Water policies in Europe: an OECD perspective

25/05/2012

The Future of EU Water Policy – Closing session

Brussels 25 May 2012

Good morning ladies and gentlemen. I would like to take this opportunity to congratulate Commissioner Potocnik and his team on the successful EU Green Week and in particular on the very welcome focus on water this year.

The European Commission’s “fitness check” on policies for freshwater resources is an important opportunity to identify areas where new policies are needed or existing ones can be streamlined. It is also an opportunity to eliminate obsolete measures or those that are excessively burdensome. We look forward to what we all can learn from this exercise. And at the OECD we are happy to contribute what we can to support the exercise. As a first start, I would like to provide you with some highlights from our recent work that may help in the task before you.

The OECD Outlook to 2050 for freshwater
Reforming water policies is a challenging task. But if we do not adequately tackle this challenge, the outlook for water is not a good one. The OECD Environmental Outlook to 2050 projects that water demand will increase by 55% by 2050. Cities, farmers, industries, energy suppliers, and ecosystems are increasingly competing for their daily water needs. The costs of inadequate water management area high, not just financially, but also in terms of lost opportunities, compromised health and environmental damage. Ensuring that robust and effective water policies are in place is more important now than ever.
The OECD Outlook illustrates the challenges posed to managing water resources by increasingly rapid urbanisation, population growth and changing economic dynamics. The Outlook projects that by 2050 3.9 billion people – more than 40% of the world’s population - are likely to be living in river basins facing severe water stress. This means that they will face an increasing risk of water shortages, and very likely increasing costs related to water management. Climate change will exacerbate these challenges.
This is also a concern in European countries – such as Spain, where abstraction as a share of renewable water resources is already above 20%. However, only considering water stress at a national level may conceal unsustainable use in some river basins that cross national boundaries. In arid regions, freshwater resources may be so limited that demand is only met by drawing down groundwater supplies faster than they can be replenished.

In addition to the growing pressures on water quantity, water quality is also a concern. Increased flows of nitrogen, phosphorus and pesticides from agriculture and poor wastewater treatment threaten ground water, rivers and oceans, harming human health and the environment. The deterioration in water quality is estimated to have already reduced biodiversity in rivers, lakes and wetlands by about one-third globally, with Europe being one of the regions with the largest losses, together with China, Japan, South Asia and Southern Africa.

Continued efficiency improvements in agriculture and investments in wastewater treatment are expected to stabilise and restore surface water and groundwater quality in most OECD countries by 2050. However, meeting increasingly stringent standards of water quality will be costly and require significant investment. And it will be critical to adopt approaches that are efficient and minimise the costs as far as possible. We see this as a major challenge for Europe in the coming years, and in particular in a period of continuing fiscal constraint.

Policy responses
A robust policy framework on water centres on several important building blocks, and I would like to address the key ones briefly.

First, pricing water and water-related services appropriately is essential. Pricing water promotes efficiency in use, and can help manage demand and allocate water to users and uses where it adds the most value. It can encourage water reuse and recycling. And pricing water works. For example, thanks in large part to pricing, one-third of OECD countries have reduced total water use since 1990 even while their economies have grown. The cost-recovery principle cast in the EU Water Framework Directive makes a clear case for water pricing. The exact scope and ambition of the cost recovery principle could be further refined and implemented across countries, but the basic tenets are robust.

Second, in the face of increasing demand for water and more uncertain water supplies, securing enough water of good quality, at the right time and where it is most needed becomes even more challenging. And this includes ensuring adequate water for the environment. Ensuring minimum ecological flow and taking into account the natural morphology of rivers are increasingly a part of environmental planning in some OECD countries. The EU Water Framework Directive has required this approach. Investment in ecologically sensitive water storage and water distribution systems in water scarce or flood prone regions is a must. As allocation issues become increasingly difficult, it is likely that OECD and EU countries will need to explore more flexible allocation mechanisms. This is an issue which we will be looking at in the OECD as part of our work on water security.

Third, attention to social concerns and the distributional effects of water reforms are key to securing policy reforms. When not properly addressed, these issues can block policy initiatives. Experience in Chile has shown that targeted social support is more effective than artificially low water tariffs, and can help to deliver both the needed investment in water supply and sanitation systems and ensure affordability for the poor.

Fourth, green innovations for water must become much more widespread and shared across national borders. Two areas stand out: wastewater treatment equipment and techniques, and the management of nutrients and agricultural run-off. Non-technological innovation such as new business models or improved city planning will be crucial. For instance, it may make sense to decouple revenues for water utilities from the volume of water supplied or treated. In a related field, energy suppliers show that such a move can encourage conservation. The Water Innovation Partnership recently launched by DG Environment and DG Research paves the way.

The water governance challenge
These building blocks that I have sketched require effective governance across different levels of government. The Water Framework Directive aptly championed water management at river basin level. This was a major step forward. Today, more work is needed to facilitate the implementation of this approach. But several challenges must be overcome. First of all, in many cases, groundwater cuts across river basins. This is not a marginal question in Europe. In the European Union, the proportion of groundwater supply for domestic water use is approximately 70%. Second, river basin management add to a complex architecture of institutions governing water - from local to regional, to national and transboundary. The OECD has developed a framework to assess multilevel governance gaps which could be helpful in these efforts. Some European countries are already finding it useful to review the organisation of their water authorities. We are happy to work more with the European Commission and member countries on this.

Water governance also requires co-ordination across jurisdictions. Because policies seemingly unrelated to water can have an adverse impact on its use, governments should pay closer attention to the way in which their water, energy, agriculture and environment policies interact. This is clearly a complex task, but focussed action in two areas can help. First, eliminating bad policies from the past, like subsidies that negatively impact water. This can help get the incentives right and, importantly, it can free up scarce public funds. For example, decoupling farm subsidies from production in Europe is changing irrigation practices and crop patterns, as farmers in dry regions are no longer encouraged to grow water-intensive crops. Second, using cost-benefit analysis of major policy decisions more systematically can help better integrate water considerations across the water-energy-food nexus.

We are aware that the Blue Print endeavours to strengthen the implementation of European water policies, and to put more emphasis on integration, demand management and allocation issues. At the OECD, we are most interested to see the outcome of the consultation process, and we stand ready to co-operate further with the European Commission and member countries on these issues.