Moving From Theory to Practice: A Synthesis of Lessons About Incentive-Based Instruments for Freshwater Management

There has been growing interest in applying incentive-based instruments such as pollution charges and tradeable permits to address the twin challenges of accessing enough freshwater to meet our needs while also preserving the well-being of freshwater ecosystems. These instruments use direct or indirect financial incentives as motivation to reallocate water or to reduce the health and environmental risks posed by an activity. But what do we know about how they have actually performed?

New York City provides an excellent illustration of the potential for incentive-based instruments. To meet new federal drinking water requirements in the late 1990s, the city was faced with the prospect of building a $4 billion to $6 billion filtration plant and spending an additional $250 million annually to operate it. Instead, city officials paid farmers and landowners in the upstream rural Catskill watershed to better manage the land, at a fraction of the cost of the proposed filtration plant. The outcome was a win-win, improving downstream water quality for people and ecosystems and boosting the rural economy.

This is just one example. To move beyond theory and better understand how these instruments perform in practice, the Rockefeller Foundation partnered with the Foundation Center and Pacific Institute on a synthesis review of existing, largely practice-based knowledge about incentive-based instruments. For the review, the foundation developed the project's scope and provided financial support, the Foundation Center and its IssueLab service were involved in project and technology development, and the Pacific Institute wrote the text.

The resulting report looks at water trading, water quality trading, and payment for ecosystem services but notes that these are but three of a much broader suite of methods available to address threats to freshwater availability and sustainability. Other methods, such as demand-side management approaches, have demonstrated considerable success in addressing such threats but were not included in the scope of the review.

While incentive-based instruments are often juxtaposed with a "command-and-control" approach, the report reveals that, in practice, these seemingly opposing approaches often operate alongside one another. With water quality trading, for example, governments mandate caps on allowable pollutant levels and issue tradeable permits that allow those in the industry to allocate polluting activities among themselves, incentivized by market forces. Similarly, with water trading, governments need to recognize and enforce rights to water use and then institute a framework within which water trading can occur.

The review finds that despite the popularity of incentive-based instruments, information about their performance and the conditions needed to make them work are limited. Many incentive-based programs lack baseline data or monitoring systems. Further, it can be difficult to attribute change to the program rather than external factors such as fluctuating commodity prices. Finally, such programs may not have reached threshold levels for measureable impact, or that impact may occur over a relatively long time period. More robust monitoring and evaluation are needed, and this information should be made more broadly available on open-access platforms.

The studies that have been done to date show that performance varies widely. Some programs, like the New York City program, have been highly successful, providing benefits to the community, regional economy, and environment. Others have had more mixed results. For example, the nation's largest agriculture-to-urban water trade, between the Imperial Irrigation District and the San Diego County Water Authority, has improved water supply reliability for the recipient, at the cost of significant adverse ecological, economic, and public health impacts in the area of origin.

The review identifies necessary, enabling, and limiting conditions – such as the nature and enforceability of existing water rights – that contribute to the success of any specific instrument. The success of a program in one set of conditions has little bearing on its potential under a different set of conditions. Altering the existing conditions requires determined effort and political will, as well as funding to incentivize stakeholders. The time and effort required to implement the necessary conditions for some instruments, especially water trading, helps explain their limited use in practice relative to their much more extensive presence in commentary and the theoretical literature.

The report concludes that decisions about whether and how to apply a particular instrument depend on the specific objectives, circumstances, conditions, and needs of a given area. These decisions should be based on an open and transparent process, with meaningful participation from all affected parties. Such an approach will help to craft a solution that is appropriate for local conditions and ensure that it is fair and equitable. It will also help reduce opposition and promote acceptance from those who will implement and be affected by the program. Those with the least power may not have the resources to participate, or they may be skeptical of the groups involved. In these cases, there is a need for consistent and rigorous outreach and, potentially, for engaging a trusted intermediary.

Many of these hard-earned lessons have already been captured by researchers and nonprofits worldwide in case studies, evaluations, and white papers. By going beyond anecdotal cases and instead synthesizing some of the lessons captured in the existing knowledge base while drawing out the unique characteristics of specific projects and geographies, we hope this effort can provide other foundations, practitioners, and researchers with a better understanding and starting place for their own work.

You can download the full study here, view the interactive tool here, and explore the related digital collection here.

Heather Cooley directs the Water Program at the Pacific Institute, where she conducts and oversees research on an array of water issues, including sustainable water use and management, the connections between water and energy, and the impacts of climate change on water resources. Michael Cohen's work at the institute has focused on water use in the Colorado River basin and delta region and the management and revitalization of the Salton Sea ecosystem. And Matthew Heberger conducts research on water resources policy, planning, and management for the institute. This post originally appeared on the Pacific Institute's Insight blog.