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The Value of Water: Economic Value

Instream ecological flow reserves were traditionally estimated based on hydrological and biological characteristics, rather than economic criteria. Recently however, there has been a shift in the focus of streamflow reserve estimation to its economic criteria and benefits (i.e. agricultural and biodiversity valuation as a measure of welfare impacts associated with modified streamflows) (Matete 2004).

The Valuation of Ecological Systems and Services

Valuation of ecological systems and the services they provide is premised on two distinct, but complementary valuation paradigms: anthropocentric and ecocentric paradigms. The anthropocentric valuation paradigm, also known as the utilitarian approach, has its foundation in neoclassical welfare economics. According to this approach, an ecological value is estimated from the utility humans derive from using ecological services. […] It then follows that the basis for deriving measures of economic value of the environment and goods and services it provides is their effects on human welfare (Freeman 1993). Contrarily, humans can value the environment and its services for their pure existence or intrinsic value. This form of valuation is purely premised on altruistic and ethical or ecocentric concerns not directly related to satisfaction of material human needs.

Source: Adapted from Matete 2004

Assigning a 'Value' to Water In southern Africa, until recently, water has largely been regarded as a free good with undefined property rights. This view, combined with the fact that in many countries water prices are highly subsidised, has resulted in the unsustainable use of water resources (Hambira and Gangdidzanwa 2006). Monetary accounts assign a value to the flow and stock accounts through pricing, costs, charges, tariffs, etc. as a way of ensuring that the population is conscientious of water use and the overall costs associated with water use. The assigned monetary value should be low enough to allow for basic needs to be met but high enough to discourage unsustainable use and waste. “Water Pricing can be described as assigning water its true value in order to reflect its scarcity, supply costs and environmental damage” (Hambira and Gangdidzanwa 2006). By assigning a value to water the goal is to recover the costs associated with its delivery, planning and any environmental damage.

The cost of environmental damage is incorporated in water pricing.
Source: Vogel 2005
( click to enlarge )

 

Botswana, South Africa and Zimbabwe use an Increasing Block Rate (IBR) tariff regime. “Even though this regime is supposed to encourage conservation, it falls short of giving water its true value that reflects its scarcity due to the fact that it does not incorporate environmental costs such as harm caused by pollution and damage to the environment during exploration for new water supply facilities” (Hambira and Gangdidzanwa 2006). The IBR is based on the concept that the user is charged more with the more water he or she uses. The initial charge, presumably the charge for fulfilling basic needs, is low. The greater the use the higher the charge; it is hoped that this regime discourages the indiscriminate use of water.

In Mozambique, “The value of the tariffs is established depending on the required volume measured or estimated as a function of the type and size of the activity, the nature of the activity and amount of contamination produced” (Barros 2009). The Water Law (1991) differentiates between the use of water in the public and the private domain, and absolute priority of water use is given to “human water supply, sanitation requirements and common uses”, environmental sustainability is the next highest priority (Barros 2009).