Pricing water

Anything scarce and in demand commands a price; this is one of the basic principles of economics. Water is scarce in some contexts (drought, degraded quality), so water pricing is increasingly seen as an acceptable instrument of public policy. Water-use charges, pollution charges, tradable permits for water withdrawals or release of specific pollutants, and fines are all market-based approaches that can contribute to making water more accessible, healthier and more sustainable over the long term. For this reason, oecd countries are working toward the goal of “internalising” the full marginal costs (including environment costs) into decisions that affect water use and water quality. By Tom Jones

One particular area of water policy that has become increasingly subject to pricing principles is that of public water supply and wastewater services. Efficient and effective water pricing systems provide incentives for efficient water use and for water quality protection. They also generate funds for necessary infrastructure development and expansion, and provide a good basis for ensuring that water services can be provided to all citizens at an affordable price. The metering of water consumption is a prerequisite for the application of efficient water pricing policies. About two-thirds of oecd member countries already meter more than 90% of single-family houses, although universal metering remains a controversial issue in some contexts.

Selective metering is less controversial, particularly if the public knows that new water resources are scarce, or if the metering applies to discretionary water use, like private swimming pools. Metering new homes is also more widely accepted than converting older ones.

Most of the oecd area population still live in apartments, where metering tends to be for water supplies entering the building, rather than for individual apartments, although this is starting to change.

Charging in volumes
In terms of the structure of prices for public water services, there is a clear trend in oecd countries away from fixed charges and towards volumetric charging; in other words, the more you use, the more you pay. Even where fixed charges still exist, the policy of allowing large free allowances is in decline. Hungary, Poland and the Czech Republic, for example, already use pricing systems based solely on volumetric pricing, with no fixed charge element at all.To encourage conservation, the trend in volumetric charging is also moving away from decreasing-block tariffs and towards increasing-block ones. This means that the charge increases with each additional unit of water used or wastewater treated, rather than providing discounts to high-volume users.The pricing systems for wastewater treatment are rather more complicated than they are for water supply. This is partly because responsibility for sewerage, sewage treatment, and drainage is typically held by different bodies, each with their own principles and practices. Another complicating factor is that use of water directly from natural sources in the environment represents roughly 75% of total water consumption by the industrial sector (on average) in oecd countries.

Nevertheless, the basic charges for wastewater services are sometimes linked directly to volumes of water delivered from the public water supply system. Where this is the case, the structure of wastewater charges tends to mirror that of water supply systems.

Overall, however, industrial water consumption levels are actually not a very good proxy for industrial sewerage and sewage disposal costs, as discharges vary so much from industry to industry. Hence the trend in oecd countries towards separating industrial water use charges from wastewater charges.

Pollution costs
In most countries, standard sewerage charges are supplemented by “special strength” charges designed to recover the costs of any extra capacity required to treat particular industrial effluents.Industrial effluent charges can also be set by pollution content. In France, for example, a charge is levied on the eight types of pollutants deemed most dangerous and difficult to treat (heavy metals, phosphorus, soluble salts, etc.). The charge is calculated as a function of pollution produced during the period of maximum activity on a normal day. In other cases, the charging formula involved can reflect the costs of treating a particular effluent, or the environmental sensitivity of the receiving waters.

Service providers generally receive the proceeds of any industrial effluent charges. This revenue is sometimes channelled into an investment fund that can either allocate the money to water service providers, or to commission wastewater treatment investments directly.Water charge levels have been rising in most oecd countries in recent years. One reason for this is that water quality is often getting worse as a result of over-consumption, especially where groundwater is used. Moreover, government budgets have been stretched to the limit, putting upward pressure on charges. Indeed, there is a demand for more efficient and equitable approaches than across-the-board subsidies for achieving social goals, like affordability.

Expect higher prices
There are other contributing factors, too. There may be past pollution of groundwater that necessitates more sophisticated and more expensive treatment, with a consequent need to develop more expensive demand-management or supply-based regimes. Maintaining and enhancing existing sources can also require more elaborate treatment to deal with new organic pollutants, often from non-point sources. And there may be legislative reasons, with eu directives, for instance, demanding tighter wastewater treatment standards.

As these trends are unlikely to be significantly reversed in the near future, further price increases are in the offing for most oecd countries.

Concern about the affordability of household water services for vulnerable groups, such as low-income households and retired people, has led to the development of a range of policy measures aimed at resolving affordability problems, while still meeting economic and environmental goals. In general, policies that target specific vulnerable groups – such as through income-related support – have been found to be more efficient at achieving all three objectives than across-the-board subsidies.

As regards “non-public” water services, about half of oecd countries levy some form of general charge on water abstracted outside the public system. In some countries, this charge has an explicit environmental objective, so the proceeds are allocated to an environmental fund. The Netherlands, for example, has two abstraction charges: one levied by the provinces for groundwater protection; and the other levied by the state within the general taxation regime.

For various reasons, some industries are finding that it is more efficient to avoid using the public treatment system to dispose of their effluents, and are developing their own self-treatment and re-use facilities.

General discharge controls are also often imposed on direct wastewater discharges that do not go through public sewers. The proceeds of these charges always go to the government, since there is no service provider involved. For example, a permit is usually required for discharging directly back into a river or aquifer. Some countries reduce these charges on the basis of environmental criteria. For example, there is a 75% reduction in the basic charge in Germany if the environmental standards envisaged by current regulations (expressed as “best available technique”) are maintained.

Subsidy conundrum
While pricing structures for municipal and industrial water services increasingly reflect the full costs of providing the services, agricultural water use – primarily for irrigation – remains heavily subsidised, which encourages inefficient use of often-scarce resources. Recent oecd reports indicate that industrial and household water users often pay more than 100 times as much as agricultural users, although comparisons of this type are difficult because of the differing water quality needs and conveyance standards of different users. Nevertheless, it is clear that water prices are significantly lower for agriculture than for other user sectors in most oecd countries.

Oecd countries are working towards more complete recovery of infrastructure and operating costs from users, although rather slowly. Greater transparency, including in the level of implicit subsidies provided through undercharging for infrastructure use, could help build public support for further reforms.

Tom Jones is the Head of the Global and Structural Policies Division, oecd Environment Directorate. His article Pricing water originally appeared in the oecd Observer No 236, March 2003.

References
Oecd (1999). The Price of Water: Trends in oecd Countries.Oecd (2003, forthcoming). Social Issues in the Provision and Pricing of Water Services.Oecd-iwa (2001). Water Management and Investment in the New Independent States.

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