Department of Environmental Economics
Institute for Environmental Studies, VU University

• Meeting the overall goal of good chemical and ecological status and sustainable water use through the application of:
• Economic principles
- Polluter Pays Principle
• Economic analysis
- River basin characteristics (Article 5)
- Cost-effective programme of measures (Article 11 & Annex III)
- Cost recovery water services (Article 9)
• Economic instruments
- Water pricing policies (Article 9)

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• Are the costs of implementation disproportionate?
• Not a standard economic concept, no standard guidelines
• No international benchmark available:
Reasons of overriding public importance in Habitat Directive (1992)
ALARA Principle: As Low As Reasonably Achievable (1993)
BATNEC in IPPC (1996): Best Available Techniques Not Entailing Excessive Costs
• Economic impacts (costs and benefits) & financial implications (increase prices, taxes, charges, fees etc.) across different basins, sectors, and stakeholders
• Uncertainty surrounding costs and benefits!
• Economic benefits of the WFD?
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• Political decision!?

• Complex public good
• Critical environmental function (infinite value)
• Transboundary water flows
• Valuable feedback mechanisms (multifunctional, re-usable)
• Water has value but no price, or price ≠ true value
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• High value if there is too little, negative value if there is too much water

WFD, Art. 9, Par.1:
‘ member states shall take account of the principle of recovery of the costs of water services, including environmental and resource costs , … , and in accordance in particular with the polluter pays principle ’
(SSPI022723)

Uncertainty
Integration hydro-economics
International basin
Basin
Groups of water bodies
Water body
Complexity

• Abstractions of reality linking two realms of a system, i.c. economy and water
Economy transformations
Hydrology transformations
• Key to integrated modeling : economic functions of aquatic ecosystems
Consumption : drinking water, recreation etc.
Production : cooling, food and beverages, irrigation etc.
Water as a Source and Sink

Economy transformations Hydrology transformations
Ecology

Economy transformations Hydrology transformations
Ecology

Constrained maximization (multiple objectives: economic output, water quality and ecological objectives)
Max Q t,p
=f t,p
(C t,p
,L t,p
,T(R t,p
)) subject to
C=C
L=L
R=R=water quantity/quality objectives where
Q : output (e.g. crop yield, electricity etc.)
C: capital
L: labour
T: transformation function
R: water resources (quantity, quality) t,p
: time and place (basin)
Groundwater

Top down
Economics Hydrology
Bottom up

• Large scale
• Affecting other interrelated sectors (households, agriculture, industry)
• Price incentives in programs of measures (e.g. taxes, charges, marketable permits) to stimulate sustainable water use affecting market equilibrium prices
• HENCE
• More comprehensive economic modeling approaches needed
• Economy-wide modeling of the direct and indirect economic
WFD impacts
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Modular approach
Economic model
Water & substance flow model
Water quality model
Economic scales
Micro Firm model
Meso Sector model Regional model
Macro National model
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Change in
National
Income
Verandering in nationaal inkomen
0.05%
0.00%
-0.05%
-0.10%
-0.15%
-0.20%
-0.25%
-0.30%
-0.35%
2000
20% reductie
50% reductie
50% red. + derogatie
2005 2010 2015 2020 2025 2030
Change in
Water Quality
2000 emissies in 2015

Relative reduction in value added of industries: scenarios comparison
Basic metal industry
Chemical industry
Rubber- en plastics industry
Transport by water
Paper and -board industry
Transport equipment industry
Textiles, clothing and leather industry
Non-commercial services
Elektrotechnical industry
10% scenario
50% scenario
Transport by land
0.0
-
10.0
%
-
20.0
%
-
30.0
%
Applied
General Equilibrium Model
-
40.0
%
-
50.0
% 60.0
2%
5%
20%
11%
Distribution of direct and indirect costs:
3%
50% scenario
51%
Rijn West
Rijn Midden
Rijn Oost
Rijn Noord
Schelde
Maas
Eems
8%

Wetland ecosystem structure and processes
Functions
Hydrological
Flood water retention
Water recharge
Biogeochemical
-Nutrient retention & export
Ecological
-Wildlife habitat and nursery
-Landscape structural diversity
-Natural flood protection
Water supply
Habitat maintenance
Socio-economic benefits
-Improved water quality
Waste disposal
-Fishing
Wildfowl hunting
Recreational amenities

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Open ocean $ 252/ha/yr
Coral reefs $ 675/ha/yr
Tropical forests $ 2,007/ha/yr
Grasslands
Wetlands
$ 232/ha/yr
$14,785/ha/yr
Lakes/rivers $ 8,498/ha/yr

• Guidelines for water resource valuation in the WFD
• Move away from constant unit values
• Value functions
• Transfer testing
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What are the non-market goods & services provided by the WFD amenable to robust economic valuation?
Source: Hime, Bateman et al. (2009)
Copyrights reserved.

Valuation at individual water body level or river basin level?
How do we account for substitution effects?
Source: Brouwer, Martín-Ortega & Berbel, 2009
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Appropriate rules of aggregation using GIS
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Source: Bateman et al., 2006

• Important role economics in WFD, but still much misunderstanding of the value added of economic tools and methods in WFD decision-making
• A variety of approaches used in a highly political-economic context
• Economic value of water evident, but not always evidenced
• Little empirical evidence available yet to produce ‘best practice recommendations’ in specific context of WFD
• Need for further development economic methods and tools to underpin the economic value of the WFD:
- Integrated models with more emphasis on wider economic impacts
- Experimental water pricing models
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• Integrated hydro-economic modeling (Richard Tol)
- Integrated modeling nutrient abatement Baltic Sea - K. Hyytiainen
- Integrated modeling nutrient & sediment loads Tasmania – M. Kragt
• Water conflict & cooperation (Ines Dombrowski)
- Transboundary water sharing Volta basin – A. Bhaduri
- Wetlands decision rights Sweden - K. Elofsson
• Water resource valuation (Ian Bateman)
- Ecosystem valuation ecological restoration Danube basin – M. Getzner
- Water security and environmental flows South Europe – J. Martín-Ortega
• Water markets & pricing (John Rolfe)
- Two-parts instrument non-point source pollution Spain – R. Goetz
- Water quality trading US – G. Poe
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European Commission
DG Research
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