An accounting model for assessing FCR

Recent European legislation adopts the concept of Full-cost recovery (FCR) as the guiding line for pricing of environmental services. In this paper, the meaning of the FCR concept is analysed and the economic rationale for its application is discussed. The basic idea developed is that FCR is a misleading concept, since costs are by definition recovered, and the problem becomes to assess how it is covered. After presenting the various options available for cross-subsidisation, an accounting framework for analysing the structure of cost recovery of an environmental service is proposed. Alternative ways of financing the service are listed according to their distance from the pure long run marginal cost, representing the economic optimum. Applications to a set of case-studies recently developed by the author are finally presented in order to clarify the potential usefulness of the proposed methodology.