Economic incentives for behavioural change

Not surprisingly, public participation is a crucial element in increasing the general acceptance of EPIs and in motivating stakeholders to participate. This is not to say that public participation is always required to make the EPI acceptable. For example, the importance of public participation may be reduced in cases where the EPI as such, or the specific solution EPI intends to promote, has already gained public (social) acceptance.

When dealing with the application of EPIs, there is substantial variation in the needs, opportunities, and constraints facing each country. Even within countries, there is a substantial variation in the capacity to implement economic instruments across different regions or sectors. Some desired changes are easier to implement through economic instruments while others are easier to implement through command and control regulations. EPIs are by no means substitutes for other modes of governmental action, but instruments that can complement and strengthen governance as part of a broad mix of policy instruments. Broadly, it is possible to discern between: (i) combinations of EPIs, as part of a strategy for “packaging incentives”, and (ii) mixing with other types of policy instruments, including regulatory, awareness raising, information, etc. When screening potential EPIs, one should be aware of the existing policy mix, but the selection should not be dictated by it.

The costs and benefits of EPIs are hardly investigated, and little information can be found on how they compare to classical command and control approaches.

The costs of an EPI can be distinguished between the direct costs (e.g. cost of paying the tax) and transaction costs (e.g. the time and money cost of getting to the market, finding a buyer or seller, negotiating a purchase, consummating the trade, and returning from the market). Transaction costs might also relate to additional monitoring required. For example, the transaction costs from monitoring groundwater or surface water may impede the adoption of a tax (e.g. tax on the disposal of polluted drainage water on a volumetric basis), but it may also be worth paying to make sure the tax is effective. Likewise, a new water allocation mechanism may increase economic efficiency but impose high negotiation and enforcement costs, making simpler allocation mechanisms potentially preferable.

The benefits of EPIs include improved environmental quality and economic efficiency as well as a better social distribution of the burden to achieve the desired objective. At the same time, EPIs raise revenue (in the case of charges) in order to finance pollution monitoring and control or allocation activities, for instance, and can be therefore relevant for financing adaptation measures.

EPIs are recognised at political level in several major pieces of European legislation and policy documents:

• The EU Water Framework Directive introduces a set of principles and measures that rationalize water use across member states. Its Article 9 calls for the full cost recovery of water services through pricing.
• The 2012 EU Blueprint to Safeguard Europe’s Waters emphasises the importance of incentive water pricing and other EPIs such as water trading and payments for ecosystem services in the policy mix to improve Europe’s water management.
• The EU Action on Water Scarcity and Droughts (from 2007) highlights the role of incentive pricing for adapting water demands and ensuring sustainable water management
• The EU Floods Directive (2007) encourages the uptake of green infrastructures and natural flood management by financially rewarding land managers and water users.
• The Common Agriculture Policy includes financial reward (in the form of subsidies) for the protection of the water environment.
• The Nitrate Directive (1991) promotes the adoption of cooperative agreements through codes of Good Agricultural Practices.
• The Climate Change Adaptation Strategy (2013) encourages the greater use of insurance to build resilience against climate change impacts in particular water scarcity, droughts and flood risk.
• The EU biodiversity policy (including the Habitat and Birds Directives and the LIFE financing mechanism) encourages the use of financial and non-financial rewards for the protection of aquatic ecosystems.

The design and implementation of EPIs could take from 1 to 5 years.

EPIs are normally long lasting measures. However, lifetime is often determined by the policy framework, the specific legislation in place and social acceptance.