Friday, July 18, 2008

Why do we pay people to waste our most precious resource?

It's one year today since the contract to build Sydney's desalination plant was signed and ANU environmental economists Quentin Grafton and Michael Ward have run the numbers on whether it was a good deal.  Their conclusion: the net benefit to Sydney households of the plant is negative one billion dollars.  Ouch.  The decision to build it will cost each Sydney household on average more than $700.

What's the alternative though?  Well how about just letting people pay the actual cost of water so that they have an incentive to economise?

When most things get scarce, their price goes up.  This sends a signal to consumers to economise and find alternatives and a signal to producers to find new sources and ways to produce them.  We don't do this with water though.  Instead we subsidise one of our most precious resources - massively.  We encourage industrial water users to recycle their water or else use recycled water rather than water we've spent millions making fit for drinking.  But why would they when it's so cheap?  Cheap because it's subsidised by every taxpayer.

So why don't we do this?  According to NSW's Water Minister Nathan Rees, that system "would result in gross inequalities and be a nightmare for business":
Any form of sound business planning would be impossible if water prices fluctuated from month to month and season to season.
The current system isn't too equitable either.  Is it equitable that low income earning taxpayers who do their best to save water subsidise big water users to fill their pools and keep their lawns looking lush?  In any case the extra revenue from actually charging wealthy water users for the water they use can be used to provide assistance to low income households.

As for the business certainty argument, businesses deal with price fluctuations all the time.  I'm sure the cafe downstairs from my work would be happier if coffee bean prices didn't fluctuate, but they don't ask the government to nationalise the coffee trade to deal with it.  The prices of rent, employees, petrol, commodities, food and every other business input fluctuate weekly or daily.  And if it's critical for a particular business to know the price of water in advance, I'm sure purchasers and suppliers could negotiate to lock in a price in advance for a set period.  That's what futures markets do with commodities around the world.

The federal government is putting a price on carbon emissions - a challenging and complicated task that involves working out the emissions from a huge range of business activities and creating new and untested markets.  So why can't we allow a realistic price to be placed on one of our most precious resources?  The alternative is pouring an extra billion dollars into an environmentally questionable desal plant that we don't really need.


Anonymous said...

Is it equitable that low income earning taxpayers who do their best to save water subsidise big water users to fill their pools and keep their lawns looking lush?

That's exactly the right question.

Finn 'Appliance Efficiency' Peacock said...


I completely agree with you, water should more closely reflect its value. Imagine the incentive it would provide to convince us to get that 6 star water rated washing machine.

I built a tool recently to show the lifetime water-cost of australian washing machines.

Surprisingly, at $1.50 per kL, the water cost is almost as much as the electricity cost. If water doubles or triples, those super efficient machines will start to make a lot of sense financially...

Anonymous said...

You can save and pay as much as you like for water, but the fact remains with climate change water is going to dry up, hopefully not in my lifetime. Unfortunately for the lower income ratio, saving water is never going to cut your water bill. I would have thought, that any new home that is being built today, tomorrow and anywhere in the future should have compulsory water tanks and compulsory solar heating systems. Personally I don't think that will ever happen because that would mean people would become too self sufficient, and you can't make money off self sufficient people. Stop justifying the money factor and look hard facts.

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