Economic incentives in sustainable water management: a Risk-Based Decision Analysis approach for determining groundwater pollution charges under uncertainty

A risk-based decision analysis methodology is presented, that can be used as a water policy tool in the
design of economic incentive instruments, under conditions of uncertainty. A contaminated groundwater
resource system with unknown hydrogeological parameters is used as a case study. The polluter
has to select the policy to be followed among a series of alternatives, ranging from the extreme and
environmentally risky scenario of paying pollution charges as long as the aquifer will remain polluted,
up to the conservative option in terms of reduced environmental risks policy of safely rehabilitating the
groundwater system. The full-cost price of water, including direct, opportunity, and environmental
costs, both actual and probabilistic, as well as the risks of failure of the alternative scenarios due to the
uncertainty, as they result from stochastic simulation, are embedded in a risk-cost-benefit decision
model, developed for the evaluation of the alternatives. The pollution charges to be imposed by the
local water authority are determined through the appropriate development of this model and the use
of a proposed algorithm, in a way that these charges can act as incentives to the polluters, forcing them,
or the authorities, to select the most environmentally sustainable water policy, namely that of safely
restoring the aquifer.