part of the costs of a water service, the rest of the costs will have to be paid or subsidised by others. These others can be the public at large contributing through general taxation (tax revenues being used by the central government to subsidise the supply of water services in ways described above) or other user groups that pay a larger fraction of the total costs (including resource and environmental costs) than they generate. |
Once the external subsidies have been identified, the general formula for calculating the cost recovery rate for water services can be calculated as follows:
,
where CRR is the Cost Recovery Rate, TR the total revenues (depending on the cost recovery mechanism this figure could be based on either fixed or variable charges in EURO/year), Subsidy the total amount of subsidies paid to the water service, and TC the economic costs (in EURO/year) of the water service provided.
If the water service is provided free of charge, the CRR equals zero. The problem with assessing the full extent to which the PPP holds is that external resource and environmental costs must be calculated and added to the financial cost. This may be difficult due to data availability (e.g. cause and effect are not always clear and environmental costs are often incurred at a scale that is larger than the scale of analysis). In such a case, to make an estimation of the extent to which environmental and resource costs are recovered, aggregated data on the quantity of water used by the different sectors and the amount of pollution caused by water services may at least be sufficient to inform a general assessment of the most important pressures and pollutants. In combination with information on environmental charges and levies, they can provide sufficient information to give a qualitative estimation of the extent to which the polluter pays principle has been applied.
In addition, due to the difficulties of identifying and allocating environmental and resource costs, it is important to distinguish between financial cost-recovery and overall cost-recovery. Financial cost-recovery should be analysed in the first instance as a minimum, and then overall cost-recovery could be estimated on top of this, bearing in mind the difficulties of doing so.
Illustration 7 - Cost recovery in Hungary and the need to identify subsidies
To meet EU accession requirements, Hungary must comply with EU regulations concerning wastewater collection and treatment by 2015. As a result of accession negotiations, total wastewater collected must be 79.5%, and the level of treated sewage must be 90% (from 38.5% in 2002). The investment costs for this undertaking will total € 820 millions. Most of the necessary investments will be financed by State and EU subsidies, although the present level of these subsidies is already high with over 1/3 of the water services companies having negative earnings.
An assessment of cost-recovery in Hungary remains difficult: the water services sector is highly fragmented with companies using different accounting systems; data gathering and processing is costly, due to the number of companies and claims of data confidentiality; economic valuation of environmental costs is lacking.
An overhaul of the water services sector in 1990 led to increased decentralisation, with local control transferred to local and regional companies (with public ownership of assets), and the establishment of 5 regional, fully state-owned companies that handle bulk production and some supply. Regulatory responsibilities and ability to set prices for water and sewage were also transferred to local water authorities (except for the regional companies, whose prices are set by the Ministry of Transport, Telecommunication and Water Management
MoTTW). Local control over pricing means varied costs relative to production costs
areas with higher production costs must charge more for water than areas with lower production costs. Along with the transfer and loss of centralized control, the central government also decided to reduce subsidies for operation costs in the water sector, claiming that local water charges should recover the water sector operating costs. However, as illustrated in the following table, this is a difficult task.
Table 1: Characterisation of the Water Services Sector in Hungary
|
Agriculture |
Industry |
Household Use |
|
'Free price' system, where control over pricing is exerted via the tender process. |
Systematic economic change since 1988 led to declines in industrial production and use of less polluting production. |
Water/sewerage pricing a political decision, with responsibility in the hands of local officials. |
|
Prices vary based on use of gravity or pump, distance to carry water, required pressure, economies of scale, whether there is infrastructure to be maintained, etc. |
Decrease in demand due to price increases and bankruptcy of production companies. |
High prices relative to disposable income, along with unwillingness (or ability) to pay has led to 10% consumer debt to companies. Even if the charges per unit of consumption = the costs per unit, actual revenues from charges will still not fully recover costs. |
|
Prices usually cover operation and maintenance costs only |
Revenues (industry and households combined) cover only operating costs, not depreciation or development. Amortisation isnt used as a practice, so future costs are undervalued. |
Revenues (households and industry combined) only cover operating costs, not depreciation or development. Amortisation isnt used as a practice, so future costs are undervalued. |
|
Water use rights by application and last for 3 years, except for a large regional water supply company that also operates irrigation objects in a 25-year concession. |
Large industrial users mostly extract water individually. The prices of water purchased are not centrally regulated, which means diverse pricing structures. |
Due to legal/technical constraints, it is impossible to shut down water services for non-payment to households. |
|
Prices not available to the public. No official requirement to collect price data; data that is collected is generally considered confidential. |
Revenues from industry are used to cross-subsidise household use. |
Benefits from cross-subsidy from industrial sector. |
The subsidies that are provided by the central government are the responsibility of the MoTTW. Each year, the MoTTW sets threshold values for water and sewage unit costs and municipalities (local governments) with higher costs receive the difference as a subsidy. The charges paid by the household consumers in the subsidised settlements are then equal to the threshold level of costs.
In practice, the Ministry first decides on the aggregate amount of transfers in each year, and then determines threshold values. In 1998, 1999 and 2000, total subsidies amounted t to CHF 3.4, 3.8 and 4.1 billion (at current price) respectively. For 1998, this is less than 0,5% of the total costs of water and sewage services provided for households in the country. More than one third of the settlements in Hungary (usually smaller villages) receive this kind of subsidy.
With a relatively low level of forecasted household incomes, simply raising the water charges will not result in an improved water sector. Further, increased investments from the EU and the state alone will also not result in an improved water sector. Given the state of the sector, and the need for further investments and reform to meet the EU accession goals, a closer look at how the subsidy system operates, how these are implemented, and how they are measured to meet overall policy goals may be necessary. The situation in Hungary may also be relevant to accession countries facing similar challenges, and to some Member States.
Source: P. Krajner (2002, forthcoming).
Task 7 - Identify the Allocation of Costs to Users and Polluters
The allocation of costs to water users will require determining a number of cost drivers, which are proxy indicators for estimating the amount of costs that they generate. These cost drivers are likely to differ according to the type of costs that are at stake. For example, in the case of the provision of a water distribution service, 'volume of water used' might be an adequate driver for allocating operating costs whereas 'required pipe capacity' may be a more appropriate driver for allocating investment costs. Cost drivers for environmental costs might be linked to the quality of the water discharged into the environment or into the sewer.
Specific attention should be paid to the potential existence of cross-subsidies between users of the water services (see Box 1 of this information sheet). The availability of data will largely determine to what extend those cross-subsidies can be made explicit. Typically, the allocation of costs to different categories of water users can be a difficult exercise.
|
3. Reporting on Cost Recovery |
It follows from the tasks outlined above that information is needed on the specific water services involved, their costs (including possible environmental and resource costs) and the way they are paid for (or not), providers, users/polluters and possible subsidies/transfers is required to estimate the rate of cost recovery (see Illustration 8 of this information sheet for an example on how this may be achieved).
This information can usefully be compiled in a matrix, as shown in Table 1 of this information sheet. This structure makes the interactions between the economic system and the water basin explicit and combines all the necessary information in one general accounting matrix. In this structure, a distinction is made between the different water users (households, industry and agriculture) and providers of water services (communal and individual). A similar structure is currently used by the National Accounting Matrices, Water Accounts (NAMWA)1.
Illustration 8
Observatory for household water pricing (France)
Since the middle of the 1990s, increased attention has been paid to water pricing for households in France, with the launching of observatories in different Ministries and within the river basin water agencies. Originally, these observatories were developed to determine the average price per cubic meter of water (including water supply and waste water treatment). Already from the beginning, some attempts were made to identify the different components of the price (investment, maintenance, subsidies, etc.). However, the results of these studies were highly variable from one region to the other. In 1999, the Ministry of Environment and the water agencies decided to create a national observatory of domestic water prices at the National Institute for Environmental Statistics (IFEN). This observatory is based on information collected from 5000 municipalities, which are interviewed every three years. A great deal of technical and economic information is collected, such as:
While still in its start-up phase, it is expected that the data from this new national observatory will stimulate more work in the field of cost-recovery for household-related water services that will be of direct use for implementing the economic-related articles of the Water Framework Directive. |
Artois Picardie River Basin Agency
See also: http://www.ifen.fr/pages/4eaulit.htm#65
Table 1 - General structure of information requirements with respect to reporting on cost recovery
|
Water service |
Provider |
User/Polluter |
Financial costs |
Resource costs |
Environmental costs |
Possible cost recover mechanisms |
Possible subsidies/transfers involved |
|
Supply of (drinking) water |
communal/ individual (agriculture, industry, household) |
Households Agriculture Industry |
Annual costs of water infrastructure, maintenance and operation costs |
Opportunity costs of alternative water uses |
Environmental damages due to abstraction, storage, impoundment etc. |
Utility charges, market prices, abstraction taxes/charges paid by households, industry and agriculture etc. |
Subsidies to low-income households, capital subsidies on investments in water supply infrastructure |
|
Irrigation |
communal/ individual (agriculture) |
Agriculture |
Annual costs of irrigation system, maintenance and operation costs |
Opportunity costs of alternative water uses |
Environmental damages due to abstraction, storage, impoundment etc. |
Abstraction charges and/or charges paid for the use of the irrigation system by agriculture etc. |
Subsidies on agricultural water use, capital subsidies on investments in irrigation system. |
|
Hydro power |
communal |
Industry Households |
Annual costs of investment, maintenance and operation costs |
Opportunity costs of alternative water uses |
Environmental damages of impoundment, dehydration of nature |
|
Subsidies on industrial electricity use, capital subsidies on hydropower dam construction. |
|
Drainage |
communal/ individual (agriculture) |
Households Agriculture |
Annual costs of investment, maintenance and operation costs |
Opportunity costs of loss of wetlands |
Environmental damage to wetlands, dehydration of nature |
Water management charges paid by households, agriculture, industry |
Financing of large scale drainage out of general means, other subsidies |
|
Sewerage |
communal/ individual (industry) |
Households Agriculture Industry |
Annual costs of sewerage system, maintenance and operation costs |
|
Environmental damage of (residual) water pollution |
Sewerage and pollution charges paid by households, industry, agriculture |
Capital subsidies on investments in the sewerage system, financing of sewerage out of general means |
|
Waste water treatment |
communal/ individual |
Households Agriculture Industry |
Annual costs of waste water treatment, operation and maintenance costs |
|
Environmental damage of (residual) water pollution |
Waste water treatment and pollution charges paid for by households, industry, agriculture |
Capital subsidies on investments in waste water treatment, subsidies to users of waste water treatment. |
|
BASELINE SCENARIO |
Directive references: Article 5, Article 9 and Annex III, also implicit in Annex II
3-Step Approach: Task 1.2, Task 2, Task 1.3 and 3.3.
Information sheets: Recovery of Costs and Cost-effectiveness Analysis
This information sheet will help you develop one or several alternative baseline scenarios (or 'business-as-usual' (BAU) scenarios), and proposes an optional approach to complement the forecasting analysis (to define the BAU scenarios) with prospective analysis.
|
1. Objective |
Article 5 requires that each Member State shall ensure that 'an economic analysis of water use is undertaken for each River Basin District' and Annex III further specifies that this analysis should 'take account of the long term forecasts of supply and demand for water in the RBD and where necessary: estimates of the volume, prices and costs associated with water services and estimates of relevant investment including forecasts of such investments'.
The construction of long-term forecasts (what is referred to as business-as-usual scenarios) during Step 1.2 of the 3-step economic approach is needed for:
-
Identifying whether there is a gap in water status between the projected situation and the Directives objectives by 2015 (Step 2
as illustrated in Figure 1 of this information sheet);
-
Identifying potential measures to bridge that gap (if there is one) and construct a cost-effective programme of measures (Step 3.1 and 3.2);
-
Making the relevant calculations necessary for taking into account the principle of cost recovery of water services, taking into account long-term forecasts of supply and demand for water in the River Basin District (Step 1.3 and 3.3).
Note that the business as usual scenario will only integrate what would happen in a given river basin district without the Water Framework Directive, due to changes in population, technologies, the implementation of water policies resulting from previous European directives, other sector policies, climate change, etc. During Step 1.2 of the economic assessment, it will be important to focus on the forecasting of pressures and of key socio-economic drivers that are likely to affect those pressures. It is only during Step 2 of the overall approach that these forecasts are translated into an assessment of their impact on water status.
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2. Key Issues |
Given the use of the baseline scenario, it is important to broaden the scope of the forecasting analysis suggested in Annex III in order to:
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Forecast not only investments but other key parameters and drivers influencing water supply and demand (or more generally all significant pressures), since a failure to do so would undermine the definition of the programme of measures;
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Not rely too much on a mere projection of past trends, as such forecasting method tends to produce misleading results: forecasts need to integrate predictable changes in past trends based on a series of assumptions concerning these changes;
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Identify (and distinguish) variables that can be derived with a high degree of confidence and those that are uncertain. This distinction should be made for physical parameters as well as for economic and policy-based drivers; and
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Build a series of alternative scenarios using alternative assumptions, particularly with respect to policy options. This will allow stressing the main (significant water management) issues in the river basin district, and discussing policy options by simulating their consistency and their long-term significance (e.g. it can be useful to compare two distinct scenarios, one where water prices and charges are kept stable and one where they increase: both assumptions are realistic, but stem from different policy options).
In order to build the baseline scenario, it will be necessary to forecast a set of variables before assessing the impact that these changes will have in terms of pressures and water status. It will be important to distinguish between three types of variables as presented in Table 1 below.
Table 1
Categories of variables to be examined for the business as usual scenario
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Categories of variables |
Examples |
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Trend variables |
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Critical uncertainties |
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Water policy variables |
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3. Practical Tasks for deriving the Baseline (Business-as-Usual) Scenario
The proposed approach for developing the Baseline Scenario is outlined in three tasks, as shown in Box 1 of this information sheet. This box serves as a visual aid throughout the process outlined below.
Box 1
Illustration of the General Method
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Look out! Developing the baseline is an iterative process The first baseline scenarios developed for supporting the development of river basin management plans are likely to build on existing knowledge of trends in key variables and lack robustness and to incorporate many uncertainties. As the assessment of significant water management issues evolves, it will be possible to identify areas where further work is needed to improve the baseline scenarios. To enable revisions, it would be important to keep a log of:
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Task 1 - Assess current trends in 'trend' variables (including physical parameters and socio-economic drivers)
The output of this task is a survey of past observations, historical data and a forecast of ongoing trends over a relatively short-term horizon. This work will be partly based on physical and ecological characterisation of the river basin and will build on technical and data handling/statistical expertise. The analysis of past evolution of water resources and physical parameters will mostly rely on technical expertise and on the analysis of trends in pressures, water uses, water services and impacts. The data to be gathered are summarised in Table 2 below.
The methodology for this task will be based on a comparison between the past and present status of trend variables in the river basin (including water uses, water services and physical parameters -as per Annex V of the Directive). This should enable:
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Pointing to significant changes in the river basin district: e.g. major degradations and improvements: what quality and quantity parameters have deteriorated or conversely improved, and what were the most apparent causes?
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Gathering knowledge on the evolution of the human and technical context: population and its location, economic activity components, equipment and water works;
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Assessing the rate of policy implementation and especially, the pace of water investments over the recent period;
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Evaluating the likelihood of the above trends to be prolonged over the mid-term future: are there good any reasons for assuming that the worsening /improving parameters will stop worsening / improving?
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Compiling a first identification of the main pressures likely to cause a future gap between the Directives objectives and the possible future situations, and thus help identifying key driving forces and drivers linked to these pressures.
Table 2 - Data to be gathered in Task 1
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TASK 1 |
Key points |
Output |
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Identify Trends in Physical parameters |
Map evolution of:
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Overview of general trends in the hydrological system in the RBD. |
| Identify Trends in socio-economic drivers influencing water uses and, water services and impacts |
Map evolution of:
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Overview of general trends in water uses and services in the RBD. |
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Identify Trends in Water Policies and Regulations |
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Overview of general trends in the implementation of present water policies and regulations. |
Illustration 1 - Oise river basin (France): case study of deriving a baseline scenario
As part of the Seine River District in France, the Oise River Basin suffers from high diffuse pollution from agricultural runoff, high urban water intensity, dense industrial concentration on main and smaller rivers, and overall poor water quality in the main river and some of its smaller tributaries. By identifying past trends and the present state of water policy, surface water quality and pollution (including sewage equipment and discharges), a baseline scenario was formulated to provide insight to policy makers for addressing present and future water resources management. The following maps highlight some of the studys results:
Task 1 - Evaluation of major past trends
Evolution of polluting activities 1990-1999:
+2.7% population increase (+0.3%/year)
+11% industry production growth (+1.3%/year)
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Task 2 - Baseline projections In a second phase, the effects of the development of future activities and planned policies and programmes (sewage works) in the Oise river basin were simulated and critical factors that limit compliance with good quality (chemical) status were identified. The baseline scenario highlighted major difficulties for achieving surface water quality objectives, including durable nitrate pollution involving groundwater and incompatibility between the 'good' status definition and some natural processes (e.g., suspended matter standards versus erosion). While the baseline scenario has a useful purpose, there is an extreme uncertainty about the future level of economic activities in the region, particularly for industry and agriculture. The availability of data for this study was a great asset that allowed for scenario building, and the study provided useful results about the risk of non-compliance with the good status objectives of 2015, and allowed for a wider vision than recent planning preparation (up to 2006). |
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Look out! Do not rely too much on past projections and examine alternative scenarios, rather than an unique one Reviews of existing past projections have shown that long-term projections in the water sector usually proved false when evaluated afterwards. Accordingly, it would be dangerous to suggest that an adequate image of the future can be the result of a mere projection of past trends. In addition, it will be important to avoid presenting one 'image of the future' as a baseline scenario. A plurality of images, from a series of combination of variables, will be preferred. |
Illustration 2
Issues with trend extrapolation: 'The past is not necessarily a good indicator of the future' (England and Wales)
In England and Wales, water demand rose steadily from 1960 to 1975. Applying an assumption that 'the past is a good indicator of the future', it would have been logical to apply a simple linear relationship to demand from 1975 onwards. However, a simple non-causal relationship ignores the real drivers affecting water use. It is therefore not surprising that this extrapolation technique often fails, as it would have done in this hypothetical example (see Figure 1).
Figure 1 Water supply in England and Wales, 1961-2000
For short-term forecasting a more refined approach using a multiple linear regression form of extrapolation of trends might be suitable. This might be dependent on variables such as temperature and rainfall but it is likely to be more effective if applied to specific elements of water demand rather than total water demand. Indeed, the problem with overall trend forecasting is that it fails to analyse causal relationships and as a result, lacks transparency. Therefore, a more disaggregated approach to demand forecasting might be preferable (see Illustration 3 of this information sheet).
Using simple trend projections might have benefits, as it is a low cost method and that it is quick and simple to derive a trend line. However such method has also many disadvantages, in the sense that it produces low quality forecasts and that it is reliant on good quality time series from which to derive statistical relationships. In sum, the past is not a reliable indicator of the future for anything other than possibly short-term forecasting.
Illustration 3
A disaggregated approach to demand forecasting (England and Wales)
A preferred approach to trend projection and an important building block of any demand forecasting exercise requires adopting a disaggregated approach to demand forecasting, in order to identify the key drivers of demand and in particular, the key sectors having an impact on demand. This illustration draws on water demand forecasting activity undertaken to develop a water resources strategy for England and Wales. Its purpose is to demonstrate the level of detail necessary to reasonably apply assumptions about future water use brought about by changes to the key drivers of demand. The approach is valid for different sized areas although in small river basins there may be local issues relating to robustness of sample sizes and data availability.
The causalities of short-term changes in water demand are likely to be different to those affecting the longer-term. In the case of the former, it may be sufficient to examine recent history to establish how existing pressures are likely to translate into total water demand. Since water demand within a river basin will fluctuate over the longer-term (+5 years) as individual water uses grow and/or decline, it is logical to estimate how total water demand may change by examining the drivers of demand and the consequences for each use. Table 1 summarises the breakdown of total water demand used in the case study referred to above.
Table 1 Elements of water use by sector
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Sector of demand |
Component of demand |
Micro-components of demand |
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4 no. sectors: |
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8 no. components eg Toilet use, personal washing, clothes and dish washing, garden watering. |
14 no. micro-components eg various WC, bath, shower, hand basin, washing machine, washing by hand, garden sprinkler. |
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18 no. components eg Chemicals, food & drink, textiles, retail, hotels. |
Not applicable. |
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23 no. crop types relating to three different soil types and seven agro-climatic zones. |
Not applicable. |
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Reported and unreported leakage on trunk / distribution mains and on service connections to customers. |
Not applicable. |
A similar level of disaggregation to that described is recommended as good practice in order to introduce sufficient confidence into the supply-demand balance assessments that are key to establishing a baseline water use estimation.
The benefits of such detailed disaggregation include:
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Improved robustness of forecasts by reducing the uncertainty inherent in use of generic assumptions;
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Transparent forecasts of total water demand where the key sectors for growth / decline can be described explicitly
provides a clear platform on which to engage stakeholder debate;
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Application of specific assumptions can be restricted to just the relevant sectors;
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Facilitates development of sector-based scenarios of political, economic, social and environmental futures; Facilitates application of 'what if ?' tests to forecasts, such as impacts of water management policies, technology etc.
The disadvantages of such disaggregation include:
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Availability and costs of obtaining econometric and water use data at such a detailed level;
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Cost effectiveness may be questionable for very short-term forecasting (year on year) particularly in regions where there are considerable surplus resources and robustness of forecast is less critical.
Source: UK Water Industry Research Ltd / Environment Agency (1997). For enquiries relating to demand forecasting email: rob.westcott@environment-agency.gov.uk
Summary of the key drivers of demand for each sector
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Drivers |
Sectors |
Household demand |
Leakage |
Industrial and commercial demand |
Spray irrigation demand |
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Task 2
Project certain changes in water policy variables and derive longer-term projections
Based on the previous task, key driving forces and drivers related to water and water policy (be they hydrological, socio-economic or policy/regulatory related) should be identified and analysed. In this task, it is proposed to concentrate on changes that are more certain and for these certain changes:
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To make reasonable assumptions about the future dynamics of the analysed drivers;
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To assess the impact of changes in these drivers on pressures; and
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To estimate the resulting impacts and thus water status.
Task 1 will have given an estimation of the future increase in raw pollution from human activities (pressures analysis). This task will try to answer the following questions:
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What additional quantities of pollution will be abated in the future (e.g. following the construction of additional sewage treatment works)?
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What will be the effects of planned policies on water availability for the water services and uses (e.g. regulation policies, storage equipment policies)?
This task is central to the Water Framework Directive process and thus has to be steered by the district authority at high decision-making level. A 'strategic co-ordination group' will probably be needed to incorporate all expertise and interdisciplinary inputs in the process. Again, on these matters, it is recommended not to strive for describing one unique image of the future if not possible. When choices among different values are necessary for some variables (e.g. activities growth rates, technological changes, policy implementation rates), a series of alternative baseline scenarios can be prepared. The table below summarises the approach in Task 2.
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TASK 2 |
Key Points |
Output |
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Make assumptions about the future dynamics of trend variables identified in Task 1 |
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Assumptions on the future dynamics of trends |
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Make projections based on certain trends |
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Baseline or Business-as-usual projections of the RBD in 2015 |
Illustration 4 - A methodology for scenario building developed for the region of Sfax (Tunisia)
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Relevant experiences of scenario-building used in the policy debate are few and far between, which is why it is interesting to introduce an approach developed in Tunisia, in the context of acute water pressures. While Tunisia may not be representative of European contexts at large, the approach taken was usefully applied despite the lack of means and data, and it proposed some simple tools to build scenarios, based on 're-using' the technical forecasts that generally exist in water planning institutions. In Tunisia, the scenario-building exercise was conducted to feed the debate on strategies related to water demand management, as the approach still tends to focus on supply-side solutions without examining the links between water resource management, land use planning and economic development. For instance, irrigation demands are often considered as an input into the projections rather than something that can be acted upon independently. As such, the scenario-building exercise followed a four-step process: Step 1: Use technical planning forecasts as a foundation, and analyse the underlying assumptions in detail; Step 2: Build scenarios using basic assumptions combined into contrasted scenarios, and make an explicit representation of the water uses/resource system to quantify the water balance with the assumptions; Step 3: Choose a range of combinations for the assumptions (e.g., one combination is the backbone of one scenario), and then calculate the water balance over time that corresponds to the combination; Step 4: Based on these elements, imagine a plot that tells the story of the system from now until 2030, giving consistency to the assumptions and water balance curves. The region of Sfaxs demographic projections demonstrates this four-step process. For Step 1, three alternative choices were considered to forecast the regions demography:
Data was technical and derived use per use. For every use, more or less simple trends analyses of past evolutions were used to derive projections of, for example, population, unitary domestic consumption, or irrigated area (see Fig.1). This simple framework was used as a basic representation of the water uses/water resources system. |
Figure 1: Example of assumptions formulation on the demographic evolution of the Sfax region
Source: Treyer, S. (2002, forthcoming).
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Step 2 requires a check on the global consistency of a combination of assumptions. In the Sfax region, the following critical queries were posed: (i) what are the underlying assumptions for each growth curve (population, leakages)? Is it an exponential, linear or logistic curve? What is the growth rate?; and (ii) What is the statute of the variable: is this a trend that can be extrapolated, a critical uncertainty (depending on external uncertainties) or is it a project variable (which is subject to decisions by stakeholders)? (iii) What is the anticipated water resources supply/demand balance and is the sum of water uses below the maximum available resources? Also, the political and social context of the scenarios must be considered in conjunction with the technical assumptions that form their foundation. Step 3 requires combining basic assumptions to develop alternative scenarios by reducing a set of basic assumptions, explaining qualitatively the process of evolution and quantifying the assumptions on future evolutions. In Sfax, the alternatives developed were land use planning, spontaneous development, and the baseline scenario. To represent the scenarios, it was important that they were consistent in format with a structured list of assumptions to ensure transparency (for discussion with stakeholders); a quantitative evaluation of the resources/demand balance; a narrative illustrating the causal paths, major issues, and transitions that could occur; and, if possible, a geographic representation of the spatial distribution of resources and uses. It is important to stress that transparency of the scenario construction, methods and use of the data sources is as important as the reliability of the data underlying the assumptions. The water resource/uses water balance, modeled in Step 2, combined with the set of assumptions for the land use planning scenario resulted in a situation where the forecasted solicitation of the deep aquifer from planned development became greater than the threshold for aquifer renewal. It was therefore necessary to imagine other ways to generate water supply, particularly concerning agricultural use of groundwater. Step 4 requires imagining a plot and a narrative. The following was imagined for the land-use planning scenario: 'A very dynamic land use planning policy is being implemented. Local development stakeholders are negotiating subsidies and some autonomy from the state in a way that natural water resources limitation cannot be taken into account. Finally, the development model for which a lot of money has been invested is put into question because of excessive water use.' Then, this scenario was imagined for the spontaneous development scenario: 'The city of Sfax continues growing without implementation of land use planning policies. Because of water scarcity and of the Euro Mediterranean free trade zone, agricultural employment in the region decreases drastically. Sfax must incorporate this new population and labour force, which accelerates water supply problems in the city. Thanks to its political weight, the city manages to have a bigger allocation from the national water resources network, but national solidarity and water resources sharing becomes a problematic national political issue.' This last example shows why social and political elements must be added to the technical forms of the baseline scenario. While the techical plans indicate a growing and intensifying irrigation sector, the sectors future is in fact more uncertain. Both for regional and national policies, the impact of external factors on water scarcity are important to at least acknowledge, even if they are not quantifiable. The scenario approach presented here is possible to implement without important efforts and even with little data. It exemplifies that the baseline scenario necessitated by the Water Framework Directive can be built as one particular combination of assumptions, for instance the one based on land use planning and other existing plans. The other possible combinations are also plausible and are necessary counter examples to the baseline scenario. It is therefore necessary to put into discussion the scenarios that are built, and to ensure that the construction method is transparent enough for any stakeholder to be able to participate in the discussion. |
Illustration 5 - Example output from a scenario building exercise in the Ribble (England)
Source: Integrated appraisal for river basin management plans. Environment Agency, Andrews et al(ii), extract: the Ribble case.
Task 3 - Integrate Changes in Uncertain Parameters (integration of critical uncertainties)
In this task, more uncertain changes that are likely to have significant impacts on the pressures and water status are integrated into the analysis for developing the final business-as-usual scenarios to be used for identifying the gap in water status.
At this stage, the possibility of uncertain events or 'what-if scenarios' will therefore be integrated into the 'business-as-usual' scenario with questions such as:
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What if the river basin district goes through a technology or water consumption shift?
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What if a series of severe droughts or flooding events occur during the next 10 years?
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What if agriculture common policy is radically changed? etc.
Of course, possibilities for such variations are infinite. However the first two tasks will have helped designating the key parameters on which uncertainty analysis is necessary (e.g. if diffuse pollution appear as a major issue in a district, analysis of uncertainty in that field is worthwhile, through the analysis of alternative agricultural policies for example). The Table below summarises the key issues that could be examined during that Task. Taking into account such changes will produce the Baseline scenarios for the district.
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Task 3 |
Key points |
Output |
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Identify changes to the parameters that are uncertain and could have significant impacts on the water policy |
Pay special attention to:
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Alternative baseline scenarios |
Illustration 6
The incorporation of critical uncertainties in the development of a Water Resources Strategy (England and Wales)
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The only certainty surrounding long-term forecasts is that they are likely to be wrong! Any best estimate forecast contains uncertainties. One way of dealing with some of these uncertainties is to define scenarios, or story lines, within which the key drivers of demand evolve on a justified basis. The use of scenarios enables us to test not only 'what if?' scenarios but it also provides an indication of the sensitivity of components to particular assumptions. The Agencys case study referred to above (see Illustration 3 of this information sheet) used a demand-forecasting approach based on the projection of disaggregated demands. In order to assess the key uncertainties related to these forecasts, the possible impacts of different socio-economic and political pressures on the key drivers of demand were examined using the Foresight tool, developed by the UK Government to project alternative Environmental Futures scenarios over a period of several years. Note that the process used in developing this Foresight generic tool involved drawing on national and global future scenarios for the state of the environment as a whole (without focusing particularly on water), which were then developed and reviewed by business, government and academia. This produced a tool that others can use to explore possible futures. Scenario development In the study, four future scenarios for water use were developed for the period 2010 and 2025, which reflected different permutations of regionalisation versus globalisation and communitarian versus individualistic traits. Key lessons The areas of greatest residual uncertainty in this process were in relation to the pace at which policies might be applied and their relative success. Expert advice drawn from stakeholders in business, trade associations, economists, government and the water industry helped to minimise such concerns. Wherever possible these judgements were reinforced by practical examples and real experiences. One weakness that emerged from the use of scenarios, however, is if the forecast relies on unsubstantiated key judgements about demand changes. The benefit of this approach is to acknowledge that the future cannot be reliably predicted, however, it is possible to identify the circumstances under which significant demand changes might realistically occur. As well as facilitating a means of testing combinations of assumptions and their relative effects / sensitivity, this method permits an examination of the robustness of management options to a range of demands. Also it facilitates debate on the potential acceptability of various options under certain socio-economic conditions. Source: Environment Agency for England and Wales (August, 2001). |
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4. The role of public participation in scenario-building |
The choice of assumptions made while developing a business as usual scenario will require discussions with the public and stakeholders, and input from economists and technical experts.
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Look out! Participation in scenario building can take many forms Participation in scenario building can take many forms. Most past experiences demonstrate that public participation should be placed as much 'upstream' in the process as possible. At least 3 modes of participation are possible:
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The use of scenario building for public participation
One particular method of involving the public is to use scenario building (or foresight methodologies). This may usefully complement forecasting (i.e. the derivation of the business-as-usual scenarios) in order to structure policy discussion and public participation, and identifying key water management issues. Scenario building as an exercise is not so much carried out to produce one single image of the future, but it intends to foster the debate on present and immediate future policy options by exploring their possible future consequences. Prospective scenarios can provide colourful illustrations of the main issues for water management, give extended view of the ongoing policy debate on water (e.g. supply- or demand- management), illustrate the pros and cons of the possible solutions, reveal possible factors of change, and offer a possibility of a wide but formalised interdisciplinary discussion. Prospective scenario building is proved to be much less 'data-demanding' than forecasting a baseline.
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Optional additional task |
Key points |
Output |
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Combine various combinations of possible changes in parameters, using futures studies methodology |
Design several contrasted scenarios in order to allow for uncertainties surrounding the key parameters Organise and give effective result of stakeholders and public participation |
Exploratory scenarios |
Methods and practical tasks in this field are very diverse, with respect to:
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The spatial scale: world perspective, river basin / regional scale, local scale.
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The time horizon: preferably long-term horizons (25 to 100 years);
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The type of 'input variables': either in qualitative or quantitative terms;
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The type of output: contrasted 'visions', possible statements on water status, qualitative and/or quantitative scenarios,
The role of public participation in scenario building at river basin district level: A summary
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Task |
Role of public participation |
Output |
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Task 1 |
System analysis and choice of determinant assumptions In-depth interviews with main stakeholders, experts and institutions of the district, aimed at:
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Overview of general trends in key variables Short-term projections |
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Task 2 |
Scenario building based on task 1 inputs and participation from stakeholders, experts, representatives, scientists through working groups, thematic workshops, etc |
Baseline scenario without uncertainty |
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Task 3 |
Large-scale debate on the proposed scenarios: presentation at various policy levels, large communication, and collection of opinions from the public. The list of assumptions that underlie the scenarios should be delivered as clearly as possible to allow transparency and possibilities for criticism and reformulating, etc. |
Alternative baseline scenarios incorporating uncertainty |
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Task 4 (optional) |
Amendment of scenarios, and quantification refinement: based on previous tasks, derive and calculate the precise significance of scenarios for their systems and instruments: investment and subsidising system, pricing, technical actions, policy organisation, etc. Organisation of large scale publication and participative discussions. |
Exploratory scenarios |
Illustration 7 - The role of participation in four long-term thinking exercises in the field of water
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World Water Vision |
Globesight |
WaterGAP |
WEAP |
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Approach |
Participatory Vision Development based on reference scenarios |
Human in the Loop Systems Dynamics Simulations |
Simulation of Resources Dynamics |
Policy analysis |
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Spatial scale |
World, Region (river basin, socio-economic region, or territorial region), and Sector |
River basin |
World/region on a 0.5-0.5° scale, using river basins as smallest output entity. 4000 river basins in total. |
Municipal, agricultural systems, single sub-basins or complex river systems. GIS based. |
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Time scale |
Up to 2025 |
Calibrated on historical data. Time horizon flexible. |
Up to 2100 (historical data is used for calibration) |
Time horizon flexible. |
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Inputs |
Demography Economy Technology Society Governance Environment Hydrology (through the use of quantitative models) |
Demography Energy Economy Agriculture Hydrology |
Land cover Climate Population Income Technology |
policies costs demand factors pollution supply hydrology |
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Nature of inputs |
Qualitative |
Quantitative |
Quantitative |
Semi-quantitative |
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Output |
Visions and scenarios, which have become independent. The overall synthesis is largely built on the preferences elaborated in the scenarios. |
Water balance between water demand and water supply |
Water availability Water Withdrawals Water stress indication |
Water sufficiency costs and benefits Compatibility with environmental targets Sensitivity to key variables |
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Nature of output |
Qualitative, with quantification |
Quantitative |
Quantitative |
Quantitative |
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Socio-economic driving forces |
Demography Technology Society Governance Economy Environment |
Demography Energy Economy (GDP) Agriculture |
Population Income Electricity Water Intensity Agricultural intensity Water use efficiency |
Policies Costs Demand factors Pollution Supply |
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Scenario use |
Value-laden reference scenarios being used to fuel debates and visioning exercises, as well as direct input to the final vision. |
Different scenarios can be run, either through data changes or through different interventions by the human element. |
Scenarios are used as input for the model. Water use scenarios (technological change and structural change) and climate scenarios are used. |
What-if policy scenarios |
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Participation |
Large scale consultations among stakeholders through contributions and feedback to intermediate versions of documents and through workshops. Decentralisation of the exercise in order to foster appropriation and legitimisation. |
Cybernetical view of participation. Human beings are seen as submodel. The goal-seeking behaviour of algorithms is replaced by the goal-seeking behaviour of human 'models'. |
Scientists-based model which does not include participation. However, WaterGAP can handle participation upstream (in defining socio-economic scenarios) and downstream. |
Decision support system in which the (individual) user can assess different scenario possibilities. No citizen participation is included in the concept. |
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5. Summary |
The development of baseline or business-as-usual scenarios require a range of economic and technical expertise to account for, and investigate, trends and evolutions of a wide range of hydrological, technical, socio-economic and regulatory parameters. Methods that need to be mobilised include:
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Statistical analysis of past data;
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Economic and environmental modelling, e.g. to asses the impact of changes in sectoral policy drivers on key pressures;
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Review of existing planning documents that develop scenarios for key socio-economic sectors; and
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Interaction with, or participation of, key stakeholders.
The development of the baseline scenarios investigates drivers and parameters at different scales:
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For parameters and drivers linked to local changes, input into the analysis of potential changes in these parameters and validation of key assumptions with stakeholders and the public is likely to enhance acceptance of results of the analysis and the selected baseline; and
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For global changes (e.g. climate change) and EU/national sector policies, interaction and feedback will be required between river basins and between countries to ensure coherent assumptions are made for foreseen changes in key drivers.
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COST-EFFECTIVENESS ANALYSIS |
Directive references: Articles 4 & 5 and Annex III
3-Step Approach: Step 3.2
See other information sheets: Baseline Scenario, Estimating Costs and Disproportionate Costs
This information sheet will help you carrying out a Cost-effectiveness Analysis (CEA). The CEA is used for assessing the cost-effectiveness of potential measures for achieving the environmental objectives set out by the Directive and construct a cost-effective Programme of Measures.
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1. Objective |
Cost-effectiveness analysis (CEA) is an appraisal technique that provides a ranking of alternative measures on the basis of their costs and effectiveness, where the most cost-effective has the highest ranking. The CEA proposed here takes an economic view of cost-effectiveness (see Estimating Costs Information Sheet for a definition of the term).
The CEA is used for assessing the cost-effectiveness of potential measures for achieving the environmental objectives set out in the Directive, and in particular for:
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Making judgements about the most cost effective programme of measures which could be implemented in order to bridge a potential gap in water status between the baseline scenario and the Directives objectives (Annex III) (see also Baseline Scenario Information Sheet); and
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Assessing the cost-effectiveness of alternative measures in order to estimate whether those programmes of measures are disproportionately costly or expensive (Article 4) (see also Disproportionate Costs Information Sheet).
The focus of this information sheet is on the first component of this analysis. The sheet outlines issues relevant to estimating the effectiveness, costs and economic impacts of water improvement measures as well as the key tasks of the CEA.
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2. What are the Key Issues? |
Key issues to look out for when conducting the cost-effectiveness analysis include:
-
Provide value added information to aid decision-makers;
-
Be practical and proportionate, allowing for the costs of carrying out the analysis and the availability of data and the importance of the effects and costs in question;
-
Cover fully the costs and economic impacts of measures for the different sectors, whilst avoiding double counting;
-
Be applicable to a wide range of measures in a RBMP (see Box 1 of this information sheet), including specific control and abatement measures for both water quality and water resources (e.g. abstractions);
-
Be able to cover measures that incur costs and achieve effectiveness in different periods;
-
Be readily applicable in practice and capable of generating summary cost estimates in and across basins, sectors and measures in order to aid decision-making on measures that could be taken at national level and subsequently included in the RBMPs.
|
Possible Measure/sector |
Decision-making body |
Level of decision |
Level of Implementation |
|
|
|
|
|
|
1. Requirements for water industry to implement measures to reduce abstraction |
National Relevant Ministry |
National |
River Basin District |
|
|
|
|
|
|
2. Controls on other Direct dischargers |
Environment Agency National ministries re control measures for other sectors |
RBMP & also In line with National/Agency policy on sector |
River Basin District |
|
|
|
|
|
|
3. Controls on other abstractors |
Environment Agency |
RBMP |
River Basin District |
|
|
|
|
|
|
4 Best practice controls on pollution and abstraction at farms |
Agency in charge of environment (but, in a clear national policy context) |
RBMP & also In line with National/Agency policy on sector |
River Basin District |
|
|
|
|
|
|
5. Controls on other indirect dischargers (e.g. run off from traffic on roads) |
National Ministry |
Highways Agency, Local Authorities |
Highways Agency, Local Authorities/basins |
|
|
|
|
|
|
6. Agri-Environment programmes (financial and technical assistance and advice to go beyond good practice) |
National agriculture + finance ministries in response to Ministry submissions |
National |
Regional/basins |
|
|
|
|
|
|
7. Economic instruments 8. Morphological measures |
National agriculture + finance ministries In response to Ministry submissions River Basin Agency |
National RBMP |
National taxes (but pollution charges and tradable permits are local) River Basin District |
|
3. What are the Practical Tasks? |
The key components of the CEA are the costs and effects on water of the measures. These and other tasks are outlined below. At times, this will save you doing the job twice, since most of the cost analysis for the cost and benefit assessment will have already been performed for the cost-effectiveness analysis. Some other key points to consider throughout the process include:
-
The cost-effectiveness analysis should be used to refine the programme of measures by focusing on the largest cost components and the major determinants of the effectiveness of measures. The analysis should then be used to develop packages of the most cost-effective measures for achieving alternative water status;
-
Some measures have differing uncertainties concerning their effectiveness and costs. To allow for this, it would be desirable to use ranges of costs instead of point estimates;
-
It is costly to undertake a CEA. Therefore, the focus of the analysis should be on the limited number of water bodies requiring actions to achieve good status. Consider only those measures that are likely to be worthwhile for achieving this aim.
Figure 1
Tasks and Key Questions in Analysing and Reporting on Cost-Recovery
|
Key Tasks |
And Questions |
Task 1 - Define the Scale of the Analysis
|
Sub-task |
Key points |
Look out! |
|
Define the spatial scale |
|
Data can be aggregated to identify key environmental and sectoral problems and appraise the cost-effectiveness of measures at RBD level. |
Illustration 1
Determination of scale based on information in Cidacos (Spain)
|
The analysis of pressures in the Cidacos river has played three roles for the cost-effectiveness analysis: In Cidacos, information about emissions exists (for point pollution) or in some cases it is possible to rely on estimates (for diffuse pollution). For example, estimates of leachate of nutrients from farms are based on estimates empirically tested elsewhere (elaborated by the National Plan of Irrigation) applied to the existing information for Cidacos. This depends on the types of soil, types of crops and productivity, irrigated areas, use of water and monthly distribution, irrigation techniques and efficiency of irrigation systems. This information exists in the Cidacos river ordered by irrigation co-operative and by total number of hectares. The identification of the water bodies for the analysis was done on the basis of types of pressures and in such a way that it would be possible to monitor improvements of water status resulting from the programme of measures. Control stations helped defining the limits of the water bodies used for the Cidacos study. |
Task 2 - Define Time Horizons
|
Sub-task |
Key points |
Look out! |
|
Identify the relevant time periods for the analysis |
|
Distinguish between:
|
Task 3 - Determine the Effects of Measures on Water
CEA requires comparable and if possible, quantitative information on the effects of measures.
|
Sub-tasks |
Key points |
Look out! |
|
Assess technical feasibility and applicability of specific control measures for each RBD |
Base the analysis on:
|
|
|
Assess effectiveness (see Illustration 2 for an example). |
|
Multi Criteria Analysis based on scientific advice may serve to combines these various effects into a weighted composite index so that the relative effectiveness of the measure can be assessed on a consistent basis. Consider how long before a measure can be
|
Key issues to address include:
-
How to choose and combine criteria for determining the relevant effects? Effects on water are diverse (e.g. effects on emissions of dangerous substances; water flows; water pollution levels, biological quality of the water body; and groundwater etc); and
-
Should failing one criteria mean failing to meet the objective (fail one fail all) or should the fact that different measures may have different effects on different metrics be taken into account?
To make it easier, it would be important to identify the effect of the measures on each parameter as clearly as possible (see Illustration 3 of this information sheet).
Illustration 2 (below) demonstrates how the effectiveness of measures was assessed for the Ribble basin.
Illustration 2
Assessing the effectiveness of measures in the Ribble (UK)
This example illustrates how effectiveness of measures was assessed in the Ribble basin. It is assumed that an aggregate 50 percent reduction in nutrient levels would be needed to achieve the necessary reduction in the risks of not achieving good water status. However, it should be noted that, depending on the outcome of other research on the appropriate compliance assessment model, different formats for presenting risk reduction information might be more appropriate. In addition, precise estimates of the risk reduction may not be the most appropriate format for presentation. Broader categories of risk reduction (High-Medium-Low, or ranges) may be better. However, in order to make the analysis tractable, point estimates are used here.
The table presents estimates of the effectiveness of number of measures for the River Ribble. For example, STW optimisation may be judged to deliver a 20% risk reduction (+/- 5%, i.e. 15% to 25%). The measure can become operational immediately (i.e. no specific time lag).. This might be contrasted to the agricultural general binding rule measure, which might deliver the risk reduction, but entails considerable uncertainty about its effectiveness and would require a significant lead time. Full effectiveness of this measure would not be expected until the 2021 planning date. In addition, this measure is not currently available, as it would need to be negotiated at a national level.
|
Aggregate risk reduction required |
Risk reduction delivered |
Feasibility |
Expected km delivered in 2015 | ||||||
|
2021 |
2027 |
Measures |
2015 |
2021 |
2027 |
Uncertainty range |
2015 |
2021 |
2027 |
|
Elevated Nutrient Levels | |||||||||
|
50% |
50% |
STW Management optimisation |
20% |
20% |
20% |
5% |
5 |
5 |
5 |
|
|
|
STW Opex scheme |
50% |
50% |
50% |
10% |
14 |
14 |
14 |
|
|
|
STW Capex scheme |
50% |
50% |
50% |
10% |
14 |
14 |
14 |
|
|
|
Agri surveillance/enforcement |
2% |
2% |
2% |
1% |
1 |
1 |
1 |
|
|
|
Agri General binding rule |
10% |
50% |
70% |
25% |
3 |
14 |
19 |
|
|
|
Agri Nutrient surplus charge |
15% |
30% |
50% |
25% |
4 |
8 |
14 |
|
Land drainage | |||||||||
|
0% |
0% |
Risk acceptable, do nothing |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
|
Dangerous substances | |||||||||
|
25% |
25% |
Monitor + R&D |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
|
Abstraction | |||||||||
|
0% |
50% |
Monitor + R&D |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
Source: J. Fisher. Integrated appraisal for river basin management plans. See Annex E.
Illustration 3
Issues in conducting the cost-effectiveness analysis in Cidacos (Spain)
|
In Cidacos, information for determining water quality status was drawn from the control stations in the river that measure a number of quality parameters and other stations that measure quantity of water, pluviometry and estimate runoff. There are also two stations that monitor biological indexes along the river all year long, allowing for the identification of the current status of key parameters in winter and in summer. Selecting quality parameters From an initial assessment, a few key parameters were selected for the Cost Effectiveness Analysis, including water quality and hydromorphological parameters that need to improve to achieve the objectives (as defined in the existing quality plan). The criteria for selecting those parameters were the following:
The hydromorphological parameters chosen were: water flow, and improvements of river borders and river vegetation. Others such as the existence of barriers, bridges, etc., were not considered for the purpose of this study since it was difficult to assess the effectiveness of the measures when the inter-relations between physico-chemical and hydromorphological parameters with the biological parameters have not been characterized. Examining the effects of measures on combined sets of parameters From the study, it became clear that it is important to identify and characterize the inter-relations between the different 'selected' parameters in order to assess with some accuracy the effectiveness of measures. Some simple examples are: an improvement of water flow affects dilution of pollutants and hence has a positive effect on physico-chemical parameters. However the objective of water flow is not affected by the water quality parameters. By contrast, water flow would be negatively affected by the improvements of river border vegetation (that demands water). It is important also because it helps identify those parameters (often those with key synergies) on which it could be most effective to intervene. Analysing the effectiveness of measures The analysis of the effectiveness of the measures for the Cidacos river were based on:
The effectiveness of the measures was estimated on the basis of actual data for the Cidacos River. For example, the estimation of the effectiveness of measures aimed at improving water flow (such as improvement of irrigation, canals, substitution of pipes, or changes to low pressure water distribution systems) varies according to water use and density of irrigation networks. This information applied to the real data on the Cidacos (on density and number of hectares with different water applications) leading to estimates of total maximum water saving potential for each individual measure. In the case of agriculture, 27 measures were analysed in terms of their maximum potential for water savings or reduction of Nitrites, Nitrates, and BOD5. These have been expressed in absolute numbers or expressed either as a percentage reduction of pollution or percentage increases in water savings in relation to the base line indicators. The main problem was how to measure the improvement of water quality resulting from a certain reduction in pollution. Another problem was to identify how much each user contributes to the water status of the river. This information used in relation to agriculture had been collected to prepare the National Irrigation Plan. The available information for urban areas came from empirical evidence of demand management programmes, management of urban water, inspection reports to companies and commercial water uses and the reports on measurements on pollution from wastewater treatment plant outlets. |
Task 4 - Estimate the Costs of Proposed Measures
Analysing the costs and economic impacts consistently for distinctly different sectors is a major challenge. All costs should be measured in comparison with the business as usual situation that would arise in the absence of the option. Also, who pays for measures that have significant effects on particular parties (e.g. water customers in respect of water bills) and the scale of any such payments should be identified. Therefore the allocation of costs of the proposed measures is a key element of the analysis.
|
Sub-tasks |
Key points |
Look out! |
|
Determine costs of measures |
|
Formats should be developed for different types of sectors and measures. These need to build on the existing costing conventions currently used in each sector (see Annex I of this information sheet). |
|
Determine costs of other policy measures |
|
|
|
Estimate non-water environmental impacts from the control measures |
|
The CEA does not value the water related benefits of measures. Benefits are included in the appraisal of derogations, see Disproportionate Costs Information Sheet. |
Illustration 4
Allocating costs of measures to water users in Cidacos (Spain)
In the Cidacos case study, the most cost-effective measures require many actions in the irrigation communities located upstream of the river and no action in those located downstream. The cost reduction gains that result from this approach far outweigh other more symmetric alternatives. However, the drawback is that measures must be funded and the target farmers cannot finance the programmes of measures by themselves. Therefore, they must rely on other farmers contributions, especially those whose irrigation districts will not be modernised or rehabilitated.
The consideration of institutional issues means that the costs and benefits for the six irrigation communities of the Cidacos River would have the following effects:
The numbers in the Table gives an idea of the winners and losers from the proposed programme of measures, which may stir conflicts amongst usually quite united stakeholders. Thus, measures will need to be taken to enhance the persuasiveness to gain the support for a cost- effective set of measures. While in the Cidacos project, it is assumed that all irrigators will be charged equal water rates, the net margins variation found in the study might support the option to implement differential rate schemes.
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Task 5
Assess Cost-effectiveness
The unit-cost effectiveness estimates from above analyses should form the main element of the appraisal of costs of measures. Cost-effectiveness can be presented in two ways: (i) costs divided by the effect, or (ii) effect divided by costs. For the selection of measures in the framework of the Directive, the former is used:
Costs per effect:
KEm = Km/BEm
KEm - cost-effectiveness of measure m (Euro/m3)
Km - economic costs of measure m (Euro)
BEm - the water quality improvement (= the effect) of the measure (say in km or m3 of improved water body)
The cost-effectiveness analysis itself can be broken down into a number of tasks:
-
Analyse the costs of individual measures;
-
Produce ranking of measures based on their cost-effectiveness (see Illustration 5 of this information sheet);
-
Produce proposed programme of measures to achieve given objective; and
-
Rank alternative programme of measures to achieve a given objective based on their overall effectiveness.
Illustration 5
Ranking measures based on their cost-effectiveness
Different measures can be implemented to achieve an improvement in the water status for a specific parameter. In order to select an appropriate set of measures, these can be ranked according to technical efficiency (ability to obtain an X reduction of pollutants or increase in river flow) and associated costs.
In the Cidacos scoping study, a total of 26 policy measures for improving the water flow were identified initially. These measures involved reducing pressures on water abstraction by reducing the water demand, increasing the efficiency of the water distribution networks in urban and the rural areas, and importing water from another basin through existing infrastructure, and each of them was appraised according to effectiveness and cost. As shown in the diagram below, the cost and efficiency of each measure can be represented by marginal cost curves (see blue and green curves), indicating the cost in euro per unit of achieved flow increase (litre per second) and so provide a ranking. (The red curve shows the average cost of the resulting policy package.)
In the Cidacos river, an increase in the water flow of 50 litres per second is required to meet the objectives of the Directive. Following the ranking of measures (as shown in the diagram), it was shown that the most effective measure (i.e. the measure that could achieve the greatest increase in water flow at the lowest cost) was the implementation of a water saving programmes (WSP) in the agricultural sector (achieving 20% of the requirement, or 10 litres per second), mainly by reducing the demand and changing irrigation techniques for farms using more than 6.000 m3 per Ha, followed by WSP designed to reduce the demand in households and firms (urban uses), which achieved another 15 percent (or 7.5 litres per second) of the required flow increase.
However, note that the cost effectiveness (and ranking) of a measure is not always constant. For some measures, the marginal cost increases with the level of efficiency (see water recycling, blue curve). It is therefore important to carefully look into the behaviour of costs: assuming that costs are constant may lead to an inefficient selection of measures.
Illustration 6
Estimating the cost-effectiveness of proposed measures in the Ribble (UK)
|
This illustration demonstrates how costs of measures were reported and used to calculate the cost-effectiveness of measures in the Ribble river basin. Annex I (to this information sheet) illustrates a worked example of proformas for recording and presenting the ranges of costs of individual measures. The example used is that of the Ribble STW Capex scheme. Capital and operating costs were recorded separately. In capital costs, a distinction is made between the costs of the pollution control equipment and installation. In operating costs, a distinction was made between changes in operating costs and changes in revenues or receivables. These were then used with information on the economic life of the investment (30 years in this example) and the discount rate (6%) to estimate the present value of costs and the equivalent annual value of costs. Recorded costs were reported in a common unit Annual Equivalent Cost (AEC). The reported (financial) costs (see Annex I to this information sheet) were used together with the appraisal of the other impacts and the assessment of the effectiveness of the option to calculate cost-effectiveness. Table 1 below presents an illustrative assessment of the costs and effectiveness of options for the Ribble. Cost-effectiveness is measured here in terms of the annual equivalent costs of the measures divided by the km of river delivered to good status. This is a fairly simplistic statistic, which may not be appropriate in all circumstances. It is of great importance that the calculated CE variable should show explicitly the uncertainties, regarding both the costs as well as the effectiveness of some measures. This can only be resolved through the judicious use of ranges of cost and CE calculations. The key points in Table 1 are highlighted in bold. This shows that Sewage Treatment Works (STW) optimisation is most cost-effective (EAV= Euros1,852/km/yr) but is insufficient alone to achieve the target status. It would achieve 20% of the required 50% risk reduction. For 2015, the STW Capex scheme is the next most cost-effective measure, followed by the General Binding Rule (GBR) with agriculture and the STW opex scheme. The GBR measure, however, is more cost-effective in the long run because of the long time-to-effect lag due to the lags in implementation of the measure and the slow environmental response to this measure. Once the cost effectiveness is assessed, strategies involving packages of options can be defined on the basis of meeting the different targets at different points in time. If the objective is G2015, the best strategy would be STW optimisation, GBR + opex scheme; then monitor to see how effective the GBR is and turn off the op ex scheme, if/once the full effect is felt. This flexibility would not be possible if the initially cheaper Capex solution was chosen. If target is moderate status in 2015, followed by achieving good status in 2021, however, the op ex scheme would not be necessary and this would reduce significantly the costs. |
Illustration 6 (continued): Table 1 - Illustrative results for the option appraisal (costs and cost effectiveness)
Ribble
|
Aggregate risk reduction required |
Risk reduction delivered |
Feasibility |
Expected km delivered in 2015 |
Cost (Euros) |
Cost per km delivered (Euros) |
| |||||||||
|
2015 |
2021 |
2027 |
Measures |
2015 |
2021 |
2027 |
Uncertainty range |
2015 |
2021 |
2027 |
EAV of future costs |
2015 |
2021 |
2027 |
Other relevant (measures specific) ancillary impacts |
|
Elevated Nutrient Levels |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
50% |
50% |
50% |
STW Management optimisation |
20% |
20% |
20% |
5% |
5 |
5 |
5 |
10,000 |
1,852 |
1,852 |
1,852 |
Impacts on water prices; Environmental impacts of energy consumed at STW |
|
|
|
|
STW Opex scheme |
50% |
50% |
50% |
10% |
14 |
14 |
14 |
300,000 |
22,222 |
22,222 |
22,222 | |
|
|
|
|
STW Capex scheme |
50% |
50% |
50% |
10% |
14 |
14 |
14 |
200,000 |
14,815 |
14,815 |
14,815 | |
|
|
|
|
Agri: tight specific surveillance/enforcement |
2% |
2% |
2% |
1% |
0.6 |
0.6 |
0.6 |
100,000 |
185,185 |
185,185 |
185,185 |
Economic impacts on agriculture; Wildlife + natural habitat + soil protection benefits of buffer strips |
|
|
|
|
Agri General binding rule |
10% |
50% |
70% |
25% |
3 |
14 |
19 |
60,000 |
22,222 |
4,444 |
3,175 | |
|
|
|
|
Agri Nutrient surplus charge |
15% |
30% |
50% |
25% |
4 |
8 |
14 |
250,000 |
61,728 |
30,864 |
18,519 | |
|
Land drainage |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
0% |
0% |
0% |
Risk acceptable, do nothing |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
|
|
Dangerous substances |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
0% |
25% |
25% |
Monitor + R&D |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
|
|
Abstraction |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
0% |
0% |
50% |
Monitor + R&D |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
n.a. |
|
Illustration 7 - Addressing uncertainty in cost-effectiveness analysis: an example from the Scheldt estuary
|
A cost-effective analysis of the Scheldt estuarys morphological measures involved three different types of uncertainty: The effectiveness of the measures; the costs of the measures; and the assumptions made in the baseline scenario. To address the first uncertainty, experts were asked to estimate the probability of measures reaching their ecological objective. If the probability was below 100%, additional measures were defined until the ecological objectives were reached. This means to address the measures effectiveness within the CEA was then formulated by summing the probability of reaching the ecological objective times the costs of the additional measures to reach the objective. The cost of the measures was accounted for by including ranges of costs instead of point estimates. The uncertainty surrounding the loss of added value through reduced navigation in the Scheldt estuary was considered especially large, and for the calculation of these costs large assumptions were made. This uncertainty was expressed in the CEA by including the probability of the actual costs being lower, and using expected cost figures instead of point estimates in the analysis. To address the uncertainty surrounding assumptions made in the baseline scenario, experts were asked to judge the probability that the assumptions were correct. This involved asking experts whether they thought the baseline would succeed in maintaining the natural dynamics of the estuary. Experts judged the probability of this being true as 80%, leaving a 20% change that additional measures would be required. As this finding revealed major savings for the first alternative and major costs for the second, including the uncertainty of assumptions in the baseline scenario made quite a difference. In average annual costs (million EUR/YR) Option 1 Option 2 De-poldering No further deepening Uncertainty not included 7.3 38 Most extreme, with uncertainty 11 - 45.4 Expected outcome, with uncertainty 8.4 11.9 By including uncertainty into the expected costs of measures in the cost-effectiveness analysis, the outcome of the assessment changed considerably. Besides, it made the range of costs explicit, a range that turned out to be much larger for the one option then it was for the other. As this is important information for decision makers, uncertainty should always be included when performing a cost-effectiveness analysis. |
Task 6 (Optional)
Estimate the Economic Impact of Measures
In addition to this process, it may be useful to estimate the economic impact of the proposed measures, although this would go strictly outside of the cost-effectiveness exercise. In addition to direct costs, such an analysis would account for induced costs (i.e. the costs on other economic sectors) and the environmental costs not linked to water (see Illustration 8 for an example).
|
Sub-tasks |
Key points |
Look out! |
|
Estimate the exchequer (net) costs |
The net impacts on public expenditures and revenues may be important because of the impacts on the economy of a change in net exchequer costs. This primarily includes the impacts of expenditures for agri-environment schemes and net impacts on revenues of economic instruments and, in countries with publicly owned water services, the impacts of changes in the prices charged for water services. If any major such costs arise, they should be reported separately. |
Includes primarily the impacts on expenditures for agri-environment schemes, revenues of economic instruments and impacts of changes in the prices charged for publicly owned water services. |
|
Estimating wider economic and social impacts |
|
Consider these only where there are particular concerns about economic and social impacts, e.g. dislocation costs and frictional unemployment impacts in a sector. |
Illustration 8
Impact of the incorporation of the economic impact of measures on the ranking of measures in Cidacos river basin (Spain)
Any change in the economic conditions affecting irrigated farms can potentially have other direct costs and also indirect costs. Costs that would need to be taken into account are those that affect land dedicated to agriculture and water consumption. 'Other direct costs' are likely to be small if farmers keep the same practices or cropping patterns that they used prior to the implementation of a given measure. But if farmers consumption is expected to fall, their output will change and their labour demand will also fall.
The Cidacos study considered (as in the Spanish Ministry Agriculture National Irrigation Plan) that 1 € of output produces 0.319 € of further added value. This is one measure of other direct costs (or benefits). The other is the impact in the labour market. The Cidacos case study makes the assumption that the loss of one hectare of irrigated land eliminates about 40 € of wages in addition to the losses of farmers income.
An application is shown for the measure 'restoration of the riverine forest'.
|
|
Net margin (including subsidies, €) |
Subsidies € |
Lost wages € |
Indirect economic effects, € |
Flow increases in litres/s |
|
1 Ha in CR A |
775 |
189 |
26 |
255 |
0.06 |
|
1 Ha in CR- B |
1096 |
153 |
54 |
360 |
0.07 |
|
Average |
935 |
171 |
40 |
308 |
0.06 |
|
15 Ha |
14,029 |
2,567 |
593 |
4,616 |
0.96 |
In addition, wider costs in the irrigation sector may be associated with those costs that are borne by stakeholders beyond the gates of the farms. In the Cidacos case study, it was assumed that attention should be given to those sectors linked to the agricultural sector, such as farm input suppliers and food processors. In addition, irrigated agriculture hires workers to perform various tasks, generating labour rents that are important in many agricultural areas. Impacts on the rural economy are thus integrated to the study, evaluating the other direct costs and labour market effects.
The Table below reports the selected programme of measures costs in terms of Euros per increased unit of river flow. The reported evaluations indicate that incorporating wider costs in the analyses provides a different picture than excluding them. These differences are amplified when the costs reported in the table are brought to the basin-wide analysis, where other sectors and the spatial dimensions of the measures are fully integrated. For instance, if a measure applied in a non-agricultural sector has a cost of 5000 Euros for each litre/second of additional flow, many measures will not be desirable if all costs are included, and others would be more cost-effective if those costs are not included.
Measures costs (expressed in Euros per increased flow of 1 litre per second)
|
|
Indirect and labour effects included |
Only direct effects included | ||||
|
Measures |
Water Body I |
Water Body II |
Water Body III |
Water Body I |
Water Body II |
Water Body III |
|
A |
672 |
2846 |
2522 |
672 |
2356 |
2522 |
|
B |
2576 |
6466 |
5892 |
2103 |
4865 |
4433 |
|
C |
3567 |
6366 |
7652 |
2684 |
4790 |
5758 |
|
D |
4301 |
6845 |
9667 |
3236 |
5151 |
7274 |
|
E |
5552 |
12624 |
12320 |
4177 |
9499 |
9270 |
|
F |
6440 |
12887 |
15828 |
4846 |
9697 |
11910 |
As a general rule, if cost differences are not very significant, an evaluation focused on direct costs may provide a valid starting point. However, if wider costs are thought to be important and sensitive to the regional or local economies, then they should be taken into account at least in the sensitivity analysis.
Source: Ministerio de Medio Ambiente, Gobierno de Navarra, Virtual Scoping Study of the Cost Effectiveness Analysis in the Cidacos River. See Annex E.
Illustration 9
Analysis of Alternative Agricultural Measures: the Wise Use of Floodplains Project in the Erne Catchment (Ireland)
In order to engage stakeholders in thinking about local sustainability and the effectiveness of alternative measures to reach quality objectives, the Wise Use of Floodplains project in the Erne Catchment in Ireland used a simple model for public participation entitled the Local Sustainability Model (LSM).
The basic model can be supported with more detailed analysis or sub-models on specific issues. The participative process of establishing the baseline and discussing predicted impacts is as valuable as the result itself. The model is a simple three by three matrix. The columns represent three aspects of local sustainability: the natural environment, the community and its culture, and the economy. These are ranked as being Robust, Stable or Fragile. Communities can use this framework to assess how their area performs, shading in the model to provide a 'picture' that local people can recognise.
The process of establishing the model leads a community through discussions on these three aspects using local knowledge and professional expertise. The example on the right shows an area which has a stable natural environment and community, but where the local economy is fragile. For potential catchment management options, or measures, arrows are drawn on the matrix reflecting the expected impacts. The model allows locals and professionals to share this qualitative impact assessment without the domination of one or the other.
Based on participatory work using tools such as the LSM, the Erne Wise Use of Floodplains Project developed options to restore water quality in the Erne catchment. An impact assessment study enabled comparison of their cost-effectiveness. Participatory work by the Erne project identified land management options and environmental impact criteria that were key to water quality in the catchment. These options included co-ordinated catchment-level changes to agricultural practices in the Erne, such as:
-
Whole-scale buy-in to agri-environment schemes;
-
Whole-scale adoption of mixed/organic farming methods; and
-
Introduction of buffer strips on the most polluted rivers.
The economic, social and environmental impacts of these measures where analysed in a consultants study that used a set of financial indicators, and ten weighted environmental and social criteria. The effectiveness scores were inevitably subjective, and encountered problems of double counting. Practitioners can be wary of these issues, and should develop and verify effectiveness scores with as wide a range of stakeholders as possible.
The management options socio-environmental scores were compared to their predicted additional costs to taxpayers. The study revealed the current financial support for agriculture in the Erne catchment, and could be used to design more cost-effective policy modifications. The methodology developed in this project is interesting in the sense that it allows identification of cost-effective policies in relation to social and environmental objectives.
Source: I. Dickie (2002, forthcoming). See also the Royal Society for the Protection of Birds, www.rspb.org/economics/water
|
4. What are the Requirements for the Cost-effectiveness Analysis? |
A broad-brush qualitative assessment provides a good foundation for the CEA. It can be used to identify the relevant costs, economic impacts and non-water environmental impacts of measures (see Tasks 4 and 5
see also the illustration on the methodology used in the Erne catchment in Ireland). However, a quantitative analysis is necessary on top of this, looking at (ranges of) estimates for the effects on water quality, and the financial costs of the main measures.
Where relevant, there should be a qualitative description of impacts over and above the direct costs already estimated. They may include:
-
The nature, scale and significance of other considerations such as any wider economic and social impacts;
-
Any distributional issues regarding who pays the costs;
-
The ability of the sector to pay (or likelihood to pass on) the costs;
-
Non-water environmental impacts of the measures; and
-
The (administrative) costs of designing and implementing the measures.
As an option, the analysis can be taken further through the inclusion of the following actions:
-
Developing nation-wide guidelines to assess cost-effectiveness. These guidelines should be developed in collaboration with the other regulators and representatives of the major stakeholders;
-
Developing Guidance, drawing on practical experiences of the effectiveness of main measures. This would again probably be at national level and based on commonly applicable measures;
-
Developing tailored formats for the estimation and presentation of cost estimates for the main types of measures for the major sectors. Costs should be presented in terms of changes in the cost elements arising from the proposed measures as compared with a business as usual baseline scenario. The appropriate expert and regulatory bodies should review carefully the estimates in relation to (ranges for) benchmark cost estimates for standard cost items. These benchmark estimates could be based on expert review of available estimates for each standard cost item. Ranges for the cost estimates should be presented, clearly and explicitly so that these can form the basis for discussions with the main stakeholders concerned. The segments of the sector to which the estimates relate, and key assumptions and factors behind uncertainties surrounding the estimates should be set out. This would allow subsequent improvements, as better information is obtained through increasing experience in applying the control measures;
-
In the middle of the following RBMP period (i.e. around 2013), there should be an evaluation to check the costs and effectiveness of the measures in the first agreed RBMP. This will provide a better basis for assessing the cost effectiveness of measures for the next RBMP. It will also offer opportunities for increased feedback and system learning.
Annex I (of this Information Sheet)
Illustration of Format for Presenting Costs
|
1. CAPITAL COSTS | |||
|
Cost component |
Cost (euro) | ||
|
|
Low estimate |
Medium estimate |
High estimate |
|
Pollution control equipment costs |
|
|
|
|
Primary pollution control equipment |
450,000 |
600,000 |
750,000 |
|
Auxiliary equipment |
112,500 |
150,000 |
187,500 |
|
Instrumentation |
150,000 |
200,000 |
250,000 |
|
Modifications to existing equipment |
157,500 |
210,000 |
262,500 |
|
Other (please specify) |
|
|
|
|
Total pollution control equipment costs |
870,000 |
1,160,000 |
1,450,000 |
|
Installation costs |
|
|
|
|
Land costs |
37,500 |
50,000 |
62,500 |
|
General site preparation |
15,000 |
20,000 |
25,000 |
|
Buildings and civil works (eg foundations/ supports, electrical, piping, insulation etc) |
225,000 |
300,000 |
375,000 |
|
Labour and materials (engineering, construction and field expenses) |
157,500 |
210,000 |
262,500 |
|
Other (please specify) |
|
|
|
|
Total Installation costs |
435,000 |
580,000 |
725,000 |
|
Other capital costs |
|
|
|
|
Project definition, design and planning |
75,000 |
100,000 |
125,000 |
|
Testing and start-up costs |
15,000 |
20,000 |
25,000 |
|
Contingency |
22,500 |
30,000 |
37,500 |
|
Working capital |
15,000 |
20,000 |
25,000 |
|
End of life clean up costs |
30,000 |
40,000 |
50,000 |
|
Miscellaneous |
37,500 |
50,000 |
62,500 |
|
Total other capital costs |
195,000 |
260,000 |
325,000 |
|
Total capital costs |
1,500,000 |
2,000,000 |
2,500,000 |
|
2. CHANGE IN OPERATING COSTS (INC. REVENUE CHANGES) | |||
|
Cost component |
Annual costs (Euro p.a.) | ||
|
|
Low estimate |
Medium estimate |
High estimate |
|
Change in operating costs |
|
|
|
|
Additional labour for operation and maintenance |
15,000 |
20,000 |
25,000 |
|
Water/sewerage |
- |
- |
- |
|
Fuel/energy costs |
12,000 |
12,000 |
12,000 |
|
(specify energy/fuel type) |
Grid |
Grid |
Grid |
|
Reagent costs |
- |
- |
- |
|
Waste treatment and disposal |
22,190 |
32,920 |
43,650 |
|
Other materials and parts |
- |
- |
- |
|
Change in operating costs of any additional pollution abatement equipment operation |
- |
- |
- |
|
Insurance |
- |
- |
- |
|
Taxes on property |
- |
- |
- |
|
Environmental tax/charge |
- |
- |
- |
|
Other general overheads (please specify) |
- |
- |
- |
|
Total additional operating costs |
49,190 |
64,920 |
80,650 |
|
Change in revenues |
- |
- |
- |
|
By-products recovered/sold |
2,000 |
2,000 |
2,000 |
|
Other (please specify) |
- |
- |
- |
|
Total revenues |
- |
- |
- |
|
Net change in operating costs |
47,190 |
62,920 |
78,650 |
|
3. TOTAL COSTS PRESENT VALUE or EQUIVALENT ANNUAL COST (Euro) | |||
|
Cost component |
Low estimate |
Medium estimate |
High estimate |
|
Total capital costs |
1,500,000 |
2,000,000 |
2,500,000 |
|
Net change in operating costs |
47,190 |
62,920 |
78,650 |
|
Economic assumptions |
|
|
|
|
Economic life of equipment |
30 |
30 |
30 |
|
Discount rate |
6% |
6% |
6% |
|
Net present value |
2,188,500 |
2,918,000 |
3,647,500 |
|
Equivalent annual cost |
150,000 |
200,000 |
250,000 |
|
PRICING AS AN ECONOMIC INSTRUMENT |
Directive references: Article 9
3-Step Approach: Step 1.3 and 3.1, and potentially Step 3.2
See other information sheets: Estimating Costs, Reporting on Cost Recovery
This information sheet helps you assess the effectiveness of pricing as a measure to achieve the environmental objectives of the Directive.
|
1. Objective |
The Directive recognises water charges and prices as basic measures for achieving its environmental objectives. This information sheet proposes and illustrates a range of methods for assessing whether pricing policies (actual or proposed) provide appropriate incentives for users to reduce their water uses and pollution. This is particularly relevant for two main purposes:
-
Assessing the incentive properties of current pricing policies (Step 1.3) and preparing the basis for the introduction of pricing policies that provide adequate incentives for users to use water resources efficiently (Step 3.4 and Article 9);
-
Reporting on the tasks and measures proposed for ensuring that pricing plays its due role in enhancing the protection of water resources (Articles 9 & 13 and Annex VII).
|
2. How does pricing impact water consumption and discharge? |
The price of water is an important variable that influences the amount of water used by users or the amount of pollution they discharge. As such, it can be a useful measure to introduce (amongst others) in order to meet the objectives of the Directive:
-
Pricing policies can help make users more efficient in their use of water resources by giving them financial incentives to shift to technologies and practices that ensure a better use of available resources or act to reduce leakage; and
-
Similarly, on the dirty water side, pricing can incentivise users to shift to less polluting input or processes, eliminate highly polluting production lines and practices, or install treatment facilities to treat polluted water before discharging it into the environment.
To yield such effects, however, pricing policies must be designed so that a reduction in the quantity of water used or pollution discharged would lead to a simultaneous reduction in the total bill for the particular user. This means that the price of water should be proportional to the quantity of water used or the pollution generated (see Box 1 of this Information Sheet).
Incentive-based pricing can be more or less effective depending on its design
-
Seasonal tariff variations can be very effective to provide higher incentives for saving water in periods with high scarcity only (e.g. increase a - see Box 1 - in the summer);
-
Increasing-block tariffs, with dissuasive charges above a certain level, can be an effective way of reducing demand from users with very high demands;
-
High fixed charges (F in Box 1) and low volumetric charges might reduce tariffs incentive properties on demand.
Tariffs with a volumetric element are key to introducing incentives
|
To introduce incentives, tariffs should incorporate a volumetric element, such as: P = F + a.Q + b.Y, where, P = total price for water services (e.g. supply of water, treatment); F = a component of the price related to fixed costs (e.g. overheads); a = the charge per unit of water extracted from the environment and used, linked to variable costs (e.g. pumping costs); Q = the total quantity of water used; b = the charge per unit of pollution produced and emitted to the environment, linked to variable costs (e.g. variables costs of treatment, emission charges etc; and Y = the total volume of pollution emitted. |
and on user demand characteristics
for example, the impact of volumetric tariffs on demand might be negligible:
-
If the total bill represents a small portion of a users production costs or income;
-
If the water user has no alternative (due to technical, social or economic constraints).
An important measure of whether or not pricing policies are likely to have an impact on water demand is the price elasticity of demand (see Box 2 of this Information Sheet).
Box 2
Estimating the Price Elasticity of Demand
|
How responsive the demand for water is to a change in price is usually captured by the notion of 'price elasticity of demand'. This parameter is defined as the percentage change in quantity demanded when the price changes, divided by the percentage change in price (see Box 3 for an illustration). For example, suppose that a 10 percent increase in price reduces the water demand by 5 percent, then the price elasticity of demand is -5/10 = -0.5. The higher the price elasticity in absolute terms, the more responsive the demand will be to changes in prices. The price elasticity of pollution discharge can be computed in a similar way.
|
To develop efficient incentive pricing policies and to assess the impact of these policies on water uses and pollution and on the state of the environment, it is important to answer the following questions:
In addition, it is important to take into account other policies than those strictly related to water might affect demand (see Illustration 3 of this Information Sheet). The second point represents the main challenge from an economic point of view and is illustrated in Box 3 of this Information Sheet.
Illustration 1
Current water pricing in the Vouga river basin (Portugal)
In the Vouga River Basin, information on water pricing was sought during a scoping exercise for the implementation of the WFD. It was found that this information was available for only 18 out of 32 municipalities and for the two existing public irrigation facilities. The outstanding feature of the data was the wide disparity both in tariff structures and in actual tariff levels.
For the irrigation facilities, the users payments are unrelated to actual water consumption (in one case there are per ha charges and in another case per hour) so pricing has no incentive impact whatsoever.
As with municipal systems, all require a monthly fixed payment (which varies with the requested capacity) as well as a variable (per m3) charge. However, there are great disparities in the rates and in the structure of the variable part.
-
For similar capacity, the monthly fixed payment can be very different; for instance, for 30 mm it varies between 1.05€ and 9.5€;
-
Only three municipalities have seasonal rates (higher in the summer, mainly for larger consumption);
-
The majority of municipalities charge different rates for domestic, industrial, agricultural, and other users; only two apply the same rates to all users;
-
Some municipalities charge a constant price per m3 for the industrial and commercial sectors. Otherwise, increasing block rates are applied but in two distinctive ways: for one group (e.g Mira) the price charged on all water consumed is defined by the block where total consumption falls (average price equals the block rate), whereas in the other group (e.g. Castro Daire) the price charged for each m3 is the price of the block where that m3 is (average price equals a weighted average of block rates). The first scheme is meant to discourage excessive consumption, although it implies highly irregular marginal prices as shown below:
|
Municipality |
Block structure and prices |
Marginal Price for 5th m3 |
Marginal Price for 6th m3 |
Marginal Price for 7th m3 | |||
|
Mira |
Block |
0-5 m3 |
0-10 m3 |
0-15 m3 |
|
|
|
|
€/m3 |
0.22 |
0.30 |
0.37 |
0.22 |
0.70 |
0.30 | |
|
Castro Daire |
Block |
0-5 m3 |
6-10 m3 |
11-20m3 |
|
|
|
|
€/m3 |
0.17 |
0.30 |
0.55 |
0.17 |
0.30 |
0.30 | |
Such disparity is especially odd considering that many municipalities are connected to the same bulk supplier, who charges all municipalities the same price per m3. Moreover, there are a few cases where the rates charged by municipalities are lower than this bulk rate.
Source: P. Mendes. Scoping key elements of the economic analysis in the Vouga River Basin. See Annex E.
Box 3
The impact of price on demand
The approach promoted by the Directive in the use of pricing as an instrument (or as a measure) consists of defining an environmental goal and calculating the total amount to be paid by users (the tariff), by category of user, in order to achieve this goal. However, given that pricing is only one measure amongst a package of measures, this might be difficult.
|
3. Possible Approaches for Assessing the Relation Water Prices/Water Demands |
Several approaches can be used to assess the relation between water prices and water demand/pollution discharged, as follows:
Interviewing key experts/stakeholders: ask people 'what if?' questions in order to assess how they would react to a proposed change in the tariff structure or level.
Reviewing existing literature. Several types of literature reviews can be performed:
-
Review of analysis already carried out in the river basin of interest. If this analysis is not out-dated and no significant changes in key variables and policies have taken place since it was carried out, then it can potentially provide useful information;
-
Review of analysis carried out for the same uses under the same hydrological and socio-economic conditions;
-
General literature review, although this is likely to yield only very general results (such as agriculture is more responsive to price changes than households) that have no direct practical use in performing economic analysis for the Directive.
-
Cross-sectional models can be developed for comparing responses to price changes of user groups that face different price regimes at a given point in time; and
-
Time-series models can be developed for comparing responses to price changes of a user group across a period of time.
Such models have mostly been developed for analysing price incentive issues for the household sector, as information on the volumes used and prices tends to be more readily available (see Illustration 2 of this Information sheet).
Developing behavioural models for specific sectors. Optimisation models can be developed for the various economic sectors to estimate the relationship between the price for water and the water demand/pollution discharged. Such models are formed by combinations of mathematical equations that attempt to reproduce real decision-making processes that aim at achieving given objectives (e.g. maximising the total income of a firm) taking account of key technical, legal and economic constraints faced by given economic sectors. Key tasks for carrying out behavioural modelling are outlined in Box 4, and an application is shown in Illustration 4 of this Information sheet.
Behavioural models can be built for an entire sector, i.e. accounting for all farmers of a given irrigation scheme, if the different users of this sector are homogeneous in terms of objectives, constraints, conditions. However, if different users in the sector face a wide variety of strategies and constraints, it is more appropriate to identify key types of users and develop models for each user type.
Illustration 2
An application of time series modelling: Did water pricing play a role in reducing household water consumption in Athens, Greece?
|
Severe droughts at the end of the 1980s and beginning of the 1990s have resulted in significant changes in the price of water in the region of Athens. Such price changes have taken place in a policy context where the need for demand management beside efforts to discover and tap additional water resources is increasingly recognised. To assess the role water pricing can play to reduce the water consumption in the domestic and small commercial sector supplied by the Athens Water Utility Company (EYDAP), a statistical analysis of past price and water consumption information was undertaken to estimate the price elasticity of water demand. The information used for this statistical analysis included (i) the quarterly water consumption (in m3) for an eleven-year period (1989 to 1999) for a sample of 1000 consumers, and (ii) price levels for the same period. It is to be expected that consumers with different levels of water consumption will react differently to water price changes. Therefore, a statistical cluster analysis has been performed to identify five groups of consumers based on their quarterly consumption levels: (i) lower than 15 m3; (ii) between 15 and 30 m3; (iii) between 30 and 45 m3; (iv) between 45 and 60 m3; (v) above 60 m3. The analysis of the consumption information showed that the dramatic price increase that took place in the third quarter of 1992 led to a significant reduction in the demand for water. This was the case for all the groups of consumers except for the group with the lowest water consumption (lower than 15 m3), which did not alter its consumption. On the basis of the quarterly water consumption and (deflated/constant) price levels, a statistical time series model was developed to estimate the long-term price elasticity of the water consumption for each consumer group. To validate the model, all variables were tested and found to be statistically significant. The results show that the long-term price elasticity of demand for the different consumer groups range from -0.58 for the low consumption group (i.e. quarterly consumption lower than 15 m3) to -0.87 for the very large consumption group (i.e. quarterly consumption above 60 m3). These elasticity values show that water pricing (combined with active information and awareness campaign) can be used as a major measure for controlling water consumption in the Athens area, and that price changes are likely to have a greater impact on the water consumption of large water consumers as compared to small water consumers. |
Box 4 - Key Tasks for developing behavioural models
|
|
|
|
Look out! Models can be useful tools to organise participation Models can be very useful tools to support discussion between experts and stakeholders about various water pricing measures. This element of assistance to the discussion is sometimes more important than its exact predictions. |
|
|
Look out! Reality is often more complicated than simple models Many countries in Central and Eastern Europe have witnessed significant changes in water consumptions since the early 1990s. Such changes were as much related to changes in water prices (following a cut in subsidies to the water sector) than to overall economic changes, which resulted in a drop in economic activity. Therefore, to account for changes in non-water related variables in time series models would be particularly important when analysing changes in water demand and tariffs in Central & Eastern Europe. |
Illustration 3
Taking account of broader policies to estimate the incentive properties of pricing policies: the impact of the CAP in Cidacos (Spain)
|
That the Common Agricultural Policy (CAP) programmes affect farmers water demand has been thoroughly documented across many European countries and regions. This implies that water-pricing policies will, in principle, have different effects depending on the Agricultural policy scenario considered. In general, those CAP programmes that provide measures of income support decoupled from production would not affect irrigators water demand. By contrast, those other programmes based on production subsidies will have a significant impact on farmers water demand. In the latter case, farmers responses to pricing policies will be sensitive to the agricultural policy scenario. The way to ascertain the effects of a change of policy in farmers water demand is to simulate farmers behaviour. In the absence of calibrated models, relevant to the area of study, one can formulate several policy scenarios and carry out simple sensitivity analysis. In the Cidacos case study, the following scenarios were proposed: A key implication of assuming one or another CAP scenario is that irrigation water demand will shift as the economic conditions improve or get worse. This implies that farmers demand response to water pricing will change as agricultural prices or product subsidies change. This is reflected in the following graph: |
Illustration 4
An application of behavioural modelling: Demand for irrigation water in Tarquinia (Lazio, Italy)
Water uses in the Marta River are characterised by a high number of users and a high degree of pollution. Keeping the river water flow above a minimum vital level is seen as a key target for both water management and sanitary authorities. However, this requires lower demand from some economic sectors during periods of significant water shortages. Therefore, to assess the role water pricing could play to reduce water demand from agriculture, an economic linear programming model was developed for the entire irrigation system.
Following a detailed analysis of the irrigation and farming systems, the model was developed as an aggregation of sub-models representative of the conditions faced by different farm types (facing a variety of land, labour, financial constraints) and for different districts of the irrigation systems with different water availability and distribution systems. The objective of the linear programming model was to maximise the gross income from agricultural activities, taking account of the key constraints faced by farmers in terms of labour availability, access to hired labour, land constraints, crop rotation constraints, and water availability. Built with a series of equations (equalities or inequalities) that link input (fertiliser, labour, water) and output (yield, gross margin) variables, and for a variety of crops, the model identifies the combination of crops that yields the highest farm income within the limits of the constraints set. By comparing the cropping pattern estimated by the model with real cropping pattern information for two different years, the model was calibrated and validated.
The model was then used to assess the changes in cropping patterns, farm income and water consumption that would result from changes in the price of irrigation water. The model was run several times with different price levels, and the water consumption resulting from each price level and computed by the model were recorded.
The results obtained from different model simulations, i.e. the water demand and the price elasticity of the water demand for different price levels, are presented in the table.
|
|
Actual water demand |
Proposed water price increase | |||
|
+5% |
+15% |
+25% |
+50% | ||
|
Water demand (1000 m3) |
9,212 |
8,851 |
8,733 |
8,479 |
8,116 |
|
Price elasticity of demand |
|
-0.78 |
-0.35 |
-0.32 |
-0.24 |
Note that the estimated values of water demand and elasticity are valid for conditions close to actual agricultural policies. Significant changes in these policies, for example a change in subsidies and agricultural product price support, would change the opportunities and constraints faced by farmers, and therefore also their responses to changes in the price level.
|
4. What is the most appropriate approach, depending on circumstances? |
Each approach set out above has its strengths and weaknesses and is more or less suitable according to circumstances, as presented in the Table below.
|
Approach |
Strengths |
Weaknesses |
When is it suited? |
|
Interviewing experts and key stakeholders |
|
|
|
|
Reviewing existing literature |
|
|
|
|
Developing statistical models |
|
|
|
|
Developing behavioural models |
|
|
|
The approach chosen to assess the relationship between the price and water use will also depend on the information, human and time resources available. For example, undertaking a literature review and discussing pricing policy changes with key stakeholders may be the only short-term possibility. However, in the long run, it is important to ensure that more robust and accurate results are achieved. It is also important to ensure that the analysis and level of details are appropriate for the issues of the river basin considered.
Clearly, the incentive dimension of pricing policies is key, but not the only measure to achieve the WFD objectives. The definition of new pricing policies also needs to consider cost recovery issues, as specified in Article 9 (see Reporting on Cost Recovery Information Sheet). In addition, other social, environmental and economic effects of proposed changes in water pricing policies must be taken into account when designing these new policies.
|
DISPROPORTIONATE COSTS |
Directive references: Article 4 (Paragraphs 3-5 and 7)
3-Step Approach: Step 3.3
See other information sheets: Estimating Costs, Cost-effectiveness Analysis
This information sheet will help you assess whether the costs of the Programme of Measures are disproportionate and whether derogation from the Directives objectives could be justified following an assessment of costs and benefits.
|
1. When is it Necessary to Assess Disproportionate Costs? |
This information sheet presents an approach for determining whether the total costs of the programme of measures are disproportionately costly or expensive and is relevant for justifying derogation. In particular, this approach is relevant for:
-
Designating heavily modified water bodies (HMWB) when the beneficial objectives served by the artificial or modified characteristics of the water body cannot, for reasons including disproportionate costs, reasonably be achieved by other means, which are a significantly better environmental option (Article 4.3, see Illustration 1 of this information sheet for further explanation);
-
Time derogation when completing the improvements in the status of water bodies within the time scale would be disproportionately expensive (Article 4.4, see Illustration 2 of this information sheet for further explanation);
-
Less stringent environmental objectives when the achievement of these objectives would be infeasible or disproportionately expensive and the environmental and socio-economic needs served by such human activity cannot be achieved by other means, which are a significantly better environmental option not entailing disproportionate costs (Article 4.5); and
-
Failure to achieve good status or failure to prevent deterioration as a result of new modifications to the water body when the beneficial objectives served by those modifications or alterations of the water body cannot for reasons including disproportionate costs be achieved by other means, which are a significantly better environmental option (Article 4.7).
The analysis of whether costs are disproportionate or not will need to be initiated relatively early in the process, around 2006, in order to ensure that the public can be consulted on such a key element of the economic assessment (by 2008) and that work can be co-ordinated with other expertise, as this process will require a combination of technical and economic expertise. The precise tasks of the analysis are described in Box 5 at the end of this information sheet. If achievement of good quality status is only possible after 2015, an interim lower objective can be set for 2015 and a time derogation be registered in the RBMP. If in 2009 it is considered that good status cannot be achieved by 2027, less stringent objectives should be registered in the plan.
Illustration 1 - Disproportionate costs in the designation of Heavily Modified Water Bodies: An example from the Netherlands
For the designation of Heavily Modified Water Bodies (according to Article 4.3), alternatives for the beneficial objectives of a water body must be presented. These alternatives must be: 1) technically feasible, 2) a better environmental option and 3) not cause disproportionate costs. In the EU Heavily Modified Waters working group, four typical Dutch water bodies* were tested for designation as HMWB. A summary of the alternatives to maintain the beneficial objectives and the costs involved is presented in the table below.
This table shows that although the absolute costs (A) may seem high for the 1st case (1000 millions €), the relative costs as expressed per km2 of restored water body (B) show a different picture. There, the costs are still the highest for the first case (6000 €/km2), but they are much more of a similar order of magnitude than in the other cases. Another criteria presented is to scale the costs to the size of the catchment (C), which in this example reverses the conclusion drawn from approach A: now the costs for case 1 are the lowest (5 €/km2). The exercise presented illustrates how such benchmarking can present a framework to assess the disproportionality of costs. It should be kept in mind that in the final conclusion, issues such as the ability to pay and the (intrinsic) value of the type of ecosystem restored should also be considered.
|
Designation task |
Dammed estuary (1) |
Lowland brook (2) |
Shallow lakes (3) |
|
Measures to achieve GES |
Destruction of dam |
Land reclamation for restoration of stream morphology |
Land reclamation for restoration lake hydrology |
|
Define beneficial objectives? |
Safety, fresh water supply |
Safety, agriculture |
Safety, fresh water supply, recreation |
|
Define alternative for beneficial objective? |
Higher dikes to maintain safety and relocate fresh water intake points |
Create retention areas; buy alternative land for agriculture; mitigate costs of yield losses |
Displace the present habitation (no cost estimate); use surface water for drinking water |
|
A: Costs of alternative |
1000 millions € |
1.5 million € + 2.5 million € /y |
PM + 9.24 million €/year |
|
B: Costs per km2 (restored) water body |
6000 K€/km2 |
3600 K€/km2 |
PM+3900 K€/km2 |
|
C: Costs per km2 catchment |
5 K€/km2 |
500 K€/km2 |
PM+2000 K€/km2 |
* The waterbodies studied were: The Haringvliet Estuary (Dammed estuary; 1); the Hagmolenbeek (Lowland brook ; 2) and the Veluwerandmeren & Loosdrechtse Plassen (Shallow lakes; 3)
Source: M. van Wijngaarden (2002, forthcoming).
Illustration 2 - Considerations for time derogation in the Alsace (France)
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Figure 1: Quantity of salt remaining in the aquifer as a percentage of the initial stock (2002) for the three scenarios. Figure 2: Area where the salt concentration is higher than 250 mg/l for the three scenario (in km²) In the Southwestern part of the Alsace region (France), the potash mining activity has generated an intense pollution of the Rhine valley alluvial aquifer. The pollution originates from huge waste dumps containing salt (sodium chloride) that have accumulated since the early 1900s and have been leached by rainfall. The polluted water has progressively extended over time following the aquifers flow lines. Different measures aimed at reducing the salt emission, increasing salt elimination and accelerating dilution through artificial aquifer recharge have been implemented, resulting in a significant reduction of pressure over the last 10 years. However, these measures are unlikely to be sufficient to restore the quality of the aquifer by 2015. A hydrodynamic model was used to test current measures effectiveness. The results indicate that if the measures already implemented are maintained from 2002-2027, the salt concentration of water will fall below 250 mg/l in the whole aquifer (to drinking standard) and approximately 96% of the salt present in the aquifer in 2002 will be removed. From this model it can be concluded that the current measures are sufficient to achieve the objective of good status in 2027, and that a time derogation can be defined if the more intensive, alternative programs of measures are disproportionately expensive. This scenario corresponds to the 'third best' option in the Figures 1 and 2 below. Two more intensive alternatives were defined to meet the 2015 objective. The first (or 'second best') option consists of constructing more lines of pumping wells to prevent migration of the pollution plume, to meet the environmental objective in 2021. The 'first best' option consists of constructing hydraulic barriers plus a line of pumping wells and a pipeline to evacuate the pumped water, and will meet the environmental objectives by 2015. Costs for these options are still being studied. The following charts show the three options according to their ability to meet the quality and time objectives. A preliminary analysis shows that the benefits of the first best option likely to accrue to direct uses (agriculture, industry, drinking water) are not likely to be significant in either monetary value or through employment or economic development. However, the benefits for future uses (avoided costs of treating polluted drinking water; gains from future industrial/economic development; etc.) may be more significant. The work presented is ongoing and does not yet answer the question of the type of derogation needed for the Alsace aquifer. Part of the discussion concerns the choice of simulation model to determine the effectiveness of the alternative programmes of measures. In this case, the comparison of technical effectiveness of various programmes of measures has been undertaken using a simple hydrodynamic model. The major difficulty here was choosing the level of detail for the model, which determines the accuracy of results and the confidence stakeholders may have in the analysis. The choice of model also raises the question about how uncertainty should be considered in the logical argument to justify a derogation. Should the Member State petition for a derogation when the models say that the gap between the simulated quality of water and the objectives is expected to be close to 20% with a possible error of plus or minus 25%? Or should the error be expressed in number of years (the objective will be reached in 2015 plus or minus 5 years)? |
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2. What are the Key Issues? |
Disproportionate cost refers to beneficial objectives being achieved by other means in the context of designations, derogations and new modifications. Disproportionately expensive refers to measures for improving water quality (see Box 1 of this information sheet). This has two implications:
- Extended time or less stringent objectives can be justified on the grounds of disproportionately expensive measures (Articles 4.4 and 4.5); and
- Designation of heavily modified water bodies, new modifications and (again) less stringent objectives can be justified when the current needs and socio-economic benefits accruing from this activity cannot be achieved by other means not entailing disproportionate costs.
Box 1
Disproportionality and Derogation
Note that Annex D.2b of this Guidance Document goes into more details for explaining the procedure to follow for designating Heavily Modified Water Bodies (Article 4.3) and justifying a derogation based on Article 4.7 following new modification/activity.
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Look out! Estimating all benefits to society One source of identification of impacts of qualitative benefits is the consultation required under Article 14.1 of the Directive. However, note that benefits that may accrue to interested parties are not the only source of benefits. The analysis should attempt to fully incorporate all possible impacts so that the total economic value to society as a whole is established. |
How Should Alternatives be Compared?
When derogation relates to heavily modified water bodies, new modifications or less stringent environmental objectives, it must be ensured that the human activity affecting these waters, and the environmental and socio-economic benefits accruing from this activity cannot be achieved by other means not entailing disproportionate costs. If there is an alternative option to achieving the objectives, its costs must be assessed so that they are not disproportionate. Importantly, alternative means should be a significantly better environmental option, not restricted simply to water quality. Significant implies that the benefits from the alternative means should be appreciable compared to the original means.
What is Disproportionate?
Illustration 3 of this information sheet demonstrates in a simplified way what disproportionate cost means. Whether an improvement is found to be disproportionately expensive or other means disproportionately costly will be decided by individual Member States on a case-by-case basis (see Illustration 4 of this information sheet for an example on decision making). Ultimately, disproportionality is a political judgement informed by economic information. Given the uncertainty around estimates of costs and benefits, bear in mind that:
-
Disproportionality should not begin at the point where measured costs simply exceed quantifiable benefits;
- The assessment of costs and benefits will have to include qualitative costs and benefits as well as quantitative;
- The margin by which costs exceed benefits should be appreciable and have a high level of confidence;
- In the context of disproportionality the decision-maker may also want to take into consideration the ability to pay of those affected by the measures and some information on this may be required. This analysis might need to be disaggregated to the level of separate socio-economic groups and sectors, especially if ability-to-pay is an issue for a particular group within the basin. Whether and where this information is available depends on the scale or geographical area for which costs and benefits are considered (see Box 2 of this information sheet).
Illustration 3
The interpretation of the Directive on disproportionate costs
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A sewage treatment works is discharging effluents into a watercourse (a small stream), which is a tributary and flows 1km down from the discharge into a much larger water body (a large river). The water quality of the tributary is of moderate status whilst the river is of good status. The tributary runs under roads and through an industrial estate. The costs of possible measures, modifications to the works and a higher level of treatment for the effluent are high. The quantifiable benefits of improving the water quality on the tributary are appraised using benefits transfer techniques and a check is made to see if there would be any regeneration benefits. The measured benefits are low; in addition there are qualitative benefits from improving the ecology but there is little possibility of improved recreational use or angling. It is decided for the 2009-2015 River Basin Management Plan that the costs of reaching the environmental objectives of the tributary significantly exceed the benefits and the measures are judged to be disproportionately expensive. A lower quality objective, moderate, is recorded in the RBMP for this particular water body. For the less stringent objectives to be set, the environmental and socio-economic needs served by such human activity cannot be achieved by other means which are a significantly better environmental option not entailing disproportionate costs. The need served by the human activity is the disposal of sewage effluent. In accordance with the Directive, an alternative option to higher levels of treatment, which meets the need, is explored with the water company. It is possible to build a pipeline from the treatment plant directly to the river and thus bypassing the tributary. Due to large dilution factors, this measure would have no negative impact on the water quality status of the river and is a better environmental option because the tributary is cleaner than under the first option. The cost and benefits of each of each option are compared but it is found that the pipeline option would be disproportionately costly, as it would entail much higher costs but only a slight increase in benefits. Having explored other means of meeting the needs of achieving the human activity and rejected them, the less stringent objective for the water body is set. |
Illustration 4 - Using an expert panel to assess disproportionate costs in the Scheldt estuary
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The Scheldt estuary, located in part in the Netherlands and Belgium, is an important source of economic land use and navigation. However, increased socio-economic pressure has directly affected the estuarys morphology, and resulted in a reduction of the systems natural dynamics. After developing a base case scenario and trend line to project future impacts, an expert panel representing both countries was convened to assess whether the costs of measures to reach the desired ecological objectives were disproportionate. The panel first assessed the broader socio-economic effects of two alternative scenarios: either reducing the navigation channel by not allowing further deepening, or to reduce economic land use by de-poldering agricultural land. For these, a distinction was made between significant effects with associated costs, non-significant effects and effects that were significant but not quantifiable. The first category of effects was introduced to the cost-effectiveness analysis, and included increased salinity, yielding extra drinking water costs; increased scarcity of land, impacting land prices; and effects on recreation in the region, yielding either a loss or gain of added value. Because these broader effects were included, the outcome of the original cost-effectiveness analysis changed, and the option for no further deepening became the most cost-effective. Non-significant effects were then disregarded, while the third category of effects was left for the final stage of preparing the river basin management plan, the assessment of the financial implication, organisation and instrumentation of the plan. These included the effect of the chosen option on political relations between the Netherlands and Belgium, societal support for the option, and the effect on regional employment. To judge whether the no further deepening option posed disproportionate costs, the panel used the following criteria:
Because public funds are sufficient to finance the proposed measures and the relative costs for private sector are relatively low (maximum 38 million Eur/yr, with an added value of 16 billion Eur/yr), ability to pay was not deemed disproportionate. A more extensive analysis would include the use of indicators, the effect on the sectors competitiveness, or on the financial solvability of the private sector company. Cost comparison was also not considered disproportionate. A similar project in the Netherlands was sited as having relatively higher costs to reach comparable ecological gains. For a more extensive cost comparison, the panel proposed to use the indicator of costs per ha of comparable nature quality created in another domestic project. An analysis of functional impacts demonstrated a difficulty in quantifying ecological objectives and societal benefits for the purposes of a cost-benefit assessment. As the other criteria showed that the costs of reaching ecological objectives in the Scheldt estuary were not disproportionate, the panel decided not to assess the relative value of costs and benefits. |
Box 2
Issues to consider when assessing ability to pay
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3. What are the Practical Tasks for Assessing Disproportionality? |
The analysis required for justifying derogation from the environmental objectives of the Directive is directly related to methodologies used for carrying out cost and benefit assessments. However, the approach proposed here is substantially different and reflects the requirements of the Directive.
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Look out! Traditional cost-benefit analysis The traditional Cost Benefit Analysis (CBA) estimates the net benefit (or cost) of an activity, policy or project in monetary terms (often for a country). The valuations are based on 'the willingness to pay of the potential gainers for the benefits they will receive as a result of the [activities], and on the willingness of potential losers to accept compensation for the losses they will incur2. In layman terms, this means comparing variations of quantifiable costs and benefits, caused by the activities, for people affected by the policy under consideration. |
The overall process for assessing disproportionality is presented in Box 3 below, showing a gradual deepening in the level of assessment.
Box 3
Assessing Disproportionality
Assessing disproportionality
As shown in Box 3, the assessment may be largely qualitative at the initial stages. Costs and benefits of the alternative programmes of measures for achieving different water quality states should be identified and listed, though not necessarily fully valued. The extent to which costs and benefits are valued will depend on the type of derogation:
-
For derogation on the basis of less stringent objectives and for the assessment of other means (HMWB and new modifications), a fully quantified valuation may be undertaken for market costs and benefits and described in qualitative terms for non-market cost and benefit items (see Box 4 for an example of a checklist);
-
For time derogations, simple financial criteria may suffice to prove disproportionality as this is only a temporary measure. Over time, and as more robust quantitative data are collected, a deepening of the assessment could include a more extensive identification and quantification of costs and benefits, including financial, economic, environmental and social costs and benefits.
Box 4
Example of AST Checklist
However, it is often very difficult to obtain (reliable) quantitative estimates for all costs and benefits, which are necessary for conducting a CBA. Therefore, the proposed disproportionality assessment should use quantified costs and benefits where possible, but it strongly emphasises the need to incorporate qualitative measures where quantitative ones are unavailable. The final output should look at developing a table where qualitative, quantitative and monetary information is presented so that trade-offs are transparent, e.g. when justifying derogation for a specific water body (see Illustration 5 of this information sheet).
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Look out! There is a link between the disproportionate cost analysis and the cost-effectiveness analysis: dont do it twice! In terms of process, it is important to bear in mind that the evaluation of costs and benefits for the purpose of the disproportionality assessment will take place after having conducted a cost-effectiveness analysis for the construction of a programme of measures. As a result, it will not be necessary to estimate again the costs (and potentially, benefits) that will have been estimated for the cost-effectiveness analysis. For the measures that are part of the programme of measures, the cost-effectiveness analysis will have estimated:
In addition to this, and for the measures in the Programme, the disproportionality assessment will require estimating the induced costs (i.e. costs for other sectors of the economy) and the water-related environmental costs. However, in some cases, the induced costs might have been estimated as part as a follow-up to the cost. For measures outside of the programme, all these cost categories will need to be estimated. A fully quantified cost benefit analysis is not required for each assessment, however costs and benefits should be quantified wherever possible in particular where markets exist. |
Assessing disproportionate costs in the Ribble (United Kingdom)
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This illustration outlines the procedure carried out for assessing disproportionate costs of measures in the Ribble basin. Drawing on potential impacts (identified by the stakeholder consultation processes at the earlier Objective specification stage), a matrix of costs and benefits for two identified measures was developed (see tables). The first (high cost) Option 1 achieves good status by 2015. The second (lower cost) Option 2 achieves good status by 2021. An important prior consideration here is the extent to which costs can be reduced by extending the time scales for the measures. Given the potentially large number of water bodies for which more detailed assessments may be needed, it will not be possible to carry out original research and surveys in each and every case. Consequently, some form of benefits transfer (BT) analysis may be needed, which would apply valuations derived from other studies of similar cases. The results of the application of the BT exercise are shown in the tables, where monetarised benefits of £74,500/yr (Option 1) and £51,000/yr (Option 2) are estimated. Given the high incremental cost of Option 1 (£300,000/yr), the results of the benefits transfer exercise are taken as evidence that a timing derogation, allowing good status in 2021 (Option 2) to be the objective, may be an appropriate strategy. In this case, however, it is assumed that there is sufficient uncertainty about whether the BT exercise fully captures the important differences between the options particularly in terms of the incremental ecological improvements, which are not measured well in the existing benefits transfer information, and the rural economic diversification benefits. It is decided, therefore, that this water body should be passed on for further stakeholder consultation. However, in-depth stakeholder consultation can only cover a small number of people. In addition, the consultation raises the issue of how to value some types of benefits those that accrue to relatively affluent sections of the population, who may not reside within the basin but may bring in tourist revenues. These are issues that require a more broad-based assessment, using a more representative sample of affected people. Consequently, the conclusion of the assessment is, that this water body should be one of those, on which further stated preference analysis would be undertaken. Analysis of the data (through modelling) reveals an implicit valuation of the benefits of Option 1 at £40,000/yr. This information would then be incorporated into the revised AST to facilitate the overall decision making by DEFRA (Department of Environment, Food and Rural Affairs). This final decision-making would be done on the basis of all the evidence quantitative, qualitative and indicator (monetary and non-monetary). In this case, the implication would be that the goal of good water status in 2015 would involve disproportionate costs. |
Option 1
Undertaking STW Optimisation, Operational P Removal and Negotiated Agreement with Dairy Farmers
Option 2
Undertaking Operational P Removal and Negotiated Agreement with Dairy Farmers
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3. What are Practical Tasks for Comparing Costs and Benefits? |
The rest of this information sheet deals in more details with the process for carrying out the estimation of costs and benefits. Attempting to measure the net benefits for the whole economy would often prove impossible. For the assessment of costs and benefits, the assessment would therefore need to be limited to the parties directly concerned with the policy measures.
In fact, a derogation would often be sought for failing to meet the Directives objectives at the level of a particular water body and the definition of the appropriate scale of analysis would also have to do with the spatial and hydrological characteristics of the water body. For example, in order to reach the environmental objectives for a small, acidified lake, you may consider implementing a liming scheme. When looking at the costs and benefits you may want to restrict the impact assessment to the population of the one village immediately adjacent to that lake. However, if you are dealing with pollution of a complex groundwater system, the scale of impacts may necessitate the inclusion of neighbouring villages.
Tasks for assessing costs and benefits of reaching the environmental objectives of the Directive are presented in Figure 1 below and explained in the following Sections.
Figure 1
A Process for Assessing Costs and Benefits
Task 1 - Define the Key Groups Potentially Affected by the Measures Aimed at Achieving Good Water Status
Achieving the environmental objectives set out in the Directive will have varying impact on a large number of parties. However, all these groups will not be affected directly and, as mentioned above, it might be difficult to assess the induced costs and benefits and unnecessary or too difficult to assess the tertiary impacts. Remember that every assessment has finite resources. It is therefore important to concentrate on groups that are most affected.
Task 2
Identify the Types of Costs and Benefits Arising from the Measures and Focus on the Significant Ones
Once the user groups have been identified, the types of costs and benefits that are likely to arise must be determined. In Task 3.2 of the Guidance, the most cost-effective measures will need to be identified (see Estimating Costs Information Sheet and Task 4 of the Cost Effectiveness Analysis Information Sheet). Following this task, the direct and non-water related environmental costs of the programme of measures will be known.
It is important to evaluate and focus on the costs and benefits likely to have an important impact, for example those that appear to have a significant effect compared with the baseline (see Baseline Scenario Information Sheet) and, within them, identify the different types of benefits (requiring different methods of measurements).
As an option, a matrix can usefully be created to map and rank the different types and significance of benefits arising from achieving the objectives. This matrix/list should include both qualitative and quantitative benefits and address issues such as magnitude of benefits, importance in relation to decision-making and other criteria for selecting or deselecting different benefits.
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Look out! for double counting when estimating costs and benefits! The use of multiple methods may be important to compare different measures of costs and benefits, however it is important to avoid double counting. Double counting may arise because the same benefits have been picked up several times (either as benefits or avoided costs) within the same study or separate studies when adding values across and will overstate the expected benefits. |
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and dont forget to take into account uncertainty of the estimates! It is important to describe the sources of estimates and confidence for all sources of cost and benefit estimates. This is important since all estimations of benefits, whether qualitative or quantitative, can be more or less certain. In particular, when using benefits transfer, using estimates in a context that they were not derived in may induce a high degree of uncertainty. |
Choose Methodology for Estimating Costs and Benefits and Collect Data
Estimating Costs Information Sheet outlines the many ways of measuring environmental costs and benefits. Different methods can be used to estimate different types of benefits and are appropriate in different contexts. For example, direct market methods are applicable when environmental goods are factor inputs and changes in availability or quality affects production costs and a qualitative description is useful under some circumstances. Box 6 in Estimating Costs Information Sheet, which gives some guidance on when to choose what methodology.
Task 4 - Carry Out the Assessment of Costs and Benefits
It is important to assess all costs and benefits, including qualitative and quantitative (biophysical and monetary) items. By now, you will have estimated the cost of the measures (see Task 3.1 of the Guidance). Similarly, you will have assessed environmental impacts of the programmes of measures. You should describe these clearly.
If unit costs have been derived and will be applied to the environmental impacts, the number of units and cost or benefit per unit must be presented. This will facilitate the estimation of total effects: for unitary measures the unit environmental cost or benefits should be multiplied by the quantified biophysical impact.
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Note that technical expertise (e.g. from experts working on the analysis of pressures and impacts) is necessary for producing such estimates. There is a need to integrate economic and biophysical impacts in the Cost Benefit Assessment.
Where qualitative values are minor, these shall at least be listed alongside the quantitative estimates of net benefits to support/contradict them. However, it is likely that qualitative values will play an important role. Look at each sector for costs and benefits, and present these in a way that aids decision-making. A tool could usefully be developed to achieve an efficient presentation. A rough example of such a presentation for reducing anthropogenic pressures (mainly nitrates) in agriculture is given in Illustration 6 of this information sheet.
Like the Cost Effectiveness Analysis, the Cost Benefit Assessment may be incremental. In initial stages, a large part of the assessment may be qualitative, this will help single out the key issues. Quantitative estimates (both monetary and biophysical) may be added over time and as more research is complete and data are available.
Neither point estimates nor simple qualitative descriptions will alone give the decision maker information on how changes to different variables may affect the results of the assessment. It is therefore important to address uncertainty in the information presented, whether quantitative or qualitative (see Illustration 6 - Figure 1 of this information sheet), to guard for different outcomes. Focus on the variables that are likely to have the greatest impact, and define how much these may change and would have to change in order to change the outcome of the whole assessment.
Illustration 6 - Improving the quality of water by reducing pressures from intensive agriculture by application of the proposed cost and benefit assessment methodology: An example
Objective: to improve the quality of water by reducing pressures from intensive agriculture. The assessment looks at the costs of investments and measures needed to improve water quality (and reduce the level of nitrates) and the expected benefits from these measures.
Task 1
Define the Key Groups for the Assessment. Intensive agriculture over a limited area gives rise to a high anthropogenic pressure on the natural environment. This pressure may manifest itself in a deteriorating quality of surface waters, and may have negative economic impacts on a wide range of users, the most significant impacts being on the immediate geographical area on agriculture, industry, households, shellfish fishery and some recreational activities.
Task 2
Identify the Types of Costs and Benefits. The programme of measures to restore water quality will affect users in the following ways:
Types of Costs
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Agriculture |
Restoring water quality entails investments and preventive measures and charging (a tax) on pollutants (an internalised environmental cost that can be treated as a financial cost). For curative measures, the storage and application of slurry have to be improved. This has different cost implications depending on animals. Preventive measures mainly involve the creation of grass strips, on 1 to 3 percent of the useful agricultural area. There is also a tax on every kilo of excess nitrogen. |
|
Local Authorities and Households |
To improve water quality, there has to be investment in municipal wastewater disposal systems. This involves investment and operating costs. |
|
Industry |
Industry has to invest in wastewater disposal to preserve water quality and will also increase the operating costs. Costs will have a negative effect on the unit production cost of businesses. |
Types of Benefits
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Local Authorities and Households |
In effect, local authorities are choosing between investing in measures to protect the drinking water supply, or to bear greater health risks. An improvement in water quality makes it possible to avoid these costs (generate benefits). |
|
Recreational Activities |
Households use surface and coastal water resources for recreational activities (bathing, sport, walks, fishing). Deterioration in the quality will lead to either less use or greater health risks, all of which entail a cost. |
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Effect on Shellfish Culture |
Water quality has a significant effect on the selling price of shellfish and the volume produced: where quality is good, it permits direct sales, giving bigger margins and a higher value added (packaging, dispatch, sale). |
Task 3 - Choose Methodology and Collect Data. Once the types of benefits and costs have been identified, it is possible to select the appropriate methodologies for collecting data on benefits. Note that the costs will need to be assessed in the cost-effectiveness analysis required by Task 3.2. In this particular case, different methodologies are chosen for different benefit components.
Task 4
Assess Costs and Benefits. Quantitative estimates of costs and benefits are aggregated and qualitative estimates are listed alongside.
Choice of Methods
|
Local Authorities and Households |
The costs of protection stem from the setting up of de-nitration or de-nitrification plants, changes in agricultural practices and the search for alternative sources of supply. Benefits are measured through the costs of mitigation. |
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Recreational Activities |
Contingent valuations have been used to show households willingness to pay to preserve these recreational uses (on top of their current water bills). These figures correspond to the user gain linked to bathing and to the value attributed to catching certain species of fish. |
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Effect on Shellfish Culture. |
The economic loss for shellfish culture is reflected in the loss of production and profits for businesses located in the polluted area. Direct market methods were therefore used to elicit the values. |
(Illustration 6 continued)
Figure 1- Assessing Costs and Benefits: Reducing the Anthropogenic Pressures (Mainly Nitrates) of Agriculture
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SECTOR |
ITEMS |
ASSESSMENT TYPE | ||
|
Qualitative |
Quantitative (Biophysical impacts) |
Quantitative (Monetary impacts) | ||
|
|
Costs |
- |
- |
(€) |
|
Agriculture |
Pollution control (slurry) of stock farming |
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|
|
|
|
Changing farming practices |
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|
|
|
Grass strips creation (preventative measure) |
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Industry |
All industry Wastewater disposal improvements: Investment costs Operating cost |
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Shellfish industry Investments in purification system |
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|
|
Households |
Effects of more costly wastewater disposal |
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|
|
|
|
Benefits |
- |
- |
(€) |
|
Agriculture |
- |
|
|
|
|
Households |
Avoided health costs from improved drinking water |
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|
|
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|
Costs avoided for treatment of drinking water (de-nitration and de-nitrification plants) |
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Industry |
Agri-business Costs avoided for de-nitrification |
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Recreation |
Improved recreational quality |
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Box 5
Decision Flowchart
1 This structure has been elaborated in the NAMEA (National Accounting Matrices-Environmental Accounts) and NAMWA (National Accounting Matrices- Water Accounts) by the Netherlands Statistical Bureau (CBS), and is now being reproduced in most EU member states and further elaborated by Eurostat.
2 The Department for Transport, Local Government and the Regions (DTLR) in the UK (2001), 'Multi Criteria Analysis: A Manual
Countries:
Europe›Austria
Europe›Belgium
Europe›Cyprus
Europe›Czech Republic
Europe›Denmark
Europe›Estonia
Europe›Finland
Europe›France
Europe›Germany
Europe›Greece
Europe›Hungary
Europe›Italy
Europe›Latvia
Europe›Lithuania
Europe›Luxembourg
Europe›Netherlands
Europe›Poland
Europe›Portugal
Europe›Spain
Europe›Sweden
Europe›Switzerland
Europe›United Kingdom
non Europe›Turkey
Eco regions:
On land›01 - Iberic-Macaronesian region
On land›02 - Pyrenees
On land›03 - Italy, Corsica and Malta
On land›04 - Alps
On land›05 - Dinaric western Balkan
On land›06 - Hellenic western Balkan
On land›07 - Eastern Balkan
On land›08 - Western highlands
On land›09 - Central highlands
On land›10 - The Carpathians
On land›11 - Hungarian lowlands
On land›12 - Pontic province
On land›13 - Western plains
On land›14 - Central plains
On land›15 - Baltic province
On land›16 - Eastern plains
On land›17 - Ireland and Northern Ireland
On land›18 - Great Britain
On land›19 - Iceland
On land›20 - Borealic uplands
On land›21 - Tundra
On land›22 - Fenno-Scandian shield
On land›23 - Taiga
On land›24 - The Caucasus
On land›25 - Caspic depression
River Basins:
Danube
Danube
Danube
Danube
Danube
Danube
Danube
Danube
Daugava
Daugava
Ems
Gauja
Lielupe
Miño
Neman
Neman
Näätämöjoki
Odense
Pregolya
Rhine
Rhine
Rhine
Rhine
Rhône
Rhône
Rhône
Scheldt
Shannon
Venta
Vistula
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