1. The European Union Water Framework Directive (WFD) requires member states to balance ecological and economic water management objectives in water resources planning. Member states are required to achieve “good surface water and groundwater status” in all water bodies. Member states are required to implement water pricing policies that provide incentives for efficient use and contribute to the environmental objectives of the Directive. This study interprets WFD water pricing objectives as a call for the use of volumetric water pricing at the river basin scale and then investigates the impact of applying such a policy. Introduction Using hydro-economic modeling to investigate trade-offs between ecological and economic water management objectives Niels Riegels*, Valerie Sturm, Roar Jensen, Charalampos Doulgeris, Flemming Møller, and Peter Bauer-Gottwein *ndr@env.dtu.dk We assume that a river basin planning authority could implement a volumetric water pricing policy that would be applied equally to all wholesale water users in the basin. Hydro-economic modelling approach is used to identify appropriate prices and estimate welfare impacts of implementing volumetric prices. Approach is tested on Aggitis River basin in northern Greece (~2300 km 2 ). Two water pricing policies are investigated. In the first, a single volumetric price is applied to all users, irrespective of time, space, water use type, or water source. In the second, surface water and groundwater are priced differently, with energy cost used as a surrogate for water price. Ecological and sustainability indicatorsMain results ApproachDistribution of opportunity costsImpact of higher prices on crop areas Impact of higher prices on flow regimeConclusionsOptimization approach Optimization approach used to identify appropriate prices. Appropriate prices assumed to be those that achieve WFD environmental objectives while minimizing costs to other users. Environmental quality and sustainability indicators developed to estimate whether WFD objectives are met. River basin model and an economic valuation tool are run iteratively using water price as a decision variable. WFD ecological status requirements are imposed only with respect to hydrological regime. Status is estimated by comparing cumulative distributions of important flow variables to unmodified distributions. Average monthly flows used to assess ecological status. Groundwater pumping constrained so that pumping does not exceed capture of river base flows. Top: Daily flow histories for two reaches in study area. Bottom: CDFs comparing distributions of August flow volumes. Maximum difference between CDFs is used to define ecological status. Both pricing policies result in a flow regime that is closer to the unmodified regime. Flow regime is altered because of surface water abstraction and also because of groundwater pumping impacts on river base flows. Simulated flows at basin outlet: A: Unmodified B: Baseline C: Pricing policy 1 D: Pricing policy 2 Volumetric pricing of wholesale water use at basin scale could be used to achieve some of the environmental objectives of the WFD. Opportunity costs of achieving WFD environmental objectives implemented in this study estimated to be ~€12-13 million/year. Opportunity costs concentrated in the agriculture sector (about 75% of total). Impacts on agriculture are greatest for growers of low value crops like maize and cotton. Production of high value crops like vegetable and orchard crops would probably continue under higher prices because these crops can be grown profitably using deficit irrigation. Pricing surface water and groundwater differently could reduce economic impacts on growers of low value crops. Changes in irrigation profits for one representative water use location shown at left. Impacts are concentrated on low value crops such as maize and cotton, although impact is reduced under policy 2 Because energy cost is used as a surrogate for groundwater price under policy 2, and marginal water costs are low at low flow rates, it is profitable to irrigate low value crops if reduced amounts of water are used. Positive Mathematical Programming (Howitt, 1995) used to predict farmer responses to water price changes. High-value crops such as vegetable and orchard crops would remain profitable under higher water prices because these crops can be grown profitably using a deficit irrigation strategy. Average annual benefits of water use for entire basin shown at left. Impacts concentrated in the irrigation and domestic sectors. Surface water price is higher under policy 2 because groundwater use increases; surface water price must be raised to compensate for reduced base flows.