Pricing and long-term management of water

The Commission is presenting questions and options in connection with defining water pricing policies enabling the sustainability of water resources to be boosted.

ACT

Communication from the Commission to the Council, European Parliament and Economic and Social Committee: Pricing and sustainable management of water resources [COM(2000) 477 - Not published in the Official Journal].

SUMMARY

Water management is one of the European Commission's environmental priorities. The framework directive on water sets out the guidelines for water policy in Europe for the decades ahead. It more especially promotes the use of pricing and taxation as an incentive for consumers to use water resources in a more sustainable manner and to recover the cost of water services per sector of the economy. It is with this in view that the Commission has prepared its communication on the pricing and sustainable management of water resources. Its aim is to enable a fruitful political debate to take place on this matter and to inform those concerned.

The Commission stresses that this communication should not be taken as solely advocating pricing in order to solve water-resource problems. However, this must be taken into due consideration and be combined with other instruments as part of drawing up of management plans for water resources at individual catchment-area level.

Water and water policy in Europe

The sustainability of water resources is threatened in several of Europe's regions. By way of an illustration one may mention the salination of groundwater, the reduced flow in many water courses, and the diffuse pollution that can be attributed to agriculture.

This being the case, the use of economic instruments (taxes, duties, financial assistance, negotiable permits) has gained increasing importance and was fully legitimised in the United Nations' Rio Declaration on the Environment and Development in 1992. The central environmental role to be played by economic instruments is also recognised at Community level. The Treaty considers that, in particular, the "polluter pays" principle is an underlying principle of European environmental policies. Furthermore the framework directive on water advocates a boosting of the part played by pricing in order to improve the sustainability of water resources.

The "water price" is defined as being "the unit or overall amount paid by users for all of the services that they receive in terms of water, including the environment" (example: wastewater treatment).

Water pricing policies in theory and in practice

In order to achieve the environmental aims and to include the major economic principles, water pricing policies must reflect the following costs:

• Financial costs: direct costs embracing the costs of supply and administration, operation and maintenance, and also capital costs.
• Environmental costs: cost of the waste caused by water use on the ecosystem, for example: salination or degradation of productive soils).
• Resource costs: cost of resource depletion leading to the disappearance of certain options for other users.

Each user must bear the cost of consuming water. If pricing is to promote better water-resource use prices must be directly linked to the amount of water consumed and/or pollution produced.

There are major differences between the water pricing systems in the Member States. In the south European countries for example agriculture, which is a major water consumer, pays for its water at preferential rates (because of various subsidies). Recently pricing played an increasing part in the water policy in many Member Sates. In the countries which joined the European Union in 2004 water pricing is also expected to expand, mainly owing to the major cost of alignment with the Community patrimony.

The water pricing policy enables the pressure on water resources to be restricted and infrastructures to be maintained. Moreover, a harmonised approach to water pricing is needed in order to avoid any distortions in competition arising from uneven application of economic principles on the internal market.

Promoting water pricing policies enabling the sustainability of water management to be improved.

It is necessary, in order to map out a pricing policy, to be aware of the following factors:

• The demand for water which, in agriculture, for example, is still not well understood. Measuring methods (meters, use of satellite scanning …) must be developed.
• The elasticity of the demand for water as compared with its price.
• The financial cost of water supplies.
• The environmental cost of the resource. However, it is difficult to assess those costs.

It is relevant to incorporate a variable factor (quality, pollution) into pricing structures in order that these may genuinely provide an incentive.

For reasons of cost and political acceptability, the introduction of a new pricing system will have to be gradual. Moreover social-order considerations must be taken into account in water pricing, but must not take precedence where sustainable water resource management is under threat. Social back-up policies will be preferred to these. Systematic ex ante and ex post assessment of the effects on demand of any such pricing policies is needed.

The matter of scale is also to be considered. Financial costs are better assessed and managed at water-service distribution level, but in environmental terms it is that of water catchment area that is the most appropriate. This may cause difficulties in the case of cross-border catchment areas (for example the Rhine river basin): the cost must then be shared among the interested parties and the administrations in the various countries.

In order to ease the transition to incentive pricing, it might be necessary to adapt the existing institutional framework. It would, in particular, be necessary to ensure transparency (via information and communication policies and quality/price comparisons) and the involvement of the public in water pricing polices. Monitoring water prices in order to ensure that these reflect costs in an adequate manner must also take place.

The water pricing policies must be combined with other measures in order to solve the qualitative and quantitative water resource management problems. It must also ensure better synergy between water pricing policy and the other European Union's policies: the common agricultural policy or the structural and cohesion policies must also provide incentives for better use of water. The European Commission's framework research and technological development programme also has a key role to play in providing new economic assessment and analysis methodologies.

Implementation of the framework directive on water will provide the necessary impetus for formulating water-price policies based on the factors set out in this communication.

Last updated: 22.09.2006