Let me alert you to a very fine piece of water research that has just come out in the UK, on the other side of the big pond. The so-called “Cave Review: competition and innovation in water markets” was commissioned by the governments of England and Wales, to professor Martin Cave, a well-known network economist. It comes at a time when – due to concerns about climate change and water scarcity – governments look for more efficient ways of allocating this scarce resource. The Cave Review has made significant headway in London and Cardiff. It will certainly have a lasting impact once it has crossed the Channel over to Continental Europe; perhaps it will soon even cross the Atlantic Ocean. See here for the full review, the interim report, and more material.

Martin Cave provides a detailed benefit-cost analysis of market-oriented instruments to foster social welfare and the ability of the sector to innovate. His recommendation can be summarized as follows:

• Tradable abstraction charges should be introduced to favor the efficient allocation of water resources across river basins;
• Likewise, the amount of discharges back into the water cycle can be dealt with tradable discharge quotas. These need to be differentiated by the polluting substance;
• Market structures should be allowed to evolve towards the most efficient structures, and thus the interdiction of merging water utilities should be abandoned;
• Competition for the resource and collateral services should be intensified by allowing “wheeling” (wholesale competition) for industrial users (< 70 mn. l/year);
• The capacity of the sector to innovate should be fostered by an incentive-compatible system of tendering research projects amongst the (privately-owned) industry, public research bodies, and state subsidies.

Bottom Line: Martin Cave has thrown a big stone into the pond; the discussion of these issues will be exciting on both sides of it.