Using Economic Instruments for Water Demand Management: Introduction Bernard Cantin, Dan Shrubsole and Meriem Aït-Ouyahia

Abstract: This article presents the main policy research issues related to the application of selected economic instruments (EIs) for water demand management. It builds on the papers presented at the Policy Research Initiative’s Symposium on economic instruments for water demand management, most of which are published in this special issue of the Canadian Water Resources Journal. Despite the great promises made on their behalf, there is limited concrete evidence of the efficacy or cost effectiveness of EIs (or of any other instrument for that matter) used for water demand management. A number of policy research avenues are proposed to better assess their advantages and limitations. These include fostering multidisciplinary efforts, particularly in the social sciences, to understand how our institutional arrangements affect water use; increasing Canada’s ability to monitor water supply and use; and documenting the strengths and weaknesses of economic instruments in well-designed comparative case studies, as well as in new projects, by a commitment to the development of adaptive management frameworks that make conscious efforts to learn from policy implementation. Doing so, however, requires a clarification of the primary objectives for using EIs, which has more often than not been left relatively vague and multifaceted.

Résumé : Cet article présente les principaux enjeux de la recherche sur les politiques liés à la mise en œuvre de certains instruments économiques (IÉ) pour gérer la demande en eau. L’article est basé sur des textes présentés au Symposium du Projet de recherche sur les politiques, dont la plupart sont publiés dans cette édition spéciale de la Revue canadienne des ressources hydriques. Malgré des attentes élevées à l’égard des IÉ, il y a peu de preuves concrètes de leur efficacité (ou de celle de tout autre instrument) à atteindre les objectifs visés et ce, à un coût moindre. Un certain nombre de pistes de recherche sont proposées afin de mieux évaluer les avantages et les limites des IÉ, incluant: encourager les efforts multidisciplinaires, en particulier dans les sciences sociales, visant à comprendre comment les arrangements institutionnels affectent l’utilisation de l’eau; améliorer la capacité de mesurer la quantité d’eau disponible au Canada, et son utilisation; et, documenter les forces et faiblesses des instruments économiques dans le cadre d’études de cas comparées, ainsi que dans le cadre de nouvelles expériences, où l’apprentissage serait favorisé par l’adoption d’une approche de gestion adaptative dans la mise en oeuvre des politiques. Une telle approche, cependant, exige une clarification des objectifs justifiant l’utilisation des IÉ, objectifs qui sont le plus souvent soit vagues soit multiples. Bernard Cantin1, Dan Shrubsole2 and Meriem Aït-Ouyahia1 1 2

Policy Research Initiative, Ottawa, ON K1P 5A9 Department of Geography, University of Western Ontario, London, ON N6A 5B9

Submitted January 2005; accepted February 2005. Written comments on this paper will be accepted until September 2005. Canadian Water Resources Journal Revue canadienne des ressources hydriques

Vol. 30(1): 1–10 (2005)

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Introduction Prior to the 1970s, the use of ‘command and control’ regulations dominated the practice of water and environmental management in Canada. Under this approach, governments established requirements, such as specifying the standards to be met and the technologies to be used in achieving those standards, to resource users. If for some reason there was a water shortage, use restrictions were imposed (e.g., no lawn watering on alternate days or a limit on the amount of water a company could take from a river). However, command and control systems provide little flexibility or incentive for innovation and do not ensure the implementation of efficient and effective solutions. Monitoring the activities of water users, and prosecuting those who fail to comply, may require a large, highly trained and well-funded bureaucracy. The use of economic instruments (EIs), or more precisely market-based instruments (MBIs), gained prominence in the 1970s when the OECD started advocating the “polluter-pay” principle. One intent of EIs is to shift the costs of resource use or pollution control from governments — and society — to resource users. Under command and control approaches, resource users were often able to avoid these costs because they discharged permitted wastes into water, air and landfill sites, where any associated costs would be borne by society, particularly future generations. By shifting the burden of costs to the user (or polluter), economic instruments are believed to offer the following advantages (Stratos, 2003): •

they can correct for the ‘externality problem’;

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industries that apply continuous improvement programs are rewarded with reduced costs and/ or enhanced goal achievement;

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the development of new technologies would be stimulated; and

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a smaller inspectorate could be required, reducing compliance costs (which in the United States, reach $200 billion annually for pollution control).

For these reasons, MBIs have the reputation of being overall more efficient than command and control

approaches. They can be defined as the “use of marketbased signals to motivate desired types of decisionmaking. They either provide financial rewards for desired behaviour or impose costs for undesirable behaviour” (Stratos, 2003). Four general types of MBIs have been identified (Table 1). Table 1. Types of Market-Based Instruments.

• Property rights: ownership rights, use rights, development rights and transferable development rights can all be used to promote responsible resource management. • Fee-based measures: fees, charges, taxes, deposit-refunds and revenue-neutral feebates all impose payments of specified amounts, thereby creating an explicit cost associated with environmentally damaging activities and an easily quantifiable incentive for reducing the activity. • Liability and insurance regimes: liability rules and various types of bonds can provide strong incentives to avoid environmental impacts and to clean-up and restore environmental damage. • Tradeable permits: provide mechanisms for minimizing the social and private costs of meeting a cap on emissions. Modified from Stratos (2003).

The Government of Canada explicitly embraced EIs in its Federal Water Policy (1987). That document supported the use of a fee-based measure (Table 1) — realistic pricing — as one central element of its approach to water policy, in particular for water demand management. The federal government also identified its desire to use economic instruments in a discussion paper entitled, Economic Instruments for Environmental Protection (Government of Canada, 1992) that was released under Canada’s Green Plan. Again, water pricing was viewed as crucial to future management activities. Despite the rhetoric around the desirability of economic instruments, there has © 2005 Canadian Water Resources Association

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been little effective action at the federal level. Some provinces and municipalities have implemented some EIs, but a nationwide effort appears to have been lacking. The recent wave of provincial water policy changes that occurred in the wake of the Walkerton (Ontario) tragedy in 2000 and the North Battleford (Saskatchewan) outbreak in 2001, apart from renewing the regulatory frameworks to ensure drinking water quality, demonstrate a renewed interest in using EIs to achieve environmental objectives and manage water allocation. On June 14, 2004, the Policy Research Initiative (PRI) organized an international symposium on the use of EIs for the management of water demand in the context of Integrated Water Resources Management (IWRM). The purpose was to take stock of existing experiences and research, Canadian and international, highlighting issues and barriers related to the implementation of EIs. The symposium was divided into four sections. The first three examined the application of pricing mechanisms, and taxes, in the municipal, agricultural and industrial sectors. The fourth section examined how water markets can promote the efficient and sustainable allocation of the resource between different uses. The IWRM context matters, as provinces, which have responsibility for most aspects of water management, have indicated that they are aiming for IWRM. Canada also committed to the WSSD in 2002 (World Summit on Sustainable Development, Johannesburg) to develop a plan for the implementation of IWRM by 2005. EIs have to be seen as one of the tools that could be used to reach that overall objective. The problem, however, is to define what we mean by IWRM in specific contexts, and to link the use of EIs to these contexts. As different experiences presented in this special issue show, with respect to water management, location and context are everything. But there are still general lessons that emerge from these experiences. After presenting a general background on the use of EIs for water demand management, we highlight the main themes addressed by the papers presented at the symposium and published in this special issue. We conclude by highlighting what we feel are important policy research needs to better assess the usefulness of, and implementation issues associated with, the use of EIs in the context of the overall objective of implementing IWRM and Sustainable Development (SD).

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Basic Facts about Water Demand, Allocation and Prices There appears to be a large potential to reduce water demand in Canada. Canadians, on average, are the second largest per capita water users in the world, after the United States. The 78 percent of the Canadian population living in urban areas use 12% of the water supplied in the country. The data used in this section are taken from Environment Canada (2004), unless otherwise specified. Only 57% of municipal water users in 1999, and probably a smaller proportion of agricultural users, were metered and charged in proportion to the volume of water used, a low percentage when compared to other OECD countries. In addition, water use can vary by a factor of two or three between Canadian cities. Finally, possibly only 20% of Canadian municipalities have established demand-side management plans (Pleasance, 2004). Agriculture in Canada is not a big user, at 9% of total supply, but it is a large consumer, as less than 30% of agricultural water withdrawals are returned to the environment. Of the total water withdrawals in this sector, 85% are for irrigation, mostly in the semi-arid Prairie Provinces, where drought is a significant threat. Competition for irrigation water is increasing, in part due to continued urbanization, but also due to demands from other sectors, such as the oil and gas industry and the development of other agricultural sectors such as the livestock industry or higher value but more irrigation-intensive crops. In spite of price increases in recent years, farmers pay a very low percentage of just the operating and maintenance costs for providing irrigation water, let alone the full costs of water. The industrial sector, overall, is the largest water user in Canada, with mining accounting for 1% of total water withdrawals in Canada, manufacturing for 14%, second to thermal power generation (nuclear and fossil fuel) at 64%. While about 90% of the water use in this sector is self-supplied (i.e., taken directly from lakes or rivers and not dependent on public utilities) the price paid to access the resource is very low. In many provinces, no fees or very small fees are charged for direct abstraction of water, and when they exist, those fees are not based on the actual quantity of water abstracted. In response to growing demands for limited water supplies, most provinces have developed water rights legislation to regulate withdrawals. Legislation © 2005 Canadian Water Resources Association

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and regulations generally list water uses in order of importance, with domestic and municipal needs in first and second place. From a legal standpoint, allocation is governed by two main approaches: the law of riparian rights, applying mostly in the eastern part of the country; and through “prior appropriation” in the west, where the Crown licences water use on a first-in-time, first-in-right basis. Another important feature of appropriative water rights law is the “use it or lose it” principle, which, as the name implies, means that users lose their water entitlements if they do not use them. While there is a widespread belief that water is plentiful in Canada, there are signs that water demand is approaching the limits of natural supply in many parts of the country, in particular in southern Alberta, southern Ontario and in some parts of British Columbia. In a number of uses, even though water is returned to the environment, it is often in a polluted or heated state. Furthermore, growing demand requires water supply infrastructure investments that could be delayed to a certain extent through well-designed water demand management strategies. Faced with the longterm possibility that water will become increasingly scarce, it is crucial to get a better understanding of the issues related to water demand management generally, to the allocation of water between uses, and to the implementation and use of EIs to achieve these objectives.

Water Demand Responsiveness to Price

A common thread found in arguments in favour of using pricing strategies, and demand-side management more generally, is that they are a less expensive means to provide additional water than building new infrastructure, such as reservoirs. Implicit in this view is that water demand is not fixed and can be modified. Prices are one instrument that can affect demand. As Tate (Symposium presentation) maintains, without correct price signals, there may be little chance for changes in behaviour. However, Eaton (Symposium presentation) points out that “price is but one of seven means to motivate water users”. In the economics literature, residential and agricultural water demand is found to be relatively inelastic (Espey et al., 1997; Hanemann, 1998; Renzetti, 2002; Garrido, 2002). Industrial water demand is more

responsive to price and self-supplied industries seem to be sensitive to their marginal cost of water (cost of using one more unit of water). However, the impact of price is limited since water is in general a limited part of their total cost of operation (Renzetti, this issue). Water demand in general seems to be more sensitive to the price structure than the price level (e.g., flat rates, where the price does not vary with quantity used, versus volumetric charges) (Reynaud and Renzetti, 2004; Strosser, Symposium presentation). In fact, merely raising prices in a flat rate structure may be an overly simplistic solution that can have the perverse effect of increasing water consumption to the extent people feel they are entitled to more water because they are paying more for it (Dinar et al., 1997). Even if water demands for different sectors exhibit low price elasticities, pricing and other economic instruments (Table 1) are still promoted as contributing to economic efficiency, water use efficiency (through, for example, water-saving technologies) and conservation. It is worth noting that water use efficiency and conservation are different concepts. The former pertains to the productivity of water used for specific purposes, for example in a production process. The latter refers to retaining water in ecosystems and to maintaining essential ecological services. While efficient use can lead to conservation, this is not always true (Garrido, 2002). EIs are also advocated as a means to recover water supply cost and as a signal to influence consumers behaviour to reduce water use. So the main, and still unresolved question, is: Will consumers receive the ‘right’ signal and react as desired if the price structure rather than the price level is made more efficient?

Challenges in Selecting the Appropriate Pricing Scheme Selecting the appropriate pricing strategy is not a simple task. With full-cost pricing, prices should ideally reflect all the costs of operating, maintaining and replacing infrastructure, as well as the opportunity cost and the cost of any externalities such as environmental degradation. However, taking account of all externalities is a cumbersome task, which can be expensive, since the externalities are numerous and challenging to identify and measure, as the environmental impacts of water use are poorly understood: “…assigning a value © 2005 Canadian Water Resources Association

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to environmental damages or resource scarcities is still a major challenge.” (Speck, Symposium presentation). Determining the right tax (or abstraction charge) in the industrial sector is equally challenging. There are few studies that have been completed on the industrial sector. There is a need to better understand how firms value water (i.e., what is the role of water in their production function) in order to better assess the impacts of imposing higher water charges (Renzetti, this issue).

Full-Cost Recovery and Efficient Pricing

Given that consumers in Canada generally face relatively low water prices, a first step towards full-cost pricing would be to charge consumers most or all of the costs of supplying water without taking into account environmental and social externalities. This direction is currently being promoted by Ontario’s government. Cost recovery and efficient pricing are, however, two different objectives. Pricing at average cost (where utilities break even) allows utilities to recover their costs, while efficient resource allocation is in theory achieved when prices are set at the marginal cost (Tsur, this issue). In practice, the marginal cost is either below or above the average cost, but they are rarely equal. In addition, the marginal cost is challenging to calculate since it requires detailed cost data that may not be available or reliable (Hanemann, 1998; Renzetti, 2000). Attempts to establish prices based on marginal cost may thus lead to revenue variation, as utilities will either make excessive profit or deficit. Instability of revenue can be problematic for water utilities. Another important point to consider is the fixed costs of water supply. Determining how and by whom these costs are covered does not affect the efficiency of water allocation and could be based on principles of equity (Tsur, this issue). One proposition is to use intersectoral cost transfers where, for example, the urban sector could invest in efficient irrigation technologies for the agricultural sector as a form of source-water protection. This would be financially more viable for farmers and would lead to many environmental benefits, which would accrue to the urban consumer (Strosser, Symposium presentation). The fact that lower irrigation prices lead to lower food prices could also support such an approach (Tsur, this issue).

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Implementing Pricing Changes and Evaluating their Effects

It is crucial to take into account implementation costs in any evaluation of pricing strategies. Indeed, the costs of introducing metering and volumetric pricing can be prohibitive, making them less cost-effective than other pricing methods. Implementation costs will vary by sector and location reflecting different local conditions and institutional arrangements. Consequently, each situation may call for a different method and uniformity of approach is clearly not justified (Tsur, this issue). Although for most industrial users, as seen above, water may not be an important part of the overall cost structure, those that are dependent on water and are affected by its price (e.g., food and drink industries), may be seriously impacted by any price change. This is an important issue when firms are competing internationally. Although Speck (Symposium presentation) argues that there is limited indication that higher water prices actually affect international competition, he also notes that for the most part, European firms sensitive to the international context have been shielded from water charge or price increases.

Water Markets Why get into the problem of finding the ‘right’ price when a market can do it for you? In theory, in a perfectly competitive market, willing buyers and sellers meet to exchange a good or commodity and an equilibrium price is found, reflective of all the values put on water. Water markets, in this perspective, would ensure that water goes to those that value it the most, fostering higher value uses. Water use and allocation, in essence, would become more efficient without the need for overall planning and management. However, environmental externalities, third party impacts, implementation costs, transaction costs and some restrictions on water rights impede the development of a market (Zilberman and Schoengold, this issue). For example, the “use it or lose it” principle (water rights must be used or the allocation is reduced by the amount saved) clearly discourages investment in more efficient technologies and water use reduction. Another example is the “first-in-time, first-in-right” principle: rights are determined according to historical © 2005 Canadian Water Resources Association

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use. Since water is usually underpriced, those who have senior rights have little incentive to sell them (Zilberman and Schoengold, this issue). A clear but detailed definition of property rights will reduce the risks perceived by the users and hence make the implementation of a water market easier (Horbulyk, this issue). Achieving clear property rights can, however, be a cumbersome task. In the Rio Grande Basin, in Texas, 15 years were required to clarify the pre-existing water rights (Eaton, Symposium presentation). In addition, the mobility, volatility and variable (changeable) quality make it difficult to define and regulate water as property.

Implementing Markets

As with changes to pricing policies, Horbulyk (this issue) reminds us that there are important implementation issues associated with the creation of markets. Market design and operation depend on complex legislative and administrative arrangements. Such instruments, in short, “these instruments are as much legal as they are economic” (Young and McColl, this issue, p. 66). To function properly, a market requires government intervention, including regulatory oversight, monitoring and enforcement. Specific policy instruments may also be needed to address undesired effects of a market, as we will see below. Modifying the system of rights, establishing mechanisms to facilitate and monitor trades, and possible expansion of water infrastructure to facilitate new transactions, are important costs to be considered in evaluating the costs and benefits of introducing markets. Given such costs, water markets may become attractive only when the resource is very scarce (Zilberman and Schoengold, this issue). Other major challenges for water markets are high transactions costs and third party impacts. Transaction costs affect the value market participants put on water rights (Horbulyk, this issue). If transaction costs are too high, few or no transactions will occur and the market will not be worth implementing. The intervention of third parties who are not involved in the transaction, but who might be impacted by the trade, or who intervene to prevent feared environmental impacts, may also impair the operation of the market.

Markets in Practice

There are few but still significant examples of water markets, some of which were discussed during the symposium and/or presented in this issue (Australia, California, Texas and Alberta). These diverse experiences highlight significant differences in the design, operations and effects of water markets. They also highlight the need to better understand the environmental and social effects of markets and to plan for these effects when considering their implementation. In general, exchanges in water markets, where they have been implemented, still comprise only a limited part of total water supply. In California, water per se and not water rights is traded and the trades occur mostly between water agencies (Howitt and Hanak, this issue). Howitt and Hanak present some of the main features of the evolution of this market from 1990 to now, including: the complexities and the central role of state institutions in putting a water market to work; the flexibility markets can provide, particularly in periods of shortage; and significant remaining points of conflict: the social implications for source communities, that is, where the water can be imported from; the need for conjunctive management of surface water and groundwater; and maintaining funding to ensure allocation of water for the environment. In California, market design adjusted incrementally to deal with undesired impacts. In the Texas case, market design is rather simple, with minimal regulatory constraints on trades (Eaton, Symposium presentation). According to Eaton, the market that started in 1986 has had the intended effect of allowing more efficient water allocation, but has not contributed to a reduction in water use in the agricultural or municipal sectors. In fact, a water market can relieve the pressure for water conservation since the risk of water shortage can be addressed through buying water instead of investing in more efficient technologies. Water use can also increase if water rights are traded from a non-user to a user. From a social perspective, it appears that smaller farmers and less well-off municipalities are disadvantaged. Water markets in Australia first led to economic, social and environmental problems because the licensing systems were not designed for them (Young and McColl, this issue). As a result, the country began exploring separate entitlement and allocation systems

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as well as other policy changes. For example, licence conditions will address environmental issues, such as salinity. One of the main lessons of the Australian example, apart from the importance of anticipating and planning for undesired effects, is that the sequencing of reforms counts. In Alberta, more precisely within the South Saskatchewan River basin, a water market has recently been established to allow transfer of an allocation under a licence, permitting new players where water is fully allocated. Transfers can be made on either a permanent or temporary basis. They need government approval and can occur only when an approved management plan is in place. The “first in time, first in right” principle has been maintained. The Alberta government has the right to withhold 10% of the water transferred for environmental needs (Yee, Symposium presentation). Since its inception in 2002, five transfers have occurred in this market.

Economic Instruments: What is the Goal Again? As many of the studies in this issue indicate, it is still difficult to ascertain if market-based instruments applied to water demand management achieve the often lofty ambitions proponents have for them. The application of EIs may have limited effects in contexts where other policies have a greater impact on water use. In the United States and Europe, Eaton (Symposium presentation) and Strosser (Symposium presentation) suggest that agricultural policy and subsidies can have a greater influence on water demand than actual water prices. A major difficulty in assessing the effectiveness of EIs is that their intent is often not clearly defined or that many objectives are pursued simultaneously. Where water abstraction taxes have been introduced in Europe, they might have been primarily designed to raise revenue but promoted to achieve environmental goals (Strosser, Symposium presentation). In such a context, it is difficult to assess the real impact of prices on changing water use efficiency or reducing water demand except as a side effect of other choices (Strosser, Symposium presentation).

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Horbulyk (this issue) highlights the importance of separating objectives that are behind pricing strategies. As seen above, cost recovery and efficient pricing are different objectives and may require different instruments. “… it is not generally the case that use of just one policy instrument can meet the twin goals of efficient resource allocation and meeting public revenue needs or targets. This choice has to be made in a way that allows effective use of the instrument for one purpose or the other.” (Horbulyk, this issue, p. 61). Young and McColl (this issue) go one step further by asserting that one instrument should target no more than one goal and should target the goal for which it is the most effective. A related question, not addressed by the authors, is whether the adoption of a water market could in itself limit the range of instruments available. According to Brooks (this issue), achieving greater efficiency in water use through water-demand management tools, including pricing, is an important first step to improving water management. He argues that Canada should be aiming for the development of water soft paths, which will lead to conservation. Based on the experience gained with energy policy, soft paths could replace our reliance on capital-intensive approaches to meet water demand with “a multitude of geographically distributed, relatively small-scale sources of supply coupled with ultra-efficient ways of meeting end-use demands” (Brooks, this issue, p. 84). Key to understanding the notion of a soft path is the fact that in general the demand is not for the water resource itself but for the services it provides (e.g., water for a garden need not meet drinking water standards; in addition, a garden can fulfill a number of needs, aesthetic or others, without requiring waterdemanding plants). By looking at the bundle of services we are expecting water resources to serve, many more options can be conceived to satisfy demands. Other keys to soft paths are scenario building and backcasting, which imply the willingness and capacity to define future scenarios that are sustainable, and then work backwards from them to establish what choices are needed to get there. As Brooks notes, to do this requires a reasonable understanding of water use in the economy. However, the last year for which data are available across sectors in Canada is 1996; there is an urgent need to update our knowledge of Canadian water use.

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Cooperation, Information and Regulatory Oversight Having adequate information is crucial to implementing EIs. Another requirement is cooperation. As equity concerns are one of the primary objectives of IWRM, the need to involve water users in the decision-making process is self-evident. Experiences also show that cooperation can considerably increase the chances of success in implementing EIs. The fact that there ought to be a better relationship or information exchange between water users and providers is at the heart of Dupont’s thesis (this issue). Canadian utilities have limited knowledge of their clients’ views of the water services currently provided, including those aspects related to water quality. Since they do not have this information, utilities face high levels of uncertainty with respect to the potential effects of pricing changes. With a modified regulatory environment that would put pressure on utilities to set performance targets, meet these targets and be more open to public scrutiny, Dupont maintains that customers would probably be more willing to pay the price the service provided to them is really worth. An indication of this is that in the absence of such information and regulatory overview, water users are already paying more since they are buying bottled water and filtration devices that, added to their water bill, actually raise the real price they are paying for water. Reforms in the South East Kelowna Irrigation District were phased in over time in order to alleviate opposition by users (Pike, Symposium presentation). The first phase included metering and served educational purposes (not the introduction of a different pricing system), allowing the district to better understand water demand. Allotments for drought years were then determined using this information and punitive fees based on metering were adopted as a deterrent to going over one’s allotment. Intriguingly, the metering and education phase of the program, without pricing, achieved a 10% reduction in water use. Leamington is an Ontario municipality where water provision was developed and managed in partnership with an important water-dependent food company (Dick, Symposium presentation). The participation of the company in the management of water was key to the approach chosen when Leamington reached its capacity limits. In essence, working with the company indicated early on that significant savings and deferred

expenses could be achieved by shifting water use at nonpeak times and steered the public utility towards the adoption of sound financial planning and maintenance of its infrastructure. This strategy, adapted in time to fit the addition of new large water users such as the greenhouse industry, made adaptation possible and cost effective. Pricing and particularly metering are important for all users, but the key to Leamington’s success is that efficiency efforts have targeted the biggest users, not so much the residential ones.

Research Needs Sustainable development has been defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. In considering future research directions, it is important to place the use of EIs within this context to better understand and explain how they and other policy instruments (e.g., regulations, subsidies, grants, information, publicprivate ownership and partnerships) can contribute to SD and IWRM. Answering this question would assist in transforming SD from a concept to an operational idea where the required policy choices and trade-offs among competing objectives are made. To meet this policy and research challenge, it is helpful to consider ‘the big picture’. From the perspective of SD, social desirability and acceptability require an understanding of human nature and the way in which our institutional arrangements (i.e., legal, administrative, economic, financial, sociopsychological, cultural, political considerations) affect resource use, as well as interactions between people and the environment. This is a daunting challenge, which can only be met by multidisciplinary research efforts. Since pricing for efficient allocation and cost recovery are two distinct objectives, as we have seen in this paper, a first issue is to answer the following question: Should or should not water provision be subsidized, and in what circumstances? A clear answer to this would go a long way in clarifying the debates around the adoption of pricing strategies, and the design of such instruments. Related to this is one of the most important issues when considering the application of EIs (and other policy instruments as well), which is fairness or equity among water users. At present, subsidies in various © 2005 Canadian Water Resources Association

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forms tend to obscure issues of fairness. Consistent with the essence of SD, EIs must be considered in concert with social and environmental requirements. This is not a simple task. As the case study approach adopted by many authors in this issue suggests, the application of EIs and SD varies temporally and spatially. Fairness has many meanings in both the procedural and allocative senses of the word, and defining it is complex because of the need to consider both spatial and temporal aspects. If the objective of pricing the use of water is to influence the behaviour of users and managers, and to raise revenues, it must be perceived to be, and actually be, fair. This means it must have community support, which can be facilitated through participatory approaches. Participatory approaches force the consideration of equity within a watershed — who uses and pollutes water, who benefits and pays for these uses in space and time. Documenting the factors that promote and detract from community support would be another helpful research frontier. Having a broad understanding of that context is an essential prerequisite for the effective application of EIs that support the achievement of SD. These considerations indicate two other important areas for research. First, a focus on the means to calculate the price in a transparent, consistent and relatively simple manner is required. Although there has been work on the use of contingent valuation and other methods to assess the benefits of a variety of policy instruments, establishing the “right price” is more of an art than science. No “ideal” single approach or mix of approaches has been developed to define the optimum level of trade-offs required among ecosystem maintenance and enhancement, the financial requirements of water utilities, societal needs and wants, and political realities. This point highlights the need to differentiate among different types of water demands, particularly those that might be difficult to price in the market place. In this regard, more attention is required on balancing instream flows, public good functions and withdrawal needs — urban, agriculture, industrial and mining. The use of EIs should embrace more than just a consideration of water quantity. Its effective implementation also requires the integration of quality. While water quantity is of prime concern in most Canadian municipalities, it is water quality that will drive most decisions in the industrial and

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mining sectors. Within the municipal sector, it is appropriate to link water quantity concerns with water quality and wastewater treatment issues. At the same time, there is a need to better understand the nature of the institutional arrangements that support the implementation of any economic instruments, their outcomes, and their associated social and environmental impacts, both real and perceived. Considerable effort is required to document the implementation of EIs in the water sector. Good data are fundamental to any research effort. Comments made during the symposium suggest that Canada’s present ability to monitor water supply and use is less than adequate for both management and research purposes. Mechanisms to deliver these data should be aggressively pursued. Past data collection efforts have focused on the water resource itself — measures of use and quality. It would also be appropriate to obtain more information on the perceptions, attitudes and beliefs of consumers, industry and operators about the nature of water and its use, and the delivery of water services. Of particular importance will be to determine the key factors that drive water use decision-making and behaviours. As with other policy instruments, EIs may be most useful if applied in an Adaptive Management framework, such as the soft path analysis proposed by Brooks (this issue). Adaptive management refers to approaches that make conscious efforts to learn from policy implementation, establishing a more rigorous and systematic approach to learning, as well as facilitating continuous and more effective improvements. Adopting such an approach highlights the need to clearly distinguish between different objectives to determine the most appropriate set of instruments (or a combination thereof ) to adequately and cost-effectively help to achieve them.

References Brooks, David. B. 2005. “Beyond Greater Efficiency: The Concept of Water Soft Paths.” Canadian Water Resources Journal, 30(1): 83-92. Dinar, A., M.W. Rosegrant and R. Meinzen-Dick. 1997. “Water Allocation Mechanisms – Principles and Examples.” World Bank Working Paper No. 1779.

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Dupont, Diane P. 2005. “Tapping into Consumers’ Perceptions of Drinking Water Quality in Canada: Capturing Customer Demand to Assist in Better Management of Water Resources.” Canadian Water Resources Journal, 30(1): 11-20. Environment Canada. 2004. Threats to Water Availability in Canada. National Water Research Institute, Burlington, Ontario. NWRI Scientific Assessment Report Series No. 3 and ACSD Science Assessment Series No. 1. Espey, M., J. Espey and W.D. Shaw. 1997. “Price Elasticity of Residential Demand for Water: A MetaAnalysis.” Water Resources Research, 33: 1369-1374. Garrido, A. 2002. “Transition to Full-Cost Pricing of Irrigation Water for Agriculture in OECD Countries.” Environment Directorate and Directorate for Food, Agriculture and Fisheries, OECD. Government of Canada. 1992. “Economic Instruments for Environmental Protection Discussion Paper.” Minister of Supply and Services, Ottawa, ON. Hanemann, W.M. 1998 “Determinants of Urban Water Use.” In Baumann, D., J. Boland and W.M. Hanemann, Urban Water Demand Management and Planning. McGraw-Hill, New York, p. 31-75. Horbulyk, Theodore M. 2005. “Markets, Policy and the Allocation of Water Resources Among Sectors: Constraints and Opportunities.” Canadian Water Resources Journal, 30(1): 55-64.

Renzetti, S. 2002. The Economics of Water Demands. Kluwer Academic Publishers, Boston/Dordrecht/ London. Renzetti, Steven. 2005. “Economic Instruments and Canadian Industrial Water Use.” Canadian Water Resources Journal, 30(1): 21-30. Reynaud, A. and S. Renzetti. 2004. “Micro-Economic Analysis of the Impact of Pricing Structures on Residential Water Demand in Canada.” Report for Environment Canada. Stratos Inc. 2003 “Economic Instruments for Environmental Protection and Conservation: Lessons for Canada.” http://www.pco-bcp.gc.ca/smartregregint/en/06/01/su-11.html Tsur, Yacov. 2005. “Economic Aspects of Irrigation Water Pricing.” Canadian Water Resources Journal, 30(1): 31-46. Young, Mike and Jim McColl. 2005. “Defining Tradable Water Entitlements and Allocations: A Robust System.”Canadian Water Resources Journal, 30(1): 65-72. Zilberman, David and Karina Schoengold. 2005. “The Use of Pricing and Markets for Water Allocation.” Canadian Water Resources Journal, 30(1): 65-72.

Symposium presentations can be accessed at http:// policyresearch.gc.ca/page.asp?pagenm=SD_Water_ prog

Howitt, Richard and Ellen Hanak. 2005. “Incremental Water Market Development: The California Water Sector 1985-2004.” Canadian Water Resources Journal, 30(1): 73-82. Pleasance, G. Comments.

2004.

Symposium:

Discussant

Renzetti, S. 2000. “An Empirical Perspective on water Pricing Reforms.” In Dinar, A. (Ed.), The Political Economy of Water Pricing Reforms. Oxford University Press.

© 2005 Canadian Water Resources Association