37744 World Bank Analytical and Advisory Assistance (AAA) Program China: Addressing Water Scarcity Background Paper No. 2 Evolution of Integrated Approaches to Water Resource Management in Europe and the United States Some Lessons from Experience __________________________________________________________________________ April 2006 Environment and Social Development East Asia and Pacific Region The World Bank World Bank Analytical and Advisory Assistance (AAA) Program The paper was prepared by Y.S. Cao and edited by Jeremy Warford. The paper is one of the international experience background study papers of the World Bank's Analytical and Advisory Assistance Program (AAA) "China: Addressing Water Scarcity." The study is under the management of Jian Xie of the World Bank's East Asia Environment and Social Sector Unit. For more information on and other reports of the World Bank AAA Program "China: Addressing Water Scarcity", please contact Dr. Jian XIE, The World Bank, 1818 H Street, NW, Washington D.C, 20433, USA, Fax: 202-522-1666, Email: jxie@worldbank.org; or visit the program website at http://www.worldbank.org/eapenvironment/ChinaWaterAAA Environment and Social Development Department East Asia and Pacific Region The World Bank Washington, D.C. April 2006 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202- 522-2422, e-mail pubrights@worldbank.org. ii China: Addressing Water Scarcity Background Paper No. 2 TABLE OF CONTENTS Acronyms and Abbreviations iv Chapter 1: Introduction 1 Chapter 2: Pressure for Change 2 Growing Scarcity 2 An Integrated Approach 3 Chapter 3: Basin-based Management 5 Europe 5 United States 14 Chapter 4: Economic Instruments 17 Water Rights and Trading 17 Abstraction Fees 20 Prices and Taxes 21 Privatization 26 Chapter 5: Public Participation 29 Importance of Public Participation 29 Europe 29 United States 32 Chapter 6: Some Lessons from International Experience 34 Basin-based Management 34 Economic Instruments 35 Public Participation 36 References 37 List of Boxes Box 1: New Approaches 4 Box 2: Time Schedule for Implementation of Water Framework Directive 6 Box 3: Cross-Country Water Management: The Rhine River 11 Box 4: Chesapeake Bay Program 13 Box 5: Idaho Water Supply Bank 19 Box 6: Taxation of Fertilizers in Europe 22 Box 7: Irrigation Water Charges, OECD Countries 26 Box 8: Privatization of Urban Water and Wastewater Services: Some Lessons 27 Box 9: The Århus Convention: Three Pillars for Public Participation 30 iii World Bank Analytical and Advisory Assistance (AAA) Program ACRONYMS AND ABBREVIATIONS CAMS Catchment Abstraction Management Strategies CBC Chesapeake Bay Commission CFR Code of Federal Regulation CIS Common Implementation Strategy CSOs Combined Sewer Overflows CWA Clean Water Act DOE Department of Energy DRBC Delaware River Basin Commission DWR Department of Water Resources EA Environmental Agency EC European Commission EEA European Environmental Agency EPA Environmental Protection Agency ESA Endangered Species Act FERC Federal Energy Regulatory Commission FMfE Federal Ministry for Environment, Nature Protection and Nuclear Safety FWS Fish and Wildlife Service GDR German Democratic Republic ICPR International Commission for the Protection of the Rhine against Pollution ICPR International Commission for the Protection of the Rhine ICWE International Conference of Water and Environment IHE International Institute for Hydraulic and Environmental Engineering IWRM Integrated Water Resources Management LAs Load Allocations N Nitrogen NCWCD Northern Colorado Water Conservancy District NP Nitrogen Phosphorus NPDES National Pollutant Discharge Elimination System NPK Nitrogen Phosphorus Potassium NPS Nonpoint Source OECD Organization for Economic Cooperation and Development Ofwat Office of Water Service OTA Office of Technology Assessment RAP Rhine Action Plan RBA River Basin Authority RBMP River Basin Management Plan SCS Soil Conservation Service SDWA Safe Drinking Water Act TMDLs Total Maximum Daily Loads UN United Nations UNECE United Nations Economic Commission for Europe USDA United States Department of Agriculture USFR United States Federal Register USGS U.S. Geological Survey WFD Water Framework Directive WLAs Waste Load Allocations iv China: Addressing Water Scarcity Background Paper No. 2 CHAPTER 1: INTRODUCTION This report is designed to highlight some of International experience indicates that there the key policy, legal and institutional issues are certainly many experiences that can be encountered in the management of water taken to improve the situation in China, resources, drawing primarily upon where there is prima facie evidence that experience in Europe and the USA. The water resources are being used in wasteful objective is to identify issues and lessons way, as judged by indicators such as that are most relevant for the situation now economic efficiency or equity. Thus the existing in China, where, despite legislative widespread concern that major rivers are and institutional reforms, water scarcity and drying up implies acceptance of the view deteriorating quality clearly pose a growing that the diversion of upstream resources for threat to continued economic growth. various uses is unjustified in terms of productivity or fairness. Countries throughout the world have wrestled with these problems for many In reviewing some international experience, years. Major difficulty lies with the fact that this report first outlines the nature of the conflicting interests are typically involved, issues, and then considers key institutional, and lack of policy, institutional and legal, and regulatory approaches, followed financial mechanism to address and sole by a review of economic instruments and these issues. finally the role of public participation. Some general lessons from this experience Nevertheless, significant progresses have are then drawn. been achieved in water resource management in Europe and the Unites States and some other countries over the past 10 to 15 years. Water policy and management are experiencing a transition of from sector to an integrated manner. 1 World Bank Analytical and Advisory Assistance (AAA) Program CHAPTER 2: PRESSURE FOR CHANGE Growing Scarcity irrigation water can affect river flow and aquatic environmental conservation. Europe and the United States made significant progress in economic and social Poor water quality is a direct consequence of development from the end of World War II inappropriate economic activities. to the 1960s, but by that time it was Eutrophication due to nutrient discharge becoming increasingly apparent that this leads to an algae boom in lakes and had come at a price, namely the rapid reservoirs. Nitrate and pesticides coming deterioration of the environment. Water from agriculture pollute ground water, and resource management was already, and treatment is expensive. From the 1950s to continues to be, one of the most urgent the 1970s, the Rhine River, the largest in the environmental issues needing attention as Western Europe and the supplier of scarcity and the declining quality of water drinking water to many bordering threaten economic growth and public countries, was heavily polluted by industry, health. The major causes of the problem are agriculture, transportation, etc. In some highlighted below. sections, certain species of fish became extinct. Catastrophic water-related events Urbanization: Urban expansion and occurred frequently; one example was the population growth requires increased water disastrous 1986 fire in Schweizerhalle, supply and sanitation capacity including Switzerland, which led to serious pollution both collection systems and treatment of the Rhine. For several days, fisheries and plants. Increasing abstraction from surface drinking water production had to be and groundwater is accompanied by an stopped as far as 1,000 km downstream in increase in the amount of wastewater the Netherlands. The Rhine River was discharged into aquatic systems. Flooding labeled a "European sewer." A similar results from increased runoff. situation occurred in the 1980s in the United States. The deaths caused by Giardia Lambia Industrialization: More chemicals, many of in the water-supply system indicate that them toxic and non-biodegradable, drinking water is no longer safe even eventually flow into surface, ground, and though sophisticated processes and marine water. Air pollutants also contribute technology have been developed and to deterioration in water quality. applied. Modern Agriculture: More and more Flood Control and Power Generation: More chemical fertilizers and pesticides are being and more dams and reservoirs have been utilized to increase productivity. A built for flood control or power generation. significant amount of these chemicals enters However, these physical infrastructures can rivers, lakes, reservoirs and soil, resulting in impair the self-purification capacity of the eutrophication and groundwater pollution river systems and lead to ecological and threatening the safety of the water disasters. Power generation uses enormous supply. Erosion causes sediment issues. amounts of water, reducing environmental Livestock has become another source of flow and affecting fish and other wildlife. water quality deterioration. Abstraction of 2 China: Addressing Water Scarcity Background Paper No. 2 Engineering Infrastructure: Engineering and policy analysis done many years approaches have been applied to satisfy earlier. Major shortcomings in various types of water demand for many implementation still exist, but the shift from years. Along with increasing abstraction sectorally fragmented to integrated water and wastewater discharge, aquatic systems resource management, the corresponding are becoming more and more vulnerable. creation of new institutions and regulatory Free water extraction and unreasonably low frameworks, more emphasis on non-point prices of water service further accelerate controls, demand management, and public this tendency. participation and stakeholder involvement mark major departures from traditional Huge investments have been made in practice (Box 1). sewage collection and treatment plants, at times not always yielding expected results. General acceptance of a systemic approach Moreover, non-point (diffuse or area) has been illustrated in recent years by new source pollution plays a major role in water policies and themes presented in overall pollution and is difficult to address. several international conventions such as The shortage of funding has become more the UN Declaration on Sustainability and more acute in light of the need to Agenda 21 in Rio de Janeiro (UN, 1992) and implement stricter standards and to the Dublin Conference on Water and upgrade aging infrastructure. Environment (ICWE, 1992). Celebrated statements made in these conventions Institutions and Administrations respond asserted that: slowly in the face of various challenges. This is due partly to the fact that in most · Users, planners and policy-makers at cases, they do not have jurisdiction over the all levels should participate in water area of the basin in which the water development and management (UN, problems occur. As a consequence, sectoral 1992) operations tend to work independently of each other, causing conflict among various · Fresh water is a finite and vulnerable administrations, up- and down-stream, resource (ICWE, 1992) reducing water supply and quality. These human activities and management · Water has an economic value in all its approaches lead to river-flow reduction, competing uses and should be falling groundwater tables, and saltwater recognized as economic goods (World intrusion. Eventually, the scarcity of clean Bank, 1993). water threatens all aspects of human activity, and not merely the rate of Water policies in Europe, the United States economic growth. and other industrialized countries have also changed in parallel to these new initiatives. An Integrated Approach For example, The Water Framework Directive (WFD) (EC/2000/60) of the European Growing problems worldwide toward the Commission (EC, 2000), promulgated in end of the 20th century provided the 2000 after a series of consultations from impetus for many governments to adopt a mid-1995, marks a milestone of water more systemic approach to water resource policy. This "river-basin-based water management, based largely upon research 3 World Bank Analytical and Advisory Assistance (AAA) Program policy" sets up a common integrated framework law. It shifts from a program- approach and an ambitious target for by-program, source-by-source, and Member States to achieve "good water pollutant-by-pollutant approach to more quality" by 2015 (Section 3.1.1). holistic watershed-based strategies. This management approach emphasizes Similar changes have been observed in the protecting healthy waters and restoring United States' Clean Water Act (CWA) impaired ones on a watershed basis. (CWA, 1972), the major water quality Box 1: New Approaches From Sectorally Fragmented to Integrated Water Resource Management (IWRM). Conventionally, water- related sectors operated entirely independently of each other, and often with conflicting interests in making use of the limited water resources they all shared. In contrast to this fragmented management situation, integrated water resource management plans consider water supply, pollution control, agriculture, hydropower, flood control, and navigation together. The major objective is to improve the allocation of increasingly scarce water resources where costs of water are defined in terms of opportunities foregone, or the highest value of alternative uses. New Regulatory and Institutional Frameworks. To apply new policies and approaches, new regulatory frameworks, including regulations, standards and guidelines, have to be formulated and promulgated. Integration requires that water resources be planned and managed on a basin or watershed basis, so new institutions have to be created to facilitate this. Non-point Control. Point-source pollution has been largely under control in Europe and the United States although sewer overflow and storm-water pollution remain unsolved. Nowadays non-point sources such as agricultural run-off, much more difficult to control, tend to be the main contributors to water pollution. Demand Management and Use of Market Based Instruments. Traditionally water resource management consisted essentially of construction and expansion of ways to meet growing demand. This purely engineering approach resulted in wasteful and inefficient use. Recent years have witnessed an increasing role of demand management, which emphasizes efficient water usage and conservation. Instruments include pricing, taxation, water rights security and transferability, as well as a growing role for the private sector in water resource management. Public Participation and Stakeholder Involvement. Public participation and consultation are now seen as crucial to stimulating and pressuring governments and polluters to fulfill their responsibilities. Legal and institutional measures are increasingly being taken to ensure stakeholder involvement in planning and implementation of water-related policies and investment projects 4 China: Addressing Water Scarcity Background Paper No. 2 CHAPTER 3: BASIN-BASED MANAGEMENT The overriding institutional issue in water Not only does it make integrated river-basin resource management is how to encourage planning and management compulsory for an economically efficient and equitable member states and candidate countries, it allocation of water resources in view of the combines the overarching theme of conflicting demands from various sectors, sustainable water-resource use with the i.e.: agricultural, industrial and municipal following environmental objectives: water supply; power generation; flood control, navigation, and the disposal of · Expanding the scope of water waste water. This is complicated by the protection to all waters, surface waters invariable presence of externalities, where and groundwater, for example upstream and downstream · Achieving a status of "good" for all interests lie in different geographical or waters by a set deadline, legal jurisdictions. It involves three key · Water management based on river components, i.e, water quality, water basins, quality and land planning. And even if · "Combined approach" toward both economically efficient solutions which fully recognize opportunity costs can be point and non-pointed pollutant identified for the relevant society as a sources, whole, considerations of equity in allocation · Setting price right , of resources may arise, and political · More closely involving citizens, and considerations invariably do so. The heart · Streamlining legislation. of the issue is how to achieve sensible compromises between the multiple The WFD establishes a framework objectives and constraints that are involved providing a common approach, objectives, in a sustainable manner i.e. that are based principles, definitions, and basic measures on integrated water resource management ­ for water resource management in or basin-based management plans. European countries. Covering both water quantity and quality, it stipulates that "for To this end, many new institutional, legal water quantity, overall principles should be and regulatory initiatives have been taken laid down for control on abstraction and on Europe and the USA to facilitate a more impoundment in order to ensure the holistic, cross-jurisdictional approach to environmental sustainability of the affected water resource management. Some of these water systems (41)," and that "control of are summarized in this section. quantity is an ancillary element in securing good water quality and therefore measures Europe on quantity, serving the objective of ensuring good quality, should also be The Water Framework Directive (WFD). This established" (19). A timetable for Directive, promulgated in 2000, represents a implementation of various tasks has been fundamental reform of the EU's water set for member states (Box 2). policy and legislation on both environmental and administrative terms. 5 World Bank Analytical and Advisory Assistance (AAA) Program Box 2: Time Schedule for Implementation of Water Framework Directive Water Framework Directive sets out a clear deadline for each of the requirements, adding up to an ambitious overall timetable. Key milestones are listed below. Year Issue 2000 Directive entered into force 2003 Transposition in national legislation; identification of River Basin Districts and Authorities 2004 Characterization of river basin: pressure, impacts and economic analysis 2006 Establishment of monitoring network; start public consultation (at the latest). 2008 Present draft of river basin management plan 2009 Finalize river basin management plan including programme of measures 2010 Introduce pricing policies 2012 Make operational programmes of measures 2015 Meet environmental objectives 2021 First management cycle ends 2027 Second management cycle ends, final deadline for meeting objectives In order to address the challenges in a co-operative and coordinated way, member states, Norway, and the Commission agreed on a Common Implementation Strategy (CIS) for the Water Framework Directive. In the new Work Programme 2005/2006, the four Working Groups (Ecological Status, Integrated River Basin Management, Groundwater and Reporting will continue to address the key issues for implementation. In addition, new groups on "WFD and Agriculture" and "CIS" will share experiences in this area, and a new pilot river basin network will support the technical activities in all working groups. Source: http://europa.eu.int/comm/environment/water/water-framework/timetable.html The WFD has established requirements for should be defined. Reference instituting River Basin Management Plans conditions for the surface-water body (RBMPs) for each river-basin district in the EC's Member States and international river types encountered should be included basins, whether they fall entirely within the and economic analysis of water use EU or extend beyond the boundaries of the should be conducted and Community. Some details are as follows: summarized. · The characteristics of the River Basin · Significant impacts on the status of District, including maps of the surface water and groundwater due to location and boundaries of water human activity, including an bodies (surface and groundwater) as estimation of point- and diffuse- well as eco-regions and surface water source pollution, and a summary of body types found in the river basin land use should be analyzed. Pressures on the quantitative status of 6 China: Addressing Water Scarcity Background Paper No. 2 water (including abstractions) are to management plans for sub-basin, sector, be estimated and supplemented by an issue, or water type, to deal with particular analysis of other impacts resulting aspects of water management. from human activity on the status of water. Economic analysis of water service and water use is a major element of river basin · For waters for which the objective of management planning (Article 5). For the "good quality status" cannot be former, the analysis should reveal the achieved, the River Basin Authority present situation as well as the costs and (RBA) must develop and submit for benefits of proposed measures to restore approval a program of corrective water quality. This helps in the evaluation measures. The contents of the and selection of optional measures and program are stipulated as well. provides a basis for pricing and other reforms and also contributes to greater · The results of the monitoring transparency. Economic analysis of water programmes for the status of surface use should aim at identifying the value of water (ecological and chemical), water in various uses and thus is groundwater (chemical and indispensable for river basin management quantitative) and protected areas plans and water policy making (1EC, 2003). should be presented, including a map of the monitoring networks. These The WFD sets out the legal requirements monitoring results are the first and general principles of basin-based indicator of the true state of the institutions stating that such institutions aquatic environment in the river basin. should have clear legal and administrative status allowing them to fulfill their role in · A list of the environmental objectives water resource management, and that there established under Article 4 for surface should be clearly defined institutional waters, ground waters, and protected relationships with other institutions with areas. RBMPs should identify the water­related responsibilities. water bodies where the authorities Essentially, three models of water resource have to declare (and defend) for the institutions exist in Europe (van Beek, 1997). first time the application of extensions These include river-basin (watershed) based and derogations under the directive's management systems in the UK and France, Article 4(4), (5), (6) and (7). whose administrations are centralized, and in Spain, whose administration is semi- · A summary should be prepared of the federal (Barragué, 1999); administration- program or programs of measures boundary-based systems adopted in many adopted under Article 11, including countries, whose administration is the ways in which the objectives decentralized; and a co-ordinate model as established under Article 4 are to be adopted in the Netherlands (van Beek, achieved. 1997). Systems in the UK, France, and Germany, which all have rich experience in River basin management plans involve water resource management, are water quality, quantity and land planning summarized below. and may be supplemented by the production of more detailed programs and 7 World Bank Analytical and Advisory Assistance (AAA) Program United Kingdom1 2001 the agency's plan for managing The major water institution in the UK most the abstraction regime of each closely resembles that required by the WFD. catchment The Environmental Agency (EA) is the leading central administrative body with · Drought plans, which set forth the responsibility for long-term water resource agency's role in managing droughts planning and the duty to conserve, augment, redistribute, and secure the · Regular reviews of water companies' proper use of water resources in England water-resource and drought plans and Wales. The water resource policy is basin-based. The EA has offices at national, · Reviews of regional water-resources regional, and area levels. Its eight regional strategies, setting forth the agency's offices correspond to the eight big river vision for the long-term management basins in England and Wales. of water resources in each region and The Agency's responsibilities cover a · Water resource strategies, which set broader water-related spectrum: flood forth the agency's vision for the long- control, water quality, waste minimization term management of water resources in certain regulated industries (including throughout England and Wales. minimization of wasteful use), fisheries, navigation, etc. This coverage provides Private water companies in the UK play favorable conditions for managing water in important roles in implementation of the an integrated manner. While land use EA's policies and plans (IHE, 1998). These planning is not integrated naturally with companies are responsible for public water water resource management in the UK as supply in England and Wales. Each water both spatial fit and policy priorities differ company has the statutory duty to develop (van Beck, 1997), it is recognized that it is and maintain an efficient and economical necessary to work increasingly closely with system for water supply in its area, and the planning authorities to ensure that the Agency's duties in respect of water- water resource implications of new resources management do not relieve the developments are understood and managed companies of that obligation. Water in a sustainable fashion. This not only abstraction and effluent discharges fall covers the impact on water resources of under the authority of the Environmental new housing, but also industrial activities Agency. that dewater and otherwise affect local rivers and streams. (EA, 2001) Economic regulation of water companies in England and Wales is carried out by the The EA has a decisive influence on water- Director General of Office of Water Services resource policy formulation, as illustrated (Ofwat). Water companies produce plans by some of the programs and activities showing how they intend to manage and under its jurisdiction (EA, 2001): develop their supply systems. The Director General reviews water company prices · Catchment Abstraction Management yearly and determines prices to customers Strategies (CAMS), which set forth in so that companies have sufficient income to carry out the parts of these plans that he 1Part of the contents is taken from: considers justified. http://www.environment-agency.gov.uk/. 8 China: Addressing Water Scarcity Background Paper No. 2 development with respect to the France 2 environment by distributing aid and taxing The Environment Ministry (more users. A Water Agency's sphere of influence specifically, its Water Department) is covers all the surface water, groundwater responsible at the national level for and territorial seawaters relating to each of protection, management and upgrading of the river basins. aquatic environments and river systems, water quality, programming and The power of the Water Agencies rests on coordination of state intervention in two principles: relevant sectors. · Solidarity: everyone has to pay The National Water Committee, consulted charges to the Water Agencies for use by the Water Agencies, plays a key role in of water. Everyone benefits from the national water policy and drafts of construction of infrastructure. legislative and regulatory texts. The Committee is chaired by a Member of · Decentralization: decision-making Parliament and composed of power rests upon the River Basin representatives of the National Assembly Committee and the Agency's Board of and the Senate and of important institutions Directors. Both the Chairman of the and national federations. Water Agency's Board and the Director of the Agency are The Water Agencies (Agences de l'Eau) government-appointed. manage the water of six major hydrographic basins. There is a water In contrast to the Environmental Agencies agency in each basin. A River Basin in UK, the Water Agencies have no power Committee exists in each river basin as well. of policy formulation or construction that The Water Agency works as an executive relate to water or sanitation. These duties lie organ for managing water resources, while mainly with local governments. This system the Committee acts as a 'Water Parliament' is regarded as somewhat aligned to the and is composed of between 60 and 115 basin-based institution as defined in the users, elected representatives, specialists WFD (Barragué, 1999). and state officials. Both organizations are involved in the preparation of the Water Germany 3 Resources Development and Management The institutions in Germany show different Master Plan (SDAGE). The six natural river features from those in the UK. Under basins in France are, therefore, each constitutional law, the federal government managed by two bodies--the River Basin has the right to enact general provisions Committee and the Water Agency. The concerning the framework for water Ministry of the Environment supervises resource management. The states must both. compile such general laws of the federal government by enacting their own laws at The Water Agencies are public bodies state level, and they may also make responsible for balancing economic supplementary regulations. 2Source: http://www.lesagencesdeleau.fr/. 3This section is heavily drawn from FMfE (2001). 1 9 World Bank Analytical and Advisory Assistance (AAA) Program education, and training vary from state to The Federal Ministry for the Environment, state. Nature Protection and Nuclear Safety In contrast to the United Kingdom and (hereafter, the Ministry for Environment or France, Germany's strong decentralized FMfE) deals with basic questions of water structure of federal, state, and municipality resource management as well as with agents creates a cross-state water-resource transboundary cooperation at the central management scheme that relies mainly on level. The Ministry for Environment is coordination through various organizations responsible for the Federal Water Act, the or more formalized co-ordination platforms Wastewater Charges Act, the Detergents for major rivers such as the Rhine, Elbe, and and Cleaners Act and the Federal Nature Weser. Coordination of course becomes an Conservation Act. Proposed legislation on even more complex problem where environmental protection, projects, and international waterways are concerned, the programs are discussed with the Federal Rhine River experience being of particular ministries such as The Federal Ministry for interest in this regard (Box 3). Consumer Protection, Food and Agriculture, The Federal Ministry of Health, Comparing the water institutions in the and The Federal Ministry for Transport, three countries, the common feature they Construction and Housing. The FMfE is the share is that these institutions have a legal supreme authority in environmental and status and overall power concerning water water resource issues at the federal level. quantity, water quality and hydrology (e.g. flood control) in river basins. River basin- Implementation of water resources based cross-jurisdictional institutions are in management regulations is solely the place in the UK and France while specific responsibility of the states and organizations are set up for managing cross- municipalities. Water management jurisdictional water issues in Germany. administration at the state level is mainly integrated within the general United States administration of the relevant state. Technical functions are carried out by Federal Responsibilities. According to the authorities with various names (such as U.S. Constitution the federal government authorities for environmental protection, for formulates general policy and regulations water-resources management or for water for water resource management, while and waste). Detailed responsibilities of states are responsible for implementation. these authorities with respect to fields such Correspondingly, there are two levels of as hydrology, water-resources management water institutions. This section summarizes planning, official technical advice, water resource institutions at both the preparation of technical guidelines, federal and state levels as well as the interstate river basin commissions that manage cross-state water resources. 10 China: Addressing Water Scarcity Background Paper No. 2 Box 3: Cross-Country Water Management: The Rhine River The River Rhine, which was once referred to as "Europe's sewer," is a successful example of cross- country water management. Real international cooperation on River Rhine protection began in the 1970s. The International Commission for the Protection of the Rhine against Pollution (ICPR), consisting of Switzerland, France, Germany, Luxembourg, The Netherlands, and the European Union, plays an essential role in coordinating with other governmental agencies and institutions. Two Bern Conventions in 1969 and 1999 (ICPR, 1999) provide legal foundation for its operation, dispute solving, and financial responsibilities. The tasks involved in international Rhine protection have changed over the course of this cooperation. Initially, chemical water pollution (through municipal and industrial wastewater, oxygen deficiency, oil, and chloride) and elimination of its causes were clearly priorities. After the introduction of an internationally concerted monitoring program and with the help of contractual and political agreements, the water quality of the Rhine visibly improved. Paralleling the decrease in chemical water pollution, biological ecological status assessment gained importance. The samplings performed in the five-year rotation record indicate a considerable improvement in biological quality components, such as fish, invertebrates, phytoplankton, and waterfowl. Another consideration for Rhine protection is flood protection. Driven by the aforementioned flooding in the 1990s, the ICPR assessed and summarized flood-protection activities on the Rhine. A "Plan of Action ­ Flood" was set up in 1995. This plan centers especially on water retention in the river plains and the expansion of retention basins on the Rhine. The "Plan of Action ­ Flood" is to be implemented in phases until 2020 at an estimated cost of 12 billion. Its successful implementation presupposes interdisciplinary thinking and measures from the local to the international levels. The water management problems of this multilaterally and intensely used river have been addressed with sustainable and increasingly efficient resolutions. This experience was used in drafting the European Water Framework Directive. Source: Frijters et al., (2001). The institutions at the federal level that The EPA plays a leading role in regulating have responsibility for water resource water quality. It has ten regional offices issues relating to their areas are (OTA, spanning the whole territory of the United 1993): States. Each office covers several states and one or more entire river basins, which cross · The Environmental Protection Agency several state jurisdictions (EPA): its duties include issuing (http://www.epa.gov/water/ permits for discharge of pollutants region.html). The authority of Regional EPA into aquatic systems, setting national offices on the states is via empowering of drinking water standards, developing approval of the state regulations and criteria that enable states to set water standards and approval of federal funding quality standards, administering state used in water. grant programs to subsidize costs of building sewage treatment plants, etc. 11 World Bank Analytical and Advisory Assistance (AAA) Program · The Army Corps of Engineers: the Agricultural Water Quality Protection most important federal water resource Program, the Small Watershed development agency in budgetary Program. terms, responsible for projects involving flood control and flood · The National Oceanic and plain management, water supply, Atmospheric Administration under navigation, hydroelectric power, the Department of Commerce: deals shoreline protection, and recreation, with watershed management and non- etc. point-source pollution in its coastal zone and fisheries management. · The U.S. Geological Survey (USGS) under the Department of the Interior: · Federal Energy Regulatory assesses the quality, quantity, and use Commission (FERC) under the of U.S. water resources. The Bureau of Department of Energy (DOE): issues Reclamation provides municipal and licenses for hydropower projects, irrigation water and operates considers measures to preserve hydroelectric facilities in the western environmental quality, etc. states. State Institutions. By constitutional law, · Fish and Wildlife Service (FWS) under state governments hold most of the the Department of the Interior: the authority to allocate water, apply water lead federal agency for conservation of rights, trade water, ensure and protect fish and wildlife and their habitats; water quality, etc., within the state responsible for endangered species, jurisdiction. State water institutions, as freshwater and endangered fisheries, agencies of state governments, are in charge certain marine mammals, and of water resources and quality within the migratory birds. Manages 700 national state's jurisdiction. They are well wildlife refuges; assesses established at the state level in the United environmental impacts of States (http://www.epa.gov/water hydroelectric dams, stream /region.html). canalization, and dredge and fill operations. Interstate Institutions: River Basin Commissions. In the United States some · Soil Conservation Service (SCS) under river basin-based water commissions are the Department of Agriculture responsible for cross-state water resource (USDA): helps farmers develop soil management. The Delaware River Basin and water conservation plans and Commission (DRBC), which involves arrange for cost-share funding for Delaware, New Jersey, Pennsylvania, and implementation of conservation New York, and The Chesapeake Bay practices in cooperation with other Commission (CBC), which involves agencies, offers advice to farmers on Maryland, Virginia, Pennsylvania, and the pesticide and fertilizer use and land District of Columbia, are two well-known management, and is responsible for examples. The Commissions are legal water improvement programs such as entities rather than purely administrative the Conservation Reserve Program, institutions. the Wetlands Reserve Program, the 12 China: Addressing Water Scarcity Background Paper No. 2 Box 4: Chesapeake Bay Program The Chesapeake Bay Program was created in 1983 to reverse decades of man-made decline in the estuary. Signatories of the Commission are the States of Maryland, Virginia and Pennsylvania, the District of Colombia, and the U.S. Environmental Protection Agency. An organization chart of the Commission is shown below. Experience in the Chesapeake Bay region illustrates the complexity of integrated basin management, in particular in relation to the vast number of interests involved. For example, the Federal Agencies Committee referred to in the chart has responsibilities with regard to formally designated "Partners", namely 11 Federal Departments, and about 30 sub-agencies, and these are in most cases paralleled by departments with similar responsibilities in the three States and the Washington DC Government. And other Partners include 20 foundations, watershed organizations and NGOs, and 16 Universities, as well as the headwater states of Delaware, New York, and West Virginia. The experience however also demonstrates the necessity of integrated basin management. In particular the multitude on non-point sources of pollution combined with decreasing natural buffers cross jurisdictions and sectors and can only be addressed by a regional approach. This applies in particular to the management of forests and protection of wetlands as well as programs to control agricultural run-off, which is largely responsible for a major and growing problem in the Bay, namely the growth in nitrogen pollution. Source: http://www.chesapeakebay.net 13 World Bank Analytical and Advisory Assistance (AAA) Program Establishment of these two Commissions waters, waters of the contiguous zone was initiated by the federal government. and the oceans, and The members of the Commissions include the governors of the states involved and the · Programs for the control of nonpoint federal representative, who is an officer sources of pollution are to be appointed by the President in the case of the developed and implemented Delaware Commission and the expediently so as to enable the goals Administrator of the USEPA in the case of of this act to be met through the the Chesapeake Bay Commission. This control of both point and nonpoint ensures the Commissions' overall power sources of pollution and authority on basin-water related matters including setting policies, The CWA establishes the basic structure for regulations and codes. The massive regulating discharges of pollutants into the administrative and institutional waters of the United States. The statute complexities associated with large interstate employs a variety of regulatory and non- basin management are illustrated in the regulatory tools to sharply reduce direct case of the Chesapeake Bay Program in Box pollutant discharges into waterways, 4. finance municipal wastewater-treatment facilities, and manage polluted runoff. The Clean Water Act Many regulations based on the CWA are The holistic approach to water resource introduced in this chapter. management in the US at the federal level is perhaps best illustrated with respect to the The CWA stipulates that "It is the policy of issue of water quality, as enshrined in the Congress that the authority of each State to The Clean Water Act (CWA). This, the allocate quantities of water within its United States' water-quality framework jurisdiction shall not be superseded, law, was first enacted in 1972 and sets out abrogated or otherwise impaired by this national water policies as follows (Section Act. It is the further policy of Congress that 101): nothing in this Act shall be construed to supersede or abrogate rights to quantities of · The discharge of toxic pollutants in water which have been established by any toxic amounts is prohibited State (Section 102(g))." · Federal financial assistance is There are several other water-related provided to construct publicly owned initiatives not covered by the Clean Water waste-treatment works Act that significantly impact water resource management in the United States. · Area-wide treatment, management, and planning processes are to be · Safe Drinking Water Act (SDWA): This developed and implemented to assure act, originally passed by the Congress adequate control of sources of in 1974 and amended in 1986 and pollutants in each state 1996, aims to protect public health by · A major research and demonstration regulating the nation's public drinking effort is to be made to develop the water supply. The act authorizes the technology necessary to eliminate the United States Environmental discharge of pollutants into navigable Protection Agency (EPA) to set 14 China: Addressing Water Scarcity Background Paper No. 2 national health-based standards to point-source discharges, Load protect against both naturally Allocations (LAs) for nonpoint sources occurring and man-made (NPS), and a Margin of Safety (MOS). contaminants that may be found in By law, the EPA must approve or drinking water. disapprove the lists and TMDLs established by states, territories, and · Endangered Species Act (ESA): Enacted authorized tribes. If a state, territory, in 1986 under the authority of the Fish or authorized tribe submission is and Wildlife Service (FWS), the act inadequate, EPA must establish the requires each state to set up a list or the TMDL. minimum stream flow to protect specific species of fish and the overall · Water Quality Management Plans. US environment. This act has important Federal Regulation CFR 40 Part 130 repercussions for irrigation, (USFR, 1999) mandates basin-based hydropower, navigation, and like principles and components of water- projects. quality management plans, and the TMDLs is one such component. Important initiatives under the general framework of the CWA include Total · Non-point Source Program. In 2003, EPA Maximum Daily Loads (TMDLs) (CWA, enacted the new Nonpoint Source 1972), water-quality planning and Program and Grants Guidelines management (USFR, 1999), and Nonpoint (1EPA, 2003) for States and Territories Source Program and Grants Guidelines under Section 319 of the Clean Water (1EPA, 2003). Act. The document recommends that, whenever feasible, watershed-based · Total Maximum Daily Loads (TMDLs) . plans be developed and implemented Early in 1972 the CWA (section 303d) for all watershed projects, whether stipulated TMDL provisions, which they are designed to protect set a limit to the amount of a pollutant unimpaired waters, restore impaired that can be discharged into a water waters, or both. The guideline body. It required states to develop a stipulates that a watershed-based plan list (303d List) of water bodies for contain the following components: which existing pollution-control activities were not sufficient to attain a. An identification of the causes and applicable water quality and to sources or groups of similar develop Total Maximum Daily Loads sources that will need to be (TMDLs) for pollutants, including controlled to achieve the load both point and nonpoint sources reductions estimated in this (NPS) or stressors causing impairment watershed-based plan (and to and an allocation of that amount to the achieve any other watershed goals pollutant's sources. The current identified in the watershed-based operating TMDLs program is under plan). Sources that need to be 1992 TMDLs regulation contained in controlled should be identified at CFR 40, part 130 (USFR, 1999) and the significant subcategory level consists of three key components: with estimates of the extent to Waste-Load Allocations (WLAs) for 15 World Bank Analytical and Advisory Assistance (AAA) Program which they are present in the watershed. f. A reasonably expeditious schedule for implementing the NPS b. An estimate of the load reductions management measures identified expected for the management in this plan. measures recognizing the natural variability and the difficulty in g. A description of interim, precisely predicting the measurable milestones for performance of management determining whether NPS measures over time. management measures or other control actions are being c. A description of the NPS implemented. management measures that will need to be implemented to achieve h. A set of criteria that can be used to the load reductions estimated of determine whether loading the critical areas in which those reductions are being achieved over measures will be needed to time and whether substantial implement the plan. progress is being made toward attaining water-quality standards d. An estimate of required technical and, if not, the criteria for and financial assistance, associated determining whether this costs, and/or sources and watershed-based plan needs to be authorities that will be relied upon revised or, if a NPS or TMDL has to implement the plan. been established, whether the NPS or TMDL needs to be revised. e. An information/education component to enhance public i. A monitoring component to understanding of the project and evaluate the effectiveness of the encourage early and continued implementation efforts over time participation in selecting, and measured against the criteria designing, and implementing the established. NPS management measures to be implemented. 16 China: Addressing Water Scarcity Background Paper No. 2 CHAPTER 4: ECONOMIC INSTRUMENTS Water Rights and Trading (appropriative rights). An appropriative right exists without regard to the Most aspects of this topic are addressed in relationship between the land and water. some way in the United States, which These rights are entitlements to a specific encompasses a variety of approaches to the amount of water, for a specified use, at a allocation of water rights and trading in specific location with a definite date of those rights. priority. An appropriative right depends upon continued use of the water and may Water Rights. There is no national water- be lost if the water is not used. Unlike rights law in the United States; and water riparian rights, these rights can generally be resources fall mainly under the authority of sold or transferred, and long-term storage is states (Andreen, 2005). Most states have not only permissible but common. There are water code(s) or law(s) that outline the rights four essential elements of appropriative of public water and wastewater utilities as rights application and transfer: Intent, well as the state's authority over investor- Diversion, Beneficial Use, and Priority owned utilities and rates setting. State laws (OTA, 1993). or codes define the allocation of the rights of private parties and government entities to "Beneficial use of water" is the basis of a use such water. The doctrines which are water right. Many state water laws define referred to in approval of water-rights the contents. The goal in beneficial use is to applications are different depending upon avoid water waste, so that water is available whether the water in question is surface or to as many water-rights holders as possible. ground water as well as its geographic Return flow is water that returns to streams location (OTA, 1993; Andreen, 2005). and rivers after it has been applied to beneficial use. It may return as a surface Doctrines addressing surface water in the 31 flow or as an inflow of tributary eastern states are dictated by proximity of groundwater. Many water rights depend on land ownership (riparian rights). Riparian surface and subsurface return flows. Under water rights occur as a result of land Colorado law, native basin water is subject ownership. A landowner who owns land to only one use, and thus return flow that physically touches a river, stream, pond, belongs to the stream system to fill other or lake has the right to use water from that appropriations (Quinn, 2004). source. This water right, however, is only a usufructuary right and not a property right For groundwater, water rights applications in the water. The riparian right is part of the are considered according to one of three riparian land and cannot be transferred for doctrines: absolute, reasonable use, or use on other lands (OTA, 1993). appropriation permit. The absolute doctrine, used exclusively in Texas, gives In the 19 western states water is usually rights to the overlying owner and does not allocated according to a "grandfathered" restrict usage. The "reasonable use" system of "first in time, first in right" doctrine, used in California and most eastern states, gives the rights to 17 World Bank Analytical and Advisory Assistance (AAA) Program landowners, but with the added provision granted priority over economic interests, that their use of the water cannot interfere are imposing more and more influence on with other users. The third doctrine, used in existing water rights. Such laws have the western states, is based on priority, created federal regulatory rights to meaning that prior users of groundwater minimum flows and have the potential to have the greatest legal rights (OTA, 1993). require states to reconsider the allocation of water in order to improve instream flows State governments impose interventions on and water quality (Andreen, 2005). the usage of water rights. The constitutions of all western states declare water to be a Water Trading. Water trading is useful in public resource. Some states, such as regulating water distribution. In some parts California and Washington, have started to of the United States, there are well enforce the public interest requirement. In established active water-trading markets these states, any transfer (sale, lease, or that aim to encourage the highest beneficial exchange) of water rights is subject to use of water, provide a source of adequate approval by the State Water Board through water supplies to beneficial new and the application process. In the Eastern part of supplemental water users, and provide a the country, about half of the states of the source of funding for improving water user one-hundredth meridian have facilities and efficiencies. A typical example supplemented, since the 1950s, to one extent is the Idaho Water Supply Bank (Box 5), or another, the riparian rights system with which began in the 1930s. The Bank is an administrative permit scheme (Andreen, operated by the Water Resources Board and 2005). has two program areas, the Rental Pool and the Water Supply Bank. The Rental Pool In addition to the interventions of state water relates to stored flows from federal water administrations, federal environmental laws projects and is administered by local and regulations such as the 1972 Clean committees within water districts. These Water Act and the 1986 Endangered Species committees establish the rules subject to the Act, which specify that water quality and approval of the Water Resources Board biodiversity conservation objectives are to be (Camkin, 2004). 18 China: Addressing Water Scarcity Background Paper No. 2 Box 5 Idaho Water Supply Bank The Water Supply Bank relates to the management of natural stream flows and groundwater, and is administered through the Idaho Department of Water Resources (IDWR). It substitutes for a water- rights transfer process by removing some of the assessment requirements of transfers. Consequently, access to water sought through the Water Bank is generally provided within a couple of weeks, as opposed to several months through a water transfer. The IDWR keeps a list of water rights available for lease on the Internet; interested parties can call the IDWR to see if water may be available to them. Water users who in any given year have rights to more water than they need can put the excess stored water or natural flow rights they will not use in the Bank. From there, the water can be sold or leased to people who do not have enough to meet their needs. This system helps make excess water available to other users for irrigation or other authorized uses. Water from the Water Supply Bank has also proven valuable in providing stored water for downstream-salmon-recovery efforts. This Water Supply Bank approach helps put the maximum amount of water to beneficial use. There is also incentive for those not using their water rights to make them available through the Water Supply Bank as it stops the forfeiture clock. However, because the intent of the Bank is to make water available for beneficial use, a key policy question is whether the forfeiture clock should stop if the water placed in the Water Supply Bank cannot physically be taken by others, for example due to environmental constraints. Where possible, the IDWR is obliged to rent out the water rights that have been in the Bank the longest (i.e. first in, first out), which can restrict an open market exchange in some cases. The rules of operation of the Water Supply Bank are established in the State Water Plan. The Water Resources Board can amend the rules through the SWP planning process. Large scale water trading also occurs in the It should be noticed that state governments western United States: water trading from maintain the right to intervene in trading, agriculture to municipality and industry since unrestricted trading may very well has made essential contributions to change the use of the water. Several economic development in the region. A important factors, including physical typical example of this type of economic infrastructure, variability of the large boost is illustrated by the Northern number of agencies that need to be involved Colorado Water Conservancy District in any comprehensive water-strategy (NCWCD). This local agency partnered agreement, critical property rights, and a with the federal government (Bureau of conflict between established and newer Reclamation) to construct the Colorado-Big users make unlikely the possibility of a Thompson (C-BT) Project, the largest trans- market simply directing water to where its mountain diversion project in Colorado, marginal productivity appears to be highest which supplies supplemental water to 30 (O'Brien et al., 2001). cities and towns, over 100 ditch and reservoir companies, and 600,000 acres of Water Quality Trading. Water quality irrigated farmland in north-eastern trading aiming at cost-effective water- Colorado. pollution control has been used in the United States for some time. The first EPA water-quality trading policy was issued in 19 World Bank Analytical and Advisory Assistance (AAA) Program 1996, and the latest Water Quality Trading impair water quality. EPA does not support Policy was enacted on Jan. 13, 2003 (2EPA, trading of persistent bio-accumulative toxic 2003). Trading works well under the pollutants at this time. following conditions (2EPA, 2003): The policy supports trading to improve or · There is a "driver" to motivate finding preserve water quality in a variety of approaches to reduce pollutants, circumstances. For example, in unimpaired usually a Total Maximum Daily Load waters, trading may be used to preserve (TMDL) or a more stringent water good water quality by offsetting new or quality-based requirement in an increased discharges of pollutants; in waters NPDES permit impaired by pollutants, trading may be used to achieve earlier pollutant reductions · Sources within the watershed have and to make progress toward water quality significantly different costs to control standards pending the development of a the pollutant of concern TMDL; and trading may be used to reduce the cost of achieving reductions established · The necessary levels of pollutant by a TMDL. The EPA does not support reduction are not so large that there trading that delays implementation of an are insufficient potential surpluses in approved TMDL. the watershed to be traded, and The EPA's policy stresses that to be credible · Watershed stakeholders and the state and successful, the trading programs regulatory agency are willing to try an should include the following general innovative approach and engage in elements: clearly defined units of trade, use trading design and implementation of standardized protocols to quantify issues pollutant loads and reductions, provisions to address the uncertainty of non-point EPA's Water Quality Trading Policy source loads and reductions that are traded, provides guidance to states and tribes on accountability mechanisms for all trades, how trading can occur under the Clean public participation and access to Water Act and its implementing information, and monitoring and program regulations. The policy discusses the Clean evaluation. Water Act (CWA) (Section 301(b)) requirements that are relevant to water Abstraction Fees quality trading. Most countries in Europe levy fees for EPA's policy supports trading of nutrients private abstraction of groundwater. For (e.g., total phosphorus and total nitrogen) example, in the Netherlands, the water and sediment-load reductions. The policy abstraction charging scheme on recognizes the potential for environmental groundwater comprises two different taxes: benefits from trading of pollutants other one charged by the provinces and another, than nutrients and sediments but believes additional national levy. The national that these trades may warrant more groundwater abstraction tax was scrutiny. The policy does not support any introduced in 1995 as one of several "green trading activity that would cause a toxic taxes." The main objective of this tax is to effect, take priority over human health, or act as an incentive and to reduce groundwater use in favor of surface water 20 China: Addressing Water Scarcity Background Paper No. 2 by narrowing or eliminating the price groundwater investigation consent to differential between ground and surface construct and then test pump the source are water. Ground water is cheaper in the required. The Catchment Abstraction Netherlands due to lower treatment costs; it Management Strategy (CAMS) for the amounts to 70 percent of the country's related area will provide relevant water supply. information on the Environment Agency's approach to abstraction licensing in the The tariff is set per cubic meter and is catchment (EA, 2005). An application fee determined mainly by political and abstraction charges are levied. considerations. In 2000 the tariff per cubic meter was 0.166/m3 for public water- Prices and Taxes supply companies, 0.12/m3 for other users, and 0.025/m3 for infiltrated Water Pollution: The Polluter-Pays Principle. groundwater. The tax generated total Generally, in both Europe and the United revenue of 163.4 million, and as it falls States, pollution control relies primarily on under the general government budget, it is the enforcement of standards ­ so called administered and collected by the Ministry "command and control - rather than the use of Finance and the Central Environmental of economic incentives. However, in recent Tax Unit in Rotterdam (Kraemer et al, 2003). years the growing use of environmental taxes to address water pollution in Taxes on the abstraction of water from the industrialized countries has been natural environment were introduced in extensively documented by OECD and Germany at the state level after earlier others. Most European countries have discussions at the federal level in the 1950s introduced emissions charges for industrial failed to bring about the imposition of a wastewater, typically based upon volume, federal tax in the 1960s. Water resource and varying according to the type of taxes were introduced not as alternatives to pollutant. In the USA, charges on command-and-control instruments but as emissions, levied by states, vary according their complement. On January 1, 1988, to source, volume, and/or toxicity of the Baden-Württemberg became the first discharge. German land to establish a tax on water abstraction, the tax being established in In practice, due to the administrative order to finance compensation to farmers problems inherent in monitoring to ensure for restrictions on fertilizer use in water compliance with standards, there appears to catchment areas. Similar links exist between be an increase in the use of product charges water resource taxes and environmentally or indirect instruments where taxes are motivated subsidies in other states. levied on the sale of a potentially polluting (Kraemer et al, 2003). substance rather than upon discharges of effluent into a river or other water body. In the UK anyone wishing to abstract water While non-compliance still remains an from a surface source (e.g., river, stream, or important issue, this is clearly less of a canal) or from an underground source will problem for fixed, point sources of pollution need an abstraction license according to the as opposed to non-point pollution, where Water Resource Act of 1991. If the water is run-off from agricultural chemicals remains being abstracted from an underground one of the most intractable problems. source, such as a well or borehole, a 21 World Bank Analytical and Advisory Assistance (AAA) Program Box: 6: Taxation of fertilizers in Europe Summary of European experiences of nitrogen taxation Tax base and rate Countries Dates (% of fertilizer price) Tax product use Finland 1976-1995 Fertilizer tax (less than 3%) Subsidies of cereal export 1992-1995 Specific tax on nitrogen Since 1987 fertilizer (70%) Cost of administration Fertilizer tax collected fertilizer and control regulation producers and importers Sweden 1985-1993 Tax on NPK fertilizer (around Support of agricultural Since 1985 20%) exports Environmental tax on NP Subsidies, expenditure, fertilizer (increased rate) State budget since 1995 In all: 20-30% of nitrogen fertilizer price Austria 1986-1993 Tax on NPK fertilizer (increased Subsidies for export rate) Subsidies expenditure for 39% then 59% of nitrogen environmental protection fertilizer price Norway Since 1988 Tax on NP fertilizer State budget Around 20% of nitrogen fertilizer price Source: Bel, (2004) The practice of taxing fertilizers has been widely adopted in Europe in order to reduce Disposition of revenues from pollution nitrogen discharge into surface and taxes remains a controversial issue. groundwater (Box 6). The revenues Political realities often dictate that such generated are used as governmental revenues are earmarked for environmental revenues as well as for expenditures on improvements, or channeled back to the water-pollution control. Such an approach polluting sectors via a myriad of subsidy has not been used in the United States. In programs. Indeed, OECD experience that country agricultural policy is designed indicates that the use of economic in regard to environmental consequences, instruments for pollution control in the and indeed some programs show that the industrialized countries is small, but Department of Agriculture is well aware of subsidies of one form or another are by far the environmental problems that agriculture the dominant type of economic instrument can cause, but it prefers to tackle them observed in practice. through conditional access to subsidies, rather than applying the "polluter-pays While they may be necessary for political principle" (O'Brien, et al., 2001). purposes to ensure the cooperation of industry, or, in some cases, to compensate 22 China: Addressing Water Scarcity Background Paper No. 2 for social problems caused by imposition of further and further away from consumption pollution control measures, subsidies are centers have to be exploited; in other words, clearly inconsistent with the polluter-pays long run marginal costs of supply exceed principle, impose a fiscal burden, invite average costs. An economically efficient corruption, and once established they are price is one that equals long run marginal difficult to remove. Indeed, rather than production costs including any subsidizing environmentally degrading environmental costs that may be incurred in activities, the trend should be to introduce the production process: valuation of "green taxation" to make a positive fiscal incremental production is demonstrated by contribution, and to establish a "level consumers' observed willingness to pay. playing field" in which, as far as possible, Such a price would also yield financial true costs are reflected in the prices charged surpluses; since invariably the bulk of the for environmentally-related resources. water consumed in a municipal system is consumed by a relatively small number of The above experience shows that despite an wealthy households, commerce and increasing use of economic instruments for industry, there is generally considerable environmental purposes, much still needs to scope to generate enough funds to provide be done to make the polluter-pays principle a basic requirements to the poor at little cost reality, whether by means of requirements to them. While in principle it is desirable that waste generators pay for the cost the that subsidy programs should be explicitly incur in meeting effluent standards, by targeted and controlled by a central agency directly levied economic instruments, or by such as the Ministry of Finance, in practice indirect forms of taxation based upon the inadequate fiscal administrative cost of environmental damage that is caused. mechanisms mean that it will generally be more practical for the water authority to Domestic water supply directly cross-subsidize the poor by a Traditionally, many European countries and system of increasing block rates. the United States provided financial subsidies for public water supply, often in Tariff structures for public water the name of protecting the poor, but such a consumption vary. The majority of policy has had perverse effects. The industrialized countries, however, use a consequence has been that financially combination of the flat fees plus variable deprived utilities have been unable to charges. Where flat fees or fixed elements generate sufficient funds to expand service to are used in the tariffs, these may be charged low income areas, typically leaving the poor at the same level for all households, or with inadequate volume and quality of water varied (depending on the lot, household, or even for their basic needs. Growing garden size; the pipe or meter size; the recognition of this problem has led, in recent number of taps; or the number of rooms). years, to efforts to ensure the financial viability of water utilities, generally A general shift of tariff reform of public implying, inter alia, an increase in water water supply towards more economically rates. efficient charging systems, and the implementation of incentives for water Indeed, the increasing cost of water supply is conservation, has been observed. A general becoming a major issue throughout the moving tendency is away from fixed-price world, as demand grows and as sources and decreasing-block tariff structures, and 23 World Bank Analytical and Advisory Assistance (AAA) Program towards volumetric charging and increasing- supply. On the other hand, water-intensive block structures (OECD, 1999). Ensuring industries in Germany can obtain rebates. In affordable water to the poor is a key to the Netherlands, if surface water is injected successful price reforms. To promote into the aquifer before groundwater affordable water supply and wastewater- abstraction, the abstractor can claim a treatment services, a range of innovative subsidy, which will then reduce the total tariff structure and methods have been used charge. Similarly, in Italy, industrial users to alleviate hardships caused by tariff reform are all charged the same, but a 50 % while still providing incentives for efficient reduction is given if water-saving water use (1OECD, 2003). techniques are employed (OECD, 1999). Industrial Water Supply Sewerage The price structures for industrial consumers Household Sewage. The tariff of household are generally fixed at the local (municipal) sewage is based largely on volumetric water level and can vary widely within a country supplied to households because of a close (e.g., in order to reflect differences in cost relationship to the volumes of sewage structures). The most common structures are generated and water supplied. Thus, the two-part tariffs, including a fixed element, structure of wastewater charging regimes which generally varies according to some tends to follow closely that of domestic characteristic of the user, and a variable water-supply systems in most developed element, usually based on average cost countries (OECD, 1999). pricing. The supply amount is an important factor to the price. Decreasing block (lower Domestic sewerage fees in Europe vary price is offered to the larger supplier) prices considerably, with Germany being the are in effect in the United Kingdom and part highest at an annual rate of 113 per habit, of the United States (Great Lakes). The block Denmark ranks the second, France and the structure is increasingly being applied in U.K. are moderate, while Ireland is the Italy, Portugal, and the western United States lowest (FMfE, 2002). This sequence is (OECD, 1999). consistent with the technologies and processes adopted in the sewage treatment. Direct abstraction is another major resource Germany and Denmark have the highest for industry water supply in addition to portion of the tertiary biological-treatment public water supply. Lower quality plants in Europe. Generally, sewerage fees requirement for some industry is one of the have increased steadily in recent years. main reasons for direct abstraction. The physical source of industrial water The structure of annual total sewage fees in abstractions can be either groundwater or Germany is made up of basic charges, surface water depending on the investment regular wastewater charges, and connection needs and charge levied by environmental charges. Basic charges are levied on about regulators. Most countries levy fees for 11 percent of the people served, mainly low direct abstraction of water resources. income groups. So, basic charges help to achieve a more reasonable distribution of When distinctions by type of user are made, the high fixed costs (some 75 to 85% of the industrial uses tend to face higher charges costs) (FMfE, 2001). than domestic ones. In Poland, for instance, abstraction charges for public supply are 6 to The wastewater charge in Germany consists 47 times lower than those for industrial of a sewage charge based on the freshwater 24 China: Addressing Water Scarcity Background Paper No. 2 scale (the charges are calculated on the basis providing these services. For agricultural of drinking water consumption only) and users, although irrigation run-off can be rainwater charge based on the size of the site quite polluting (particularly where minerals to be drained. The average tariffs of are leached), there are generally no facilities households, sewage and rainwater are in place to reduce this "environmental 2.28/m3, 1.79/m3 and 0.77/m2, subsidy." respectively (FMfE, 2001). The pricing of wastewater services for Industrial Sewage. The volume and industrial users is generally based on characteristics of industrial sewage vary accounting principles, which aim at considerably from one company to another. covering some fraction of the historic costs Thus, industrial water consumption levels do of providing these services. However, not represent a good proxy for industrial charging systems based on historic costs sewerage and sewage disposal costs. As a will not typically generate sufficient result and closely related to the shift toward revenues to finance current investment more cost-reflective water tariffs for needs. For this reason, even if sewage tariffs industry, the separation of sewerage and are set to recover operating and trade effluent prices for industrial sewage is maintenance costs, they would be a tendency. The number of countries in insufficient to cover future investment costs. which the costs of industrial sewage services This is particularly true in some EU are included in the price of water supply (or countries, where the implementation of the in general local taxes) has therefore been Urban Waste Water Treatment Directive decreasing steadily. Trade-effluent charges (91/271/EEC) (1EC, 1991) has led to usually depend on the metered volume of considerable investment needs in order to pollutants and/or pollution contents. In comply with more stringent standards. other cases, the charging formula can defer the costs to the water-treatment company Agriculture treating a particular effluent (OECD, 1999). In addition to volumetric pricing, various types of tariff structure are used for Trade effluent charges are levied in 17 OECD irrigation water in the OECD countries (see countries and are under consideration in a Box 7), although levels are very low. few others. Opponents are concerned about the competitive implications for local Indeed, supplies are virtually free in parts industry, or perceive that monitoring costs of the United States and some European will be too high. countries, with the Netherlands and Austria being exceptions to this rule. More In countries where sewage service costs have commonly, irrigation prices are intended risen significantly, industrial users have only to make farmers responsible for the increasingly set up their own treatment and variable costs of supplying water, whereas effluent re-use facilities. A permit is needed part or all the fixed costs are covered by for direct discharge of treated industrial public agencies, at taxpayers' cost. In many wastewater. cases, water consumption is not metered, leading to difficulties in defining pricing For domestic and industrial users of the mechanisms and choosing tariff structures. public water system, wastewater charges are often insufficient to cover the full costs of 25 World Bank Analytical and Advisory Assistance (AAA) Program Box 7: Irrigation Water Charges, OECD Countries Area-pricing: charges for water used per unit of irrigated area. This structure may sometimes lead to area pricing discrimination depending on factors affecting water utilization such as crop irrigation, irrigation technologies, and the season of the year Tiered-pricing (sometimes called "block-rate" pricing): different prices for the volumes of water expected to be used in different ways Betterment levy-pricing: charges irrigated land based on the increased value of land, due to the provision of irrigation water Water markets (including auctions): public agencies can elicit farmers' "willingness-to-pay" for marginal units of water and set prices accordingly Passive trading: the district offers a price ­ presumably one which equates aggregate water supply and demand ­ and farmers make use of whatever amount of water they want. Farmers' consolidated rights to water are then charged at the average price, but those whose consumption is higher pay the offered price, and those consuming below their rights would receive a payment for their thrift Volumetric pricing (of any kind), with a bonus: farmers are required to pay for any water that exceeds a certain volume and are financially rewarded if their consumption is below another threshold Source: OECD (1999). Similar comments to those made earlier significantly in the 1990s (2OECD, 2003), but about municipal water supply also apply to it is still estimated that only 10 percent of irrigation water. Pricing at less than long the world's population is supplied with run marginal cost (defined to include drinking water by private operators. While opportunity cost ­ or highest value in the nature of private sector participation alternative uses) is an inducement to ranges from partial financing of wasteful use. Moreover, failure to recover investments to an increasing role in the costs of operation and maintenance results operation of services, most countries have in further inefficiency and waste, often with opted for the concession approach, in which adverse environmental consequences as the private sector participates in managing well. some services but the public sector retains ownership of the system. Views expressed Private investment by the OECD on lessons from experience of private sector operations in urban water Private participation in water and sewerage and wastewater services are shown in Box sector in the OECD countries increased 8. 26 China: Addressing Water Scarcity Background Paper No. 2 Box 8: Private participation in Urban Water and Wastewater Services: Some Lessons The following list outlines some of the key lessons from OECD experience with private-sector investment in urban water and wastewater services. If a government decides to involve private firms in meeting its responsibility, it also needs to shift from being the manager of the water system to being its overseer and regulator. Water fees are often too low to support major private investments. Water users are willing and able to pay for many water services. Addressing the social aspect of water provision is crucial to the success of private-sector participation. Costs and risks are often too high. Governments and users are often not willing or ready to address risks to investors' satisfaction. Private water-operating companies are limited in number and cannot do everything. Municipalities need to set infrastructure-performance standards to reflect local needs and demand. Local and central governments need to improve their regulatory capacity. Public awareness needs to be increased so that the form of private involvement best fits local needs. Source: OECD, (2003) 2 Private financing in water infrastructure technical expertise and/or financial takes the forms (1) capital investment: resources. In France, with regard to a contractual options vary from Building growing number of municipally owned Operation and Transfer (BOT) to Design, systems, service providers are permitted to Building, Operation and Transfer (DBOT). decide whether they want to manage the The length of contracts may also vary from service themselves (direct management) or three to thirty years. At the end of the to delegate management to a private contract, assets are transferred back to the operator. Currently, "concessions" (i.e., the municipal or state authorities; and (2) direct delegation of authority to private concerns) financing: often called "full privatization," in France involve 75% of public water because hundred percent of the assets are supplies, but only about one third of owned by the private investors. It is the wastewater services. A variety of such rarest form of private-sector participation, systems has also been adopted in Spain; found mainly in the United Kingdom and in 40% of the population is served by the United States. In Europe, the United concessions. Direct (municipal or supra- Kingdom goes the farthest in direct municipal) or delegated public privatization of the water sector. management remain the norm in Belgium, Canada, Denmark, Greece, Korea, and Even where the public water supply system Sweden, and in some areas in Austria and remains publicly owned, service Italy (OECD, 1999). management is increasingly being delegated to private operators. This In Germany various enterprise models have approach seems particularly well suited to been adopted in wastewater services as decentralized systems, in which follows (FMfE, 2001): municipalities see delegation as a useful way of overcoming their own lack of 27 World Bank Analytical and Advisory Assistance (AAA) Program · Municipality-operated enterprise: operated by the municipality within Confronted with the demand increase, user the framework of the general competition on limited water sources, needs of municipal administration. upgrading of aging infrastructure, and budget · Enterprise in its own right: operated constraints, the government's role in water management in many advanced countries has by municipality as special property been shifted from a primary provider of water with independent accounting. services to a more innovative creator and · Company in its own right: enterprise regulator of policy and reform (1OECD, 2004; under private law in the hands of the 2OECD, 2004). municipality. · Operator's model: operating functions Private investment enhances the financial in put transferred to a "private" entrepreneur to water service, but full recovery via user while responsibility for implementation of charges of capital costs seems unlikely over the the functions remains with the respective near term (OECD, 1999). The public subsidies are municipality. still provided as illustrated by the fact that substantial special funding by the federal Germany's experiences illustrate that the poor government and the EU was made available for performance are attributed to faulty incentive the reconstruction of infrastructure in the new structures, the politicization of appointments states in the former GDR and the EC's new and management, and other bureaucratic member states especially on wastewater weaknesses rather than the types of ownership treatment infrastructure (FMfE, 2001). of water services. 28 China: Addressing Water Scarcity Background Paper No. 2 CHAPTER 5: PUBLIC PARTICIPATION Importance of Public Participation Europe Public participation is crucial to stimulating The Århus Convention and pressuring governments and polluters The Convention on Access to Information, to fulfill their responsibilities. Because of the Public Participation in Decision-Making various dimensions and sectors involved, and Access to Justice in Environmental stakeholder involvement is required at all Matters (the Århus Convention) (UNECE, stages of policy, planning, and 1998) organized by the UN Economic implementation. Given the multiple Commission for Europe (UNECE) and dimensions and broad involvement of signed by the EU, took effect on October 30, various groups and sectors with different 2001, and established three pillars for public interests in water-resource management, participation (Box 9). Public authorities at the benefits of extensive public national, regional or local levels are to participation, as a critical component to contribute to these rights' becoming IWRM, are obvious. Experience illustrates effective. that the greater the transparency in the establishment of objectives and The Århus Convention was a major event: implementation of plans and projects, the the EU has subsequently taken steps to greater the care that will be taken to ensure update existing legal provisions in order to efficient and equitable water resource meet the requirements of the Convention by management. Public participation imposes means of legislation directed at the Member pressure on polluters and administrations States, but also for its own institutions, that may be influenced by short-term through its Water Framework Directive economic gain, and opens the process to the (WFD). This introduces the notion of public scrutiny of those who will be affected to participation as defined by the Århus balance the interests of various groups Convention as follows. through either consultation or other legal channels. "To ensure the participation of the general public including users of water in the Both Europe and the United States have a establishment and updating of river basin tradition and accumulated much practical management plans, it is necessary to experience in involving the public in provide proper information of planned environmental matters, as evidenced by the measures and to report on progress with Århus Convention and Water Framework their implementation with a view to the Directive in Europe and the USEPA Public involvement of the general public before Involvement Policy. final decisions on the necessary measures are adopted" (46). 29 World Bank Analytical and Advisory Assistance (AAA) Program Box 9: The Århus Convention: Three Pillars for Public Participation The right of everyone to receive environmental information held by public authorities. This can include information on the state of the environment, but also on policies or measures taken, or on the state of human health and safety where this can be affected by the state of the environment. Citizens are entitled to obtain this information within one month of their request. Furthermore, citizens need not explain their motivations in making said request. In addition, public authorities are obliged to actively disseminate environmental information in their possession; The right to participate from an early stage in environmental decision-making. Arrangements are to be made by public authorities to enable citizens and environmental organizations to comment on, for example, proposals for projects affecting the environment, or plans and programs relating to the environment; these comments are to be taken into due account in decision-making, and information on and justification of the final decisions are to be provided. The right to challenge, in a court of law, public decisions that have been made without respecting the two aforementioned rights or environmental law in general. Source: UNECE (1998) Among the requirements of public information used for the development of involvement and consultation it specifies that the draft river basin management plan. Member States should encourage the active Member States shall allow at least six involvement of all interested parties in the months for interested parties to comment in implementation of the Directive, in particular writing on these documents in order to in the production, review and updating of the allow active involvement and consultation. river basin management plans. It requires that The above also applies to updated river Member States should ensure that, for each basin management plans. river basin district, they publish and make available for comments to the public (a) a Within a clearly defined timeframe the timetable and work program for the Water Framework Directive requires that production of the plan, including a statement when river basin management plans are of the consultation measures to be taken, at established information on the river basin least three years before the beginning of the management plan in a draft version and the period to which the plan refers (b) an interim background documentation on which the overview of the significant water decisions are based must be made accessible management issues identified in the river for consultation. Furthermore a biannual basin, at least two years before the beginning meeting in order to provide for a regular of the period to which the plan refers and (c) exchange of views and experiences in draft copies of the river-basin management implementation will be organized. Too plan, at least one year before the beginning of often in the past implementation has been the period to which the plan refers. On left unexamined until it is too late--until request, access shall be given to background Member States are already woefully behind documents and schedule and out of compliance. The Framework Directive, by establishing very 30 China: Addressing Water Scarcity Background Paper No. 2 early on a network for the exchange of information and experience between water · The way information is provided in an professionals throughout the Community, easily understandable manner. For the will ensure this does not happen. general public, the Internet, brochures, and television spots may be useful The WFD specifies the background means. Organized stakeholders may documents including all the documents that most probably get all the relevant are summarized in the river-basin information from the steering groups management plan. The set-up of the centers, or committees established. where public can access information, and the procedures for providing information, has to The New Public Participation Directive be decided on the river basin basis. Background documents can be provided in A new directive on Public Access to the form of inventories of pressures and Environmental Information (Directive impacts on water bodies or details with 2003/4/EC) (3EC, 2003) entered into effect on regard to the programs of measures or more February 14, 2005, then becoming binding detailed information on implementation for all European Union Member States. The levels under the river-basin district. directive strengthens existing EU rules in environmental information disclosure, Taking the Århus convention as a reference, aligning them with the environmental one month could be advised as a reasonable information requirements of the 1998 Århus deadline for the response to the public Convention. This Convention grants the request for information. The possibility of public access to environmental information, also placing background documents on the provides for public participation in Internet, and of making relevant references, environmental decision-making, and should also be considered. This would ensures access to justice when require a specific effort, as the same files must environmental law is infringed. be prepared for inventories according to the Directive. The main features of the new directive can be summarized as follows: Three aspects relevant to access to information and to background documents · It grants a right of access to should be considered to ensure a successful environmental information (as public and stakeholder participation (2EC, opposed to freedom of access 2003): currently) and to ensure that environmental information is made · The public and stakeholders involved available and disseminated actively are from various sectors and with to the public; different interests, · It provides a broader definition of · Information provided should cover environmental information as well broad areas and topics including as a more detailed definition of progress in planning processes, results public authorities; and outcomes of analysis, proposed measures and plans, arguments in decision making, etc, 31 World Bank Analytical and Advisory Assistance (AAA) Program · It establishes a deadline of one month the appropriate portions of the list of (reduced from the current two) for interested and affected parties required. public authorities to supply the This notice shall state the location, time, and information requested; presentation schedule, etc. · It clarifies the circumstances under Other components include regulations for which authorities may refuse to public meetings, advisory groups, provide information. Access to enforcement of permits, financial assistance information shall be granted if the agreements, and assuring compliance with public interest served by the public participation requirements. disclosure outweighs the interest served by a refusal; The fundamental premise of the EPA Public Involvement Policy (3EPA, 2003) is that the · It identifies two types of review EPA should continue to provide for procedures for the public to challenge meaningful public involvement in all its acts or omissions of public authorities programs and consistently look for new relating to requests for environmental ways to enhance public input. EPA staff and information. managers should seek input reflecting all points of view and should carefully United States consider the input when making decisions. They also should work to ensure that The USEPA recognized the importance of decision-making processes are open and public participation in making decisions, accessible to all interested groups, including policies, and procedures as early as 1979, those with limited financial and technical when regulations at 40 CFR Part 25 (EPA, resources, English proficiency, and/or past 1979) was promulgated. experience participating in environmental decision-making. Such openness to the This legal document sets forth minimum public increases EPA's credibility, improves regulatory requirements and suggests the agency's decision-making processes, program elements for public participation in and informs its final decisions. At the same activities under the Clean Water Act, the time, EPA should not accept any Resource Conservation and Recovery Act, recommendation or proposal without and the Safe Drinking Water Act as follows. careful, critical examination. This guidance is to help EPA staff and managers in Information, notification and consultation implementing the seven basic steps for responsibilities: Each agency shall provide the effective public involvement outlined in the public with continuing policy, program, and Agency's Public Involvement Policy as technical information and assistance follows: beginning at the earliest practicable time. Each agency shall provide one or more central · Planning and budgeting for public collections of reports, studies, plans, and involvement activities. other documents relating to controversial issues or significant decisions in a convenient · Identification -- determining who location or locations such as public libraries. needs to or should be informed of, interested in, or affected by a Public Hearings: A notice of each hearing shall forthcoming action and performing be well publicized, and shall also be mailed to associated actions; 32 China: Addressing Water Scarcity Background Paper No. 2 · Consideration to provide technical or · Reviewing and using input and providing financial assistance to the public to feedback -- ensuring that public facilitate involvement. concerns and opinions have an impact on the decisions made by the agency; · Provision of information and outreach -- and conducting activities to provide information to the public; · Evaluation of public involvement activities -- providing explanations for · Conducting public consultation -- decisions and how the agency (or ensuring opportunities for the public to delegated program organization) used provide input, comments, ideas, public input in the decision-making opinions, and information and to obtain process. feedback and information from the agency on a forthcoming action, decision, or other matter that may have an impact; 33 World Bank Analytical and Advisory Assistance (AAA) Program CHAPTER 6: SOME LESSONS FROM INTERNATIONAL EXPERIENCE From the experience briefly described above, to be weighed against those of overall some general lessons emerge about the role management, weighing the costs and and challenges facing basin-based benefits of strategic alternatives, which is management, the actual and potential use of often not possible at a much decentralized economic instruments, and the role of public level. Decentralization may result in participation. fragmentary decision making­ and thus often inefficient or inequitable management. Basin-based Management The core of the water resource management strategy is how to resolve the multiple An integrated, cross-sectoral and cross- tradeoffs involved in an efficient and jurisdictional approach as exemplified by the equitable manner. WFD and the CWA has been shown to be necessary if water resource management is to To some extent these problems can be be efficient. This experience shows that river addressed by improved information, basin-based water institutions with facilitating a systematic approach to the unambiguous legal status and responsibilities identification of priorities by cost-benefit for strategic water-related issues are essential analysis. While many consequences of water to the administration and implementation of development projects are not measurable in new policy and management strategy monetary terms, information required to covering water quality, quantity and land improve decision making requires continued planning. The financial responsibilities and efforts in monitoring and data management; dispute sovling among the partners are detailed information on geography, clearly defined legally. Such institutions hydrology, water quality and pollution, social should have sufficient autonomy to allow a and economic development in a river basin flexible approach to be taken, which varies requires comprehensive monitoring and according to local social, economic and characterization of surface and groundwater hydrological conditions. systems and present and potential future linkages to economic and social requirements. However, basin-based management approach Such analysis may be costly, involving many brings a series of challenges, including disciplines and technologies such as compliance with ambient or emission hydraulic modeling, GIS application, and standards, with non-point discharges being of economics. Generally, education of particular concern. For the latter agricultural stakeholders remains a problem everywhere. pollution become the major issue and not much progress has been achieved although The measures referred to in this report to some regulation such as the EC's Directive on improve water management, such as cost- Nitrate control (2EC, 1991) has been issues reflecting prices, will, if successfully many years ago. Basin-based management implemented, over time bring about invariably involves issue of conflict of interest strategic changes in water use, and thus ­ and the advantages of decentralization have have a beneficial effect on industrial and 34 China: Addressing Water Scarcity Background Paper No. 2 agricultural output and locational decisions. institutions are required to oversee private However, for long term prospective water operations, for example to ensure technical resources are so fundamental to economic and financial efficiency and pay adequate development, that institutional and incentive attention to social and environmental mechanisms are required to ensure that water objectives. And as German experience resource management is fully integrated into shows in the case waste water operations, strategic economic planning (comprehensive inefficiency may stem from- many causes water resource management, (van Beck, and apply whatever the form of ownership. 1997)), including detailed proposals for systematic estimation of the opportunity costs Nevertheless, the phasing out of subsidized of water required under various strategic financing for water and sewerage ­ one of policy scenarios. the objectives of privatization - is justified on utility efficiency and fiscal grounds, and It is important to ensure that ­ particularly in is in many cases a necessary condition for view of the rapidly escalating incremental extending service to lower income or high opportunity costs of water resources ­ these cost areas. However, given that the costs of costs are systematically factored into water are rising rapidly almost everywhere government's industrial, regional planning in the world (long run marginal costs are in and other macro-level decisions. This in turn excess of average costs), and that requires inter-agency coordination at the environmental costs are associated both highest levels of government. with the supply of water and its disposal after use, it will typically be the case that Economic Instruments standard financial norms for water and sewerage performance result in prices that With regard to public water supplies, are well below the true economic and experience has shown that in many cases environmental costs involved. Ensuring financial subsidies are counter-productive, affordable water to the poor is a key to and trends throughout Europe and the successful price reforms. Pricing according United States are to introduce more financial to long run marginal cost will in fact yield discipline ­ typically involving more cost- financial surpluses which allow a two part reflecting tariffs for both household and tariff with low rates for basic needs to industrial consumers. Transferring ensure widespread access to service by responsibility from local authorities to private cross-subsidization with minimal operators has been a characteristic of this distortions in water use. trend. To a lesser degree this also applies to sewerage and sewage treatment. In a wider economic sense therefore, water and sewerage pricing continues to be The most commonly cited advantages of subsidized by governments, thereby private-sector participation are that it brings stimulating excessive and wasteful use. The technical and managerial expertise, improves same usually applies to private abstraction operating efficiency, entails injections of fees, which should ideally reflect the capital and greater efficiency in its use, corresponding long run marginal cost of reduces the need for subsidies, and increases augmenting public supplies. Moreover, it is responsiveness to consumer needs and typically the case that irrigation water is preferences. But experience shows that it is particularly heavily subsidized. not a panacea ­ competent public regulatory 35 World Bank Analytical and Advisory Assistance (AAA) Program Much the same can be said about pollution Public Participation taxes, where they exist. Generally ­ as OECD reviews show ­ economic instruments for European and United States governments environmental protection are used primarily have recognized the importance of ensuring to generate revenue or offset costs of the public participation in water resource environmental agency involved. As in the management and have taken legislative case of public water supply and sewerage, measures to facilitate this. The presence of there is relatively little consideration given to a well-informed public has been shown to the incentive effects of pollution taxes, and be a major driving force in improving the indeed, tax rates typically bear no relation at management of water resources, all to environmental damage costs. There are particularly in the case of their some exceptions to this rule, e.g. the fertilizer environmental aspects. For example, the taxes used in some European countries, but in growing significance of voluntary general the conclusion is that the potential for agreements between private industry and using pricing and taxation to create incentives public authorities in European countries to use water efficiently and avoid waste has and Japan owes much to the environmental far to go in Europe and the United States. awareness of affected populations and the need by industrial operations to protect Water markets for water right transfer, their reputation. including water quality trading, are playing an increasing role, and, where the However, while sector-based legislative opportunity costs of water are rising measures are useful, more fundamental significantly, can be of major importance in issues are involved. A key problem with encouraging the most economically efficient regard to environmental issues in all uses of water. However, questions of fairness countries concerns asymmetry in invariably arise ­ in particular, as experience information. Genuine uncertainties about in the western United States shows - those the causes and consequences of relating to the initial allocation of water environmental degradation or resource rights. depletion allow powerful interests to manipulate information. To counter this, The government's role is shifting from a enabling factors for equitable water provider-only model to a provider-and- resource management include the basic regulator model. However, it is still true that elements of an open and transparent governments must be responsible for the administrative system, such as technical provision of water services and making them education; legal rights of accessing accessible to the poor. Public funding spent information, expressing opinions, and on water, mainly on new sanitation transparent decision making process etc. infrastructure, should have a high priority in These longer term measures are the governmental agenda. At the same time, fundamental to the achievement of virtually governments should be more innovative in all development objectives, but policy formation and system reforms to raise indispensable for water resource the efficiency of public investment and management, due to the need to reconcile operation of water services, to assist private inherent conflicts of interest that are participation through legislative and invariably present. institutional help, and to share the burden of risk. 36 China: Addressing Water Scarcity Background Paper No. 2 REFERENCES Andreen W.L. (2005). 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