Water is cheap in Canada, which leads to inefficient water use and often creates a funding gap for municipal governments, because the amount paid by users does not typically cover the full costs of supplying water. Even though efficient water pricing and competitive water markets are being used in many jurisdictions internationally, they are underused in Canada. This is regrettable, as the use of market-based instruments alongside traditional regulation can achieve environmentally beneficial outcomes such as increased water use efficiency. This Policy Brief provides a discussion of some lessons and policy barriers for the future use of market-based instruments in Canadian water policy. It then presents two case studies of Canadian jurisdictions that have implemented economic instruments for water management.

Key Messages

  • Although Canada has abundant freshwater resources, there are regions of the country that are subject to periodic water scarcity. Poor water quality can also exist, particularly in basins where there is significant agricultural, industrial and/or municipal development.
  • Market-based instruments2 – such as efficient pricing (i.e. pricing that accounts for all associated costs), permits or trading – can be used to regulate water demand, increase the efficiency of water use, improve water quality and defray the cost of water infrastructure. These tools are currently under-utilized in Canada for water management.
  • Theory, and international policy experience, suggests that using market-based instruments together with traditional regulation can achieve desirable water-policy outcomes at a lower economic cost than regulation alone.