OECD Recommends More Tariffs and Taxes to Manage Water Risks

By E. Lynn Grayson

Today's financing mechanisms cannot cover the cost of upgrading old water systems, due to public budget cuts, a failure to reflect future costs in water charges and a drop in tariff revenues as city dwellers use less water. A new report by the Organization for Economic Cooperation and Development (OECD) titled "Water and Cities: Ensuring Sustainable Futures" recommends redesigning tariffs and taxes to discourage wasteful or costly practices and seeking new sources of funding from users who generate the biggest costs.

The report also recommends that cities:

• Improve the way they use taxes and tariffs. Taxes should be designed so those who benefit most from water systems or generate extra costs foot more of the bill. Tariffs should better reflect water scarcity and the cost of upgrading infrastructure. For example, new taxes could be aimed at property developers, who need first-rate water services.

• Harness more private investment from financiers, property developers and entrepreneurs to finance new infrastructure or facilities like desalination or wastewater plants. Capital tied up in water infrastructures could be used to generate liquidity for new projects.

• Drive innovation in water management by changing regulations that favor old technologies, having tariffs and taxes reflect the true cost of inefficient practices, and introducing performance-based contracts that reward objectives like conserving water.

• Encourage co-operation between cities and their surroundings, e.g. using farmland as a buffer against floods or sending city run-off to be used for rural irrigation. Set up institutions that can manage water at different scales through urban-rural partnerships or through co-operation between neighboring towns and cities.

• Where they exist, empower water regulators to protect the public interest and increase transparency in urban water supply and sanitation to make service providers more accountable, and to introduce more independence and technical underpinning in the setting of tariffs.

OECD projects global water demand will increase some 55 percent by 2050 when global population tops 9 billion. While OECD's 34 member countries currently enjoy water security, the report concludes now is the time to address water-related challenges presented by rapid urbanization that will adversely impact cities throughout the world.

OECD's report addresses global concerns but is good insight for U.S. cities facing water scarcity and drought concerns, now and in the future. It is well understood in the U.S. that the improvement of water infrastructure is key to effectively managing water resources.

More information about OECD's water related work including further insights into the new report is available at http://www.oecd.org/.

  E. Lynn Grayson, Partner, Jenner & Block

Read more at Corporate Environmental Lawyer Blog by Jenner & Block LLP.

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