The principles of full cost recovery and polluters pay contained in the Water Framework Directive (WFD 2000/60) were approved well over a decade ago. Recently there has been greater debate in transferring these principles to national policies in EU member states following the economic recession, the difficulties in financing water and wastewater infrastructure through public finances and the impacts on the environment of the growing population. With the approval of the new water tariff (Metodo Tariffario Idrico), the Italian Regulatory Body for Electricity, Gas and Water (AEEGSI) is attempting to translate the WFD principles into a water pricing scheme that recognises environmental and resource costs as components of the tariff structure. The recognition of these costs in the tariff structure is an important step but there are evident difficulties in determining how these costs can be calculated and transferred to tariffs without compromising the ability of users to pay. In the first part of the paper, different options for calculating these costs have been analysed, from the unit cost of pollutant per quantity of pollutant removed and the unit cost of water abstraction, to cost-benefit analysis combined with environmental value transfer strategies. The recent stance taken by the governing bodies in the United Kingdom has reestablished environmental priorities in both consumption and management of the resource. It has been at the root of the changes that Ofwat has undertaken to improve upstream catchment management and introduce an outcome based approach in ensuring the best value to consumers and society as a whole. The final part of the paper examines proposals on how environmental and resource costs can be transferred to water tariffs: for resource costs, a two-tier tariff approach is proposed with the fixed part of the tariff ensuring adequate coverage of the marginal opportunity costs associated with use and the variable part providing the incentive to consumers to use less of the resource. This is because resource costs are recognised as a consequence of scarcity and of the opportunity cost associated with the resource but they are not necessarily incurred by the water and wastewater companies. Environmental costs to remove and/or prevent environmental damage are generally incurred by the companies and these could therefore be charged to users ex ante or ex post to cover the costs of the removal/prevention activity undertaken, whether operating or capital in nature.
Keywords: Water Framework Directive, environmental costs, resource costs.
Jel Code: L 95G3.