Economic modeling of water pricing strategies Nicholas Rivers Graduate School of Public and International Affairs, University of Ottawa, Canada Discussion Paper 1335 September 2013 This article assesses the costs and benefits of introducing a volumetric charge for water abstractions in Canada. and a changing climate, water scarcity is likely
to become a more acute problem in the future.
Current regulations do not provide effective
The Global Water Forum publishes discussion papers to share the insights and knowledge contained within our online articles. The articles are contributed by experts in the field and provide: original academic research; unique, informed insights and arguments; evaluations of water policies and projects; as well as concise overviews and explanations of complex topics. We encourage our readers to engage in discussion with our contributing authors through the GWF website. incentives for firms to efficiently extract water
from the environment. In particular, water
allocation is primarily the responsibility of
provincial governments in Canada, which rely
on dated regulatory frameworks to grant
licences for water extraction to end-users.
Most provinces allocate licences on a first-
Keywords: water abstraction, charge, costs, benefits, Canada come first-served system that gives priority to
existing water users.
2,3,4
In general, these
Although Canada is often recognized as having
approaches do not encourage users to use less
one of the largest supplies of fresh water in the
water than they are allocated. In some cases,
world, much of the available water is not near
they may actually penalize conservation, since
the densely populated southern boundary of
water rights based on seniority often include a
the country where it is most needed.
“use it or lose it” condition such that water
As a
result, a number of Canadian regions have
rights are revoked in the case of non-use.
experienced, or are at risk of experiencing,
water shortages.1 With increasing population
Suggested Citation: Rivers, N. (2013), ‘Economic modeling of water pricing strategies’, GWF Discussion Paper 1335, Global Water Forum, Canberra, Australia. Available online at: http://www.globalwaterforum.org/2013/09/09/economic-­‐modeling-­‐of-­‐water-­‐pricing-­‐
strategies/ Economic modeling of water pricing strategies
Current prices for water abstraction and
allocating finite water resources between
consumption are also generally trivial. For
competing end uses, a more competitive water
example, most provinces charge a one-time
price
application fee for a water use licence that
efficiency within existing users, as well as
ranges from zero to a few thousand dollars.
stimulate
Some jurisdictions additionally charge an
technologies. Whereas the water sector has
annual fee consisting of either a fixed amount
exhibited few innovations, relative to other
or one that varies based on the volume of
sectors, introducing a price that is closer to
water used. Where applied, both fixed fees as
the true marginal cost would create incentives
well as any volumetric fees, are too low to
for
encourage efficient use and extraction of water
investments in new capital infrastructure. An
resources. For example, the average cost of
increase in the price of self-extracted water
self-supplied
water
manufacturing,
in
and
would
likely
innovation
water
agencies
improve
in
to
water
water
make
use
resource
profitable
the
mining,
could also help to confer a portion of the
thermal
electric
economic rent associated with the use of a
generation industries is $0.0016, $0.0004,
public resource to its owner.
and $0.0000005 per m3.2,5 Most of this
royalty to capture resource rent is applied
average charge is made up of fixed costs,
conventionally throughout most other natural
meaning
resource sectors, including for extraction of
that
there
are
effectively
no
incentives to conserve water at the margin.
This type of
mineral deposits, removal of standing timber,
and, to a lesser extent, fisheries.
Governments
increasing
have
previously
volumetric
charges
considered
for
self-
supplied water in Canada. For example, a
major
federal
subsequent
government
policy
inquiry
document
in
and
1987
recommended that water users pay a `realistic
price’ based on volume used.6 Likewise, a
recent
government-sponsored
could
be
designed
to
Charges
reflect
any
environmental opportunity costs associated
with water use, which would further improve
the social efficiency of water use.
Finally,
revenue raised from water use charges could
be used to offset other distortionary taxes in
the economy.
review
suggested that water abstraction charges
In Rivers and Groves (2013)2, we use a
could help to improve the efficiency of water
computable general equilibrium (CGE) model
allocation.7 There are a number of potential
to assess the economy-wide costs and benefits
benefits. In addition to more efficiently
of implementing a volumetric charge on water
Economic modeling of water pricing strategies
abstraction in Canada. Our CGE model is well
water consumption (water that is abstracted
suited for this exercise because it can trace
but not discharged back to a body of water).
impacts of water pricing through the economy
We find that an abstraction charge of about
and allows the simulated economy to fully
$0.013/m3 reduces water abstractions by 25
adjust to a new equilibrium following the
percent. The model suggests that if such a
policy intervention.
Such models are used
charge was implemented as part of a green tax
extensively in the analysis of environmental
reform, where revenues from water taxation
policies in other fields (e.g., energy, climate
were used to reduce pre-existing distortionary
change) but are less applied in the study of
taxes, like labor income taxes, then the costs
water policy.
of the policy could be dampened. Demand for
water consumption is less elastic (i.e. less
The model builds on a typical CGE framework
to include details that allow us to realistically
capture the impact of water use charges on
economic and environmental indicators. For
example, we supplement economic data that
forms the basis of the model with data on
water abstraction, recirculation, and discharge
in each economic sector. We include detail on
both the volume of water used, as well as the
costs associated with each stage of extraction,
use, and discharge. We also incorporate into
the model empirical estimates of the priceresponsiveness
of
water
abstraction
responsive to price changes) in the model, so a
higher water consumption charge is required
to reduce water consumption by an equivalent
amount.
Our findings suggest a water
consumption charge of about $0.21/m3 would
cause water consumption to fall by 25 percent.
As is the case with water abstraction charges,
we find some potential for a green tax shift
from existing taxes to water consumption
charges to improve welfare in this case
(although
under
more
restrictive
circumstances).
and
consumption from a large number of partial
Water use charges can help to efficiently
equilibrium econometric studies. Finally, the
allocate rights to scarce water resources
model includes a bottom-up representation of
between users (in contrast to the pervasive
the electricity generation sector, the sector
“first
with the largest amount of water withdrawals
mechanism
in Canada.
Canadian provinces), encourage conservation
come,
first
currently
served”
allocation
in
in
place
most
within existing users, stimulate innovation
We use the model to simulate the imposition
aimed at reducing future water use, reflect
of a charge on water abstractions as well as on
Economic modeling of water pricing strategies
environmental
costs
associated
with
Our contribution is especially relevant for
abstraction and consumption of fresh water,
policymakers considering the introduction of
and confer a portion of the rents associated
new charges on water consumption. Just as
with water supply to the public owners of the
the “double dividend” literature suggests
resource. These advantages led delegates at
when dealing with pollution criteria and
the Dublin Conference on Water and the
greenhouse gasses, our research shows that
Environment to declare that water should be
using water tax revenues to offset pre-existing
considered an “economic good” and that water
distortionary taxes can also dramatically
pricing should be used to help ration the
increase
resource.9
attractiveness of a water resources policy,
the
efficiency
and
political
while also promoting conservation.
Footnotes
F1. The model is described in detail in Rivers and Groves (2013). Full model code and data is available on
the journal repository.
F2. An environmental tax shift that results in both a reduction of environmental damage and an
improvement in economic efficiency is termed a `strong double dividend’.8
References
1. Lemmen, D., Warren, F., Lacroix, J. and E. Bush (2007), From impacts to adaptation: Canada in a
changing climate 2007, Ottawa, ON: Government of Canada.
2. Rivers, N. and S. Groves (2013), “The welfare effect of self-supplied water pricing in Canada: A
computable general equilibrium assessment”, Environmental and Resource Economics 55(3): 419-445.
3. Guelph Water Management Group (2007), Characterization of Water Allocation Systems in Canada.
Technical Report 1. Guelph, ON: University of Guelph.
4. NRTEE (2010), Changing Currents: Water Sustainability and the Future of Canada’s Natural Resource
Sectors. Ottawa, ON: National Roundtable on the Environment and the EconomY.
5. Statistics Canada (2010), Industrial Water Use 2005. Ottawa, ON: Government of Canada.
6. Pearse, P.H., and F. Quinn (1996), “Recent developments in federal water policy: One step forward, two
steps back”, Canadian Water Resources Journal 21(4): 329-340.
7. Cantin, B., Shrubsole, D. and M. Ait-Ouyahia (2005), “Using economic instruments for water demand
management: Introduction”, Canadian Water Resources Journal 30(1): 1-10.
8. Bovenberg, L. (1999), “Green tax reforms and the double dividend: an updated reader’s guide”,
International Tax and Public Finance 6(3): 421-443.
9. ICWE (1992), “The Dublin Statement and report of the conference.” International Conference on Water
and the Environment. Dublin.
Economic modeling of water pricing strategies
About the author(s)
Dr. Nicholas Rivers is the Chairholder of the Canada Research Chair in Climate and Energy Policy
at the Graduate School of Public and International Affairs, University of Ottawa. His research
focuses on the economic evaluation of environmental policies, and has been published in economics
and energy journals as well as in other popular publications. Additionally, he is co-author of a
recent book on climate change policy, Hot Air: Meeting Canada’s Climate Change Challenge. Dr.
Rivers has worked for all levels of government, industry, and non-governmental organizations as
a consultant on issues related to energy efficiency and climate change program evaluation, policy
analysis and development, and economic modelling. He has received awards for his research from
the Trudeau Foundation, the Social Science and Humanities Research Council, and the National
Science and Engineering Research Council. This article summarises the results of an original study:
Rivers, N. and S. Groves (2013), “The welfare effect of self-supplied water pricing in Canada: A
computable general equilibrium assessment”, Environmental and Resource Economics 55(3): 419445.
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