Chapter 4. A comprehensive allocation regime in Denmark1

Groundwater is the major source of water supply for drinking water, agriculture and industry

Denmark is the only country in the European Union (EU) that uses untreated groundwater for more than 99% of water use, including drinking water (Joergensen and Stockmarr, 2009). In 2014, a total of 735 million m3 of groundwater was abstracted in Denmark, out of which 425 million m3 was for non-irrigation purposes (Danmarks Statistik, 2015; Thorling et al., 2015). Agriculture, forestry and fishery consume close to 50% of the total groundwater use in Denmark, 30% is consumed by households and 8% by industry (Danmarks Statistik, 2015). The volume abstracted for irrigation tends to fluctuate significantly from year to year, whereas there has been a slight and steady decrease in the quantities withdrawn for other purposes over the last decade (Danmarks Statistik, 2015; Thorling et al., 2015).

Over the past several decades, groundwater abstraction in Denmark took on increasing importance as an alternative to over-exploited surface water resources2. Surface water is generally quite limited due to the country’s flat topography. During the 1970s and 80s, Danish surface water resources became over-exploited, as a result of increased household use, the discharge of wastewater to surface water and increasingly dry summers. In response, the government gradually prohibited the direct abstraction of surface water (GEUS, n.d.), with consumption falling substantially over the next decades to about 12 million m3 consumed in 2014 (Thorling et al., 2015), less than 2% of the amount of groundwater abstracted. Given its importance in the provision of drinking water, protecting the quality of groundwater is also a vital concern (Box 4.1).

Groundwater and surface water abstraction is regulated through entitlements granted by municipalities, which must be renewed periodically. The quantity abstracted must be measured and reported to the authorities annually. For groundwater, irrigation entitlements are valid for a maximum of 15 years, whereas entitlements for water utilities can be for a period of up to 30 years (GEUS, n.d.). The Environmental Act states as a general objective that the total volumes of groundwater abstracted should not undermine water-dependent ecosystems’ compliance with defined environmental targets (Thorling et al., 2015).

Water pricing as an instrument for demand management and financing

While Denmark has a long tradition of water consumption metering and consumer charges for water supply and waste water treatment (Pedersen, 2016), the EU Water Framework Directive (WFD) encouraged the Danish government to further develop its water pricing system (Hydropolitical Academy, 2014). Full cost recovery for wastewater collection and treatment has been a legal requirement in Denmark since 1992 (OECD, 2012). Full cost recovery also now applies to water supply (NCM, 2006). Water prices in Denmark are particularly high compared to other countries3.

The average water tariff for Danish consumers has risen steadily over the past two decades, increasing by 350% per m3 between 1989 and 20124 (Hydropolitic Academy, 2014). Figure 4.1 depicts how the annual average household water bill has evolved since 2005 and the breakdown of the bill comprised of water tariffs, wastewater charges and taxes. Denmark is one of the few countries that use a two-part tariff structure, consisting of a flat fee and a charge based on metered consumption5 (NCM, 2006). The water bill accounts for approximately 1.6% of annual income of Danish families (GEUS, n.d.).

Figure 4.1. Gradual rise in average Danish annual household water bill, 2005-15

Source: DANVA, 2015. Note: 2014 prices.

From the water bill paid by consumers, approximately 50% accrues to wastewater companies, 30% consists of taxes that accrue to the government and about 20% goes to drinking water utilities (DANVA, 2015). Taxes consist of both levies for water supply and wastewater and value added tax (VAT).6 The water supply levy was established in 1994, and has been increased in subsequent years. The tax has an environmental purpose and aims to encourage reduced water consumption (NCM, 2006; Pedersen, 2016). The wastewater tax applies to all direct discharges, such as industries and municipal wastewater treatment plants (NCM, 2006). This tax was first introduced in 1997 and the rate was raised by 50% in 2014 (Retsinformation.dk, 2009). Whereas households pay this tax through the water bill, direct dischargers pay it directly to authorities. The charge is proportional to pollution load, and applies to nitrogen, phosphorus and biochemical oxygen demand (NCM, 2006).7 By providing an incentive for pollution abatement, the wastewater tax contributes to the protection of groundwater quality.

While taxes for water supply and wastewater are applied at a standard rate across country, the water and wastewater tariffs charged by water utilities and wastewater companies vary considerably (NCM, 2006). Households in the areas with the highest tariffs pay six times as much as the ones with the lowest tariffs (Dilling, 2007). This variation is mainly due to structural differences related to the provision of services, including abstraction costs, size and centralisation of customers and maintenance costs, rather than differences in operational efficiency (DANVA, 2015)

Denmark is one of only three European countries (together with France and the United Kingdom) with an abstraction charge for groundwater use (Berbel et al., 2005). The abstraction charge was introduced by the 1994 Green Tax Reform.8 The charge can be deducted from the farmers’ value-added tax proceeds, but is still considered to have an impact on irrigators’ groundwater consumption (Berbel et al., 2005).

There is also a tax on water utilities (about EUR 1 per m3 of water) that aims to reduce water losses via the distribution network, which accounts for about 5% groundwater consumption (Danmarks Statistik, 2015). The tax applies to all water abstracted by utilities, including non-revenue water. Utilities that do not reduce non-revenue water to less than 10% are penalised with additional taxes (NCM, 2006).

Wastewater charges along with the development of more sophisticated wastewater treatment facilities have had a positive impact on groundwater pollution levels.9 Wastewater charges, which were implemented in 1997, led to a significant decline in the levels of phosphorus (17% annually), nitrogen (5% annually) and organic material (3% annually) in waste water over the first four years (1997-2001) (NCM, 2006). Nevertheless, pollution levels in groundwater have only fallen slightly since then. The increase in the wastewater charge in 2014 aimed to encourage improved treatment of wastewater so as to ensure a decline in the spread of pollutants in the aquatic environment (Retsinformation.dk, 2009). However, it is too early to see the effect of this increase.

Lessons learned

Denmark has developed a comprehensive set of policies for groundwater allocation. The suite of policies to protect groundwater quality is vitally important, considering that Denmark uses untreated groundwater for 99% of its drinking water. Wastewater charges and the improvement of treatment facilities have had an important impact on the aquatic environment, including on the quality and stock of groundwater resources (see Health Check #10, Part I).

The Environmental Act requires that the total volumes of groundwater abstracted should not undermine water-dependent ecosystems’ compliance with defined environmental targets (see Health Check #4, Part I). Groundwater and surface water abstraction is regulated through time-bound entitlements granted by municipalities. The duration of entitlements depends on the purpose of use (irrigation or drinking water supply), and on the source of water (groundwater or surface water). Establishing the appropriate duration of entitlements constitute an essential requisite for a clear legal definition of water entitlements (see Health Check #11, Part I).

The total volume of groundwater abstracted must be measured and reported to the authorities annually. This requirement and other measures ensure the continued monitoring of groundwater quantity in Denmark, facilitating the government’s, and the public’s, understanding of groundwater availability (see Health Checks #3 and #8, Part I).

Furthermore, Denmark’s comprehensive system of water tariffs, wastewater charges and taxes provide incentives for reduced pollution and more efficient use of the resources. It also provides the basis for full cost recovery for water supply and wastewater treatment. Groundwater abstraction charges are also in place, including for irrigation (see Health Check #12, Part I).