Economic issues

Water is a vital resource. As an elementary basis of life, water is initially open to all types of use and no one should be excluded from access to the medium of water through ownership or pricing. The use of water can have the characteristics of public goods (ocean shipping), natural monopolies (drinking water supply) or common goods (fishing).

The sustainable management of water and the creation of access to water for every citizen is therefore an essential task of the state as a component of services of general interest.

The state performs this task through regulatory requirements and economic instruments and implements water protection measures. 

Economic instruments such as the wastewater levy and water withdrawal charges are intended to provide incentives for the careful use of water. They therefore play an important role in guiding water uses and financing water protection measures. Other economic issues relate to market and price structures in water management.

Economic aspects are also of great importance in the selection of water protection measures. In order to achieve the desired environmental objectives, the most cost-effective combination must be selected from among the possible measures and instruments. This plays a particularly important role in the implementation of European law. Water law has been shaped by Europe since the mid-1970s. Numerous EU directives set targets and procedures for water management. These must be transposed into national law by the member states. Of particular importance for national water management are the Water Framework Directive (WFD), the Marine Strategy Framework Directive (MSFD), the Flood Risk Management Directive (FRMD), the Drinking Water Directive and the Urban Wastewater Directive.

Due to its holistic approach, the WFD has an impact on almost all national regulations on water protection. Its requirements are reflected nationally not only in the Water Resources Act and the Wastewater Charges Act, but also in numerous ordinances. The WFD also contains numerous economic requirements.

"Water is not a common commodity, but an inherited good that must be protected, defended and treated accordingly." (First Recital of the European WFD).

The WFD, adopted in December 2000, takes an integrative holistic approach. It combines ecological values with economic principles and is the first EU-wide binding regulation that explicitly establishes economic instruments to implement environmental policy objectives. The integration of economic elements into the Directive is not an end in itself, but an expression of the recognition that the consideration of economic framework conditions is indispensable for the achievement of the ambitious objectives of the WFD and that the achievement of the objectives requires the selection of the most economically favorable instruments and measures.

In this regard, the economic elements can be divided into three groups, which are linked to each other and to other elements of the Directive:

1. Economic analysis of water uses under Article 5 and Annex 3.
2. Justification of exemptions under Article 4.
3. Achievement of cost-recovery water prices (including environmental and resource costs) under Article 9 and Annex 3.

These three points do not have to be achieved simultaneously, but at different times:

The economic analysis represents an economic inventory of water uses and must be carried out for each river basin district. Links to the management plans can be found on page 145 of the brochure "Die Wasserrahmenrichtlinie Deutschlands Gewässer 2015". The economic analysis can be found in chapter 6 of each management plan. In addition to the description of macroeconomic indicators, the economic importance of water services (water supply and wastewater disposal) as well as water withdrawals, other types of water use are presented. The economic analysis required by Art. 5 WFD thus represents the economic counterpart to the natural characterization of river basins and underlines the holistic character of the WFD.

Despite cost-intensive efforts in recent decades, it has not yet been possible to achieve the good status required by the WFD in many water bodies. With the establishment of the environmental objectives, Article 4 WFD defines conditions for exceptions under which a failure to achieve good status or, in the case of heavily modified water bodies, a failure to achieve good potential is permissible. In principle, an extension of the deadline or less stringent environmental objectives can be justified on the basis of the specific reasons stated there. In addition to natural conditions and technical impracticability, these include the fact that water protection measures are disproportionately expensive. In Germany, extensions of the deadline have so far mainly been used to maintain the high level of protection of the WFD as far as possible. However, as things stand at present, this is only permissible until 2027. In the future, therefore, economic aspects may play a more important role in the lowering of targets than has been the case to date. A reduction in the target is possible if human activities are such that the achievement of the environmental targets would not be possible or would be disproportionately expensive. In this context, it must also be examined whether there are not alternatives to human activity that represent a significantly better environmental option that is not associated with disproportionately high costs. The justification of exceptions is also made in the management plans of the river basin districts. It must be done separately for each water body.

According to the WFD, the member states are to charge cost-covering water prices. This means, firstly, that the revenues of a billing period must cover the costs of construction, maintenance and operation of the water supply and wastewater disposal facilities. At the same time, however, there is also a fundamental prohibition on cost overruns. Secondly, the Water Framework Directive stipulates that environmental and resource costs must also be included in prices. According to the polluter pays principle, the main user groups - industry, agriculture and households - are to receive an appropriate share of the costs incurred by the water service provider. In addition, the charging policy is to be designed in such a way that incentives are created for the economical and sustainable use of water resources. Further information on the anchoring of these requirements in Germany can be found in the chapter on market structures and pricing.

On September 11, 2014, the European Court of Justice (ECJ) dismissed the European Commission's action against Germany in Case 525/12 as unfounded. This ends an eight-year legal battle over the interpretation and application of the term "water services" in Articles 2 and 9 of the Water Framework Directive (WFD), on which the obligation to cover costs also depended. Germany - supported by various other member states - understands "water services" to mean water supply and wastewater disposal, whereas the Commission also understands them to mean hydropower utilization, navigation and flood protection, with the consequence that charges would then also have to be levied for these activities. The ECJ has now clarified that the absence of pricing does not necessarily lead to a failure to achieve the objectives of the WFD. Rather, the member states would have the option of ensuring effective water protection by other means (planning and implementation of regional measures). The judgment underlines the framework character of the WFD and enables tailor-made solutions for water management problems. Worth reading is also the opinion of the Advocate General at the ECJ, which was even clearer than the ECJ judgment.

Fundamental coordinating activities on European and national level accompany the implementation process of the WFD. Within the framework of the Common Implementation Strategy (CIS), the working group WATECO (Water Framework Directive Economics) prepared a guidance document, which specified the economic requirements of the Directive. The Guidance Documents can be downloaded in full text (No. 1 Economics and the Environment - The Implementation Challenge of the Water Framework Directive and No. 20 Exemptions to the Environmental Objectives).

The MSFD, which entered into force in 2008, also takes an integrative holistic approach. It explicitly calls for an economic and societal analysis of the use of the waters concerned - as well as an analysis of the costs of degradation of the marine environment

In principle, two approaches are possible for the socio-economic analysis:

1. the Ecosystem Services Approach 
2. the Marine Water Accounts Approach

Under the Ecosystem Services Approach, marine ecosystem services are identified. Examples for categories of ecosystem services are marine fish stocks or the ability of marine systems to absorb and degrade, decompose or store wastes, toxins and other substances.

Then, the benefits to humans from the ecosystem services must be analyzed. Finally, the ecological impacts of the different types of use that have an influence on ecosystem services and thus on human welfare must be identified. The benefits associated with ecosystem services can be captured and described using the concept of "Total Economic Value".

The Marine Water Accounts Approach starts from the economic sectors that use marine waters. For each of these sectors, the benefits resulting from the economic activity are described and, if possible, quantified. Possible indicators of economic benefits include production value, value added, or the number of workers in a sector. Finally, the ecological impacts of the different types of use are to be identified.

The main differences between the two approaches lie in the starting point of the analysis and the level of ambition (especially regarding data requirements). While the Ecosystem Services Approach starts with identifying the ecosystem service of the marine area, the Marine Water Accounts Approach looks first at the economic sectors.

The environmental impacts of marine uses lead to degradation of the marine environment, the costs of which are not, or not only, incurred by the polluter but also by other stakeholders or the general public in the form of external costs. The EU MSFD CIS Guide to Economic and Social Analysis presents three possible approaches to determining costs:

1. the ecosystem services approach,
2. the thematic approach, and
3. the cost-based approach.

The ecosystem services approach quantifies the future costs of marine environmental degradation, providing a basis for future action programs. However, the approach is very time consuming, heavily dependent on data, some of which is not available, and it requires a number of assumptions about future trends. The cost-based approach estimates the current cost of degradation by aggregating the costs of current measures to improve the marine environment. The approach thus provides an overview of how much the government is currently spending on improving the marine environment and should rather be understood as a lower bound of the actual costs of degradation.

Germany follows the so-called "thematic approach", which calculates the current costs. This is considered a pragmatic approach as it is less data and assumption dependent than the ecosystem services approach.

Following the thematic approach, in UBA 2021 The value of the German marine environment, the value difference between a good status and the current status was collected through a representative survey. Based on the status quo, the study thus determines the willingness of the population in Germany to pay for good environmental status.

Germany has already actively supported regional activities to determine the costs of degradation. In a study for the entire Baltic Sea region, results of a willingness-to-pay study in Germany for measures to reduce eutrophication in the Baltic Sea were used. Furthermore, the economic benefits of recreation based on information on travel costs and the number of recreational visits to the Baltic Sea for all nine littoral states were determined in the "State of the Baltic Sea-Report" on p. 35.

Waters are affected by the input of numerous micropollutants. One source of these is pharmaceuticals. As early as 2013, the Conference of Environment Ministers in Germany therefore decided to draw up proposals on which regulations would allow manufacturers of pharmaceuticals to participate appropriately in the costs of measures to reduce micropollutants in waterbodies.

The Pharmaceutical Fee Report takes up this decision. It examines the instrument of a drug levy and identifies possible starting points for a drug-related levy, including its economic effects and the respective legal permissibility. The study concludes that a levy on the pharmaceutical sector for measures to reduce micropollutants in water is possible in principle and makes environmental economic sense. In addition to other sources of funding, this can contribute to financing the retrofitting of municipal wastewater treatment plants with a 4th treatment stage. However, a risk-adequate design of such a levy raises numerous practical implementation issues that still need to be clarified.

A summary of the results and an assessment by the Federal Environment Agency can be found unfortunately only in German language available here.

The Ministry of the Environment of Schleswig-Holstein has commissioned a study on the possibilities of introducing a levy on pesticides, the results of which can be found as a summary unfortunately only in German language available here.

Costs of drinking water supply due to nitrate and pesticide inputs

Safe water treatment is essential, especially for health reasons. Drinking water should be tasteless, odorless and colorless. Above all, however, it must be free of pathogens and comply with limit values for chemical parameters. Only through treatment and purification does groundwater and surface water become drinkable water. Treatment costs therefore make a significant contribution to the actual costs of water supply.

The treatment of raw water could become noticeably more expensive in several regions of Germany in the future. The reason for this is the high nitrate contamination of groundwater. If nitrate inputs in polluted groundwater bodies do not fall soon, affected water suppliers will have to resort to expensive treatment methods to remove nitrate from raw water. This is one result of the UBA research project "Quantification of agriculturally induced costs to secure drinking water supply". In this project, primary data on the cost burden of nitrate and pesticide pollution were collected in five different model regions. The preventive and reactive measures applied in the model regions were examined in detail in this study. In addition, the hypothetical costs of extended technical treatment were determined for four different raw waters. Both treatment methods to reduce nitrate and pesticide contamination were considered.

The study concludes that expanded drinking water treatment for nitrate and pesticide removal would increase drinking water costs by about 55 to 76 cents per cubic meter. This corresponds to a price increase of 32 to 45 percent. A family of four would then have to pay up to €134 more a year.

A summary of the results and an assessment by the Federal Environment Agency can be found unfortunately only in German language available here.