1 Sustainable/Green Water Resources Management Prof. Dr. Phoebe Koundouri Head of Research Unit of Environmental & Natural Resource Economics ATHENS UNIVERSITY.

1

Sustainable/Green Water Resources Management

Prof. Dr. Phoebe KoundouriHead of Research Unit of Environmental & Natural Resource EconomicsATHENS UNIVERSITY OF ECONOMICS AND BUSINESS

Web Pages:http://www.aueb.gr/deos/gr/koundouri.htmlhttp://www.aueb.gr/deos/gr/akadhmaikoprosopiko.htmlhttp://www.aueb.gr/pages/prosopiko/faculty_gr_short.php?facid=1094E-mail: [email protected]

NEW Website of the Research Unit of Environmental & Natural Resources Economics will be running on Monday at www.RENAR.aueb.gr

2

WFD: A truly integrated Directive

3

WFD:3 key

principles

WFD, A MILESTONE IN EUROPEAN WATER POLICY

Continuous transparency

Never-ending process

An obligation of result

4

AN OBLIGATION OF RESULT

Actions to be defined with regards to the goal

Limited possibilities for exemptions

X

Busines

s

as

usual

X

Good statu

s

2003

2015

extensions of deadlines achievement of less stringentenvironmental objectives

a general obligation: applies to all member-states

applies to surface and groundwater

a secondary goal: prevent deterioration of status

how to fill-in the potential gap between"business as usual" scenario and the goal?

update measures in order to reach the goal

A compulsory goal: "good status of water"

5

Underlining Concept: Sustainable Development

Sustainable development (SD) is a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for future generations.

6

Triple goal of SD overspace (i) and time (t) Environmental/ Ecological Sustainability

(ecosystem resilience, resource-specific equilibrium)

Economic Sustainability (economic efficiency by economic sector)

Social Sustainability (affordability & equity by income group)

7

Where do economics come in?

Articles 5: Socio-Economic characterization of RB

Article 9: cost-recovery and allocation

Annex III: guidance for economic analysis, program of measures & CBA

8

WFD: A Manual of Implementation 3-step economics approach

Economic characterizationof the river basin

The economic assessment of potentialmeasures for balancingwater demand & supply

The assessment of the recovery of the costs of water services

Step 1

Step 3

Step 2

9

Step 1:Economic characterization of the river basin & identification of significant issues

Step1_A. Evaluation of the economic significance of water in the region.

Step1_B. Identification of key economic drivers influencing pressures and water uses.

Step1_C. How will these economic drivers evolve over time & how will they influence pressures?

Step1_D. How will water demand and supply evolve over time & which problems their paths are

likely to cause?

Construct

Baseline

Scenario

Time & Money Constraints Define the Detail of Step 1!

10

Step1_A. Evaluate the Economic Significance of Water Uses in the Region

Residential (e.g. population connected to public water supply system, population with self-supply, number of water supply companies, etc.).

Industrial (e.g. turnover for key sub-sectors, employment in sectors, etc.)

Agricultural (e.g. total cropped area, cropping pattern, livestock, gross production, income, farm population, etc.)

Tourism (e.g. total number of tourist days, daily expense per tourist day, employment and turnover in the tourism sector, etc.)

Health Related Services Environmental and Ecosystem Services

11

Step1_B. Identify Key Economic DriversInfluencing Pressures and Water Uses

General socio-economic indicators and variables (e.g. population growth, income, employment).

Key sector policies that influence significant water uses (e.g. agricultural and environmental policies).

Production or turnover of main economic sectors / significant water uses.

Implementation of planned investments linked to existing regulation, likely to affect water availability.

Implementation of future (environmental and other) policies likely to affect water uses.

12

Step1_C. Evolution of Economic Drivers & their Influence on Pressures

Changes in demographic factors, e.g. population growth in specific urban areas.

Economic growth and changes in economic activity composition, e.g. changes in the relative importance of services/sectors.

Changes in land planning, e.g. new areas dedicated to specific economic activities, etc.

Changes in social values and policy drivers, e.g. globalization. Changes in natural conditions, e.g. climate changes. Changes in non-water sector policies, e.g. changes in agricultural

policy or industrial policy that will affect production and consumption in economic sectors.

Planned investments in the water sector, e.g. for developing water services, for restoring the natural environment/mitigating for damage caused by given water uses.

Development of new technologies likely to impact water use for industrial production and related pressures.

Trend variables

Critical Uncertainties

Water Policy Variables

13

 Structure & Processes

 Environmental Functions 

 HumanBenefits

Anthropocentric

Values

Environment

Use Non-Use Values Values

Step1_D. Evolution of Demand and Supply

D ire c t U seV a lue

In d irec t U seV a lue

A c tu a l u seV a lue

O p tio n V a lue

U se V a lue

E x is te n ceV a lue

B e qu e stV a lue

A ltru is ticV a lue

F o r O th e rs

N o n -u se V a lue

T o ta l E co no m ic V a lue

- Evaluation of spatial and dynamic availability of significant water bodies.- Apply appropriate methodologies to assess sector-specific water demand.

14

Market FailureEnvironmental resource is a Public Good

Not explicitly traded in any market

No market price exists to reveal TEV (Hidden demand).

We need to retrieve TEV via WTP

Non-market Valuation Methods

15

Estimating Demand in Step1i. Identification of Sector Water Demands in the Watershed Area

Households AgricultureIndustry Environment

Revealed preference methods (indirect methods)

Hedonic Pricing Method Travel Cost Method

Averting Behaviour Method Residual Analysis (Production Cost Method)

Existence & Values for others:

Contingent Valuation MethodologyChoice Experiments: Field, Lap

Use Value Non-use

ii. Valuation Techniques for Specific Types of Water Demand

Meta-Analysis MethodMethods not strictly based on economic welfare

Replacement Cost Methods Restoration Cost Methods

16

Hedonic Valuation Method (HVM)

A resource can be defined in terms of services it yields or an `attribute' it embodies. This attribute may be embodied in other goods or assets which are marketed, and which do have observable prices. Using these prices you can derive economic value.

E.g: Farm prices in an area with good groundwater are most likely higher than in an area without either ground- or surface water. Comparing differences in farm prices across a region and controlling for other influences, then the difference in prices of these farms would lie in groundwater access.

Problems:-Only capable of measuring the subset of use values that people are WTP for through the related market. - If consumers are not fully informed about the qualities of the attributes being valued, hedonic price estimates are of little relevance.

17

Travel Cost Method (TCM)

Infers the value of a set of attributes from expenditure (time and money spent on the trip) on outdoor recreational facilities or visits to nature reserves.

E.g: Valuing the effects on the demand for recreation of a change in water quality in a river.

Problems:- Capable of measuring the subset of values that people are WTP for in the related market.- Very few applications outside resource-based recreational amenities.- Data-intensive.- What value should be assigned to time costs of travel? - Statistical problems & sample bias.

18

Averting Behavior Method (ABM)

Use of expenditures undertaken by households that are designated to offset an environmental risk, in order to infer WTP for avoiding environmental degradation.

E.g: Use of water filters.

Problems:- Limited to cases where households spend money to offset environmental hazards.

- Insufficient studies to comment on convergent validity.

19

Residual Analysis Method (RAM)

Values all inputs for the good produced at their market price – except for the water itself. The remaining value of the good, after all other inputs are accounted for, is then attributed to the water input.

E.g: Valuing water as an input in production of different crops.

Problems:

- Only part of use-value of water can be captured.

- Market imperfections can bias valuation estimates.

20

Contingent Valuation Method (CVM)

CVM relies on a constructed, hypothetical market to produce monetary estimates of value. The value of an environmental resource to an individual is expressed as: - Maximum Willingness-to-Pay (WTP)

- Minimum Willingness-to-Accept (WTA, Compensation)

E.g: Conduct survey to obtain peoples’ bids (either WTP or WTAC) for a specified change in the quality of water in a river, contingent upon the description of a hypothetical market where water quality is traded.

Problems:- Interviewing bias - Non-response bias- Strategic bias - Yea-saying bias- Hypothetical bias - Information bias

21

Choice Experiment Method (CEM)

CEM is a survey-based technique which can estimate the total economic value of an environmental stock/flow or service and the value of its attributes, as well as the value of more complex changes in several attributes.

E.g: Each respondent is presented with a series of alternatives of the environmental stock/flow or service with varying levels of its price and non-price attributes and asked to choose their most preferred option in each set of alternatives.

Problems:- Simplified version of reality … but CEM eliminates or minimises several of the CVM problems (e.g. strategic bias, yea-saying bias, embedding effects).

22

Operational at the policy level?

Question: How can these methods be made operational in the context of the development of groundwater management strategies at the policy level?

Answer: Recent years have seen a growing interest in the potential for producing generally applicable models for the valuation of non-market environmental goods and services, which do not rely upon expensive and time-consuming original survey work, but rather extrapolate results from previous studies of similar assets.

This approach is called meta-analysis for the use and non-use values generated by environmental resources.

23

Meta-Analysis Method (MAM)

Meta-analysis is the statistical analysis of the summary of findings of empirical studies: i.e. the statistical analysis of a large collection of results from individual studies for the purpose of integrating the findings.

E.g: Freshwater fishing meta-analysis of valuation studies.

Meta-analytical research seems to have been principally triggered by:

- Increases in the available number of environmental valuation studies.- Seemingly large differences in valuation outcomes as a result of use of different research designs.

24

Environmental Benefits-Transfer

Transposing monetary environmental values estimated at one site (study site) to another (policy site).

Values must be adjusted to reflect site specific features. When time or resources are limited, this provides an

alternative to conducting a valuation study. Using meta-analysis for benefits transfer has advantages.

E.g: Environmental Valuation Reference Inventory (www.evri.ca)

Problems- May involve bias- Validity and reliability issues

25

List of case studies on water-valuation from my research team

Direct use values: Irrigation for agriculture PF, RC, MPDomestic and industrial water supply PF, RC, MPEnergy resources (hydro-electric) CVTransport and navigation CVRecreation/amenity HP, TC, CVM, CEMWildlife harvesting CEM

Indirect use valuesNutrient retention RCPollution abatement RCFlood control and protection RC, CEMStorm protection RC, PFExternal eco-system support RC, CEMMicro-climatic stabilisation PF, CEMReduced global warming RC, CEMShoreline stabilisation RC, CEMSoil erosion control PF, RC, CV, CEM

26

List of case studies on water-valuation from my research team

Option valuesPotential future uses of direct and indirect uses

CVM, CEMFuture value of information of biodiversity CVM,

CEM

Non-use valuesBiodiversity CVM, CEMCultural heritage CVM, CEBequest, existence and altruistic values CVM, CE

27

Methodology for Constructing Baseline Scenario Using Parameters from in Step 1

1 Consider three possibilities of evolution of population. Consider two possibilities of evolution of demography of other cities in the region. Consider possible evolution of rural population.

2 Build scenarios using basic assumptions and quantify the water balance with these assumptions.

3 Apply step two over time.

4 Based on steps 1,2,3, imagine a plot that tells the story of the system from now until at least 2030, giving consistency to the assumptions and water balance curves.

28

How to apply the ‘Baseline scenario’?

2003 2015 2021

Water Balance/

‘Good Water Status’

Initial status

gap

Starting from initial status it is possibleto elaborate a baseline scenario.

The baseline scenariorefers to the situationwithout doing anything else thanplanned today.

Date at which ‘Water Balance’ should be met.

Measures to close the gap

are needed!

29

Step2:Assess Cost-Recovery of Water Services

Step2_A. How much do current water services cost?

Step2_B. Who pays these costs?

Step2_C. What is the current cost-recovery level?

Step2_D. Propose cost-recovery mechanisms.

Step2_A&B. Current cost of services Who pays for these costs?

COST OF

WATER

ABSTACTION

TOTALECONOMICVALUE

CAPITALCOST

OPERATION &MAINTENANCE(O&M)COST

RESOURCEADMINCOST

FORGONEVALUE OF ALTERNATIVEUSES(present/future)

EXTERNAL COST OF WATER QUALITY REDUCTION

PAIDBY USERS

FINANCIAL COSTSRESOURCECOST

ENVIRONMENTALCOST

Estimate costs of water services by sector. Do users and/or institutional mechanisms recover these costs?

Analysis per use: Households, Tourism, Industry, Agriculture, Ecosystem, etc. per RBD

31

Step2_C. Current cost-recovery level.

Elements to be investigated:

Status of key water services (e.g. number of persons connected).

Costs of water services (financial, environmental & resource costs).

Institutional set-up for cost-recovery (e.g. prices and tariff structure, direct & indirect subsidies, cross-subsidies).

Contribution from key water uses to the recovery of costs.

Resulting extent of cost-recovery levels, linked with the affordability for water users.

32

Results for cost-recovery for Greece

33

Βαθμός Ανάκτησης Κόστους ανά Υδατικό Διαμέρισμα

Υδατικό Διαμέρισμα Βαθμός Ανάκτησης Κόστους (%)

Αττικής 106.13

Θράκης 78.28

Κεντρικής Μακεδονίας 78.27

Ανατολικής Μακεδονίας 70.74

Βόρειας Πελοποννήσου 68.22

Ηπείρου 68.11

Ανατολικής Στερεάς Ελλάδας 57.61

Δυτικής Μακεδονίας 51.71

Κρήτης 50.91

Δυτικής Πελοποννήσου 50.54

Δυτικής Στερεάς Ελλάδας 46.19

Νήσων Αιγαίου 37.84

Ανατολικής Πελοπονήσσου 34.18

Θεσσαλίας 29.82

34

Βαθμός Ανάκτησης Κόστους Ύδρευσης Ανά Υδατικό Διαμέρισμα

Υδατικό Διαμέρισμα Βαθμός Ανάκτησης Κόστους Ύδρευσης (%)

Αττικής 108.14

Θράκης 103.29

Κεντρικής Μακεδονίας 86.58

Ανατολικής Μακεδονίας 79.39

Βόρειας Πελοποννήσου 77.31

Ανατολικής Στερεάς Ελλάδας 75.1

Ηπείρου 71

Δυτικής Πελοποννήσου 62.21

Δυτικής Στερεάς Ελλάδας 61.29

Δυτικής Μακεδονίας 53.55

Κρήτης 49.67

Νήσων Αιγαίου 42.94

Ανατολικής Πελοποννήσου 37.89

Θεσσαλίας 33.66

35

Βαθμός Ανάκτησης Κόστους Άρδευσης ανά Υδατικό Διαμέρισμα

Υδατικό Διαμέρισμα Βαθμός Ανάκτησης Κόστους Άρδευσης (%)

Κρήτης 56.25

Δυτικής Μακεδονίας 41.05

Ανατολικής Μακεδονίας 27.38

Ηπείρου 22.44

Αττικής 21.30

Βόρειας Πελοποννήσου 19.41

Ανατολικής Στερεάς Ελλάδας 15.98

Ανατολικής Πελοποννήσου 15.66

Δυτικής Στερεάς Ελλάδας 14.28

Κεντρικής Μακεδονίας 12.04

Δυτικής Πελοποννήσου 11.44

Θράκης 11.05

Θεσσαλίας 6.38

Νήσων Αιγαίου 1.78

36

Step2_D. Identify potential cost-recovery mechanisms/Green

Investments?

Potential cost-recovery mechanisms: Pricing Tradable permits Quotas Taxes/subsidies Direct Controls Educational/Awareness Campaigns Voluntary Agreements Legal Instruments, etc.

Green Investments in: Pollution Control and Remediation Resource Conservation and Management Land Use and Infrastructure Renewable Energy Sources

37

Step3:The economic assessment of potential measures for reaching good water status

Step3_A. Identify least-cost set of measures.

Step3_B. Assessment of cost of measures.

Step3_C. Assessment of the impact of measures on economic sectors/uses.

Step3_D. Are costs of measures disproportionate?

38

Step3_A. Search for Least-Cost Set of Measures

COST EFFECTIVENESS OF PACKAGE OF MEASURES:

Economic instruments (e.g. abstraction/pollution taxes, tradable permits, subsidies).

Measures to increase awareness regarding water scarcity, aiming at reducing abstraction/pollution.

Direct controls on pollution dischargers.

Agri-environment programs providing financial and technical assistance for, e.g. reallocation of crop production mix over agricultural land, adoption of water-saving technologies coupled with land-allocation restrictions, etc.

Green Investments

39

Classification of Economic Instruments

Economic Instrument Advantages Disadvantages

1. Standards and Quotas 

  Not economically efficient

2. Water abstraction charges

Adjustment of price signals to reflect actual resource costs; encourage new technologies; flexibility; generation of revenues

Low charges will have minimal impact on user behavior and will continue in resource over-utilization; Difficult to police

3. Pollution charges Same as water abstraction charges; polluter-pays principle

Same as water abstraction charges

4. Subsidies on water saving measures 

Readily acceptable Financial Constraints

5. Tradable permits 

Quantity based targets that are able to attain least-cost outcome. Allows flexibility.

May entail high transaction costs

6. Voluntary agreements 

Readily acceptable  

7. Liability legislation Assess and recover damages ex-post but can also act as prevention incentives

Require an advanced legal system; high control costs; burden of proof

Needs High Env Awareness

40

Step3_B. Assessment of Cost of Measures

- Estimate a range of costs along with key parameters influencing costs over time (cost change with developments in sectors).

- Allocate costs of measures to water users and identify winners and losers, in order to potentially feed into the analysis of disproportionate costs to justify derogation (Step3._D).

41

Step3_C. Impact of Measures on Key Economic Sectors/Uses

Net impacts on public expenditures and revenues: e.g.- impacts on expenditures for agri-environment schemes- revenues of economic instruments- impacts of changes in the prices charged for publicly

owned water services.

Wider economic and social impacts: e.g.- significant changes in patterns of employment- economic impacts on industries & local economic

development from changes in the price of water supply, level of discharges and water quality.

Effects on the retail price index and inflation.

42

Step3_D. Disproportionate Costs/Derogation

Disproportionality

If the achievement of good water status has significant adverse effects on the wider environment & human activities. If the beneficial objectives served by the artificial or modified characteristics cannot reasonably be achieved by other means.

Measures to improve water quality are expensive

Heavily Modified Water bodies

Water bodies substantially changed in characteras a result of physical alterations by human activity.

Less stringent objectives

Time derogation

!! Disproportionality is a political judgment informed by economic information: CBA- Disproportionality does not begin when measured costs exceed quantifiable benefits.- The margin of excess costs should be appreciable & have a high level of confidence.- Disaggregated analysis to the level of separate socio-economic groups andsectors is needed, especially if the ability to pay is an issue for a particular group.

Important forbudget-constrained

developing countries!

43

Step3_D. CBA: Cost-Benefit Analysis

Cost Benefit Analysis (CBA) is an economic tool for government policy and investment project analysis used widely.

Can incorporate environmental impacts of policies/projects within CBA to correct for market failure

“Social” appraisal of policies and projects, carried out by aggregation of benefits from, and costs of a policy/project over individuals and over time

Welfare theoretic underpinning: Economic efficiency with a temporal dimension

44

CBA Steps Stage 1: Definition of policy/project:

The reallocation of resources being proposed

The population of gainers and losers being considered

Stage 2: Identification of policy/project impacts: Define all impacts that will result from

policy/project implementation Consider additionality (net impacts) and

displacement (crowding out)

45

CBA Steps Stage 3: Identification of economically relevant impacts:

Environmental impacts of a policy/project are relevant in CBA if either

They change the utility of at least one person in the society They change the quantity or quality of the output of some

positively valued commodity

Stage 4: Physical quantification of relevant impacts: Determine physical amounts of costs and benefits and

when they occur in time Use environmental impact analysis to estimate the impact

of policy/project on the environment Estimations will be made with uncertainty, calculate the

expected value of costs and benefits

46

CBA Steps Stage 5: Monetary valuation of relevant

effects All physical measures of impacts should be

valued in common units to be comparable Common unit = money CBA analyst must

Predict prices for value flows extending into the future

Correct market prices where they are distorted Calculate prices where non exists using

environmental valuation methods

47

CBA StepsStage 6: Discounting of costs and benefits:

Once costs and benefits are expressed in monetary units they should be converted to present value terms by discounting

PV= Xt[(1+r)-t] where X= cost or benefit; r = discount rate; [(1+r)-t] discount factor; t= time

The higher the value of t the lower the discount factor

The higher the discount rate for a given t the lower the discount factor

48

CBA Steps Stage 7:Applying the net present value test:

Apply NPV test to choose those policies and projects that are efficient in terms of their use of resources

Where Bt = benefits of the project at period t, Ct = the costs of the project at period t, r = the discount rate, n = the number of years over which the project will operate

NPV is the present value of the project’s/policy’s net benefit stream, obtained by discounting the stream of net benefits produced by the project/policy over its lifetime, back to its value in the chosen base period, usually the present.

If NPV>0 accept policy or project (Based in Kaldor-Hicks Criterion) since it would improve social welfare

n

tttt

r

CB

0 1

49

Is Discounting so straight forward?

‘Humanity has the ability to make development sustainable: to ensurethat it meets the needs of the present without compromising the abilityof future generations to meet their own needs.’ WCED, 1987

‘There is something awkward about discounting benefits that arise a century hence. For even at a modest discount rate, no investment willlook worthwhile.‘ The Economist (1991), March 23, p 73.

In the decade since that comment in The Economist, the nature of theproblem with long-run discounting has become clearer.

50

The Need for Time Declining Social Discount Rate…

There are powerful reasons for choosing a declining social time preference rate. This conclusion is supported by robust recent theoretical work, which has taken several different approaches to the subject.

Although there is a paucity of empirical evidence on the pattern of that rate's decline, it may be better to use those data, which are available rather than to continue practicing discounting with non-declining rate in the long term. The data best suited the policy-makers' need were produced by Newell & Prizer (2003) and Koundouri et al (2005).

51

Constant discount rates (CDRs) s

Time declining discount rates (TDDRs) s(t)

Utility discounting

ρ

Consumption discounting μg

Uncertainty about the

future

Future fairness

Uncertainty about discount rate (s)

Weitzman Koundouri et al.

Uncertainty about

growth (g) Gollier

Chichilnisky Heal

Li & Löfgren

Observed individual

choice

Hyperbolic discounting Cropper et

al

52

Case Study: Floods Defense Over the last ten years, flood-defence investment has been

characterized by annual expenditure that has been assumed to offset significant damage; i.e., a cost–benefit ratio much greater than unity.

Stochastic model designed to assess the costs and benefits of investment in a particular cell (protected area) of flood defences for Shrewsbury for the Environment Agency.

The model determines the net benefit of investment by

comparing the damage suffered in a ‘do nothing’ scenario, with damages in the case where 100-year flood defences have been constructed. The benefits can then be compared with the costs of constructing and maintaining the defences.

53

Benefit–cost ratio for a particular cell of flood defences in Shrewsbury

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Flat Rate (6%) Flat Rate (3.5%) GammaDiscounting

Gamma Sliding Schedule

Li and Lofgren HyperbolicDiscounting

Be

ne

fit

Co

st

Ra

tio

54

Suggested Step Schedule of Discount Rates

Period of Years Discount Rate (%)

0 – 30 3.5

31 – 75 3.0

76-125 2.5

126-200 2.0

201-300 1.5

301 + 1.0

55

Effect of shift from flat 3.5% to the step schedule of discount rates

Project time horizon Potential effect on project NPV

0-30 years Small, generally insignificant

30-100 years Significant (± 50%)

100-200 years Large impact (± 100%)

200-400 years Major impact (± 150%)

56

1- Characterisation of the river basin economic significance of water uses trends in key indicators and drivers dynamic path of demand and supply of water gaps in water status by the agreed date of meeting ‘water balance’?

2- Assess current cost-recovery how much water services cost and who pays this cost? how much of this cost is recovered? potential cost-recovery mechanisms

3- Identification of measures and economic impact construction of a cost-effective programme of measures

assessment of cost-effectiveness of potential measures financial & socio-economic implications of the programme of

measures are costs disproportionate? Derogations

Summary of the 3-Step Methodology

Economic analysis needs to be integrated with other field expertise (hydrology, geology, engineering, sociology, etc.) and be considered all along the management & decision-making process.

57

Thank you.Prof. Dr. Phoebe Koundouri

Head of Research Unit of Environmental & Natural Resources Economics

ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS

Web Pages:http://www.aueb.gr/deos/gr/koundouri.htmlhttp://www.aueb.gr/deos/gr/akadhmaikoprosopiko.htmlhttp://www.aueb.gr/pages/prosopiko/faculty_gr_short.php?facid=1094 E-mail: [email protected]

NEW Website of the Research Unit of Environmental & Natural Resources Economics will be running on Monday at www.RENAR.aueb.gr