Economic aspects of water and environmental services

Since its inception, economics has taken natural resource management – and therefore water – as one of its subjects of study. Yet the 2000 European Water Framework Directive led to the normalisation and formalisation of the application of economic principles to water management and development planning, introducing the concept of cost recovery through pricing and the consideration of environmental and resource costs.

The “resource cost” represents the opportunity cost of using the resource, i.e. the costs supported by local users.

The “environmental cost” relates to actions that have effects on well-being, without these effects having an inherent monetary value. There are various methods for assigning a monetary value to these costs so they can be incorporated. Thus, some actions help to restore or maintain ecosystems from which society benefits (preservation of water quality, carbon storage, landscape and biodiversity protection, etc.). These benefits are considered to be ecosystem services, while the actions are treated as environmental services.

The most widely accepted definition of a “Payment for Environmental Services” (PES) is therefore a voluntary transaction between users and one or more “suppliers”. A PES therefore represents a payment for environmental services that have been monetarised. The use of PES is most advanced in the area of agro-environmental practices.