WIXLIB

Water Security brochure [3] Layout 1 27/08/2013 17:04 Page 5Taking steps to address water risksSteps in improving understanding of water risksPartners must first agree on the risks in order tomanage and prepare for them.The first step is to identify water risks, to measuretheir likelihood and impact. Indeed improvingknowledge and reducing information asymmetryare the basis for making effective and informedrisk management decisions.Good science and technical expertise are needed,especially because water resource management isentering an era of uncertainty, greater variabilityand increasing risks as a result of increasing waterdemand and pollution, as well as climate change.But discussions of risk in water planning shouldnot be dominated by uncertainty abouthydrological conditions. Due attention must begiven to economic, social, cultural andenvironmental factors, which can be moreimportant than hydrological uncertainties.An understanding of risk perceptions is also afundamental step in “knowing the risk”, as theperception of risk has an important influence onstakeholders’ decisions affecting theirvulnerability to the risk and risk managementstrategies.In many cases, decisions about the acceptablelevel of water risks are made implicitly, andare not the subject of informed public debate.And it is often (natural or man-made)disasters – rather than carefully assessingand managing risks in advance – thatprompts countries to worry about their levelof protection against water risks.For example, in the aftermath of HurricaneSandy, New York City is now looking at how tostrengthen its flood defences. In anotherexample, it was only after a cyanide spill intothe Tisza and Danube rivers in 2000 that theProtocol on Civil Liability to the UN-ECE WaterConvention was adopted in Kiev (in 2003).The acceptable level of water risk for societyshould depend upon the balance betweeneconomic, social and environmentalconsequences and the cost of amelioration.The limit of cost-effective or practical watermanagement is an element to consider whenevaluating the cost of amelioration.Indeed completely eliminating risk is oftentechnically impossible or just too costly.Governments need to focus on the systematicassessment of the expected costs andbenefits of options to manage water risks andto properly evaluate risk-risk trade-offs. Forexample, in Western Australia, the acceptableProbabilityTarget the risksPossible effectof climate changeAcceptable riskManaged zoneUnmanaged zoneFlood magnitude, pollution, drought severityConsequences, costsSource: Prosser (2012).level of groundwater allocation is setconsidering trade-offs between the risks toenvironmental, cultural and socialgroundwater-dependent values (“in situvalues”) and the opportunity cost of notabstracting water for consumptive use(“development risk”)Targets for water risks should vary betweenuses of water. For example, large dams toprotect downstream populations might bebuilt to survive a 1:1 000 year flood.Residences and major roads might be built toavoid inundation from a 1:100 year flood,while minor roads and recreational facilitiesmight only be secured from a 1:10 year flood.Similarly, urban water supply might beprovided to meet demand in 95% of years andnot cause any human sickness in 99% ofyears; whilst irrigation water might only meetdemand in 50% of years and have lower waterquality requirements, such as salinity levels.“The acceptablelevel of water riskfor society shoulddepend upon thebalance betweeneconomic, socialand environmentalconsequencesand the cost ofamelioration.”OECD TAKING STEPS TO ADDRESS WATER RISKS . 5

Water Security brochure [3] Layout 1 27/08/2013 17:04 Page 6Taking steps to address water risksTargeting the risksAppraising water risk acceptability meansidentifying areas subject to high-severity events,including “tail events” (i.e. low probability/highimpact risks), but also “slow-developingcatastrophic risk” areas, which are subject to lowbut cumulative impacts (e.g. gradual depletion ofwater resources; accumulation of pollutants insediments).A water risk is deemed acceptable if the likelihoodof a given hazard is low and the impact of thathazard is low. In such cases, there is no pressureto reduce acceptable risks further, unless morecost effective measures become available.However, while the level of water security can beimproved, this will generally come at a cost. Thiscost may be in economic (e.g. building new orreplacing old water infrastructure), social (e.g.closing water allocations to cap demand) and/orenvironmental terms (e.g. deterioration offreshwater systems to reduce the risk of watershortage).Depending on the existing level of water security,incremental improvements may, in some cases, bedisproportionally costly. By identifying the level ofacceptability of risks, a risk-based approachfosters targeted and proportional policy responses.Emphasising the proportionality of action toaddress risk helps to avoid taking action where themarginal cost of risk reduction exceeds themarginal expected benefits. There is also thepotential for improvements in water security to beachieved by correcting existing policy failures thatthemselves are costly and are reducing the existinglevels of water security. In such cases, risk may bereduced without imposing additional costs onsociety by simply addressing the policy distortions.Manage the risksAllocating water risks between residential,agricultural, industrial and environmentaluses raises significant political economyquestions. Uncertainty about the valuesplaced by producers and consumers onpotential changes in water security can makeany systematic effort to compare the costsand benefits of proposed targets complex forboth decision makers and stakeholders.A risk-based approach allows for assigningrisks to the actors that are likely to be able tomanage them most efficiently. For example,flood risks may be addressed more costefficiently through flood insurance orcompensating farmers converting their landinto flood plain instead of governmentinvesting in the construction of additionallevies.Once set, targets for water risks should beachieved as cost-effectively as possible. Whenconsidering which particular instrumentsshould be used to meet a given target forwater risk – among direct regulatory6 . OECD TAKING STEPS TO ADDRESS WATER RISKS

Water Security brochure [3] Layout 1 27/08/2013 17:04 Page 7Taking steps to address water risksmeasures, market-based instruments andpublic financial support – an assessmentshould be made of how each instrument, orthe mix of instruments, is likely tocontribute to the goals of water securityand economic efficiency.Another key dimension is the “social”dimension, including equity. By explicitlyconsidering the distribution of water risks,a risk-based approach helps to ensure anequitable distribution of risks amongststakeholders and can help to prevent theimposition of one group’s risk preferenceson others.As a result, policy options should beassessed from an economic and equityperspective, to ensure that risk reduction isproportional to the risk faced, pursued atleast cost and taking into account thedistributional impacts.Implementing a risk-based approach for adapting water systems to climate changeClimate change is expected to increase waterrisks and generate a greater degree ofuncertainty than water managers havetraditionally had to cope with. Confidence levelsare often low in climate change projections forkey parameters needed for water managementat local scale. A risk-based approach canprovide a flexible, dynamic and future-orientedapproach in the absence of reliable climatepredictions.Considering climate change adaptation in thebroader context of water security can ensure thatadaptation is not undertaken in an isolated waythat focuses only on climate as a risk driver to theexclusion of other, often more dominant, driversof water risks. At the same time, climate changeadaptation should also be seen as a prerequisiteto improving water security over the long-term.The OECD report, Water and Climate ChangeAdaptation: Policies to Navigate UnchartedWaters, reveals that the majority of adaptationefforts to date have focussed on “knowing” therisk by building the scientific evidence base anddisseminating information. For instance, Chile hasestablished a programme to monitor its glaciers,which provide the single most important source ofreplenishment for rivers, lakes, and groundwater inarid regions during periods of drought.Some countries have engaged in processes tobetter “target” the risk by revisiting levels ofacceptable risk. For example, the Netherlands isreviewing its flood protection standards in light ofcurrent and future challenges, including sea-levelrise resulting from climate change.Countries have also made some progress on“managing” water risks. For example, the UnitedKingdom is applying a real options approach toflood risk management for the Thames Estuary toincorporate the uncertainty of climate change andthe value of flexibility into decision making.Country profiles providing a snapshot of water andclimate change adaptation policies in all 34member countries and the European Commissionare available at: tm.OECD TAKING STEPS TO ADDRESS WATER RISKS . 7

Water Security brochure [3] Layout 1 27/08/2013 17:04 Page 84Market-based instruments for managing water risksDid you know?In Denmark, urbanwater prices – thehighest amongOECD countries –have contributed toreducing theaverage householdwater use to 110litres per head perday, compared withlong-term targetsof 130 lhd inLondon and 140 lhdin Singapore.Policy interventions to manage water risksand to facilitate trade-offs between riskswill need to draw on the full range of policyinstruments at governments’ disposal.These include traditional command andcontrol instruments such as regulations,standards and permits, as well as marketbased instruments such as taxes, chargesand tradable quota schemes. This latter setof instruments has a potentially importantrole in improving water security by creatingan incentive structure that uses marketsignals to influence behaviour rather thanrelying solely on regulatory instruments. Bychanging incentives through the use ofprice mechanisms market-basedinstruments can better signal the value ofwater among competing uses, including forenvironmental purposes. Market-basedmechanisms can be used in a variety ofways to improve water security.Water securityissueRecommended market-basedinstrumentsAdvantages of useWater supplyMarginal social cost pricing,incorporating the scarcityvalue of waterSignals the optimal time toinvest in water infrastructureso that supply is augmentedefficientlyInternational and regionalwater marketsAllows trade of water fromareas of surplus to increasethe water supply in areas ofscarcityRegional water marketsAllows trade of water from lowto high value uses creatingincentives to use waterefficiently and reduce demandMarginal social cost pricing,incorporating the scarcityvalue of waterReduces demand for waterduring periods of scarcityWater quantityBuy-backs of water user’srightsSecures water forenvironmental flows andoffsets economic lossesWater qualityEmission permit trading forpoint and non-point pollutionAllows pollution to be reducedfrom the lowest cost sourcesEmission taxesCreates ongoing incentive forall sources to reduce pollutionWater demandSource: Grafton (2011).8 . OECD MARKET-BASED INSTRUMENTS FOR MANAGING WATER RISKSSupply managementThe natural variability of water resourcesand the large upfront costs related to waterinfrastructure investment has generallyresulted in water infrastructureinvestments being made by publicauthorities rather than the private sector.To ensure that government resources areused to achieve the highest social returns,water supply investment decisions shouldbe made using cost-benefit analysis andother tools to assess the trade-offs betweenincreasing access to water and the costs ofproviding access.The use of scarcity pricing of waterresources can be used to signal the optimaltime to invest in large-scale waterinfrastructure projects, thereby, avoidingthe considerable welfare losses associatedwith water prices being raised to cover thecosts of poorly timed investments. Forexample, analysis shows that if scarcitypricing had been introduced in Sydney,Australia, at an appropriate time it couldhave reduced water demand to a levelwhich no longer required the developmentof a costly new desalination plant (Graftonand Ward, 2010).Demand managementOne way in which water demand can bemanaged using market-based instrumentsis to establish water markets. Indeed, anumber of countries (such as Australia) areaddressing the over-extraction problem byputting a cap on the amount of water thatcan be extracted and by assigning a fixednumber of tradable user’s rights foraccessing the resource.Under a properly functioning market (wherethe number of user’s rights is not overallocated), access to the resource is nolonger freely available, but depends onacquiring the water user’s right. This createsa scarcity value for water and an incentivefor individuals to use water more efficiently,for example, by employing water-efficienttechnology, adopting deficit irrigation, orgrowing less water-intensive crops.

Water Security brochure [3] Layout 1 27/08/2013 17:04 Page 9Water governance12 0006 00010 0005 0008 0004 0006 0003 0004 0002 000Water use2 0001 000002000-012001-022002-032003-042004-05 2005-06 2006-072007-082008-09Source: Skinner (2012)Environmental water to be recovered in the Murray-Darling BasinTotal environmental water4039 GL4 500Total water returnWater buybacksSavings and infrastructureWater volume (GL)4 000The affordability of water prices must begiven due attention, though. For example, inthe 1990s, inhabitants of the MetropolitanArea of Barcelona refused to pay higher waterbills to finance the wastewater treatmentplants required by the EU.GVIAP3 5003 000Water buybacks2221.8 GL2 500Savings and infrastructure1817.2 GL2 0001 5001 000500Water quantity02005Market-based instruments can be used tosecure water for environmental flows in themost efficient manner. Where water marketsare operating, buy-backs of water user’s rightsthrough markets can be used to secureenvironmental flows efficiently by purchasingthe lowest value uses of water first.South Africa and Australia have taken stepsto better manage environmental flows ofwater. South Africa has taken a directregulatory approach, where a quantity ofwater is set aside for the environment(ecological reserve) before any other wateruse permits are allocated. Australia opted foracquiring water for the environment throughbuy-backs of water users’ rights in the watermarket in the Murray-Darling Basin.2010201520202025Source: Skinner (2012)Water quality improvementEmissions taxes to manage water quality havebeen used in a number of countries forreducing water pollution and for raisingrevenues. In France, for example, emissiontaxes now make up around 12.5% ofhousehold water bills (Bommelaer et al., 2011).The use of emissions trading schemes isgaining ground, although they are lesscommon than emissions taxes. For example,with its Lake Taupo nitrogen trading scheme,New Zealand introduced the first non-pointsource to non-point source (NPS) cap andtrade scheme worldwide (Shortle, 2012).OECD MARKET-BASED INSTRUMENTS FOR MANAGING WATER RISKS . 9Gross value of irrigated agriculturalproduction ( millions)Another way to manage water demand usingmarket-based instruments is to set efficientwater prices. For example, using data from1 600 households across ten OECD countries,Grafton et al. (2011) find that householdsfacing volumetric water pricing consumearound 20% less water than those facingtariffs which are not directly linked to thevolumes of water used.Gross value of irrigated agricultural production in the Murray-Darling BasinWater used in irrigation (GL)For example, the success of water trading washighlighted in the 2007-08 drought in theMurray-Darling Basin, Australia, where thegross value of irrigated agriculturalproduction fell only marginally despite adecline in water availability of more than 70%compared with average.

Water Security brochure [3] Layout 1 27/08/2013 17:04 Page 105Policy coherence for water securityImproving water security requires a coherentapproach between water policies and other(sectoral, environmental) policies (OECD,2012a). In particular, the nexus betweenwater, energy, food, climate and biodiversitypresents significant challenges for watersecurity, and has been attracting increasingpolicy attention in recent years. Increasingthe coherence of policies (policy objectivesand policy instruments) across these areas isessential if governments wish to meet therange of policy goals while not underminingwater security objectives.Did you know?Agricultural andwater policy reformhas helpedAustralia reduce itsirrigation waterapplication rate bynearly 60% since1990.More coherent policy approaches are slowlybeginning to take shape in a growingnumber of OECD countries. For example,agricultural policy reform over the past 20years has, in part, removed policyinconsistencies and helped address waterrisks from agricultural activities. But muchmore needs to be done, including exploitingpotential win-wins (such as taking steps toincrease both water and energy efficiency).A number of OECD countries are loweringagricultural support and shifting from directproduction and farm input support topayments that are decoupled or even supportenvironmental objectives and this has helpedimprove water resource use efficiency andlower water pollution from agriculture.10 . OECD POLICY COHERENCE FOR WATER SECURITYEnergy policy reform can also bring watersecurity benefits. For example, energy policythat promotes the expansion of hydropowercan increase freshwater supply and improveflood/drought risk management through theconstruction of dams and storage schemes.But the benefits of hydropower may come atsocial (e.g. displacement of people) andenvironmental (e.g. changes in flow andcontinuity of rivers) costs. This highlights theimportance of properly assessing risk-risktrade-offs.Energy policies to enhance food security canhave negative spill-over effects on water. Forexample, electricity subsidies to farmers forthe pumping of groundwater can adverselyaffect the sustainability of groundwaterresources. In the same way, agriculturalpolicies to enhance energy security canincrease water risks. For example, theincreasing support to agricultural feedstocksto produce biofuels and bioenergy may causewater quality impacts from the use ofagrochemicals (OECD, 2012b).Climate policy appears to have significantspillover to other policy areas that affect watersecurity. This includes sectors as diverse asenergy, transport, agriculture, forestry, fisheriesand tourism. Information on such indirectwater security impacts of climate policy would

Water Security brochure [3] Layout 1 27/08/2013 17:04 Page 11Policy coherence for water securitycertainly improve economic efficiency (e.g.avoiding farmers to be paid for the reductionin nitrogen emissions at the same time asthey receive income to convert farmland toforest land, which also contributes to reducenitrogen leaching into water) and socialwelfare (e.g. air quality co-benefits ofmitigating carbon emissions improve humanhealth and reduce eutrophying depositionson surface water).Nature protection and water policies canalso help each ot

Water Security brochure [3]_Layout 1 27/08/2013 17:04 Page ii. About OECD The Organisation for Economic Co‐operation and Development (OECD) is a multi‐disciplinary inter governmental organisation, tracing its roots back to the post‐World War II Marshall Plan. Today, it comprises 34 member countries