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Economic innovations to manage water security risks and tradeoffs Anthony Cox Environment Directorate

Water Security, Risk and Society International Water Security Conference 16-18 April 2012, St Hugh’s College, Oxford


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Water security is primarily an economic issue • What level of water security can a country afford? • How cost-effectively can a country achieve its water security objectives? • How can a country evaluate and manage the tradeoffs that are necessary to achieve a level of water security? • Focus on changing incentives and changing behaviours • Nothing really new or innovative here in terms of policy instruments

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Selected policy instruments for water management Regulatory (command-and-control) approaches Norms and standards for water quality (e.g. drinking water quality, ambient water quality for recreational water bodies, industrial discharges)

Economic instruments

Information and other instruments

Charges (e.g. abstraction, pollution)

Metering of water usage

User tariffs (e.g. for water services)

Eco-labelling and certification (e.g. for agriculture, water-saving household appliances)

Payment for watershed services (e.g. for protection of catchment upstream) Performance-based standards

Restrictions or bans on activities which have an impact on water resources (e.g. polluting activities in catchment areas; ban on phosphorus detergents)

Reform of environmentally harmful subsidies (e.g. production-linked agricultural support; energy subsidies for pumping water)

Subsidies (e.g. public investment in infrastructure, social pricing of water)

Abstraction and discharge permits Water rights

Land use regulation and zoning (e.g. buffer zone requirements for pesticides application)

Tradable water rights and quotas

Voluntary agreements between businesses and government for water efficiency

Promotion of, awareness raising and training in ecological farming practices or improved irrigation technologies

Stakeholder initiatives and cooperative arrangements seeking to improve water systems, e.g. between farmers and water utilities Planning tools (e.g. integrated river basin management plans)

Insurance schemes Cost-benefit analysis of water management policies.

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Water security is primarily an economic issue • What level of water security can a country afford? • How cost-effectively can a country achieve its water security objectives? • How can a country evaluate and manage the tradeoffs that are necessary to achieve a level of water security? • Focus on changing incentives and changing behaviours • Nothing really new or innovative here in terms of policy instruments  “Innovation” lies in identifying good practices, increasing spread of economic instruments, gaining political and social acceptance, scaling up

• Focus on three inter-related areas: prices; markets; and financial sustainability 7


Water pricing • Pricing water and pollution is an important component of sound water security policy ďƒ˜ Reduces wastage, encourages investment, reduces pollution, increases innovation, helps valuation

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Water demand projected to grow by 55% by 2050 Irrigation

Domestic

Livestock

Manufacturing

Electricity

Km3

6 000

5 000

4 000

3 000

2 000

1 000

0 2000

2050 OECD

2000

2050 BRIICS

2000

2050 RoW

2000

2050 World

Source: OECD Environmental Outlook to 2050; output from IMAGE

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Decoupling water use from growth OECD freshwater abstraction by major use and GDP (1990 = 100) GDP

160

Irrigation

Population

Public supply

Total water abstraction

150

140

130

120

110

100

90

Source: OECD Environment Directorate

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

80 1990

0-

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Water pricing – reducing demand % Ownership against fee structure

Source: OECD (2011), Greening Household Behaviour: The Role of Public Policy 11


Water pricing • Pricing water and pollution is an important component of sound water security policy  Reduces wastage, encourages investment, reduces pollution, increases innovation, helps valuation

• Strong policy focus on tariffs  Tariff levels increasing in most OECD countries  Most users pay for the physical costs of water supply, but even then the tariffs do not often cover full costs (inc replacement)

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Water prices vary across OECD countries Unit price of water and wastewater services to households, 2008

Source: OECD (2010), Pricing Water Resources and Water and Sanitation Services

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Water pricing • Pricing water and pollution is an important component of sound water security policy  Reduces wastage, encourages investment, reduces pollution, increases innovation, helps valuation  But water generally under-priced

• Strong policy focus on tariffs  Tariff levels increasing in most OECD countries  Most users pay for the physical costs of water supply, but even then the tariffs do not often cover full costs (inc replacement)

• But most users do not pay for the scarcity value of water  Need to explore scarcity pricing options, but requires increased information flows to consumers

• Plus we need innovative ways to address provision of water services to poorer parts of society 14


Water markets • Australia is the poster child, but water rights and markets are used elsewhere (esp US, but also Chile, and informal water markets in Asia) • Increases flexibility, allows water to flow to highest value uses • Issues and challenges:  Unbundling water and land rights  Factoring in the environment and the participation of urban water users  No one size fits all, and requires a policy mix  Takes time, effort and institutional capacity to develop and evolve

• Nutrient trading schemes also being developed (e.g. cap and trade scheme in Lake Taupo, NZ) and PES wellestablished 15


Wastewater treatment an increasing concern

Nitrogen effluents from wastewater

OECD

India

China

Africa

Nitrogen surpluses from agriculture

Rest of the world

OECD

India

China

Africa

Rest of the world

kg of N / ha/ year

Millions of tonnes of N / year

20

700

18

600

16

500

14 12

400

10 8

300

6

200

4 100

2 0

0

2000

2050

2000

2050

Source: OECD Environmental Outlook to 2050; output from IMAGE

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Financial sustainability • Investment needs are considerable and directly impact water security  0.35-1.2% of GDP over next 20 years in OECD countries  EECCA region around USD 7 billion a year  Developing countries: USD 54 billion to maintain systems, another USD 17 billion to meet MDGs (although estimates vary widely)

• Need strategic financial planning to better match social ambition and political aspirations with financial realities  Assess financial gap; discuss policy options to close gap; develop alternative scenarios to improve water services; identify most appropriate scenario and policy mix

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The case of Moldova

Baseline


The case of Moldova

Transfers Taxes

Baseline

Tariffs

Revenue sources


The case of Moldova

Transfers

Baseline + MDGs

Taxes

Baseline

Tariffs

Revenue sources


The case of Moldova

Baseline + MDGs + EC Directive

Transfers

Baseline + MDGs

Taxes

Baseline

Tariffs

Revenue sources


The case of Moldova

Initial govt strategy Baseline + MDGs + EC Directive

Transfers

Baseline + MDGs

Taxes

Baseline

Tariffs

Revenue sources


The case of Moldova

Revised govt strategy Initial govt strategy Baseline + MDGs + EC Directive

Transfers

Baseline + MDGs

Taxes

Baseline

Tariffs

Revenue sources


Financial sustainability • Investment needs are considerable and directly impact water security  0.35-1.2% of GDP over next 20 years in OECD countries  EECCA region around USD 7 billion a year  Developing countries: USD 54 billion to maintain systems, another USD 17 billion to meet MDGs (although estimates vary widely)

• Need strategic financial planning to better match social ambition and political aspirations with financial realities  Assess financial gap; discuss policy options to close gap; develop alternative scenarios to improve water services; identify most appropriate scenario and policy mix

• Hard and soft infrastructure (NRW, improve efficiency) • Innovative financing mechanisms • Public-private partnerships – with a dose of reality 24


Concluding remarks • Water security is primarily an economic issue • Issue is implementation rather than innovation • Need to change incentives and structure institutions to allow individuals and firms to change behaviour, identify and value risks, and address tradeoffs • Focus on prices, markets and financial sustainability is a good start • Not necessarily “free” markets, but regulated markets with a mix of policy instruments

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Further information

www.oecd.org/water


Economic innovations to manage water security risks and tradeoffs