Defining and Assessing Economic Policy Instruments for Sustainable Water Management

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This first chapter sets the scene for the work presented in this book. Based on a review of the literature, the chapter introduces a definition of economic policy instruments (EPIs) and a classification of broad categories of EPIs relevant for water policy that will be used to present the following parts of the book (prices, trading and other instruments) and following chapters/case studies under each part. A literature review is presented to justify the relevance on the selection of the three broad categories of instruments selected. Further, this chapter introduces the state of the art in the application of water EPIs and their ex-post evaluation, which is followed by the presentation of the criteria that is used for the evaluation of economic policy instruments that has been applied to all the case studies in the book. In this context, criteria are grouped into three outcome criteria and three process criteria. Outcome-oriented criteria describe how the EPIs perform. They include intended and unintended economic and environmental outcomes and the distribution of benefits and costs among the affected parties. These steps consider the application of cost effectiveness and cost benefits analysis for example to assess ex-post performance of the EPI. Process criteria describe the institutional conditions (legislative, political, cultural, etc.) affecting the formation and operation of the studied EPI (particularly relevant if we are assessing the possible impacts from the use of economic instruments), the transaction costs from implementing and enforcing the instruments and the process of implementation.