European Environment Agency (EEA)

Assessment of cost recovery through water pricing


Courtesy of Courtesy of European Environment Agency (EEA)

Setting the scene

The environmental resources situation is shaped by changes in climatic conditions, coupled with pressures exerted by a rapidly growing global population, its increasing demands and the subsequent impacts on the environment. Current practices across the economy sectors are still not sufficiently ambitious in terms of sustainability; they fail to ameliorate the stress conditions of vital resources like water. In recent years, the need has been highlighted for governance and management schemes that allocate resources appropriately among users (including the environment) and that promote the efficient use of such resources.

The very nature of these needs calls for adequate policy responses. One of these policy responses — applied either separately or in combination with other economic or regulatory instruments — is water pricing. The use of such instruments brings additional social and political issues into the already complex equation of sustainable management of water resources.

Calculating a price that reflects the true value of water, and thereby contributing to the long-term sustainable management of water resources, is clearly not a simple task. However, it is critical, for both the effectiveness and the integrity of the proposed water pricing systems. In terms of regulatory principles, Article 9 of the WFD introduces the principle of cost recovery for water services in accordance with the PPP. In addition, Article 9 promotes the internalisation of environmental and resource costs that result from existing uses of water resources and of aquatic ecosystems.

In more detail, Article 9 establishes that:

  • water prices must allow for the (adequate) cost recovery of water services, including environmental and resource costs;
  • the main water uses (disaggregated for households, industry and agriculture) must adequately contribute to the recovery of costs of water services, proportionally to their contributions to the pressures imposed on aquatic ecosystems in line with the PPP;
  • water pricing policies must 'provide adequate incentives for users to use water resources efficiently and thereby contribute to the environmental objectives' of the WFD.

However, the translation of these principles into real water pricing policies applied in EU Member States remains unclear. Furthermore, the approaches and calculation methods for internalising external (environmental and resource) costs into pricing are still the subject of debate. There is a clear need to assess how current pricing (and other economic instruments) applied in EU Member States fare in relation to the requirements of the WFD and the key principles that it promotes for cost recovery, the PPP and incentiveness. There are also questions concerning the extent to which current economic instruments applied to water contribute (if at all) to the achievement of the environmental objectives of the WFD.

In the first river basin management plans (RBMPs), EU Member States reported on current water pricing policies and on the level of cost recovery achieved through existing water pricing. Results from these assessments are difficult to compare among EU Member States, due to differences in assessment methodologies, including aspects such as the definition of water services and the cost elements considered in cost.recovery assessments. EU Member States have also paid limited attention to the role of water pricing in providing incentives for more efficient use of water resources . something also reinforced in the communication A Blueprint to Safeguard Europe's Water Resources (COM/2012/0673 final). Despite the mandatory WFD reporting, many questions remain on the current state of water pricing in Europe in terms of cost.recovery levels, the internalisation of environmental and resource costs, and incentiveness or affordability (an issue that has gained importance because of the current economic and financial crisis).

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