Jaroslav Mysiak is a senior researcher in environmental economics at the Fondazione Eni Erico Mattei and the Euro-Mediterranean Center for Climate Change, both in Venice, Italy. As the co-ordinator of the EPI-WATER project, he is talking to youris.com about assessing effectiveness and efficiency of economic policy instruments to assist in meeting EU water policy goals of increasing environmental protection of water resources.

What is the main goal of the project?
EPI-WATER aims at collecting empirical evidence about how economic policy instruments (EPIs) perform in practice. Examples of such policy instruments range from water charges to specific environmental taxes or subsidies and compensation mechanisms. Our goal is to design innovative economic instruments better able to deliver on environmental challenges than the regulation alone. This approach will be tested on a representative set of river basins across Europe, following water use through all types of users, individual, industrial and agricultural. If we could demonstrate how this can be done by providing solid evidence, the water authorities might be much more willing to change the way they work.

What is the difference between financial and economic policy instruments?
Let me answer with an example. If your water consumption is not metered, and the cost of water supply is simply split among the customers, the water charge serves primary to recover water costs. In other words, it serves as a financial instrument. Instead, if you are paying only for water you have consumed, and you can see the difference on your bill, then you are likely to use water more efficiently as the price increases with usage. In this case, water charge is an economic instrument. The more so if the revenue collected is invested in providing better services and improved environmental protection.

What do we know about the effectiveness of water policy to date?
In the first phase, the project conducted a horizontal review of some thirty water policy instruments such as water tariffs, pollution charges, taxes, and water trading, implemented in Europe and elsewhere. We found little commitment to evidence-based decision making. Furthermore, we also found that the existing economic instruments have often not been designed to enhance environmental protection but are mere financial instruments used to raise revenues and cover water costs.

Far too often, the environmental and societal potential of economic instruments is not fully realised. For example, the water framework Directive makes the recovery of costs of water services compulsory. But there is no shared view on the definition of a water service. Some Member States have adopted a very narrow interpretation of the term ‘service’. The European Commission is pursuing legal actions in these cases.

How does this kind of economic policy instruments work? Are they just awarding the investments in infrastructures for a greener water system?
Infrastructure is not the only precondition. Let me use another example. Let's assume a producer requires a large volume of water but that creates low economic value. He might be willing to transfer part of his water entitlements to another user, as long as he is compensated for his loss of revenue in terms of opportunity cost. This way the other users purchasing the water credit, such as for example a water utility supplying with water a middle-sized town, is able to postpone their investments in larger water infrastructure, say, to get prepared for a drought.  Hence the transaction is a win-win situation for all. The EPI-WATER explores similar ways of making water management and use more efficient through a variety of instruments such as trading of water entitlement.