Research Reports

Economic Instruments for Water Management in Georgia
Wednesday, 13 February, 2019

Georgia has a number of laws and regulations governing water resources, dating back to the late nineties and partially amended after 2003. These changes, however, have not always followed a clear and coherent strategy. Consequently, in the words of the United Nations Economic Commission for Europe (UNECE), the current legislation is an “unworkable and fragmented system”.The Government of Georgia (GoG) has instigated changes to the Georgian water management legislation to meet the obligations derived from the Association Agreement (AA) signed with the European Union (EU) in June 2014. The implementation of the principles of the EU Water Framework Directive (EU WFD) is seen as a possible solution for the pressing challenges characterized by Georgia’s water management sector, the main issues of which being water pollution and the inefficient use of water resources. Under the provisions of the EU-Georgia AA, Georgia must adopt national legislation in compliance with the EU WFD by the end of 2018. Under the AA, Georgia has nine years to implement the principles of the EU WFD.

Economic instruments have the potential to facilitate the achievement of optimal water resource management by providing proper incentives to water users2, by ensuring that water users internalize all costs and benefits associated with their abstraction and/or effluent discharge. There are several principles which, according to economic literature, may help orient environmental policies and the implementation of economic instruments. In our work, we will focus on three main, complementary principles. The first principle is the “polluter pays principle”. This notion suggests that pollution control expenses should be allocated among polluters, according to the amount of damage they cause. In such cases, the polluter would “internalize” the costs imposed on society and modify its behavior in line with the interest of society. A similar rationale is behind the second principle, the “user pays principle”. The OECD defines the user pays principle as “a variation of the polluter-pays principle that calls upon the user of a natural resource to bear the cost of running down natural capital”. The key component behind this principle is that users of a (scarce) resource should fully pay the related opportunity costs. The third principle is the “beneficiary pays principle”. This concept, in general, supports transfers between the beneficiaries and agents responsible for the generation of positive externalities and/or the creation of public goods, to compensate them (and, therefore, help them “internalize”) for the social benefits they accrue.

The economic instruments we have considered in this work can be grouped into three categories:

1. Water Allocation Management – these are instruments incentivizing the sustainable use of water, from both bodies of surface water and groundwater, by setting an appropriate price for the use of the resource and, thereby, affecting its demand. Typically, instruments used for abstraction management comply with the user pays principle. Such instruments are: Abstraction Charges and Tradeable Water Rights

2. Water Quality Management – these are instruments aiming to prevent the deterioration of water quality by setting an increasing cost of effluent discharge. Typically, the instruments used for the management of water quality comply with the polluter pays principle. Such instruments are: Pollution Charges and Tradable Pollution Permits

3. Subsidies and Payments – these instruments are normally monetary transfers to the water users. Subsidies are typically provided to users to induce behavior that will ensure more efficient use of water resources and/or less effluent discharge. Payments for Environmental Services (PES) are normally given to farmers and/or land users for utilizing environmentally friendly practices that positively influence bodies of water. Because subsidies and PES rewards generate positive externalities, or provide public goods and are paid by (or on behalf of) the beneficiaries, they comply with the beneficiary pays principle.