In the next few months we can expect economic policies to start being released by political parties. Last week the Green Party kicked things off with a proposal to levy commercial use of water.
A levy can do two things; it might be a way of more clearly signalling to consumers the true cost of supplying water use, or it be might encompass a premium that reflects scarcity, particularly when supply is from a public resource such as an aquifer or river. The Green Party’s proposal seems to encompass both of these roles and also seems to be intended to be the beginning of a realignment of the tax system away from income taxes to environmental taxes.
I will leave aside the tax shifting debate, other than to say that while there are good arguments for 'externality taxes’ on activities that create undesirable side-effects such as polluted waterways, setting these at artificially high levels is rarely justified. Uniform expenditure taxes like GST are much more efficient means of raising revenue.
Like the congestion charge which I discussed a few weeks ago, a water levy has merit, but the Greens’ proposal is immediately undermined by misguided political interests. The Greens want to charge for irrigation and industrial use, but exempt drinking water for humans or livestock.
It is not just agriculture and industry that generally do not face the correct price for water – the price that reflects the true cost of production and delivery, and the damage done to marine life and human health by dirty discharged water. One has only to walk along an average suburban street to see water being wasted from broken pipes and leaking taps. A price on water used by households would soon lead to reduced wastage.
One can understand the Greens’ concern for poorer households, particularly at a time of rapidly rising food and energy prices. One should distinguish, however, between relative price changes and real income. One way to introduce a price for water is to charge only for use over a given threshold, but this inevitably raises the question of how to define the threshold. Is it set on a per person basis or on a per dwelling basis? Imagine the transactions costs of local or regional government having to keep track of how many people live in every dwelling in an average week or month.
A better option is to treat water like other goods for which councils charge a user-pays fee, like rubbish bags. If you have a large family you bear the cost of creating more rubbish. You probably also spend more on food, energy and clothing. Why should water be different? It may be a necessity, but that’s no reason for it to be free. And of course it isn’t free anyway. Most of us in Wellington don’t pay explicitly for each litre of water, but the cost is certainly there in our rates bill.
A multi-part water price that rises with the amount consumed would send a price signal more in line with the rising cost of supplying water, especially reticulated water. As with some electricity lines companies, an annual rebate could be given to consumers to keep the average price of water in line with the average cost of production. There is no reason why households should pay anymore for water than they do now via their rates. Some cities in New Zealand already meter household water usage. In one case that we have examined, water usage is estimated to have declined about 8% per person, even though in that particular case the price charged for water actually falls if more is used. Imagine what sensible pricing might accomplish.
There are two advantages of water charging in addition to providing an incentive not to waste water. Firstly, it changes the relative attractiveness of installing water tanks compared to expanding large scale reticulation systems. Water tanks can be part of fairly rudimentary systems that are used only to supply water for the garden, through systems that provide water for non-drinking uses, to those that supply all of a household’s water requirements. The latter options may not be economically viable in cities, but without an explicit price for water there is no incentive to even collect rainwater for the garden.
Secondly, water pricing is complementary to other water conservation measures such as low flow shower heads, dual flush toilets, and efficient washing machines. These three measures alone could reduce average water consumption by over 60 litres per person per day (compared to an estimated 240 litres currently consumed), but to obtain this result they either have to be mandated or appeal to the public’s social responsibility to conserve resources. An explicit water price would makes the benefits so much more obvious. While low flow shower heads, dual flush toilets, and efficient washing machines may cost a bit more, at an average price for water of $1.30 per cubic metre and assuming three people per household, the payback period is less than four years. And that’s without counting the benefit of less energy use for water heating.
So, the Greens are right to propose charging for water, but wrong to exempt households. They also need to clarify whether their proposal is intended to provide consumers with appropriate price signals or shift the incidence of taxation. If implemented properly, there is no reason why pricing for water should reduce household purchasing power. Indeed the whole point of accurate price signalling is that the ensuing improvement in resource allocation raises the wellbeing of the whole community.