M2 ERNEA Water Economics Alban THOMAS Academic year 2005-2006 Course outline - Water policies: the institutional fram

1. M2 ERNEA Water Economics Alban THOMAS Academic year 2005-2006 Course outline - Water policies: the institutional framework - Industrial use - Agricultural use

2. 1. Water policies: the institutional framework 1.1 Some figures for mainland France • Capacity of natural stock formation: reserves of about 1000 billion cubic meter • (m3) • Potential resource per head (annual average): 3 265 m3 • Average rainfall: 440 billion m3 per year • Internal resources (rainfall - evapotranspiration + imports from foreign • water streams): 170 billion m3 per year on average - Gross water withdrawal : 33.1 billion m3 in 2002 Of which 55 % for cooling of power plants 14 % for irrigation 19 % drinking water 12 % for industry

3. Surface water withdrawal : 80 % of total Drinking water: 62 % from groundwater Power plants: 99.9 % from surface water Irrigation: 75 % from surface water Water withdrawal and use, mainland France (billion m3)

4. - Net yearly consumption : 6 billion m3 (103 m3 per inhabitant per year) - Billed consumption volumes : 4.5 billion m3 • Housings connected to wastewater treatment network: 81 % • - Housings with autonomous wastewater facilities: 10 % • Average collection rate of wastewater in communities > 10 000 inhabitants • (62 % of population) : 68 % • - Average return rate of wastewater treatment plants (abatement rate): 73 % Pollution generated by an individual using 200 litres of water a day: 70 - 90 gr. of Suspended Solids 60 - 70 gr. of Organic Matters 15 - 17 gr. of Nitrogen

5. Water quality outlook early 2000s : - quality is increasing for surface water, - decreasing for every high quality water, - constantly deteriorating for groundwater (especially in Britanny). • 1.2 The legal and institutional framework • 1.2.1 Water legislation in France • Water Act of December 16, 1964 • - First law in France aiming at better water management • - Describe water property rights and pollution regulation schemes • - Creates the 6 Water Agencies (one for each river basin)

6. Water Act of January 3, 1992 - Declares water as part of nation’s patrimony, its protection is of general interest - Global water resource planning through the ‘‘Schémas Directeurs d'Aménagement et de Gestion des Eaux (SDAGE) The « Sapin » Act of January 29, 1993 - Not water-specific, but major impact on water utilities - Toward more competition in water industry regarding public tenders - No more direct reconduction of water utility contracts between private operators and the local community The « Barnier » Act of February 2, 1995 - New rules for water provision by private operators - Maximum contract length for water utility operation : 20 years - No more entry payments by private operators - Annual reports on water quality and price

7. The « Voynet » Act of 1999 (dropped) - Transposes the October 23 2000 European Framework Directive on Water into French law - Seeks more transparency, equity and solidarity in water pricing and management July 30, 2003 Act on ‘‘natural and technological risks’’ - To facilitate prevention of floods and promote safe management of water resource, local communities can collaborate by creating a ‘‘Etablissement Public Territorial de bassin’’ - These EPTB are now genuine actors in water policy at the river basin scale

8. Why was another law needed for water ? - Downward trend in water quality - Significant increases in water bills (wastewater treatment in particular), poor relationship between actual consumption and bill - Strong social demand toward the government: more information, health risks - Need for more consistency across many legislations, acts, directives,… The new French Water Act (2006 ?) In discussion (May 2006), French Senate, see below

9. 1.2.2. Regulation authorities and water Local level: - The mayor or President of the inter-community board The « département » level: - The « préfet » coordinates implementation of national environmental policy - Several authorities for Health, Agriculture, Forestry, Public Infrastructures (DDASS, DDAF, DDE) are in charge of controlling water quality, assisting local communities on water utility management, and construction projects. The regional level: - Same authorities as above, duplicated for regions. - Direction Régionale de l'environnement (DIREN): monitors implementation of French regulation and European Directives on environment and water

10. - Direction Régionale de l'Industrie, de la Recherche et de l'Environnement (DRIRE) : important role in controlling industrial plants The river basin level: - The «Basin Committee »: Includes representatives of local communities, users and the administration. Purpose: a) Elaborate Water Management Plans (« Schémas Directeurs d'Aménagement et de Gestion des Eaux, SDAGE) ; b) consultative body for water tax rates ; c) Elects members of the Water Agency Executive Board. - The “Water Agency”: Grants financial aids for public interest works and private quality- or quantity-improving projects; Collects emission and water use taxes.

11. The EPTB (Etablissement Public Territorial de Bassin), since 1999 • (and in the law since 2003) • Union or association on behalf of several local communities, • At the river (or sub-river) basin scale • Can act to prevent floods, facilitate management of water resources, • and conservation of wetlands. • Are consulted when SAGE and SDAGE are implemented or revised

12. - The « Local Water Commission » (CLE) : Includes representatives of the civil society and the administration. Defines and monitors implementation of the SDAGE (see above). • The national level: • - Inter-Ministry Committee for the Environnement • Consultative bodies: National Water Committee, • Higher Committee for the Environment, Higher Fishery Council. The European level: European Commission Européenne (DG Environment): Defines water quality standards, regulation and wastewater standards. Nine main Directives applicable to water and the environment

13. 76/160/CEE: Swimming water quality 80/778/CEE: Dringing water (modified by 98/83/CE) 86/278/CEE: Wastewater sludge 91/271/CEE: Residential wastewater treatment 91/676/CEE: Nitrates 96/61/CE: Pollution prevention and clean technologies. Until now, strict standards for natural resource conservation, without financial impact assessment. The Directive 2000/60/CE: Framework for a European water policy Deadline: no later than 15 years, with some exceptions: technical feasibility, local conditions, excessive costs.

14. - Coordination of resource conservation and protection measures within river basins - Consistent and exhaustive information and monitoring network for member states. Deadline: 6 years - Frequency of physical and chemical components defining water quality: 3 months (1 month for more toxic substances) . - Design of a management plan for each hydrological district - Combination of environmental quality standards and maximum emission limits - Prevention of further degradation of continental surface water, coastal water, groundwater - Promoting sustainable water management, based on long-run protection of available water resources.

15. - For each hydrographical district: analysis of local natural conditions and impact of human activities. - Economic analysis of water use, creation of a list of protected areas. - Principle of cost recovery applied to water use, according to Polluter-Payer Principle. - « Cost-efficiency analysis »: assessment of the most efficient combination of measures with minimum cost - Member states have to verify the incentive-driven feature of tariffs, for efficient resource use. Deadline with respect to national legislations: implementation of legal, administrative and regulatory provisions no later than December 22, 2003.

16. 1.2.3. The French Water Agencies - Autonomous environmental authorities, but with administrative supervision of the Ministry of the Environment. - Goal: financial participation to water disposal and pollution reduction operations. - Agencies also participate to common-interest operations: dams, water transfers, groundwater recharge, limitation of coastal water pollution. - Financial instruments: subsidies, loans with/without interest. - Within the 5-year working plan, which must be budget-balanced (through emission and water use tax receipts).

17. Executive Board: President nominated by Ministerial decree ; 8 representatives of local communities, 8 representatives of users, 8 representatives of the administration, 1 representative of the staff. The 6 Water Agencies (River Basins) are: Adour-Garonne (115,000 km2) Artois-Picardie (19,562 km2) Loire-Bretagne 155,000 km2) Rhin-Meuse (31,500 km2) Rhône-Méditerranée-Corse (130,000 km2) Seine-Normandie (100,000 km2)

18. Mission: financial participation to investment in public (common interest) or private equipments and facilities, for emission control and improvement of resource sharing. No direct initiative on private investments, but financial aid is crucial Necessary funds: taxes collected from water users in river basin: - Emission tax (water pollution) - Water extraction and consumption taxes. Funds are then redistributed in the form of direct subsidies or loans Incentive role in reducing fixed costs and later, emission charges.

19. The Water Agency tax scheme Multi-year framework of the Working Plan: Tax receipts must balance expenditures → Consequence: total amount of tax receipts determined according to expected expenses The category of users to be taxed and the unit tax rates must be approved by the Water Agency Executive Board Unit rates can be modulated geographically (coastal zones, wetlands, vulnerable areas) Taxes are collected from each individual plant, with a minimum perception threshold

20. Revenues from Water Charges Collected by Water Agencies, VII Working Plan 1997 – 2001 (in million French Francs)

21. Evolution of Charges Collected and Subsidies paid by Water Agencies, 1977-2001 (in billion French Francs)

22. Subsidies by Type of Operation (in million French Francs)

23. 2. Industrial use 2.1 Regulation of industrial water pollution in France New legal framework in the 1960s: Harmonization of water policy with objectives of the « Plan », given strong economic development of the 1950s Logic of recommendation and planning, given poor performance of pure command-and-control policies Objective: Make stakeholders participate in water management within their own river basin.

24. 2.2 The key role of Water Agencies Role of Water Agencies reinforced by new Water Act in 1992 « Agences Financières de Bassin »: - At the heart of water pollution regulation. - Initiate and monitor implementation of 5-year working plans provisions regarding water quality and resource management issues. Mission: financial participation to investment in public (common interest) or private equipments and facilities, for emission control and improvement of resource sharing. No direct initiative on private investments, but financial aid is crucial

25. Necessary funds: taxes collected from water users in river basin: - Emission tax (water pollution) - Water extraction and consumption taxes. Funds are then redistributed in the form of direct subsidies or loans Incentive role in reducing fixed costs and later, emission charges. The Water Agency tax scheme Multi-year framework of the Working Plan: Tax receipts must balance expenditures → Consequence: total amount of tax receipts determined according to expected expenses

26. The category of users to be taxed and the unit tax rates must be approved by the Water Agency Executive Board Unit rates can be modulated geographically (coastal zones, wetlands, vulnerable areas) Taxes are collected from each individual plant, with a minimum perception threshold Two types of emission tax schemes: based on actual versus estimated emissions Actual emissions: daily measured emissions (large plants) or average emission rate defined as: “daily average emission level of month with highest activity”

27. Estimated emissions: from yearly firm’s activity report by the manager An input-output table production - emissions is used, based on average emission rates of industries. Emissions are defined as a number of units per day (kg/day), not as a concentration (kg/day/litre). Tax is then computed by applying a unit emission tax rate on a list of pollutants: - Biological Oxygen Demand (BOD), - Suspended Solids (SS), - Nitrogen (N), - Phosphorus (P), - Inhibitory Matters (IM)

28. If firm claims to be over-taxed or Water Agency believes reported or estimated emissions are below actual ones, plant inspection may be required Industrial plants equipped with an abatement plant: Emission charge is reduced in proportion of reduced (avoided) pollution Abatement rate: as above, either measured or estimated

29. Example of input-output table (Production - Emissions)

30. Effluent emission and use charges, VI Working Plan In French Francs per kilo-day for Suspended Solids, BOD, Nitrogen and Phosphorus, in French Francs per cubic meter for water use.

31. What is going to change with the new water act proposal (2006) ? In Title 3 ‘‘Governance and planning’’, Chapter III ‘‘Water Agencies’’ After 40 years of operation, the whole system needed to evolve, in the way of: • A parliamentary control • (missing in current situation, even if total tax receipts is about • 2 billion Euros); • An extension of Water Agency scope of action • (the current one authorises Water Agencies only to finance • actions related to the environment and uses, difficult to understand • by the public and local decision-makers) • A simplification of the tax system and more modulation of the tax rates • (according to zoning and other local conditions), to establish • adequation between local tax level and local stakes regarding • necessary investments

32. - Necessary link between actions of Water Agencies and those of the ‘‘Water Police’’ - Facilitating the emergence of financial solidarity at the sub-river basin scale In practice, main modifications are • Subsidies granted by the WAs are conditional on compliance • with regulatory standards : stronger link between economic • and regulatory approaches • Stronger role of WAs in implementation of the SAGEs and actions of • the EPTB, they are now in charge of the FNDAE programmes • for rural communities • Maximum budget for the period 2007-2012: 12 billion Euros; • the Parliament can modity this budget and the broad • objectives of the future Working Programmes

33. - But it is the Ministy of the Ecology and the Ministry of Finance that set the maximum budget of each WA and their use (for different intervention policies, e.g., pollution control, resource management) • The rules for tax implementation and tax rate modulation are now • part of the law • A new tax on nonpoint source pollution; replaces the TGAP • (General Tax on Polluting Activities), and is set on pesticide products. • The tax is paid by resalers, and is based on the amount od active • components in pesticide products (list decided by the government). • More incentives for collective management of water resource: • tax rate for water withdrawal is higher in areas with gap between • demand and supply; by this tax rate is reduced if collective • management. - Water tax rate depend on final use: domestic, cooling, industry,…

34. A new tax on obstacles on rivers and flows: to facilitate sediment and fish • transit; depends on river flow rate and upstream-downstream difference • Overseas territories (French West Indies, etc.) already have river basin committees • but they can now collect tax on effluent emissions and nonpoint source • pollution - Note: these territories already have water use tax since 2003 (Bill 2003-660)

35. 2.3 Command-and-control regulation • In parallel with the action of Water Agencies: • The DRIRE (Direction Régionale de l'Industrie, la Recherche et la Technologie) • Designs emission standards for industrial plants, in terms of • maximum concentration of effluent emissions, • by type of pollutant (March 3, 1993 decree) • Delivers emission (in general once-and-for-all) permits to industrialists • (« sites classés »). • - Emission standards are in practice modulated depending on localization • - Firms’ compliance with standards can be controlled (« Water Police »)

36. Since 1992, plants subject to emission permits must be equiped with permanent measurement devices. If an industrialist does not comply with a standard, the DRIRE imposes a 3-year rehabilitation plan (« mise en conformité »). • 2.4 Economic Analysis of Water Agency regulation • Ideal ( ?) domain for application of environmental regulation theory: • Point source pollution • Economic instruments : « market-based » and « non-market-based » • Asymmetric information between Water Agency and the industrial firm • (abatement effort, technology, abatement cost,...)

37. Problems: - Are economic instruments used by Water Agencies compatible with regulatory instruments described by the theory? - Are those instruments set at optimal values ? - Are instruments redundant ? - How to evaluate damages due to emissions?

38. 2.4.1. Instruments used by Water Agencies: • Basic instrument: emission tax • Pigovian Tax if equal to consumer marginal damage from pollution • Problems in practice when considering a Pigovian tax: • Necessary to know precisely the social damage function, • to compute marginal damage and use it in designing the optimal tax rate • Necessary to know the social damage due to pollution, for each geographical unit • - Uniform versus personalized tax? • - Consistency with government anti-inflation (or employment) policies ?

39. Other (complementary) economic instrument: contracts (abatement subsidy, between Water Agency and the firm) Justification of contract-based policy by an imperfect pollution tax system? Type of contracts (specifying capital stock of abatement) motivated by simplicity and low control cost? Asymmetric information on: - Technology - Abatement effort - Future activity Strategic behaviour, e.g., if inverse relationship between gross pollution level and abatement rate. Firms can ask for large capital stock of abatement, claiming future activity (output) will increase

40. 2.4.2. Incentive effect of emission tax Does the level of the unit emission tax modify the behaviour of the polluting firm ? Emission tax can have an impact on - The production level (specially in case of no abatement) - The net emission level(after abatement), given level of gross emission - The abatement rate, given level of gross emission.

41. How to construct a simple model for abatement rate ? Assumption here: production cost is separable from abatement cost Hence, strategy of the firm in two steps: 1/ Decide on optimal production level, q 2/ Given q (and B), decide on optimal level of δ

42. If abatement cost is convex in abatement rate δ, β>1 and abatement rate is increasing in tax rate If abatement cost is convex in gross emission B, α>1 and abatement rate is decreasing in gross emission level (provided β>1 )

43. Estimated abatement rate equations Nitrogen log()= - 0.0269 log (B) + 0.0896 log () Suspended Solids log() = 0.0630 log (B) + 0.2134 log () DBO log()= 0.1443 log (B) + 0.1179 log () Data source: French agrofood industries, 1992-1998, all Water Agencies

44. Another application: 320 French plants in the Adour-Garonne and Seine-Normandie river basins Source: Lavergne and Thomas, J. Empirical Econ., 2005 B : BOD (Biological Oxygen Demand) emission level, in kg. / day δ : BOD abatement rate (in percent) τ : BOD emission tax (in French Francs)

45. Less efficient industries: ‘‘iron and steel’’ and ‘‘paper and wood’’ Most efficient industries: ‘‘Dairy and milk products’’ and ‘‘food and drinks’’

46. Intuition: Since environmental regulation important in decision to invest in abatement, emission standards should play a limited role after investment has taken place. Hyp. : Emission tax should play a greater role after the contract with the Agency (than before). Empirical assessment of this assumption: - Examine the impact of emission tax on gross emissions, before and after the contract; - Examine the effect of emission tax on abatement rate before and after the contract, for plants engaged in abatement activity.

47. Gross and Net Emission Model, Suspended Solids Estimation method: Fixed Effects (Within). (*) and (**) respectively denote a significant parameter at the 5 and 1 percent level. t-statistics are in parentheses.

48. 2.4.3 Impact of contracts First specification where firm i, year t, pollutant j Ki : invested capital in abatement, as stated in contract, DIFFit : Number of years since contract.

49. Effect of abatement capital investment on abatement rate, Suspended Solids Estimation method: Fixed Effects (Within). (*) and (**) respectively denote a significant parameter at the 5 and 1 percent level.

50. Second specification All pollutants considered, total tax payment: weighted average of emissions. Impact of abatement capital investment on tax payments, all pollutants Estimation method: Fixed Effects (Within). (*) and (**) respectively denote a significant parameter at the 5 and 1 percent level.