The Water Framework Directive (WFD) has the stated objective of delivering good status (GS) for Europe’s surface waters and groundwaters. But meeting GS is cost dependent, and in some water bodies pollution abatement costs may be high or judged as disproportionate. The definition and assessment of disproportionate costs is central for the justification of time-frame derogations and/or lowering the environmental objectives (standards) for compliance at a water body. European official guidance is discretionary about the interpretation of disproportionate costs which consequently can be interpreted and applied differently across Member States. The aim of this research is to clarify the definition of disproportionality and to convey a consistent interpretation that is fully compliant with the economic requirements of the Directive, whilst also being mindful of the principles of pollution control and welfare economics theory. On this basis, standard-setting derogations should aim to reach socially optimal decisions and be judged with reference to a combination of explicit cost and benefit curves – an application of Cost-Benefits Analysis - and financial affordability tests. Arguably, these tools should be more influential in the development of derogation decisions across member states, including Scotland. The WFD is expected to have extensive effects on Scottish agriculture, which is faced with the challenge of maintaining its competitiveness, while protecting water resources. Focusing the analysis on the socio-economic impacts of achieving water diffuse pollution targets for the sector, a series of independent tests for the assessment of disproportionate costs are proposed and evaluated. These are: i) development of abatement cost curves for agricultural Phosphorus (P) mitigation options for different farm systems; ii) a financial characterisation of farming in Scotland and impact on profits of achieving different P loads reductions at farm level are investigated in order to explore issues on "affordability" and "ability to pay" by the sector; and iii) an investigation of benefits assessment using discrete choice modelling to explore public preferences for pollution control and measure non-market benefits of WFD water quality improvements in Scotland. Results from these tests provide benchmarks for the definition of disproportionate costs and are relevant to other aspects of the economic analysis of water use in Scotland. This study helps to clarify the nature of agricultural water use and how it leads to social tradeoffs with other non agricultural users. Ultimately, this perspective adds to the debate of how and where water is best employed to maximize its value to society.

The EU Water Framework Directive (Directive 2000/60 EC) provides numerous requirements, including achievement of good status of all water bodies by 2015. However, meeting this environmental target brings substantial costs. In justified cases, member states may request an extension of the deadline based on disproportionality of costs of meeting the WFD requirements. Definition of disproportionate costs must be based on economic analysis and on the WFD general requirements. This thesis provides a review of proportionate costs in the context of the WFD, identifies main requirements for its practical definition as an exemption and provides a review of foreign methodical approaches to define cost proportionality. It is clear that the Cost-effectiveness analysis (CEA) and the Cost-benefit analysis (CBA) are most commonly used methods to determine the cost proportionality treshold. This thesis discuss the relevance of these methods to define cost proportionality to reach good status of water bodies. The thesis also provides methodology to assess cost proportionality based on modified CBA and analyses ecosystem services of water bodies. In addition, the thesis points out the methodological complications and uncertainties of suggested methodology. Main methodological issues are connected with definition of right scale of analysis and synergy effects of measures, analysis of costs and definition of suitable measures and analysis of benefits and quantification of ecosystem services of water bodies.