1. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 1 R. Andreas Kraemer Director - Ecologic Britta Pielen - Ecologic Economic Instruments in Water Management Global Experience and Relevance for Latin American and Caribbean Countries

2. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 2 Preview Functions of economic instruments Typology of economic instruments in water management –Water abstraction taxes –Water prices (and tariffs) –Sewerage charges (to sewers) –Effluent charges (to natural waters) –Subsidies (water sector, other sectors) –Tradable Permits (abstraction, discharge, resources) –Liability for (environmental) damage to waters –Contributions in Water User Associations Economics in the (new) European Water Framework Directive Relevance of EU and OECD experience for Latin America Conclusions

3. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 3 Functions of Economic Instruments Incentive Function Financial function (cost recovery) Fiscal function (earmarking versus general taxation) “Soft functions” (information, capacity)

4. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 4 Taxonomy Tradable Abstraction Permits Abstraction Taxes Water Prices Taxes on Water Supply Taxes on SewerageEffluent Charges Public Water Municipal Use Sewerage Treatment Industrial Use Tradable Discharge Permits Effluent Treatment Sewerage Charges Self-Supply Subsidies for Water Saving Measures Subsidies for Pollution Control

5. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 5 Water Abstraction Taxes Levied on withdrawal of water from natural water bodies Based on actual amount (volumetric) or linked to permit May differentiate between ground and surface water (e.g. Netherlands), or good & bad water (e.g. Hamburg) Fiscal function: Part of green tax reform in the Netherlands & Denmark; Earmarked for env. subsidies in some German Länder Denmark: tax led to decrease of total water consumption and of leakage from water works & pipes

6. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 6 Prices for Household Water Supply I Rule: Municipalities are responsible for water supply European Union and OECD countries tend towards: Full cost-recovery (environmental and resource costs) Volumetric pricing (metering; user-pays) [Increasing block-tariff structures] “High“ water prices (in international comparisons) are not necessarily high in relation to per capita income

7. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 7 Prices for Household Water Supply II In most cases: Combination of fixed and variable charges Great variety of tariffs France: many municipalities  Great variety of tariffs P - Two-part tariffs with linear use rate - Two-part tariffs with non-linear use rate - Flat rate (not linked to use) - Single linear tariff (linked to use) consumption

8. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 8 Sewerage Charges Levied on discharge of used water into sewer systems General aim: Cost Recovery for operation & maintenance Calculation of charges –Most often based on metered water consumption partly based on sealed surface (rainwater - Germany) –Non-recurring connection fees (France, Denmark) –Fixed components (two-part tariffs) –Higher charges for heavy polluters (“strength” - France, UK)

9. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 9 Annual Sewerage Charges & Water Prices [1992-2000]

10. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 10 Effluent Charges I Levied on the discharge of effluent into natural waters. In place in seven EU Member States. General aim: Env. incentives & (earmarked) revenue Based on pollution content of effluent  Measuring and metering devices required. Charge rates may differ among substances (Denmark: Differentiated rates for N, P, and BOD)

11. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 11 Effluent Charges II Systems differ in Functional focus (incentives or revenue raising) Calculation methods and substances included Actors liable to pay (addressee) Exemptions and rate reductions Use of revenue

12. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 12 Effluent Charges: 3 Textile Finishing Firms

13. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 13 Subsidies in Water Management I Direct versus indirect subsidies Compensation versus incentives Positive versus negative environmental effects Water subsidies Some EU countries: Subsidies for building and upgrading of water plants Off-set in Denmark: Industrial water users can deduct water abstraction tax on their VAT-bills

14. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 14 Subsidies in Water Management II Water-related subsidies to farmers: As compensation for –Land-use restrictions in water protection zones (Germany) –Conversion of arable land to native species grassland (UK) As incentives for –Cultivation of nitrogen-fixing crops (Sweden) –Conversion of acreage to organic production New Zealand: Removal of agricultural subsidies (1984)

15. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 15 Tradable Permits I Allocation of shared resource among users Tradable water abstraction rights (trading water rights  trading water) Tradable discharge permits (pollution permits) Tradable permits to use water-borne resources Requirements: Well-defined property rights Transparent initial allocation Efficient administration (data requirements)

16. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 16 Tradable Permits II Tradable water rights exist in e.g. Chile, US & Australia. No application so far in Europe (unlikely, in fact). Chile: Existing water users are granted free property rights Unallocated rights are sold by auction Separate from land rights Rights can be transferred at freely negotiated prices

17. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 17 Liability for Damage to Waters Incentive for pollution prevention Guarantee for compensation of victims Proposal for EU Directive on Environmental Liability: Based on public law Covers damage to acquatic environment Strict liability (most cases) NGOs and (affected) parties can demand action

18. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 18 The European Water Framework Directive One of the first to draw on economic instruments Economic analysis of water uses (by 2004) Sets up inventory of water uses Determines whether cost-recovery is achieved Indentify most cost-efficient combination of measures Cost-covering water pricing should be in place by 2010

19. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 19 Water User Associations (Germany) Good approach to integrated river basin management: Association of those affected: “Interested parties” Financed through members’ fees (contributions) Scope of operation: –Allocation of services among users –Water supply, sewerage –Cooperation between agriculture and water management –Development and maintenance of waters

20. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 20 The Latin American Situation Economic instruments for water management already in place Design of charging systems has to be adapted to meet specific challenges in each case Relevant factors: –Capacity building –Decentralization and participatory approaches –Integrated river basin management –Cost-recovery –Transparency

21. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 21 EU experience: benefits for Latin America? Overview of options: variety of models for expansion and improvement of existing systems Identification of instruments for application in other cases and suggestions of design Information about effects Institutional issues: Water User Associations as an option for Integrated River Basin Management

22. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 22 Conclusions Wide range of opportunities to reproduce, develop and improve existing economic instruments, in EU and OECD countries and in Latin America Permanent international cooperation desirable to guarantee information exchange and to offer opportunities for case-specific support

23. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 23 Selection of Relevant Studies Ecotec 2001: Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States. London: Ecotec. Kraemer, R. Andreas; Eduard Interwies and Eleftheria Kampa 2002: "Tradable Permits in Resource Protection and Management: A Review of Experience and Lessons Learned," in: OECD (ed.): Implementing Domestic Tradable Permits - Recent Developments and Future Challenges, 227-265. Paris: OECD. OECD 2000: Greening Tax Mixes in OECD Countries: A Preliminary Assessment. Paris: OECD. OECD 2001a: Environmentally Related Taxes in OECD Countries. Paris: OECD. OECD 2001b: Domestic Transferable Permits for Environmental Management - Design and Implementation. Paris: OECD. OECD 2002: Environmentally Related Taxes Database. Paris: OECD. Speck, Stephan 2000: The Eco-Tax Database of Forum for the Future - A Database of Environmental Taxes and Charges. London: Forum for the Future.

24. ecologic.de February 2003 Washington D.C. Inter-American Development Bank - Regional Policy Dialogue 24 R. Andreas Kraemer Director - Ecologic Britta Pielen - Ecologic Economic Instruments in Water Management Global Experience and Relevance for Latin American Countries