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Charting a Course – Chapter 4: Emerging Policy Instruments for Water Management

Numerous policy instruments and approaches exist for water management. Some of these include command-and-control types of regulation, water pricing, tradable water permits, standards, and voluntary approaches such as education and reporting programs. Within this suite of policy instruments, the NRTEE explored the potential use of two emerging and promising policy approaches — economic instruments (EIs) and voluntary initiatives — as complementary policy tools to existing policy approaches within Canada. The NRTEE examined each of these to determine if and how they might improve water efficiency and promote conservation by the natural resource sectors.

Emphasis was placed on EIs and voluntary approaches because they have been identified, both within Canada and abroad, as emerging approaches that have real potential for future water strategies. Yet, as our analysis reveals, practical experience with both types of instruments remains limited. We drew upon recent research into policy instruments, conducted our own assessment,22 and drew upon observations and lessons learned from Canadian and international experience. There are many varied and diverse approaches to water management. The NRTEE’s advice is meant to complement and improve upon existing systems in the short term, with a longer view that more substantial transformative changes may be needed in the future. Our review of policy approaches across the provinces and territories in Canada points to a good foundation in current water management practices, and some interesting recent trends toward the inclusion of EIs and voluntary initiatives that show promise for improving how water is managed. While current water-management approaches function well with water abundance, longer-term risks may not be as manageable with increasing pressures on water demands and possible water restrictions. These risks can be viewed as both environmental and economic.

Environmental risks stem from a lack of information for decision making, which becomes magnified as scarcity and water competition become acute. Essentially, insufficient information creates a risk of potential over-allocation, which could have a negative impact on the aquatic environment.

Economic risks result from the difficulty of reallocating water among users. For example, in years of water restrictions it may not be possible for governments to efficiently or effectively reallocate water, thus putting some water users (i.e., those with a lower priority licence) in jeopardy. Current water allocation systems tie water rights to one set of users, making it difficult to reallocate water to other uses.23

These two key risks limit the ability of current water-management practices to be flexible in the face of future uncertainty. Expanding Canada’s policy toolbox could make management more resilient and adaptive to circumstances of changing water supplies and demands.


The provinces and territories manage water in their respective jurisdictions and determine policy for water allocation and use. Many existing approaches manage and set water policy with a supply-oriented focus, ensuring that there is enough water for all users. Recent trends in the last decade are moving away from this approach to demand-side management, with the knowledge that the assumption of unlimited supplies of water no longer holds true. Another driver for change to demand-side management is the knowledge of and warnings from the scientific community that a changing climate will likely affect the predictability of water supply and variability of flows in much of Canada.24

All provinces and territories possess the legal and administrative capacity to license and therefore permit or restrict the use of water, to charge for licences, to charge for usage (on a volumetric basis), to monitor water flows, and to require reporting from water users. All provinces and territories have some form of licensing and permitting system in place, and all charge fees whether they are usage fees, licence fees, or both.

Licences can be issued for long terms of up to 20 or 50 years, but typically cover 5–10 year periods; some licences or permits may be issued for short-term uses lasting only a few weeks or months. It is important to note that the province or territory always retains the right to withdraw a licence or amend the terms and conditions attached to the licence if there is a need to introduce conservation measures, impose low-flow requirements, address violations, or serve some other public interest. Most licence and usage fees appear to charge for cost-recovery purposes of administrative costs, and some of these are used to support maintenance and improvement of water and wastewater infrastructure in municipal settings. This raises a key point — fees are set very low and do not reflect the full cost or the full value of water.

The licensing schemes and specific rates for usage fees vary considerably across the country and across sectors. This variability is expected given the number of provincial authorities, the wide range of water demands, and the range in costs for infrastructure and other factors related to delivery of water services in different parts of the country. Variation in rate schemes includes fixed rate, flat rate, and increasing block rate. Fixed rates do not vary according to volume, and flat rates imply one rate charged for every volumetric unit regardless of the volume that is consumed. For increasing block rate structures, the thresholds for blocks also differ across the country and across sectors. Many places have not established volumetric rates. The increasing block rate is more common among large-scale users with higher volumetric rate charges, such as mining and energy sector users.


Economic instruments (EIs) are market-based instruments that either generate prices for water or alter the cost to change user behaviour. In the case of water this behavioural change is reflected in the quantity of water used and/or the quality of water when it is returned to the environment after its use. EIs can take several forms; our research focused on water charges on a volumetric basis and tradable water permits for the purpose of managing water quantities.

In theory, there are four advantages to using EIs to manage the quantity of water used:

  • They provide incentives for behavioural change.
  • They generate revenue for financing environmental initiatives.
  • They promote technological innovation.
  • They reduce wasteful water usage at the lowest cost to society.

EIs are designed to leverage the economic interest of individuals, corporations, or communities to protect ecosystems and the services they provide. In the case of water, EIs are designed to correct market failures, also known as externalities, which occur when the human impacts on water create costs that are not reflected in market prices. In this manner, EIs are structured to more fully incorporate the value of the environment to society in market prices. In other words, environmental and social opportunity costs (opportunity costs of future uses) can be incorporated into water prices, which then send signals to users or consumers to reduce inefficient and wasteful use of water resources. Well-designed EIs can help entice more innovation at a lower cost than can relying solely on command-and-control approaches or voluntary measures. EIs have the potential to be more efficient than traditional command-and-control policy approaches as users are given more flexibility in the way they achieve environmental targets.

The approaches currently used to allocate Canada’s water do little to promote conservation and provide limited flexibility for reallocation of water to more efficient uses. The legal basis of these allocation schemes is entrenched in history and complexities of legal rights. Therefore, realistically in the short term, significant changes to the allocation approaches are unlikely. However, the EIs discussed here may be implemented within some of the existing management systems in the country, but should be done so cautiously, with due consideration of the potential impacts to sectors and the economy.


Water charges can promote economic efficiency and greater fairness because they help ensure that the users shoulder the costs of their actions. Setting the appropriate price allows other environmental objectives to be achieved. For example, if it is more expensive to use water, firms will reduce their use and seek alternatives. In essence, water charges affect costs, and firms and consumers will adjust their water use in response to the price change. Of course, not every firm is able to change its behaviour, and some sectors may be limited in their ability to reduce water intake. Similarly, some sectors are likely to pass any increasing costs along to consumers, again resulting in no water-intake reductions. Where water charges are applied, government will acquire the revenues. Water charges should be designed to be revenue neutral, whereby the revenue is directed at reducing other taxes or finance subsidies or initiatives that help further conservation and efficiency objectives. Historically, water charges or fees have largely been associated with the cost of providing the water — that is, building and maintaining the infrastructure necessary to treat and deliver water to users. In the context of this report, we are exploring the possible use of water charges on a volumetric basis, actually paying for the water itself. In Canada, this is a rarity, and has had limited implementation (see text box on Volumetric Pricing in Québec).


Québec’s regulation respecting the charges payable for the use of water came into effect on January 1, 2011.25 Charges payable for the use of water apply to all industries that withdraw or use 75 m3 or more of water per day, whether it is self-supplied from surface or groundwater or it is taken through a distribution system. An initial rate of $70 per million litres of water (or $0.07 per m3) withdrawn has been set for industries in the following categories: bottled water, juice and beverages, non-metallic mineral products, agricultural products (pesticides and fertilizers), inorganic chemical products, and oil and gas extraction. A lower rate of $2.50 per million litres of water ($0.0025/m3) has been set for all other targeted sectors. Funds collected through these charges will go to the Green Fund to support a number of government commitments in the areas of integrated water resource management and knowledge acquisition.

A key challenge for water charges is to find the right price: high enough to achieve the desired environmental objective, but not so high as to trigger significant competitiveness issues for firms or industrial sectors. In addition, political acceptability continues to be an important potential barrier to the adoption of water charges. However the ground may be shifting on public opinion of water charges, as indicated by the recent poll conducted by the Canada West Foundation whereby western Canadians are seen as supportive of a water charge that contributes to conservation goals, whether paid by individuals or industrial users.26

Licensing and water rental fees currently exist in all provinces and territories. This provides a solid foundation from which to move from a fee structure that is fiscally oriented, aimed at recovering administrative costs (but providing little incentive to conserve water), to one that is more incentive-based, where water charges send a signal that water is valuable and should be willingly conserved. Opportunities exist either to continuously improve established management systems by implementing volumetric water pricing, or where pricing is already in place, to increase the price to achieve environmental and economic objectives.


The trading of water permits essentially allows for permanent or temporary reallocation of water quantities from licence holders with a surplus of water to those in need. Water-management systems that enable trading of water permits or allocations have, in practice, delivered both environmental and economic benefits, albeit with varied experiences. In Canada, water trading exists in Alberta at a very limited scale. Internationally, Australia, western United States, Chile, and Spain have all instituted water trading with variable degrees of success.27 It is fair to say that trading has largely been used in situations of extreme water scarcity, where allocations are no longer available.

Trading systems work by setting quantities through caps on withdrawals, and firms adjust (or create) prices in response. Firms that are able to reduce their water use by over-achieving their targets contribute to a healthier environment and gain financially by selling excess credits to firms that need the water rights. Another advantage is that the system leaves the choice of technology up to the firm, allowing companies to cost-effectively customize their own solutions in their own time frames. However, it is important to acknowledge the perception or concern that water trading could lead to increasing prices or a situation in which industrial developers have an opportunity to take up significant water allocations.28 Given very limited experience with trading water rights in Canada, there are calls for caution in future implementation. 29,30

Trading water rights within a watershed represents a fundamental shift in water-management systems and so represents a real challenge. With water trading, regulators must become market designers and enforcers while remaining focused on managing water supply constraints. Existing legal, institutional, and administrative frameworks need to be assessed and reoriented to detach historical or riparian water rights and allow them to be reallocated through market trading. Finally, political barriers can be significant, with concerns about stripping away long-standing rights, commoditizing water, and concentrating water rights. Real or perceived, these outcomes can be a barrier to implementation.

Water markets in other countries have experienced both successes and failures. Water experts in Canada note that before moving toward this policy option, we need to continue a dialogue to better understand the level of acceptance for and potential implications of water trading, and implement institutional and legal safeguards.31,32


A wide range of voluntary initiatives has evolved to serve different purposes or functions. These include codes of conduct, codes of practice, guidelines, standards, certification schemes or programs, and non-regulatory agreements. The initiation and development of voluntary initiatives or programs may result from a variety of external or internal factors:

  • Responding to market and customer expectations or requirements (including those influenced by consumers or non-government organizations);
  • Maintaining a social licence to operate and community support;
  • Providing an alternative to government regulation;
  • Enabling internal management and performance improvement;
  • Demonstrating public accountability; or
  • Addressing gaps in knowledge.

Voluntary initiatives related to water use will likely play a role in improving water efficiency and conservation, but the extent of their influence remains uncertain as it is difficult to predict their potential uptake across and within the natural resource sectors in Canada. However, the experience of similar programs shows that voluntary initiatives can lead to performance improvements.*

*For example, the Chemistry Industry Association of Canada’s Responsible Care program has led to improvements in reducing emissions from toxic chemicals.

Voluntary initiatives are guided by a shared commitment among participating organizations to achieve a desired outcome. They are intended to influence, shape, control, or benchmark internal performance, external stakeholder understanding and perception, or customer and consumer behaviour in the marketplace. By definition, voluntary initiatives are non-mandatory; they are meant to encourage responsible behaviour that considers the needs of both companies and society at large. However, some voluntary initiatives include requirements for participation, for example, as a condition of membership in industry associations or to gain product or practice certification. Voluntary initiatives can also set de facto standards or benchmarks for industry performance that can be recognized by regulators or by the courts.

Voluntary initiatives exist across a range of industries, products, and services and address a range of environmental, social, and economic issues. Although voluntary initiatives can take many shapes and forms, they are often used to promote public disclosure and/or improve or standardize management practices and performance. Voluntary initiatives also have the potential to gain regulatory recognition.


In a scan of voluntary initiatives for improving water efficiency and conservation, the NRTEE identified a range of initiatives or programs relevant to water management and defined them here according to the their purposes. In addition, we briefly touch on the future policy roles these voluntary initiatives could play in improving water efficiency and conservation and in forming part of a suite of policy instruments on water management.


These initiatives are often introduced and governed by companies or associations in a single sector to demonstrate or improve performance on key issues. Industry associations often develop these programs to maintain their licence to operate, offer an alternative to regulation, or respond to market requirements. Industry-driven programs are developed with different degrees of rigour and can include a variety of elements such as guiding principles, management practice guidelines, performance standards, reporting requirements and indicators, and accountability mechanisms. Examples of these kinds of initiatives include the Oil Sands Leadership Initiative, the Global Social Compliance Program, and water-management tools developed by the International Council on Mining and Metals.

Well-designed and properly implemented, industry-driven performance and practice initiatives could move a sector or group of firms toward improved water efficiency and conservation. Key factors for success include the following:

  • The initiative is a condition of industry association membership, or peer pressure in the industry exists to ensure uptake.
  • There are clear drivers for improving water management such as the licence to operate, response to broader stakeholder pressure, market or customer demands and recognition for improved management, and reduced or more enabling regulation.
  • The initiative covers water efficiency and conservation through a consistent performance standard. For example the performance indicators are consistent from one year to the next to allow performance tracking over time.
  • The sector is already actively monitoring, analyzing, benchmarking, and targeting improvement.
  • Accountability is already established. The sector reports both internally across participating firms and publicly on the industry, at the company and/or facility-level.


Standard and certification initiatives can be led by industry associations, multi-stakeholder bodies, or external third parties. These initiatives are usually developed and adopted to improve environmental and social management practices and performance, to promote brand or product recognition, or to demonstrate a standard of performance and management practice to the market. However, unlike industry-driven performance and practice initiatives, they are usually governed by more than one interest, such as industry and government, or industry and nongovernment organizations. These kinds of initiatives can be market-facing, such as product or responsible-use certification programs, or they can be internal-facing to promote the development of effective management systems. These initiatives can be sector specific (e.g., Global G.A.P. in the agriculture sector) or applicable to a wide range of sectors or companies (e.g., Alliance for Water Stewardship and ISO 14046).

Standards and certifications can help create the conditions and the capacity for improved performance. In the forestry sector, for example, the Forestry Stewardship Council (FSC) and the Canadian Standards Association Sustainable Forest Management Certification System have helped improve forestry management practices, which have enabled companies to reap strong market recognition and rewards.

The effectiveness of standard and certification programs in contributing to water efficiency and conservation is highly dependent on the presence of clear drivers to encourage uptake. Examples include the need to improve stakeholder or community relations to maintain a licence to operate or strong market pressure to meet customer expectations. The design and rigour of these programs are also essential in driving performance improvements. As most water-related standard and certification programs are currently under development, it is too early to speculate on their future role in the Canadian context.


International reporting initiatives are often developed by non-industry organizations to encourage company transparency and accountability to stakeholders on key issues facing businesses. These initiatives promote standardized practices and approaches and are often developed through multi-stakeholder processes. The use of international reporting initiatives by companies can improve the public’s access to information and may serve as incentives for companies to improve their performance over time. Examples of these kinds of initiatives include the Global Reporting Initiative, the Carbon Disclosure Project — Water Disclosure, and the Stewardship Index for Specialty Crops.

International reporting initiatives help focus attention on material issues, including water, causing companies to prioritize and address them. By increasing the awareness of both companies and stakeholders on water issues, and by encouraging the development of management processes related to water management, international reporting initiatives have the potential to lead to improved water efficiency and conservation. However, there must be sufficient data quality and stakeholder interest in place for reporting initiatives to drive improved performance. Reporting initiatives can also be an important source of information for policy makers, as individual countries’ data and knowledge bases are often limited and insufficient.


These initiatives are often developed through partnerships within industry or between industry and other interests such as NGOs or professional organizations. They are designed to develop standard approaches and practices where gaps exist in knowledge and guidance. Natural resource sector companies participate in these initiatives to improve management practices by identifying risks and areas for performance improvement, and to demonstrate corporate social responsibility by communicating their participation and results to stakeholders. Examples of these kinds of initiatives include the WBCSD Global Water Tool, the Global Environmental Management Initiative (GEMI) – Collecting the Drops: A Water Sustainability Planner Tool, and the Sustainability Agricultural Initiative Platform.

As with industry-driven and reporting initiatives, accounting and management initiatives can certainly help companies or producers improve water efficiency and conservation. Having the ability to measure water use and its impact is often a precursor to successfully managing the resource.


Expanding the use of EIs in regions experiencing or at risk of water restrictions may prove helpful in achieving both environmental and economic outcomes. As the next chapter shows, water pricing can lead to reduced water intake by industry. However, our review of EIs supports and reinforces what others before us have noted — that specific water pricing options need careful consideration before being implemented within a watershed.33,34 Before implementing either water charges or water trading, a robust policy evaluation should be undertaken to understand environmental, economic, equity, administrative, and governance issues.*

* The NRTEE research conducted such an analysis at a national level for the natural resource sectors, providing us with general insights. However sector-specific case studies, such as that by Adamowicz (2007) on oil sands, should be conducted.

With respect to voluntary initiatives, traditional thinking suggests that such approaches are most effective when used in tandem with other forms of regulation. Regulation provides a backstop for management or performance requirements, particularly in ensuring that companies not participating in voluntary initiatives meet a minimum standard. Voluntary initiatives are designed to go beyond compliance. When they function well within a robust program design and implementation plan and have strong company uptake, these initiatives can lead to performance improvements. Further, voluntary initiatives can operate as catalysts to raise standards in a sector by informing the content of regulations, either through formal regulatory recognition, by being referenced into regulations, or by serving as a basis to reward good behaviour. Given the uncertainty related to the effects of voluntary initiatives on water efficiency and conservation improvements, their value may well lie, at this point in time, in the secondary benefits that are associated with their uptake. These include increased awareness of water issues inside companies and among their stakeholders and enhanced company capacity to manage water use and impacts.

Over time, such initiatives have the potential to improve water-use efficiency and conservation in natural resource sectors, and to inform the design and implementation of complementary economic and regulatory policy instruments.



22 Gardner Pinfold 2011

23 de Loë 2007

24 Sauchyn 2008

25 Gouvernement du Québec 2010

26 Canada West Foundation 2011

27 Gardner Pinfold 2011

28 Janmaat 2010

29 Brandes 2009

30 Econnics 2011

31 Brandes 2009

32 Cantin 2006

33 Brandes 2009

34 Cantin 2006