Carlos Mario Gomez, University of Alcalá
Xavier Leflaive, OECD
Economic instruments are part of a new approach to water policy. There still is room for improvement in the design and implementation and particularly in adapting particular kinds of instruments to local circumstances including local institutional set-ups.
There remains a great deal of uncertainty especially over the potential role of pricing, and water use right trading systems, for water demand management and allocation.
Decision-making on water management will definitely be improved with better information but cannot be dependent just on that. Information, after all, is not the only (scarce) element of decision-making.
Instead of assuming a foreseeable future, economic and financial instruments must assume that the water future is uncertain. Instruments must be assessed and chosen giving priority to its capacity to enhance adaptability and resilience and to work well under different, and essentially unpredictable, future conditions.
Financial and economic instruments are argued to be able to fulfil one or more social objectives: financial sufficiency of water development, support and promote economic growth and territorial development, and environmental sustainability, amongst others (i.e. equity concerns).
Financial goals should be clearly distinguished from economic incentives, aimed at inducing chosen behavioural changes. Cost-recovery mechanisms do emphasise on revenue collection and is essential to make the provision of water services sustainable. But the way these questions are addressed does not necessarily have anything to do with efficient pricing, whose motivation should be to optimise water use and social welfare.
In water management, information has typically been expensive and can be considered as part of transaction costs.
The effective design and implementation of financial and economic policy instruments typically require more differentiation (and hence more information than command-and-control systems).
But, economic and financial instruments save information as well (i.e. setting a price and observing behaviour is not that demanding as deciding water allocations in a centralized manner, markets might be a way of revealing preferences, etc.).
A critical issue in the implementation of financial and economic instruments is a clear definition of water rights.
Economic and financial instruments are usually only one element of a broader institutional set up. They are often combined with other policy instruments into a water policy or management strategy.
Innovative financial and economic policy instruments are not necessarily new instruments but rather better designed and implemented instruments.
Pricing, payment for environmental services, cooperation, trading schemes and other financial and economic instruments are not always easy to implement (due to high transaction costs, equity concerns, social acceptability, institutional complex demands, etc.). “
What do you think is the role of pricing and economic instruments?