Rob van der Veeren
Senior economic policy advisor for water management
Water and economics; some persisting challenges
The most important objective of economic analysis is to support decision making by providing information that is as objective as possible on all the positive and negative aspects of potential investments, such as measures for the European Water Framework Directive (WFD). However, in practice, there are quite some challenges. In this paper I will discuss three of the most persisting ones.
For both the European Marine Strategy Framework Directive and the WFD, there is insufficient knowledge of the functioning of aquatic ecosystems to carry out meaningful quantitative economic analyses. In many cases, there is confidence that a particular measure will allow the ecosystem to develop in the desired direction. However, the natural system is inherently dynamic and robust, which results in large uncertainty ranges in the quantitative description of measure-effect relationships, which increases significantly with the scale of the measures and the combined effects of various measures across the system (which is also affected by climate change). These features of the natural system do not properly fit into economic analyses.
The standard approach of economists in those circumstances, is the use of assumptions. Then you can go ahead with your analyses. However, before you know, you have combined so many assumptions that any resemblance between the model and reality is by chance. Such analysis is nice for an academic publication, but totally useless to support decision making; the original purpose of the economic analysis. In order to substantiate policy decisions, it is therefore often better to focus on writing a good qualitative story about the possible pros and cons of a particular intervention, based on information you are sure of, than performing a quantitative analysis that depends on assumptions and is not applicable to policy.
In cost-benefit analyses for environmental policies, costs are generally higher than benefits. Some people argue that this is the result of not properly taking into account the various benefits the environment delivers. They expect that once these benefits would have been properly accounted for, there would no longer be a reason to refrain from taking additional measures. For example, the European Commission thinks along these lines with respect to the Birds and Habitats Directive and the WFD.
However, as PBL rightly points out, water quality in the Netherlands is now good enough for all kinds of purposes: swimming, drinking water, etc. We no longer live in the 1970s when oil barrels floated at sea. Ever since then, we have implemented measures. By taking the most cost effective ones first, we have achieved the first 80% improvement at 20% of the costs. We are now in the trajectory where the last 20% improvement will result in 80% of the costs. And unfortunately, although this last 20% improvement is important for the number of species and their wellbeing, it cannot be perceived by the naked eye. If people cannot see the improvement, they will not be willing to pay for it; and thus the benefits should be zero. So, it is only logical that the costs tend to outweigh the benefits (by far).
‘The precautionary principle tells us that it is a good idea to think about ways to prevent litter from entering the marine environment in the first place’
This paper has shown that for environmental policies it is not always possible to perform quantitative economic analyses. And if it is, they may not always support the implementation of additional measures. However, also if for example the costs of reducing marine litter would outweigh benefits by far, the precautionary principle would tell us that it is a good idea to think about ways to prevent litter from entering the marine environment in the first place. Economists would be happy to contribute to this by looking for the most cost-effective way. ≈