now contribute around US$ 0.5 million per annum towards the conservation of about 18,000 ha. In Venezuela, CVG- Edelca pays 0.6 per cent of its revenue (about US$ 2 million annually) towards the conservation of the Río Caroní’s watershed (World Bank 2007). Some irrigation systems, such as those in Colombia’s Cauca Valley, have participated in schemes like these (Echavarría 2002b).
More generally, and as explained in Khan (2010), as countries shift to a greener set of economic arrangements, the costs of more traditional hard engineering approaches to water management involving the construction of treatment plants, engineering works to control floods, etc. become more expensive. In contrast, the cost of operating an ecosystem payment scheme is much less likely to increase. For this to occur, however, parallel investments in the development of property rights and governance arrangements may be necessary to ensure water-supply utilities can enter into contracts that maintain access to ecosystem services and expect these contracts to be honoured. Well-defined land tenure systems, stable governance arrangements, low transaction costs and credible enforcement arrangements are essential (Khan 2010).
As noted elsewhere in this chapter, early attention to governance arrangements is a necessary precondition to the inclusion of water in a transition strategy to a green economy.
Strengthening consumer-driven accreditation schemes Whilst rarely used in the water sector, in recent years there has been a rapid expansion in the use of a variety of product accreditation schemes that enable consumers to pay a premium for access to products that are produced without detriment to the environment including
its capacity to supply water-dependent
services. As observed by de Groot et al. (2007), these accreditation schemes rely on the self-organising nature of private market arrangements to provide incentives for the beneficiaries of the improved service to pay for it. Once established, these arrangements can play an important role in encouraging the restoration of natural environments.
Arguably, one of the better-known examples is the labelling scheme developed by the Forest Stewardship Council (FSC). The Council guarantees that any timber purchased with its label attached has been harvested in a manner that, amongst other things, seeks to maintain ecological functions and the integrity of a forest. Where appropriate, this includes recognition of the essential role that forests play in water purification and in protecting communities from floods.13
Increasing the use of tradeable permit, off-set and banking schemes A broad class of market-based instruments of relevance to a green economy are those that limit opportunity to pollute and / or use a resource. There are many variants of such schemes, but all work by using a market mechanism to reward people who are prepared to cease or reduce a water-affecting activity, thus allowing others to take up the same activity and thereby ensuring an overall controlled impact on the environment.
One such example is a mechanism whereby a water treatment plant can release more nutrients into a waterway by arranging for the reduction of nutrient pollution from a nearby dairy farm. In many cases, the result can be a significant improvement in water quality at a much lower cost if the water treatment plant is not allowed to increase its emissions. In rural areas, nitrate pollution charges and trading schemes are often suggested and are now operational in parts of the USA (Nguyen et al. 2006).
Another example, well developed in the USA, is the use of wetland banking schemes that require any person proposing to drain a wetland to first arrange for the construction, restoration or protection of another wetland of greater value (Robertson 2009). In these schemes, it is possible for a person to restore a wetland and then bank the credits until a third party wishes to use them. Three quarters of these wetland banking arrangements involve the use of third-party credits (U.S. Army Corps of Engineers 2006; Environmental Law Institute 2006).14
5.4 Improving entitlement and allocation systems
The last class of market-based instruments of particular relevance to water are those that use water entitlement and allocation systems to allow adjustment to changing economic and environmental conditions by allowing people to trade water entitlements and allocations.
In well-designed systems, water-resource plans are used to define rules for determining how much water is to be allocated to each part of a river or aquifer and a fully- specified entitlement system is then used to distribute this water among users. Under such an arrangement rapid changes in supply conditions can be managed efficiently (Young 2010). Australian experience in the development of fully-specified entitlement systems is described in Box 6. Among other things, the approach enables
people 14. to use bottom-up market based In each of these schemes banking and trading is possible only because
they involve the development of indices that enable wetlands of differing value per hectare to be compared with one another.