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Economic aspects of the Water
   Framework Directive

   Julia Martin-Ortega
   & Klaus Glenk




Water @ Leeds Meeting
Reducing the costs of the WFD through PES
Leeds, 9th May 2012
Background
 The WFD prescribes the use of economic tools and
  principles to attain its ecological goals
 This is one its most relevant and innovative
  aspects and has generated a great deal of research
  and implementation questions

 Economics are there to inform policy decisions
  (not a substitute for political choices!)
Aims of this talk

 To provide the context for payment for ecosystems
  services in the economic principles of the WFD
   through a case study in Scotland

 To point out key remaining challenges
 To introduce our current work on the peatland
  restoration project
Cost Disproportionality
The WFD allows for derogation of good ecological
 status (less stringent objectives) if the costs to achieve
 it are disproportionate

Two aspects of it:
  economic efficiency: the costs of achieving the targets
   outweigh the benefits
  distributional effects: are costs and benefits equally
   distributed? Who are the ‘winners’ and ‘losers’?
Cost Disproportionality
The WFD allows for derogation of good ecological
 status (less stringent objectives) if the costs to achieve
 it are disproportionately costly

Two aspects of it:
  economic efficiency: the costs of achieving the targets
   outweigh the benefits
  distributional effects: are costs and benefits equally
   distributed? Who are the ‘winners’ and ‘losers’?
Economic efficiency
 Need to compare (CBA):
     The costs of the measures to achieve good ecological status

     With the environmental benefits:

          the welfare gain resulting from the improvement of water quality
           from the current to the good ecological status (Brouwer et al. 2010)
 In environmental economics: welfare improvements are measured through
  individuals’ willingness to pay (WTP)
       WTP is an indicator of welfare change associated with and
       environmental change; not a way of putting a price on water
     Market benefits (eg. reduced treatment costs)

     Substantial non-market benefits (eg. recreation & scenic beauty, health &
      wellbeing, regulatoring services, etc)
          Non-market benefits are measured via public survey’s asking for
           people’s WTP for water quality improvements (stated preferences
           valuation)
Example: Phosphorous mitigation in
Scottish Lochs (Vinten et al. 2012)

 Of the 209 loch water bodies :
     66 below moderate status
     54 downgraded because of total P
      concentration

Cost-assessment of P pollution
mitigation measures for managed
grassland, rough grazing, arable land,
sewage and septic tank sources
   Producing mitigation costs per loch
   area to give a national scale marginal
   mitigation cost curve
Example: Phosphorous mitigation in Scottish
Lochs (Vinten et al. 2012)
  Marginal mitigation cost/benefits (£/ha loch)
                                                  5000
                                                                              marginal mitigation costs
                                                  4500

                                                  4000

                                                  3500

                                                  3000

                                                  2500

                                                  2000

                                                  1500

                                                  1000

                                                   500

                                                     0
                                                         0           0.2            0.4          0.6           0.8            1
                                                             Fraction of lochs restored to Good Ecological Status or better
Example: Phosphorous mitigation in Scottish
Lochs (Vinten et al. 2012; Glenk et al. 2011)
For the estimation of benefits
 A survey of 432 face-to-face
  interviews to a representative sample
                                                High - NO

  of the Scottish population was carried   Quality- PROBLEMS


  out
 Asking for people’s WTP for an
  increase in the % of loch area with        Medium - FEW
                                           Quality - PROBLEMS

  improved water quality
 Obtaining marginal benefits per loch
  area in GES at the national (RB) scale      Low - MANY
                                           Quality - PROBLEMS
Example: Phosphorous mitigation in Scottish
Lochs (Vinten et al. 2012)
  Marginal mitigation cost/benefits (£/ha loch)
                                                  5000
                                                                              marginal mitigation costs
                                                  4500

                                                  4000

                                                  3500

                                                  3000

                                                  2500

                                                  2000

                                                  1500

                                                  1000

                                                   500

                                                     0
                                                         0           0.2            0.4          0.6           0.8            1
                                                             Fraction of lochs restored to Good Ecological Status or better
Example: Phosphorous mitigation in Scottish
Lochs (Vinten et al. 2012; Glenk et al. 2011)
    Marginal mitigation cost/benefits (£/ha loch)   5000
                                                               marginal mitigation costs

                                                    4500       marginal WTP
                                                    4000

                                                    3500

                                                    3000

                                                    2500

                                                    2000

                                                    1500

                                                    1000                              Proportionate                      Disproportionate
                                                                                      mitigation                         mitigation
                                                     500

                                                       0
                                                           0           0.2            0.4          0.6           0.8            1
                                                               Fraction of lochs restored to Good Ecological Status or better

72% lochs mitigated proportionately at cost of £5.7m/y. Additional 28% could be
  mitigate disproportionately at £184.2m/y
Cost Disproportionality
The WFD allows for derogation of good ecological
 status (less stringent objectives) if the costs to achieve
 it are disproportionately costly

Two aspects of it:
  economic efficiency: the costs of achieving the targets
   outweigh the benefits
  distributional effects: are costs and benefits equally
   distributed? Who are the ‘winners’ and ‘losers’?
Distributional effects
 This RB (national) Scottish framework helps prioritizing, but local
  specificities are lost

 We know that benefits are not homogeneously distributed across the
  space :
     Improvements in certain areas might be more valued by general
      public
     Also because individual values are aggregated at a certain spatial
      scale, welfare impacts are higher for water bodies closer to larger
      population centres
         For example, results from the RELU ChREAM Project suggest
          that the most efficient policy for the UK would be to focus upon
          improving sufficient urban rivers rather than all rivers in all
          areas (Bateman et al. 2011)
 Also, certain groups/sectors might benefit more than others (eg. water
  companies, anglers?)
Distributional effects
 The costs are likely to be borne by specific sectors (eg. farmers)
    Water quality mitigation measures related to farm land use might cause a
      redistribution of welfare from the rural to the urban population


 This raises concerns about the equity implications and the need
  for compensation mechanisms

Payment for ecosystem services: PES initiatives aim to reach
  mutually beneficial agreements between providers and users of
  ecosystem services in recognition of the value of the service
  provided and the opportunity costs of provision
         Would it be appropriate that beneficiaries of GES pay to those
          bearing the costs of implementing WFD measures?
Remaining challenges
 Disproportionate costs decisions (including compensation and
  PES) require a political judgement (societal choice)
   But this needs to be informed by economic analysis
 We need to understand more about:
    Who are the costs bearers and beneficiaries and where are
     they located?
    What are flows of benefits and costs (how are each of the
     groups/sectors affected and how much)?
    What does this imply in terms of equity and affordability in
     different sectors and the need for compensation?
    What are the barriers/risks for introducing compensation
     mechanisms and the most appropriate settings?
Remaining challenges
 An important number of on going initiatives:
    EU Project REFRESH: Disproportionality and distribution
     effects specific to the WFD at the sub-catchment level
    Defra report (Sept 2011): Barriers and Opportunities to the
     Use of Payments for Ecosystem Services in England
     (including a chapter on freshwaters)
    Defra has commissioned a Best Practice Guide for
     Payments for Ecosystem Services (PES)
    VNN Project for peatland restoration
Remaining challenges
 An important number of ongoing initiatives:
    EU Project REFRESH: Disproportionality and distribution
     effects specific to the WFD
    Defra report (Sept 2011): Barriers and Opportunities to the
     Use of Payments for Ecosystem Services in England
     (including a chapter on freshwaters)
    Defra has commissioned a Best Practice Guide for
     Payments for Ecosystem Services (PES)
    VNN Project for peatland restoration
VNN Peatland Restoration Project
 Aim: To understand the delivery of peatland ecosystem
  services and how financial mechanisms can be used for the
  maintenance and improvement of those services through
  peatland restoration

 We have water working group, which integrates hydrological
  and economic knowledge to understand:
    How peatland interventions can deliver water services
     (quality, supply, flooding protection)
    How the valuation of WFD benefits can help in estimating
     benefits associated with peatland restoration
    To ultimately feed into the wider discussion on PES
     schemes for peatland restoration

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Martin Ortega

  • 1. Economic aspects of the Water Framework Directive Julia Martin-Ortega & Klaus Glenk Water @ Leeds Meeting Reducing the costs of the WFD through PES Leeds, 9th May 2012
  • 2. Background The WFD prescribes the use of economic tools and principles to attain its ecological goals This is one its most relevant and innovative aspects and has generated a great deal of research and implementation questions Economics are there to inform policy decisions (not a substitute for political choices!)
  • 3. Aims of this talk To provide the context for payment for ecosystems services in the economic principles of the WFD through a case study in Scotland To point out key remaining challenges To introduce our current work on the peatland restoration project
  • 4. Cost Disproportionality The WFD allows for derogation of good ecological status (less stringent objectives) if the costs to achieve it are disproportionate Two aspects of it: economic efficiency: the costs of achieving the targets outweigh the benefits distributional effects: are costs and benefits equally distributed? Who are the ‘winners’ and ‘losers’?
  • 5. Cost Disproportionality The WFD allows for derogation of good ecological status (less stringent objectives) if the costs to achieve it are disproportionately costly Two aspects of it: economic efficiency: the costs of achieving the targets outweigh the benefits distributional effects: are costs and benefits equally distributed? Who are the ‘winners’ and ‘losers’?
  • 6. Economic efficiency  Need to compare (CBA):  The costs of the measures to achieve good ecological status  With the environmental benefits:  the welfare gain resulting from the improvement of water quality from the current to the good ecological status (Brouwer et al. 2010)  In environmental economics: welfare improvements are measured through individuals’ willingness to pay (WTP)  WTP is an indicator of welfare change associated with and environmental change; not a way of putting a price on water  Market benefits (eg. reduced treatment costs)  Substantial non-market benefits (eg. recreation & scenic beauty, health & wellbeing, regulatoring services, etc)  Non-market benefits are measured via public survey’s asking for people’s WTP for water quality improvements (stated preferences valuation)
  • 7. Example: Phosphorous mitigation in Scottish Lochs (Vinten et al. 2012)  Of the 209 loch water bodies :  66 below moderate status  54 downgraded because of total P concentration Cost-assessment of P pollution mitigation measures for managed grassland, rough grazing, arable land, sewage and septic tank sources Producing mitigation costs per loch area to give a national scale marginal mitigation cost curve
  • 8. Example: Phosphorous mitigation in Scottish Lochs (Vinten et al. 2012) Marginal mitigation cost/benefits (£/ha loch) 5000 marginal mitigation costs 4500 4000 3500 3000 2500 2000 1500 1000 500 0 0 0.2 0.4 0.6 0.8 1 Fraction of lochs restored to Good Ecological Status or better
  • 9. Example: Phosphorous mitigation in Scottish Lochs (Vinten et al. 2012; Glenk et al. 2011) For the estimation of benefits  A survey of 432 face-to-face interviews to a representative sample High - NO of the Scottish population was carried Quality- PROBLEMS out  Asking for people’s WTP for an increase in the % of loch area with Medium - FEW Quality - PROBLEMS improved water quality  Obtaining marginal benefits per loch area in GES at the national (RB) scale Low - MANY Quality - PROBLEMS
  • 10. Example: Phosphorous mitigation in Scottish Lochs (Vinten et al. 2012) Marginal mitigation cost/benefits (£/ha loch) 5000 marginal mitigation costs 4500 4000 3500 3000 2500 2000 1500 1000 500 0 0 0.2 0.4 0.6 0.8 1 Fraction of lochs restored to Good Ecological Status or better
  • 11. Example: Phosphorous mitigation in Scottish Lochs (Vinten et al. 2012; Glenk et al. 2011) Marginal mitigation cost/benefits (£/ha loch) 5000 marginal mitigation costs 4500 marginal WTP 4000 3500 3000 2500 2000 1500 1000 Proportionate Disproportionate mitigation mitigation 500 0 0 0.2 0.4 0.6 0.8 1 Fraction of lochs restored to Good Ecological Status or better 72% lochs mitigated proportionately at cost of £5.7m/y. Additional 28% could be mitigate disproportionately at £184.2m/y
  • 12. Cost Disproportionality The WFD allows for derogation of good ecological status (less stringent objectives) if the costs to achieve it are disproportionately costly Two aspects of it: economic efficiency: the costs of achieving the targets outweigh the benefits distributional effects: are costs and benefits equally distributed? Who are the ‘winners’ and ‘losers’?
  • 13. Distributional effects  This RB (national) Scottish framework helps prioritizing, but local specificities are lost  We know that benefits are not homogeneously distributed across the space :  Improvements in certain areas might be more valued by general public  Also because individual values are aggregated at a certain spatial scale, welfare impacts are higher for water bodies closer to larger population centres  For example, results from the RELU ChREAM Project suggest that the most efficient policy for the UK would be to focus upon improving sufficient urban rivers rather than all rivers in all areas (Bateman et al. 2011)  Also, certain groups/sectors might benefit more than others (eg. water companies, anglers?)
  • 14. Distributional effects  The costs are likely to be borne by specific sectors (eg. farmers)  Water quality mitigation measures related to farm land use might cause a redistribution of welfare from the rural to the urban population  This raises concerns about the equity implications and the need for compensation mechanisms Payment for ecosystem services: PES initiatives aim to reach mutually beneficial agreements between providers and users of ecosystem services in recognition of the value of the service provided and the opportunity costs of provision  Would it be appropriate that beneficiaries of GES pay to those bearing the costs of implementing WFD measures?
  • 15. Remaining challenges  Disproportionate costs decisions (including compensation and PES) require a political judgement (societal choice) But this needs to be informed by economic analysis  We need to understand more about:  Who are the costs bearers and beneficiaries and where are they located?  What are flows of benefits and costs (how are each of the groups/sectors affected and how much)?  What does this imply in terms of equity and affordability in different sectors and the need for compensation?  What are the barriers/risks for introducing compensation mechanisms and the most appropriate settings?
  • 16. Remaining challenges  An important number of on going initiatives:  EU Project REFRESH: Disproportionality and distribution effects specific to the WFD at the sub-catchment level  Defra report (Sept 2011): Barriers and Opportunities to the Use of Payments for Ecosystem Services in England (including a chapter on freshwaters)  Defra has commissioned a Best Practice Guide for Payments for Ecosystem Services (PES)  VNN Project for peatland restoration
  • 17. Remaining challenges  An important number of ongoing initiatives:  EU Project REFRESH: Disproportionality and distribution effects specific to the WFD  Defra report (Sept 2011): Barriers and Opportunities to the Use of Payments for Ecosystem Services in England (including a chapter on freshwaters)  Defra has commissioned a Best Practice Guide for Payments for Ecosystem Services (PES)  VNN Project for peatland restoration
  • 18. VNN Peatland Restoration Project  Aim: To understand the delivery of peatland ecosystem services and how financial mechanisms can be used for the maintenance and improvement of those services through peatland restoration  We have water working group, which integrates hydrological and economic knowledge to understand:  How peatland interventions can deliver water services (quality, supply, flooding protection)  How the valuation of WFD benefits can help in estimating benefits associated with peatland restoration  To ultimately feed into the wider discussion on PES schemes for peatland restoration