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What Are the Benefits of the Water Framework Directive? Lessons Learned for Policy Design from Preference Revelation

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Abstract

The Water Framework Directive (WFD) seeks to achieve good ecological status of surface waters across the European Union by 2027. The WFD guidelines explicitly recognize the economics of water management by providing exceptions to water areas with disproportionately high restoration costs. This calls indirectly for estimations of benefits lost due to non-attainment. We employ a hedonic property pricing approach on waterfront recreational properties to estimate the welfare impacts of attaining the good ecological status described by the WFD. The empirical challenge is that the quality measure proposed by the WFD specifically denotes ecological quality, whereas economically measurable water quality values are heavily dependent on recreation impacts. Intuitively, the choice of water quality measure should have an effect on estimating the value of water quality. Our data provide a unique chance to compare three alternative indicators of water quality: (1) a usability-based index, (2) subjectively reported measure and (3) the ecological status determined by the WFD. We find that an improvement in water quality is associated with a statistically significant, non-linear change in recreational property values. We show how the ecological status compares with the other two indicators, and discuss the justifiability of using revealed preference methods when the valued good is defined purely on the basis of ecological criteria.

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Notes

  1. European Commission (2003) provides guidelines on defining disproportionate costs. Disproportionate costs should include qualitative assessment in addition to a cost-benefit analysis and the ‘margin by which costs exceed benefits should be appreciable and have a high level of confidence’.

  2. Finland has a total of 15 Centres for Economic Development, Transport and the Environment. They collect local water quality data for a national database.

  3. These are translated into English in Artell (2014).

  4. Swimming was the second most popular outdoor recreation activity after walking in Finland, as revealed by the Finnish national outdoor recreation demand and supply inventory (LVVI) between the years 1997 and 2000 (Pouta and Sievänen 2001). Vesterinen et al. (2010) find the water clarity at consumers’ home municipality to affect swimming and fishing behavior.

  5. One should note that in empirical analyses estimates on willingness to pay for (non-)marginal changes in water quality should be more appropriately called “capitalization effects”. For a brief review, see discussion in, e.g., Greenstone and Gallagher (2008), Kuminoff et al. (2010) and Kuminoff and Pope (2014).

  6. It turns out that there is a slightly significant negative association between the sales prices and an interaction term between the usability index and winter.

  7. Two valuation studies have been published using the data from the survey: a travel cost study (Huhtala and Lankia 2012), and a choice experiment study (Ahtiainen et al. 2015).

  8. We do not separate the full sample to smaller market areas to prevent arbitrary decisions on what constitutes a market area and to retain a reasonable sample size. As there are thousands of lakes in Finland, water is a particular element in the summer recreation and about 85 percent of recreational properties are estimated to be within 100 m from a water body; the purchase of recreational waterfront property may not be constrained to simple spatial areas.

  9. The covariate “floor space” is assigned zero if there was no building by the time of purchase. In robustness checks, an interaction term between building and the water quality indicator did not turn out statistically significant (Appendix in Table 8, columns A).

  10. Table 3 shows the coefficients, Coeff, for the water quality dummies, which are transformed to \(\hbox {e}^{\mathrm{Coeff}}-1\), or accurate marginal impacts reported in the body of the paper (see Halvorsen and Palmquist 1980).

  11. The coefficients for the other explanatory variables are very similar to the ones reported in Table 3 (not reported here). In Appendix in Table 8, we report the results for water quality category (1–5) and alternative interaction terms (building, seashore and winter dummies).

  12. Test results are available from the authors upon request.

  13. The total costs of implementing the additional measures meeting the good ecological status target of the WFD have been estimated to be about € 235 million annually in Finland (Lehtoranta 2013). Unfortunately, there has not been an attempt to discount the total costs to a net present value. If one were willing to annualize our total benefit estimates (Table 7) of about € 400–800 million using constant discount rates of 3 and 7 %, the benefits capitalized in the prices of recreational properties would amount to a range of € 12–56 million annually. For challenges in specifying the benefits, costs and effects of nutrient abatement measures for a catchment area, see Hyytiäinen et al. (2015) who consider the Baltic Sea to which Finnish catchments ultimately load nutrients.

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Acknowledgments

We are grateful for valuable feedback to the seminar and conference participants at the Annual Meeting of the Finnish Economic Association, MTT Economic Research seminar, VATT Institute for Economic Research seminar and the 21st Annual Conference of European Environmental and Resource Economists in Helsinki. We thank Mikolaj Czajkowski, Essi Eerola, Elias Einiö, Kari Hämäläinen, Mika Kortelainen, Yolanda Martinez and Rauli Svento for advice and helpful comments. We also thank Nina Intonen, Henri Lassander and Sari Virtanen for their research assistance. We would also like to thank Richard Foley for correcting our English. All errors are our own. The property sales registry data and supplementing survey data were collected in the project “Effects of water quality on the benefits of water recreation in Finland (VeHy)” funded by Water Management Research Program of Ministry of the Environment and Ministry of Agriculture and Forestry. Artell gratefully acknowledges financial support from the Academy of Finland (Grant 263483).

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Authors and Affiliations

  1. Natural Resources Institute Finland (Luke), Helsinki, Finland

    Janne Artell

  2. VATT Institute for Economic Research, Box 1279, 00101, Helsinki, Finland

    Anni Huhtala

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  1. Janne Artell
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Correspondence to Anni Huhtala.

Appendix

Appendix

See Table 8.

Table 8 Robustness checks using interactions
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Artell, J., Huhtala, A. What Are the Benefits of the Water Framework Directive? Lessons Learned for Policy Design from Preference Revelation. Environ Resource Econ 68, 847–873 (2017). https://doi.org/10.1007/s10640-016-0049-8

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