In the nextfew months we can expect economic policies to start being released by politicalparties. Last week the Green Party kicked things off with a proposal to levycommercial use of water.
A levy cando two things; it might be a way of more clearly signalling to consumers thetrue cost of supplying water use, or it be might encompass a premium thatreflects scarcity, particularly when supply is from a public resource such asan aquifer or river. The Green Party’s proposal seems to encompass both ofthese roles and also seems to be intended to be the beginning of a realignmentof the tax system away from income taxes to environmental taxes.
I willleave aside the tax shifting debate, other than to say that while there are goodarguments for â€˜externality taxes’ on activities that create undesirableside-effects such as polluted waterways, setting these at artificially highlevels is rarely justified. Uniform expenditure taxes like GST are much moreefficient means of raising revenue.
Like thecongestion charge which I discussed a few weeks ago, a water levy has merit,but the Greens’ proposal is immediately undermined by misguided politicalinterests. The Greens want to charge for irrigation and industrial use, but exemptdrinking water for humans or livestock.
It is notjust agriculture and industry that generally do not face the correct price forwater â€“ the price that reflects the true cost of production and delivery, andthe damage done to marine life and human health by dirty discharged water. Onehas only to walk along an average suburban street to see water being wastedfrom broken pipes and leaking taps. A price on water used by households wouldsoon lead to reduced wastage.
One canunderstand the Greens’ concern for poorer households, particularly at a time ofrapidly rising food and energy prices. One should distinguish, however,between relative price changes and real income. One way to introduce a pricefor water is to charge only for use over a given threshold, but this inevitablyraises the question of how to define the threshold. Is it set on a per personbasis or on a per dwelling basis? Imagine the transactions costs of local orregional government having to keep track of how many people live in everydwelling in an average week or month.
A betteroption is to treat water like other goods for which councils charge a user-paysfee, like rubbish bags. If you have a large family you bear the cost ofcreating more rubbish. You probably also spend more on food, energy andclothing. Why should water be different? It may be a necessity, but that’s noreason 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 inour rates bill.
Amulti-part water price that rises with the amount consumed would send a pricesignal more in line with the rising cost of supplying water, especiallyreticulated water. As with some electricity lines companies, an annual rebatecould be given to consumers to keep the average price of water in line with theaverage 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, waterusage is estimated to have declined about 8% per person, even though in thatparticular case the price charged for water actually falls if more is used.Imagine what sensible pricing might accomplish.
There aretwo advantages of water charging in addition to providing an incentive not towaste water. Firstly, it changes the relative attractiveness of installingwater tanks compared to expanding large scale reticulation systems. Watertanks can be part of fairly rudimentary systems that are used only to supplywater for the garden, through systems that provide water for non-drinking uses,to those that supply all of a household’s water requirements. The latteroptions may not be economically viable in cities, but without an explicit pricefor water there is no incentive to even collect rainwater for the garden.
Secondly,water pricing is complementary to other water conservation measures such as lowflow shower heads, dual flush toilets, and efficient washing machines. Thesethree measures alone could reduce average water consumption by over 60 litresper 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 thepublic’s social responsibility to conserve resources. An explicit water pricewould 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 anaverage price for water of $1.30 per cubic metre and assuming three people perhousehold, the payback period is less than four years. And that’s withoutcounting the benefit of less energy use for water heating.
So, the Greensare right to propose charging for water, but wrong to exempt households. Theyalso need to clarify whether their proposal is intended to provide consumerswith appropriate price signals or shift the incidence of taxation. Ifimplemented properly, there is no reason why pricing for water should reducehousehold purchasing power. Indeed the whole point of accurate pricesignalling is that the ensuing improvement in resource allocation raises thewellbeing of the whole community.
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