C7.4 Subsidies and incentives
Subsidies can be used to protect vulnerable and poor groups in society but great care is necessary to ensure that they do not simply benefit the better off.
However, subsidies often encourage excessive consumption of water, either when its use is directly subsidised or where the prices of goods and services that consume water are subsidised, or affect its use. Examples include:
Setting the right price signals (‘getting prices to tell the truth’) means that existing distortions in the workings of the market should be removed. For instance, farm prices should become more market-based or industrial firms should operate in a less protected environment or the prices of energy should be liberalised.
Taxes and/or subsidies need to be applied in a selective way to reflect environmental considerations ("green" taxes and subsidies) or other specific policy aims. For example, polluting farm chemicals should be taxed while water-efficient appliances could be subsidised. Subsidies can be used to encourage changes in behaviour (as for instance, to encourage the introduction of drip irrigation, see C3).
Pricing of water alone (C7.1) will not have its desired effect if it is frustrated by policies elsewhere that pull in the opposite direction. This lesson has been clearly learned from attempts to reduce water use in agriculture and to reduce the waste of water and pollution in highly protected industries.
All major policy areas affecting water use should be "joined up" (see also A3 – financing structures and A1, water policies). The market signals faced by water users (whether individual households, institutions, firms or farmers) should be consistent and persuasive.