Water Charges

Compiled by:
Corinne Waelti (seecon international gmbh)

Executive Summary

Water charges are a widely used economic instrument implied mainly by federal governments to better control water use and water pollution by imposing a price on the use of the environment. The goal of such measures is to internalise negative externalities related to water use. Charges can be placed on emissions, users, the product, or on administrative services. Apart from influencing the amount of consumption, water charges can also activate innovation processes.

Introduction

A charge can be defined as a ‘price’ paid on the use of the environment (HELMER & HESPANHOL 1997). As a type of water pricing, water charges can be related to both the use as well as the pollution of water. Besides their cost recovery element, they may also include demand management (see also water resources assessment, water balance estimation, demand creation, water allocation, tradable water rights, subsidies, and water pricing) to stimulate certain behaviour (SAVENIJE & VAN DER ZANG 2002). The outcome of water charges is a higher price, which (following market forces) reduces the demand for water or water pollution.

The Economic Model

Charge systems are one of the most frequently used economic tools to reduce the negative effects of over-consumption of water as a resource (other widely used economic measures are: subsidies, tradable water rights and water pricing).

The aim of charges is to reduce the demand for or the pollution of water by imposing a fee or tax on the consumer (opposed to subsidies, which create an incentive for innovation by promoting money for a defined action or inaction of the consumer). Firms will reduce the consumption or pollution of water if behavioural change is less expensive than paying the charge. To reduce the amount of consumption, firms can either produce less or develop and improve new, more efficient production technologies. Charge systems therefore also place incentives for innovation. Furthermore, with the collection of charges, the government can raise increased revenue to redistribute (STAVINS & WHITEHEAD 1992).

Types of Charges

(Adapted from HELMER & HESPANHOL 1997)

Four main types of charges can be identified:

Implementation

(Adapted from ANDERSON 2002)

The implementation of charges on water use and pollution imposes several requirements on regulators and the regulated community:

  • Emissions or effluents need to be measured.
  • An appropriate fee level needs to be set.
  • The due amounts need to be collected.
  • The collected amounts need to be allocated.

There are several factors hindering or facilitating an enabling environment for the implementation of charges. They contain amongst other the creation of policies and a legal framework, building an institutional framework, as well as strengthening enforcement bodies.

Implementation Differences to Tradable Water Rights

(Adapted from STAVINS & WHITEHEAD 1992)

The applicability of economic measures depends on both the specific environmental problem as well as the particular objectives of public policy. Differences in the implementation effects of charges to tradable water rights are:

  • Charges do not impose a fixed level of consumption/pollution, but rather create an incentive for less consumption or pollution by providing an economic benefit.
  • The monetary resource transfer is private-to-public because the charges are levied by the state (opposed to private-to-private between tradable water rights).
  • The costs on public and industry are more explicit compared to tradable water rights, because the user does not perceive them as being rights to pollute or use, but rather as restrictions.
  • Charges do not adjust automatically for inflation.

Charges are less susceptible to strategic behaviour of firms: If one firm holds a great part of the available permits in a water rights system, its activities may distort the price of permits.

Applicability

Water treatment and collection charges as well as charges on pollution of water have been applied in most industrialised countries, having produced positive outcomes in terms of revenue raising and pollution control (HELMER & HESPANHOL 1997). The effectiveness and efficiency of their applicability depends strongly on the given circumstances and can be enhanced in combination with other market-based instruments (such as tradable water rights and subsidies). Implementation problems presumably occur if the institutional capacity is weak, if there is inadequate institutional co-ordination, economic instability, and government or polluter resistance or inertia.

Advantages

  • Internalisation of negative externalities
  • Incentives for innovation

Disadvantages

  • Difficult to control the implementation process
  • Requires a strong enforcement body
  • Possible resistance by polluters and/or the government
  • High monitoring costs
  • Difficult to set an optimal standard

References Library

ANDERSON, R. (2002): Incentive-Based Policies for Environmental Management in Developing Countries. Issue Brief 02-07. Washington D.C.: Resources for the Future (RFF). URL [Accessed: 14.06.2012].

HELMER, R. (Editor); HESPANHOL, I. (Editor) (1997): Water Pollution Control - A Guide to the Use of Water Quality Management Principles. World Health Organization (WHO), Water Supply and Sanitation Collaborative Council (WSSCC) and United Nations Environment Programme (UNEP). URL [Accessed: 21.04.2010].

SAVENIJE, H.; ZAAG, P. van der (2002): Water as an Economic Good and Demand Management. Paradigms with Pitfalls. International Water Resources Association. In: Water International 27, 98–104. URL [Accessed: 22.04.2012].

STAVINS, R.; WHITEHEAD, B. (1992): Pollution Charges for Environmental Protection. A Policy Link Between Energy and Environment. In: Annual Reviews Energy Environment 17, 187-210. URL [Accessed: 14.06.2012].

Further Readings Library

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KRAEMER, R.; CASTRO, Z.; SEROA DA MOTTA, R.; RUSSEL, C. (2003): Environment Network: Economic Instruments for Water Management. Experiences from Europe and Implications for Latin America and the Caribbean. (= (=Proceedings of the 2nd meeting of the Environment Network of the Regional Policy Dialogue, 11th to 12th February 2003)). Washington D.C.: Inter-American Development Bank, Regional Policy Dialogue Series. URL [Accessed: 18.06.2012].

In this report, functions of and experiences with several economic instruments are documented. The paper follows the II Meeting of the Environment Network of the Regional Policy Dialogue in Washington, D.C., held on February 11 and 12 2003, where policy makers focused on the application of economic instruments for environmental management.


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PRI (Editor) (2005): Economic Instruments for Water Demand Management in an Integrated Water Resources Management Framework. (= (=Synthesis Report based in part on an Experts Symposium by the Policy Research Initiative, 14th to 15th June 2004)). Ottawa: Policy Research Initiative (PRI). URL [Accessed: 19.06.2012].

This report is a synthesis paper based in part on an Experts Symposium held in June 2004. It reviews the use of economic instruments for water demand management, such as pricing and markets. Available in English and French.


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WSUP (Editor) (2012): Sanitation surcharges collected through water bills: a way forward for financing pro-poor sanitation?. Discussion paper. London: Water & Sanitation for the Urban Poor (WSUP). URL [Accessed: 15.01.2013].

This discussion paper is a situation review of sanitation surcharge systems in African cities, focusing on systems designed to raise revenues for improving sanitation in low-income districts. The review considers existing pro-poor surcharge systems in Lusaka and Ouagadougou; systems that cannot currently be considered pro-poor, in Dakar, Beira, and Antananarivo; and the special case of Maputo, where there is ongoing debate about how a surcharge might be introduced.


Case Studies Library

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MOELLER-GUILLAND, J.; LAGO, M. (2011): Water Abstraction Charges and Compensation Payments in Baden-Wuerttemberg (Germany). Ecologic Institute EU. URL [Accessed: 18.06.2012].

Case study on the implementation of water abstraction charges in Baden-Württemberg, Germany conducted by the Ecologic Institute of the EU. The focus lies on the policy mix of economic and regulatory instruments (Regulation on Protected Areas and Compensatory Payments (SchALVO), water abstraction charges, and Market Relief and Cultural Landscape Compensation for farmers (MEKA)).


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MUELLEGGER, E. (Editor); LANGEGRABER, G. (Editor); LECHNER, M. (Editor) (2010): Sanitation as a Business (Issue 5). (= Sustainable Sanitation Practice, 5). Vienna: Ecosan Club. URL [Accessed: 01.07.2013].

This Sustainable Sanitation Practice (SSP) issue contains the following contributions: 1. Mushroom Production in Bolivia, 2. Community Human Waste Management, 3. Austria vs. East Africa - Analysis of Solid Waste and Wastewater Sector, 4. Financing the Invisible Entrepreneur, 5. Establishing a World Trade Hub for the Urban Poor.


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WSUP (2013): Get to Scale in Urban Sanitation!. (= Practice Note, 10). London: Water and Sanitation for the Urban Poor (WSUP). URL [Accessed: 07.08.2013].

Taking urban sanitation to scale requires ‘scaling out’ models that work for poorer communities, and at the same time ‘scaling up’ sustainable management processes. This short note reports scale-out and scale-up experience from Maputo and Antananarivo.


Training Material Library

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CAP-NET (2008): Economics in Sustainable Water Management. Training Manual and Facilitator's Guide. URL [Accessed: 18.06.2012].

Training guide, which delivers an overview on possible economic and financial tools for water management. The application ranges from water resources, through water supply and sanitation. Further training material as well as supporting PowerPoint’s are available on the website (in English, French, Spanish, and Portuguese).


Important Weblinks

www.economicinstruments.com [Accessed: 14.06.2102]

A list of cases from an array of countries where water charges have been implied. Hosted by the University College Dublin.

www.gwptoolbox.org [Accessed: 14.06.2012]

What are water markets and tradable permits and how can they be achieved? This page gives a short overview related to these questions. It further contains a list of documented related cases.

www.unescap.org [Accessed: 14.06.2012]

This website by the Economic and Social Commission for Asia and the Pacific (ESCAP) (division of the United Nations) offers an overview of market-based instruments for environment-related measures.