This chapter analyses the sources of financing currently available to invest in drought risk reduction measures. The first part considers existing financing and its limitations. The second part assesses the financing strategy elaborated by the national and subnational governments to ensure the Paris metropolitan area's resilience to droughts.
Adapting the Paris Metropolitan Area to a Water‑Scarce Future
Abstract
Given drought risks in the Paris metropolitan area (“the region”), strategic mobilisation of funding is required to implement the measures needed to ensure the region's resilience. Financing the region's resilience to droughts involves financing risk-reduction, i.e. ex ante financing and risk-transfer measures, i.e. ex post financing. Ex ante financing encompass investments in climate and hydrology knowledge, as well as water abstraction, to better assess future risks and raise awareness among citizens and businesses. It also covers the financing of infrastructure to better manage water consumption and supply, and to facilitate the innovation required to achieve more-efficient use. While this funding helps better anticipate, plan for, and reduce drought risks, the concept of resilience also covers measures to manage the impact of drought ex-post, when they actually happen, enabling risks to be transferred and support to be provided to people and activities affected by droughts. Ex post financing covers insurance schemes.
Implementing resilience measures requires not only a strategy for allocating financial resources, but also for identifying sources of financing. Some of the resilience measures identified to ensure that the region is resilient to droughts have already been implemented. However, while the funding mobilised for these measures is probably helping increase the region's resilience, it may prove insufficient or be misallocated and thus fail to ensure long-term resilience. In addition, certain measures, such as the maintenance of drinking water and wastewater networks, are financed by water utility revenue. If water consumption declines, the financial balance of drinking water and wastewater services could be affected, limiting the capacity for investment in plants and networks. Reducing abstraction will also have an impact on the revenues of the Seine–Normandy water agency and the lake management authority, limiting their investment.
Financing the region's resilience to droughts also requires a co-ordinated approach to align sectoral policies. In the absence of co-ordination, funding for drought resilience may be ineffective if it is competing with other funding that may be harmful to water quality or resource protection.
This chapter provides an overview of current financing arrangements and assesses their suitability for addressing the risk of climate-induced droughts. Suitability is analysed in terms of whether the funding is adequate to meet needs and how efficient it is. A distinction is made between financing mobilised to reduce risk upstream and implementing ex post measures. The overview of financing is based on an analysis of the budgets of the various resilience stakeholders to improve knowledge and risk monitoring, the resilience measures discussed in Chapter 3, as well as the ex post damage compensation measures offered.
This section looks at existing financing to predict and reduce drought risks. We make a distinction between national and local public financing.
5.2.1. National public financing
The French government's budget covers various missions that can guide or support drought resilience policies. The French government's budget is allocated to missions, reflecting the government's main public policies. These missions are then translated into programmes. Two of the 46 missions listed for 2023 contribute directly to regional resilience: "Ecology, Sustainable Development and Mobility" (3.6% of total budget in 2023) and "Agriculture, Food, Forestry and Rural Affairs" (0.5% of total budget in 2023). Other budget items, such as funds earmarked for economic development, can support regional resilience to droughts (France, 2023[1]).
These missions pursue aims directly linked to water resource management and environmental protection. Aims include support for water and biodiversity policies (1% of the Ecology, Sustainable Development and Mobility mission budget), climate policies and risk prevention (21.9% of the mission budget). The budget for this mission also includes the Regional Environmental Transition Acceleration Fund or Green Fund (5.3% of the mission budget). This fund was created in 2022, with the aim of financing regional projects to improve environmental performance and climate change adaptation in the regions. Finally, the funds allocated to this mission include expanding knowledge (1.7% of the mission's budget) and financing infrastructure, in part via agencies such as the French waterways operator (Voies Navigables de France in french). The "Agriculture, Food, Forestry and Rural Affairs" mission includes the climate resilience challenges facing the agricultural sector, including droughts.
Assessing the proportion of national funding earmarked for resilience measures in the region can be complex and requires an analysis of the actions specifically undertaken. In fact, measures to ensure drought resilience are cross-sectoral and cover often more than just drought. Furthermore, budget fungibility, vital to the flexible allocation of funding, does not allow for a sufficiently disaggregated view of national commitments. To understand what national financing is available to implement drought resilience measures for the Paris metropolitan area, this section will therefore focus on the national financing specifically allocated to the climate change adaptation actions listed in the 2018-24 National Climate Change Adaptation Plan, as well as the main national funds for risk prevention, regional environmental transition, or economic development. Water agency funding will be studied separately, at the Seine–Normandy river basin level.
The budget earmarked for implementing the 2018-24 National Climate Change Adaptation Plan (PNACC-2 in French) has provided funding for measures to predict and reduce drought- risks in all French regions. EUR 2.1 billion of the PNACC-2 total budget of EUR 3.5 billion had already been deployed by 2021 (Table 5.1). The budget earmarked for drought resilience is drawn in part from funding provided by the Ecology, Sustainable Development and Mobility mission under its "water and biodiversity", "climate" and knowledge improvement programmes. PNACC-2 funding thus contributes towards gaining the knowledge and information needed to implement a resilience strategy (1% of the budget (Ministère de la Transition Ecologique et de la Cohésion des Territoires, 2021[2])). Knowledge-sharing projects include, for example, the development of platforms for accessing climate and hydrological projections, such as the Explore 2 project. This funding also contributes to environmental and nature protection initiatives (20% of the budget), such as nature-based solutions. Actions to conserve water resources fall within this framework. One per cent of funding is earmarked for economic sectors such as agriculture, in which practices will need to evolve to conserve water resources and reduce drought risks. Four per cent of the National Climate Change Adaptation Plan budget is earmarked for prevention and resilience, focusing primarily on initiatives to communicate and raise awareness about natural hazards. Forest fires, clay shrinkage and swelling, and coastline retreat are the main risks in this category. Resilience to droughts is seen above all as an environmental protection issue.
The PNACC-2 budget earmarked for climate change adaptation focuses more on regions that are already vulnerable to droughts. The PNACC-2 programme has funded studies to assess the probability of climate change-induced droughts, to understand the dynamics of evaporation from the large Seine lakes, and to implement quantitative resource management policies across the entire river basin. However, the mid-term assessment of PNACC-2 (Ministère de la Transition Ecologique et de la Cohésion des Territoires, 2021[2]) highlights a series of measures designed to provide further support for the French overseas departments and other regions particularly vulnerable to climate hazards.
National funds for risk prevention, regional environmental transition or economic development also make a direct contribution to the resilience of regions and companies. As part of a decentralised approach to climate action, the Green Fund contributes to regional climate change adaptation. The fund has an annual budget of EUR 2.5 billion.1 In parallel, the French government has announced a significant investment plan to improve the country's industrial competitiveness and develop future technologies: the France 2030 plan.2 With a budget of EUR 54 billion, the plan supports companies adopting a green recovery approach, with investments in improving the agricultural sector that could include more-water-efficient uses. Finally, the Major Natural Risk Prevention Fund, or Barnier Fund, (Ministère de la Transition Ecologique, 2012[3]), aims to improve people's safety and reduce the damage caused by natural hazards. This fund co-finances natural hazard prevention or protection measures undertaken by local authorities. The fund has an annual budget of EUR 200 million.
Drought risks have not been properly identified by the various national funds, whose potential could be improved. In particular, the Green Fund finances ecosystem restoration actions linked to net-zero increase in built-up land. These actions enable better rainwater seepage, thus helping reduce the risk of water scarcity. However, the Green Fund has not financed any ecosystem restoration projects in the region (Gouvernement, 2023[4]), which is the region that makes the least use of the fund (Sénat, 2021[5]). This fund is only recent, though, and local authorities have already identified regional subsidies for this type of project (notably those put forward by the Seine–Normandy water agency). The under-utilisation of the fund could change over the next few years if ecosystem restoration needs are not adequately covered by existing schemes. Nevertheless, the fact the measures financed by the fund, and not covered by other bodies, have been extended demonstrates the relative priority given to this subject. In addition, the plan funds natural hazard prevention, although droughts are excluded from this category. The same is true for the Barnier Fund, which does not cover clay shrinkage and swelling linked to droughts. By taking an upstream risk management approach to clay shrinkage and swelling, however, the Barnier Fund could offer an interesting option for financing risk prevention (Sénat, 2023[6]). Better rainwater management could help prevent floods and increase soil moisture. Increasing soil moisture would be an effective measure for preventing clay shrinkage and swelling, with a positive cost–benefit ratio (Sénat, 2023[6]). This project does not appear to be on the agenda, as the Barnier Fund budget will remain unchanged in 2023 and 2024 (Sénat, 2023[7]).
This lack of consideration is reflected in the absence of a drought resilience target in the budget performance measures set out by the government. To assess the outcomes of the national government's policy in relation to the resources committed, the Ministry of Finance tracks the development of indicators intended to reflect the impact of spending. For actions relating to water, climate and biodiversity policy, 30 indicators have been established. Three of these assess water management and the good status of water bodies, which are essentially representative of water resource quality.
National funding thus seems to be mainly earmarked for strengthening knowledge to enable an assessment of the climate change-induced risks facing the Paris metropolitan area. Projects enabling the development of nature-based solutions or more economical practices tend to be directed towards other regions. Similarly, funds for community resilience and risk prevention are mainly focused on flood risk, which should be addressed alongside drought risk.
5.2.2. Public financing available at the Seine-Normandy river basin level
Support from the Seine–Normandy water agency means that local organisations can focus their funding on increasing drought resilience, thanks to effective financial assistance. Although the agency establishes a programme of funded measures, with projects accepted on a first-come, first-served basis, it has rolled out a long-term support programme to help develop and prepare ambitious climate change resilience projects. The Seine–Normandy water agency's "Water and Climate" programme is the operational arm of the basin's climate change adaptation strategy (Chapter 3). The project selection criteria are thus aligned with drought resilience objectives, offering guidance to local authorities and businesses as they draw up their plans.
Funding from the Seine–Normandy water agency provides substantial assistance for local authorities and climate change adaptation. In 2023, funds distributed by the water agency to local authorities3 in the Paris metropolitan area made up 83% of the total funding provided by the water agency for recipients in the region (Agence de l'Eau Seine Normandie, 2023[8]). More broadly across the basin, the water agency estimates that more than 50% of actions were linked to climate change adaptation in 2023, a figure that is consistent with previous years. For the most part, these actions cover pollution control and resource conservation. These will be crucial if resources are limited due to reduced dilution capacity in the environment. The budget earmarked for conservation measures is just 2% of the spending planned by the water agency within its 2019-24 programme. Measures on rainwater seepage, environmental conservation and support for changes in agricultural practices account for 18% of this budget (Agence de l'eau Seine Normandie, 2022[9]). Finally, the water agency is a key player in improving knowledge through funding training, campaigns and research programmes.
Commitments expected to be authorised in 2019-24
Note: The substantial amount allocated to wastewater treatment in the agency's budget partly reflects the significant investment to enable swimming in the Seine, one of the stated objectives of the 2024 Olympic Games and an indicator of river water quality. Quantitative resource management measures are primarily designed to support businesses and organisations to reduce consumption or install infrastructure that allows unconventional water to be reused (e.g. closed loops in industry). Other key resilience measures include rainwater management and environmental restoration and management.
Source: Authors from (Agence de l'eau Seine Normandie, 2022[9]).
However, the water agencies' funding capacities are dependent on their revenue, which is subject to the "water pays for water" principle. The agencies' budget is principally derived from the pollution and abstraction charges levied on the various users in the basin. Under the Seine–Normandy water agency's programme, 88% of water charges come from domestic users, 5.2% from industrial users and 5.9% from agriculture (Agence de l’eau Seine Normandie, 2022[10]). These charges make up over 80% of the agency's resources, with the remaining 20% coming from repayments of advances (loans granted to regional authorities). Moreover, an increase in charges would not necessarily translate into an increase in the agency's budget, as this is governed by the Ministry of Finance, which may choose to set agency budgets at a level lower than their revenue. It is possible, however, that this spending ceiling could be abolished as part of the water agencies' intervention programme (2025-30). This aspect has not yet been incorporated into the 2024 Finance Act.4
In fact, funding from the water agency is relatively low compared to existing funds that can be harmful to water resources. For example, the water agency sets standards for agriculture that are far more ambitious than those established by the Common Agricultural Policy (CAP), such as low-input crops. Yet the CAP budget allocated to the region averages EUR 152 million per year (Agreste, 2022[11]) (Agreste, 2021[12]) (Agreste, 2019[13]), i.e. almost 20 times the total subsidies allocated to the agricultural sector in 2022 by the Seine–Normandy water agency. Furthermore, a large proportion of CAP subsidies are earmarked for surface aids. These are not aligned with the water agency's resource protection objectives.
At the same time, water agencies' responsibilities have evolved, putting additional pressure on the Seine–Normandy water agency's financial resources (Serva, 2021[14]). Thus, the law on the restoration of biodiversity, nature and the countryside, passed on 8 August 2016, expanded the water agencies' remit. At the same time, water agencies are expected to contribute to efforts to reduce the civil service headcount and have been experiencing a decline in staff numbers since 2016. Despite its expanded remit, the water agency's capacity to implement and supervise is therefore limited.5 This trend could be reversed thanks to the creation of new positions in 2023.
The water agency's budget is not sufficient to achieve the desired performance targets, and is expected to be reduced. As discussed in Chapter 3, the fees currently charged are too low to effectively foster a reduction in water consumption or reduce pollution. As a result, while the purpose of water agency funding is precisely to finance actions to improve water quality in rivers and streams, local actors who degrade the resource while paying fees to support the work of the water agency, have no incentive to avoid polluting it in the first place. Separately, other funds, such as those from the CAP, are sufficiently attractive to the farming profession, meaning that it has little incentive to apply for water agency subsidies for protecting water catchments or reducing water consumption, thus potentially increasing the risk of water scarcity (Chapter 2). Under a policy of reducing consumption, the water agency's revenue could also decrease, limiting its ability to act and its performance.
The increase in agency budgets proposed in the National Water Plan is a positive first step towards strengthening the Seine–Normandy water agency's work. When the 2023 plan was published, the government announced a EUR 475 million increase in water agency budgets. This increase is in fact due to the increase in the spending ceiling, a rise in domestic use charges and the introduction of new charges designed to encourage improved performance of drinking water and wastewater networks (Sénat, 2023[7]).
Nevertheless, the agency's budget continues to be disproportionate to the challenges faced by the basin in terms of resource management objectives and, indirectly, climate change resilience. The various measures do not call into question the "water pays for water" principle, nor the appropriateness of charging fees with the aim of conserving both the quality and quantity of water resources. For as long as water charges do not encourage positive behaviour, and in particular less-polluting behaviour, the water agency will help repair the damage caused by the activities taking place in the river basin, with resources that are limited by the amount of these charges.
5.2.3. Subnational governments’ public financing
Local and regional authorities mainly fund awareness-raising and risk-reduction measures related to city and regional planning. Local and regional authorities are responsible for managing rainwater and therefore for storing or reusing it (municipalities); for protecting biodiversity and aquatic environments and therefore for implementing nature-based solutions (metropolitan areas, regions); and for allocating European funds to the agricultural sector and therefore for supporting low-water agriculture. Local and regional authorities are responsible for water and wastewater infrastructure. They therefore play an important role in ensuring the efficiency of water networks and the efficient use of water resources. They also fund awareness-raising and communication campaigns to alert people to the risks of water scarcity. Finally, they can fund infrastructure, such as the reservoirs on the Seine, which are partly financed by the group of local and regional authorities that manage them.6 For example, this consortium is responsible for the lake management company's annual operating and investment budgets.
Local and regional authorities are also funding projects using nature-based solutions. Excluding transfers from the national government and the European Union, local and regional authority budgets come from local taxes, water agency grants and financial instruments such as the green bonds issued by the City of Paris or the Paris metropolitan area to finance the environmental transition (Région Ile-de-France, 2019[15]). An analysis of the City of Paris's budget shows that the amount earmarked for nature-based solutions and city planning accounted for 2% of the total investment budget in 2023. It is the same story in the region, where less than 1% of its total budget is allocated to biodiversity. The City of Paris and the region finance urban projects (e.g. eco-neighbourhoods), protective measures such as reservoir management, greening projects, or specific measures such as rainwater harvesting subsidies (Chapter 3). Finally, the city and the region have issued bonds to finance the environmental transition, which are primarily intended to fund climate change mitigation projects (Région Ile-de-France, 2023[16]). In the Greater Paris Metropolis, the tax for aquatic environmental management and flood protection (GEMAPI in French) provides funding for nature-based solutions such as wetland restoration or flood expansion area conservation to regulate flow rates and release water during low-water periods. However, this tax is mainly used for flood control (Métropole du Grand Paris, 2023[17]) and brings in a relatively low amount across the basin. Most projects are still in the assessment phase. The Greater Paris Metropolis also contributes to safeguarding biodiversity through its Nature 2050 programme and Biodiversity Fund. The latter was created in 2023 to finance large-scale greening, soil unsealing and ecosystem restoration projects. The fund will be allocated EUR 80 million by 2030. The Greater Paris Metropolis has also launched calls for innovative urban planning projects, which are assessed according to a set of criteria including, for example, "alternative rainwater management and water recovery" (Table 5.1).
Local and regional authorities co-finance some of their projects with the Seine–Normandy water agency, which implies that the region's resilience budgets are likely to be higher. The Seine–Normandy water agency has a budget of EUR 3.84 billion over six years for the period 2019-24 and works to prevent environmental degradation and climate change-induced risks (Table 5.1). The agency offers grants or advances to local authorities, manufacturers, craftspeople, farmers or associations taking action to protect the natural environment. It can also forge partnerships with public financial institutions, creating significant investment leverage.
5.2.4. Financing drinking water and wastewater network operators
The need to finance resilience stems from economic and environmental factors that both public and private drinking water and wastewater operators must consider. These operators invest in technologies that improve the efficiency of networks and protect water catchments. They recoup their costs in part from the price of water, which is the basis for their investment plans. This search for balance, together with water price controls, encourages operators to optimise network operations and the treatment required to make water drinkable.
A drop in revenue resulting from conservation policies could mean that operators would require supplementary income to maintain current efficiency levels. Assuming that productivity remains steady, operators' revenues could see significant reductions, creating risks of disinvestment in networks or plants and increased leakage. As a result, water rates may need to be increased, other commercial services developed, or additional subsidies provided. In Germany, for example, water and wastewater operators charge for rainwater management. This explains why water is more expensive in Germany than in France (Chapter 4). Water operators could also consider nature-based solutions to reduce maintenance costs (Box 5.1).
United States: Water Infrastructure Finance and Innovation Act Program
The Water Infrastructure Finance and Innovation Act (WIFIA) Program is an Environmental Protection Agency initiative to support the financing of water-related infrastructure projects. Its main objective is to help local, regional and state entities finance large-scale water and wastewater infrastructure projects more cost-effectively. The programme offers loans and loan guarantees on preferential terms to public and private organisations undertaking water infrastructure projects. These conditions generally include favourable interest rates, extended repayment terms and lower capital requirements. In addition, by encouraging innovation in the design, construction and management of water infrastructure projects, the WIFIA Program aims to make such infrastructure more efficient, sustainable and resilient. With financing rates lower than market rates, the WIFIA Program enables borrowers to reduce their financing costs. This can translate into substantial savings for infrastructure projects. Finally, the programme also encourages private sector participation by working with public-private partners to finance and manage infrastructure projects. This can help mobilise private capital to support infrastructure development.
This programme thus has little impact on US government debt, as only funds considered to be at risk of default are accounted for as federal expenditure, and default on water-related projects is very low.
Philadelphia (USA): reducing operator costs
In Philadelphia, nature-based solutions provide cost-effective drainage (green roofs, wetlands, porous road surfaces). These solutions cost USD 2 billion, i.e. less than half the cost of a conventional upgrade to the current pipes and ponds system. Achieving a similar level of service by building an additional treatment plant would cost four or five times as much, i.e. USD 8-10 billion.
5.2.5. Financing agriculture and industry
Agricultural sector
Agriculture is probably one of the sectors most in need of funding to cope with droughts. First, this is the sector that will be most affected by droughts, and which will inevitably require transformation to preserve soil infiltration capacities, reduce irrigation or improve current crops. Throughout the region, farming households have a relatively high median disposable income compared to other professions. These households could be encouraged to invest in resilience measures such as changing crops or introducing more-efficient equipment. However, the perception of a rare and uncertain risk in a highly competitive environment, where existing crops offer high value added, does not incentivise change. In addition, almost 10% of these households have negative incomes, often as a result of making major investments, and are unable to invest in these measures (INSEE, 2022[20]). Agricultural policies and associated financial support are therefore important in encouraging greater resilience to droughts.
The sector benefits from various sources of European, national and local funding to support this transition. The Common Agricultural Policy (CAP) helps support the market, the price of goods, and farming incomes. It also promotes sustainable resource management and the competitiveness of rural areas through a EUR 25 million budget, part of which will be used to implement resilience measures (Agreste, 2022[11]). This represents 16% of CAP funding for the region. The agricultural sector also benefits from the France 2030 funding programme, which aims to improve the country's industrial competitiveness. This plan includes EUR 54 billion of investment for businesses, and one of its objectives is to improve the agricultural sector, which could include reducing its water consumption. France 2030 has contributed to environmental transition pilot projects in the agricultural sector and supports the resilience measures set out in the National Water Plan. The agricultural sector also receives support from the water agency, which subsidises equipment and practices that will help transform the agricultural model into one that manages water resources sustainably. For example, the water agency subsidises Eau de Paris, the drinking water operator for the City of Paris, to help the agricultural sector adopt sustainable practices. These more qualitative issues are also essential in limiting pollution, or even the closure of catchment areas (e.g. nitrate pollution). In 2022, water agency funding for the agricultural sector made up 4.7% of the agency's funding (Agence de l'Eau Seine Normandie, 2023[21]).
Financing aimed at transforming the agricultural sector has led to marginal improvements. In discussions with the decentralised government departments responsible for agricultural policy, there was no suggestion of any disruptive scenario. Discussions with the regional Chamber of Agriculture revealed that financial aid was still insufficient to cover the costs incurred in the past for their current operations. Moreover, as indicated in Chapter 3, sectoral transformation also requires there to be markets for new crops.
However, it is still difficult to assess whether the issue lies in increasing the amount of funding or allocating it differently. Since 2022, EU member states have been drawing up their own measures to qualify for CAP assistance (Conseil de l'Union Européenne, 2022[22]). As indicated in Chapter 2, however, current CAP measures are not aligned with the challenges involved in protecting water resources. As a result, substantial financial flows are directed towards practices that increase the sector's vulnerability over the long term.
Industrial sector
The industrial sector is also financing measures to reduce its water consumption and conserve the resources to prevent drought-induced water scarcity. For example, it has invested in technologies to improve water efficiency, including rainwater harvesting and the introduction of closed loops for reusing wastewater. (Agence de l'Eau Seine Normandie, 2021[23]). In 2022, the Seine–Normandy water agency contributed EUR 10.9 million to demand reduction projects of this type. It is, however, difficult to assess the investments that companies in the region have made in this area.
The sector also receives funding from the Seine–Normandy water agency and the France 2030 plan. The water agency allocates 3.8% of its budget to industry, with the aim of reducing pollution and saving water (Agence de l'Eau Seine Normandie, 2023[8]). The France 2030 plan has been designed to boost the competitiveness of sectors such as energy and the automotive industry, which have a presence in the region.
This financing makes a marginal contribution to the resilience of the sector and the region. Although the water agency is promoting a number of conservation and pollution-reduction projects throughout the basin, this financing is relatively small compared to the agency's budget. Similarly, there are few references to the France 2030 plan in terms of protecting water resources, with the exception of the National Water Plan published in 2023, which mentions that one component of France 2030 should support innovation by French companies to change their practices, focusing in particular on the increased use of unconventional water such as treated wastewater (Table 5.1).
Businesses can also approach banks for support in developing their operations. Public and private banks can support transformation in industries seeking to invest in technologies to reduce water consumption or optimise water resources.
Moreover, banks have an interest in aligning their investments with drought resilience objectives. The financial materiality of risks caused by droughts creates a lending risk for banks. For example, when a company experiences repeated production losses and the resulting decline in turnover, this can lead to a drop in its credit rating, and even make it a lending risk for a bank.
However, banks are still not paying sufficient attention to the risk of climate change-induced droughts. According to a report by the Carbon Disclosure Project (CDP, 2022[24]), 33% of listed financial institutions did not assess the exposure of their financial activities to water-related risks in 2021. This suggests that these financial institutions may be underestimating their exposure, or even financing unsustainable and risky activities.
Note: These budgets do not include operating expenses, in order to focus on funding of the resilience "measures" described in Chapter 3. Due to the cross-functional nature of these measures and in the absence of a taxonomy enabling all of this funding to be tracked, these budgets give an indication of the funding mobilised, but do not provide an assessment of the funding in place.
Source: (DRIEAT, 2023[25]) (Agence de l'Eau Seine Normandie, 2021[23]); (Région Ile-de-France, 2023[16]) (Conseil régional d'Ile-de-France, 2023[26]); (Ministère de la Transition Ecologique et de la Cohésion des Territoires, 2021[2]); (Institut Paris Région, 2022[27]) (EPTB Seine Grands Lacs, 2023[28]), (Métropole du Grand Paris, 2023[17]) (Ville de Paris, 2023[29]) (SEDIF, 2023[30]); (Eau de Paris, 2022[31]) (Aquavesc, 2022[32]) (Sénéo, 2023[33]).
5.2.6. Assessing the suitability of ex ante financing
Responsiveness to needs
An analysis of current financing highlights the importance attached to understanding risks and taking no-regrets action. Knowledge of water withdrawals, hydrological and climate projections and vulnerabilities in the region feeds into national and local adaptation funding plans. Although the region has not financed any studies to assess drought-related risks within the region, the Ministry of the Environment is helping fund the Explore 2 project – an update of the Explore 2070 national assessment of drought risks within French river basins. Similarly, within the Seine river basin as a whole, the European Regional Development Fund (ERDF) and the budget of the organisation managing the reservoirs upstream of Paris have been used to carry out a study to assess the risks of severely low water levels in this area. (EPTB Seine Grands Lacs, 2022[34]). Similarly, awareness-raising initiatives and nature-based solutions are regularly mentioned in the various investment plans and budgets produced at the local and national levels. This is also the case for funding for drinking water network efficiency, which accounts for a significant proportion of drinking water operators' budgets (43% for SEDIF (SEDIF, 2022[35])), and 8.3% of the Seine–Normandy water agency's budget in 2022 (Agence de l'eau Seine Normandie, 2019[36]). Nonetheless, the budget allocated to drinking water operators is smaller than the budget earmarked for improving sewer systems, including as part of the Seine swimming plan and efforts to reduce water pollution (Agence de l'Eau Seine Normandie, 2021[23]) (Agence de l'eau Seine Normandie, 2022[9]).
However, the funding announced between 2022 and 2023 to improve France's resilience to drought suggest that existing funding was insufficient. The increase in water agency budgets as part of the National Water Plan is an acknowledgement of the limits that the agencies face in meeting their growing responsibilities. Similarly, the mobilisation of France 2030 to transform agriculture and the doubling of funding earmarked for protection and irrigation equipment (Gouvernement, 2022[37]) following the 2022 drought underscore the significant needs of this sector as it seeks to increase its resilience. These funds must, however, be supervised, particularly in the case of infrastructure (e.g. irrigation), to prevent maladaptation.
Moreover, current funding does not cover certain drought resilience measures. In interviews conducted as part of the study, the Chamber of Agriculture noted the cost of the transition to more-efficient practices and the difficulties of implementing agri-environmental measures on farms. Equally, while there is funding available for rainwater management and reuse – such as the subsidies offered by the region for rainwater collectors –, greywater or treated water reuse is not included in any financing plan. Lastly, in interviews conducted by the OECD, cities highlighted limited budgets for this risk, compared with the flood risk, which is considered one of the most significant across the region.
In conclusion, current funding levels are insufficient to cope with future drought risks. However, without a detailed resilience objective that would enable needs to be assessed by sector, it is difficult to estimate the funding gap between the region's needs and the amounts that have already been mobilised.
Financing efficiency
The possible lack of funding may arise from an ineffective allocation of current financial resources, which is exacerbated by poor coordination among stakeholders in the river basin. While the water agency primarily co-finances projects with local authorities or socio-economic operators, there is no consolidated strategy for financing resilience against drought in the region. As a result, multiple organisations sometimes share similar responsibilities or pursue different objectives. For instance, while the river basin agency provides funding to support low-input farms, the Common Agricultural Policy (CAP) focuses on low-impact crops. Additionally, although the Greater Paris Metropolis or groups of municipalities are tasked with managing aquatic environments and flood protection, the water agency also plays a significant role in protecting wetlands, including initiatives aimed at flood prevention. In contrast, countries like the Netherlands are working to consolidate various funding sources into a single financing stream for water-related projects, using a fund to which all relevant stakeholders contribute (Box 5.2).
In addition, current funding reflects the priority given to flood risk, with no consideration of the aggravating role that drought plays in this issue. Rainwater management and flood prevention are important measures within the programmes drawn up by the water agency and local authorities, as well as in the national funds allocated to local authorities and natural hazard prevention. For instance, the Barnier and Green Funds do not recognise clay shrinkage and swelling as natural hazards, but flood risk is one of the main risks covered. However, flood risk prevention and preparedness could include a low water or dry soil prevention component. This could help prevent run-off caused by excessively dry soils.
The actions being funded lack a long-term strategy. Given the time required to appraise and complete infrastructure projects, it is crucial to consider these solutions early on. In light of climate change, a long-term strategy makes it possible to assess the benefits of today's financing in order to determine what will need to be implemented in the shorter or longer term. For example, when introducing demand reduction measures, it is vital to address the financial implications for both drinking water operators and the organisation managing the four reservoirs, which relies on funds paid by water users. To mitigate the potential loss of income, a long-term strategy is essential to prevent worsening the projected risks. Finally, the lack of knowledge surrounding the effectiveness of current financing means that it is not possible to identify the levers that can be used to optimise the allocation of existing resources.
The Water Act provided for the creation of a special fund, the Delta Fund, to identify the resources earmarked for the countrywide policy. It is funded by the national government, provinces, municipalities, drinking water utilities and water agencies. For the 2021-34 period, the budget for the Delta programme roll-out is expected to be EUR 1.3 billion per year on average, i.e. 0.1% of the country's GDP in 2021. In terms of order of magnitude, these numbers are comparable to those of the budget devoted to the Delta programme's remit across the Paris metropolitan area in relation to the region's GDP.
The fund offers continuity and stability of funding for Delta programme implementation until 2050 (Chapter 2). The fund's resources are allocated to three sub-programmes: flood control, freshwater availability, and spatial adaptation. From 2015 to 2021, EUR 500 million were allocated to the freshwater resources programme, with one-third coming from the national government and the rest from the regions. For 2022-27, EUR 800 million will be allocated, including EUR 250 million from the national government.
Note: The Delta programme budget covers the activities of the Seine–Normandy water agency, investments by drinking water operators and funding for biodiversity, environmental management and flood protection. These budgets are evaluated in Table 4.1 and total nearly EUR 670 million. Taking into account SIAAP's investment budgets for sewer systems, this budget may increase significantly, but remains below EUR 2 billion (i.e. 0.25% of the region's GDP). It has been assumed that the water agency's budget for the region corresponds to the assistance paid out to the region in 2023, the primary aim being to give orders of magnitude.
Source: (Netherlands, 2021[38]); World Bank data for Dutch GDP; (SIAAP, 2020[39]); INSEE, French Economy Dashboard.
Insurance schemes consist in transferring the risk to an insurer (public or private). In the event of drought impacts, insurance schemes can support affected users and hence improve their resilience. Two main insurance schemes exist in France, covering agricultural natural disasters. They compensate for some of the damage suffered by buildings and farmers in the event of a drought.
5.3.1. The agricultural disaster risk insurance scheme
In response to the increasing risks caused by climate change, a new agricultural insurance scheme was introduced in 2023. This new scheme enables the sharing of drought risk compensation among the national government, farmers, and insurers, with the goal of encouraging farmers to purchase private insurance. The scheme sets out three levels of risk and a compensation level for each. For common risks, which involve modest losses of up to 20%, farmers are responsible for covering their own losses. However, they can invest in protective equipment through initiatives like France 2030. For medium-level risks, which range from 20% to 40% crop losses, state-subsidised private insurance will supplement the compensation system up to a specified threshold set by decree. Finally, for exceptional hazards, compensation is provided by the government through a new National Solidarity Fund,8 which compensates farmers for losses of 50% or more in field crops, vegetables, and wine production. For arboriculture, meadows, or specialized crops, the threshold is set at 30% (France Assureurs, 2023[40]). Farmers who opt for comprehensive insurance receive higher compensation levels—100% compared to 45% for those without insurance.
This new scheme is designed to enhance protection for farmers, which has been deemed inadequate to cope with climate risks. In 2022, only 17% of the total cultivated area was insured.9 The premiums received by insurers are increasingly insufficient to cover claims, leading some insurers to withdraw from the crop insurance market in certain regions due to adverse selection issues (Descroizaille, 2022[41]). Furthermore, the existing scheme covering agricultural losses in the event of an exceptional event, or agricultural disaster, excludes many crops deemed uninsurable, such as grapevines and key field crops in the Paris metropolitan area. The new scheme expands government coverage for exceptional risks and encourages private insurers to diversify their portfolios by subsidising insurance premiums and providing increased compensation for losses stemming from exceptional risks for insured farmers.
While it is too early to assess this new scheme, Spain has had a similar one in place since 1978, and the results have been largely positive. Farmers' organisations assess their insurance needs. Insurance companies, working together as part of an insurance pool, can share policies, data and knowledge on risk distribution across farms, enabling them to optimise their policies. Finally, insurers are reinsured by the government. This scheme has led to many more insurance policies being taken out than in France, with 78% of fruit crops insured in 2019, compared with 3% in France. Similarly, the sum insured has risen steadily since this crop insurance mechanism was introduced (Koenig et al., 2022[42]).
Nevertheless, this reform does not incentivise risk-reduction measure. The insurance scheme does not reward practices that promote soil water retention or the choice of less-water-intensive crops (Tuffnell, 2020[43]). In fact, when subsidised, crop insurance appears to make the agricultural system less resilient to climate change (Annan and Schlenker, 2015[44]).
5.3.2. Natural disaster risk insurance scheme
The natural disaster (CatNat) scheme provides compensation for damage to buildings caused by natural disasters. It operates as a public-private partnership between the private insurance sector and the French government, similar to compulsory coverage for all casualty insurance policies (e.g., home, car, and business premises insurance). CatNat premium rates are set at 12% for home and business policies, and 6% for car insurance policies. These financial reserves can be accessed whenever the national government declares a natural disaster. Once damages exceed a certain threshold, the French government provides reinsurance through the public reinsurer, Caisse Centrale de Réassurance (CCR). According to Article L125-1 of the French Insurance Code, CatNat covers "uninsurable direct material damage caused by an exceptional natural disaster of extreme intensity, where normal preventive measures were insufficient to prevent the damage”.
Since 2016, droughts have been the biggest cause of CatNat claims in France (Figure 5.2). Alternating dry and wet periods cause damage to homes through clay shrinkage and swelling. Between 1990 and 2018, the cumulative cost of this damage was estimated at EUR 8.5 billion in France (Gourdier and Plat, 2018[45]). Record compensation, estimated at between EUR 2.4 billion and EUR 2.9 billion, was also paid out in 2022 for losses caused by clay shrinkage and swelling (CCR, 2023[46]). The Paris metropolitan area is particularly exposed to this risk (Chapter 1).
In millions of euros
Source: (Sénat, 2023[6]).
With droughts expected to become more frequent and severe, the CatNat insurance scheme could prove unsustainable. The annual cost of clay shrinkage and swelling at the national level has almost doubled since 1982 (Sénat, 2023[6]). In 2022, drought-related costs were even higher than the amount of contributions received (Figure 5.3). According to the Institut Paris Région, CatNat compensation for clay shrinkage and swelling could double by 2050 (Institut Paris Région, 2022[27]). In 2022, the Cour des Comptes, France's most senior public audit office, published a report suggesting that risk prevention measures were late and inadequate (Cour des Comptes, 2022[47]).
Note: The CCR's reserves correspond to premiums collected but not used to pay out compensation.
Source: (Assemblée Nationale, 2023[48]).
Clay shrinkage and swelling may be excluded from the CatNat scheme, despite the large number of homes exposed to drought in the Paris region. As drought may become the new normal, the Cour des Comptes suggests excluding clay shrinkage and swellingfrom the CatNat scheme. With 83.4% of the region, excluding Paris (Institut Paris Région, 2022[27]), vulnerable, the cost of medium-level damage due to clay shrinkage and swelling is estimated at between EUR 60 million and EUR 170 million per year by 2100 (Métropole du Grand Paris, 2018[49]).
Excluding droughts from the CatNat scheme would have significant economic impacts and require upstream action. A policy that would no longer pay out compensation for events that have become "normal" would be particularly expensive for private individuals and requires an upstream risk-reduction strategy. For example, water management around buildings would help supply the soil with water. Such approaches could be likened to measures that also contribute to flood risk prevention, currently covered by the Natural Risk Prevention Fund, which does not yet include drought-related risks. In the same way, strategic tree management to ensure that roots are not too near buildings helps reduce risk (DRIEAT, 2022[50]).
5.3.3. Assessing the suitability of ex post financing
Crop insurance and CatNat schemes have provided limited support to farmers and households. Between 2010 and 2020, 52% of applications submitted by municipalities for recognition of damage caused by clay shrinkage and swelling were rejected. This high rejection rate is due to the difficulty of proving a direct link between drought, which has long-term effects, and damage to homes. Similarly, the insurance coverage rate for crop losses in France was relatively low compared to countries like the United States (85% of total cultivated area), Canada (70%) or Spain (60%) (OptiMind, 2022[51]). In addition, most crops grown in the region were not covered by the national agricultural disaster scheme.
While the scheme covering agricultural losses is improving, the CatNat scheme may be running out of steam. For instance, cover in the agricultural sector may enable more-effective compensation through improved diversification of insurers' risks and the expansion of exceptional cover schemes to new crops. This is not the case for the CatNat scheme, whose financial sustainability is being called into question, and which could exclude clay shrinkage and swelling from eligibility for compensation.
Finally, these schemes do little to encourage prevention. The Elan Act has ensured that clay shrinkage and swelling risks are taken into account in future construction. However, there does not appear to be any funding for measures to protect buildings currently at risk. Similarly, while the first part of the crop insurance scheme could encourage farmers to protect themselves ex ante, the measures under consideration are limited to innovations and do not consider long-term changes.
5.4.1. A drought fund
Given the limited attention to droughts in national funds, creating a dedicated drought fund could be an effective solution. One advantage of such funds is the increased visibility they give to resilience measures that can be financed. They can also help coordinate the efforts of various agencies involved in implementing a resilience strategy. For example, Australia and the United States have established similar funds s to support long-term measures (Box 5.3). These funds may be sector-specific (Australia) or tied to water infrastructure (United States).
A similar fund could be modelled on existing national or local funds in France. For instance, a national drought fund could be set up following the Green Fund model. Projects financed by the Green Fund are overseen by regional prefects, who can select the most relevant projects for their regions. The fund is financed through the national budget, with project selection criteria set at the national level. It could support projects such as wetland restoration, building infrastructure to diversify water sources, or co-financing municipal and water operator projects to distribute water kits and improve knowledge of drought risks Another option is to leverage the GEMAPI (Flood Prevention and Aquatic Environment Management) responsibilities held by local authorities, such as the Greater Paris Metropolis, to finance a local drought risk prevention fund. These specialised funds could be modelled after initiatives like the Greater Paris Metropolis Biodiversity Fund and could be financed directly by the GEMAPI tax.
Future Drought Fund, Australia
The Future Drought Fund is an Australian government initiative to support drought preparedness and management in Australia. It was established to support the measures contained in the Australian government's drought preparedness, resilience and response plan. The fund was officially launched in 2019. It aims to invest in long-term measures to strengthen the resilience of Australian communities, farmers and industries to periods of drought, and to promote research and innovation in water management and agriculture. The AUD 5 billion fund invests AUD 100 million a year to support farmers and regions in implementing drought resilience strategies, from the adoption of new technologies to better planning, or involvement in supervised activities to make the agricultural sector more resilient. It also funds a series of programmes and projects designed to help farmers and local authorities cope with the challenges posed by drought. This can include subsidies for infrastructure projects, training programmes, soil management initiatives, more-efficient water management systems, livestock management measures and more.
Clean Water State Revolving Fund (United States)
The Clean Water State Revolving Fund (CWSRF) is a source of low-cost financing for a variety of sanitation and water quality infrastructure projects. It is a partnership between the Environmental Protection Agency and the states. The CWSRF also funds projects that support resilience in states and municipalities through water resource protection and reuse or climate resilience activities. State programmes and initiatives, such as the California Water Recycling Funding Program and the Oklahoma Water for 2060 Initiative, encourage water reuse to improve drought resilience.
5.4.2. Mobilising alternative sources of financing
Private financing
Water-related risks are still rarely assessed or disclosed, even though doing so would help evaluate companies' exposure to droughts. Currently, only facilities classified for environmental protection purposes – those likely to cause pollution or nuisances – are required to assess their water consumption (Chapter 3). The Taskforce on Nature-related Financial Disclosures (TNFD) presents a promising opportunity to encourage financial institutions to adopt water-resilient models (Taskforce on Nature-related Financial Disclosure, 2023[55]). By mandating the systematic disclosure of nature-related risks and opportunities, including those related to water, TNFD regulations aim to encourage financial organisations to consider environmental and social factors in their investment decisions. This could prompt industries to implement more sustainable water management practices and invest in technologies and projects that effectively conserve water.
Payments for ecosystem services
Payments for ecosystem services provide a financial mechanism that supports the implementation of nature-based solutions. These payments are "a voluntary transaction in which a clearly defined ecosystem service is purchased by one or more users from one or more service providers, with payment being made if – and only if – the provider actually delivers the service" (CGEDD, 2010[56]). Any business or public organisation can participate in this transaction.
In the Paris metropolitan area, payments for environmental services are on the rise. Water agencies are contributing to this and are encouraged to do so by the National Water Plan (Agence de l’eau Seine Normandie, 2022[10]). For instance, Eau de Paris has committed to offering technical and financial support—ranging from €150 to €450 per hectare—to farmers who stop using fertilisers and pesticides or adopt sustainable farming practices10 (Agence de l’eau Seine Normandie, 2022[10]). To date, some 100 farms have signed contracts with Eau de Paris, covering almost 15 000 hectares of the total cultivated area. Local authorities can also establish the necessary trust to facilitate payments for ecosystem services and may even finance these payments directly (Box 5.4). As part of its national biodiversity plan, a budget of EUR 150 million has been earmarked to offer environmental performance incentives to farming systems.11
The Burren Programme (Ireland)
In the Burren moors, a region characterised by a semi-barren ecosystem, agricultural activity has intensified since the 1970s, resulting in adverse environmental consequences such as water pollution, soil erosion and loss of biodiversity. The area has been designated as a Natura 2000 site, but farmers have challenged this classification. National and European public funds, as well as funds from the non-governmental organisation National Parks and Wildlife Service, were therefore mobilised to create a payment for ecosystem services. Payments are made for maintaining agricultural infrastructure, with performance requirements measured by indicators assessing the condition of land plots. The programme has resulted in significant improvements in habitat restoration. Between 2010 and 2015, investment totalling EUR 2.3 million enabled several actions to be carried out, such as clearing undergrowth, repairing walls and hedges, building gates and creating infrastructure for feeding livestock.
Environmental rural leases, Lille European Metropolis (France)
To safeguard biodiversity and protect water quality in farmed areas, the Lille European Metropolis has introduced financial incentives to encourage farmers to adopt environmentally friendly practices. The Lille European Metropolis has signed rural leases with reduced rates based on farmers' commitment to taking environmental measures.
Water funds
A water fund is a financing structure dedicated to sustainable water management, conservation, and addressing water-related issues. These funds are managed by a coalition of public, private, and civil society stakeholders, allowing for investment in ecosystem conservation, access to drinking water, or other goals established by the fund’s administrators. This type of initiative helps attract private funding by highlighting the benefits for businesses (Box 5.5).
Colorado River Basin Fund (United States)
The Colorado River is facing problems of overexploitation, reduced water flow and aquatic ecosystem degradation due to increasing demand for water for agriculture, industry and drinking water supply. This has had a negative impact on biodiversity and on the communities that depend on the river for their water supply. The Colorado River Basin Fund has received funding from the Environmental Protection Agency, states, private companies and non-profit organisations. It has financed a series of projects aimed at restoring the river's ecosystems, improving water management and raising stakeholder awareness of water management challenges. It has also helped increase the resilience of communities and nature to cope with water-related challenges in the region.
Greater Cape Town Water Fund (South Africa)
The Greater Cape Town Water Fund is a partnership between Cape Town, The Nature Conservancy and other local partners. Its main objective is to mobilise financing for river basin conservation, water quality improvement and sustainable water management in the Cape Town region of South Africa. The fund highlights the potential economic benefits to business and the private sector of protecting river basins, in particular by demonstrating the benefits of investing in nature-based solutions to increase available water supplies. This includes guaranteeing a reliable water supply for industrial activities, protecting critical infrastructure and reducing water management costs. The fund has developed a financial model that enables companies to make a financial commitment while reaping tangible benefits, such as reduced water-related risks and improved water quality. By focusing on the achievements and practical outcomes of its river basin conservation and water management projects, it shows private partners the positive impact of their investment.
Source: (The Nature Conservancy, 2023[58]).
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[1] France (2023), Budget général - Annexe au projet de loi de finances, Mission Ecologie, développement et mobilités durables, https://www.budget.gouv.fr/documentation/documents-budgetaires/exercice-2023/le-projet-de-loi-de-finances-et-les-documents-annexes-pour-2023/budget-general/ecologie-developpement-et-mobilite-durables.
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← 1. Green Fund budget: https://www.ecologie.gouv.fr/fonds-vert
← 2. Plan France 2030: https://www.economie.gouv.fr/france-2030
← 3. Municipalities, intermunicipal associations, basin management agencies, joint sanitation authorities, etc.
← 4. Rejection of the amendment tabled during the review of the Finance Act 2024: Overview of the amendment (senat.fr)
← 5. Seine–Normandy water agency press release: https://www.eau-seine-normandie.fr/sites/public_file/inline-files/CP_2019CAbudget2020vok_0.pdf
← 6. This group brings together the City of Paris, the departments of Hauts-de-Seine, Seine-Saint-Denis and Val-de-Marne, the Paris metropolitan area, the conurbation communities of Troyes, Champagne Métropole, Pays de Meaux, Saint-Dizier, Der et Blaise, and the Grand-Est region.
← 7. Investment payment credit for 2023.
← 8. Principles of crop insurance reform: https://agriculture.gouv.fr/la-reforme-de-lassurance-recolte