How useful are economic tools?

Here we are posting an exclusive discussion paper written by Colin Green (Professor of Water Economics at the Middlesex University) with contributions from Josefina Maestru (Director of the UN-Water Decade Programme on Advocacy and Communication). You can download and read the discussion paper here.

The paper reflects on how we can transition to the green economy with respect to water, and on the usefulness of economic tools to facilitate this transition. Below are a few extracts from the papers, with key questions raised. We’ll be inviting key figures in the water community to give their perspective on these issues.

As the paper puts simply, to shift to a ‘green economy’ we need to do more with less. This means “getting more per drop (and for less pollution)”. It suggests that options are limited to: (1) converting more rainfall to runoff or infiltration; (2) reducing consumption including by reuse and recycling; (3) shifting between uses; (4) improving delivery, reducing losses and reducing use of nutrients and pesticides, and; (5) storage. Do you agree that these are the options available to us, and which of them offer the greatest potential for improvements?

If we know the answers, what is stopping us from establishing a flourishing green economy NOW? The difficulty of course lies in ‘how’ we implement these changes.

The paper emphasises that a shift to a green economy will require increasing productivity by bringing up the worst performing closer to the best performing. The good news is – there is a huge scope for doing this. However, doing so will require a greater understanding of “why these differences occurred in the first place: the type and rate of technological diffusion and adaptation, and the barriers to adoption.”  Did the best performers face lower barriers to adopting the best available technology or were they better equipped to overcome those barriers? What are the main barriers to change, and how can we overcome them?

The paper notes that the scope for improving water productivity by reallocating water from lower (i.e. agriculture) to higher value uses (e.g. urban) is limited due to concerns about global food supply. It goes on to state that “agriculture is the critical issue”. Do you agree that agriculture lies at the heart of the green economy challenge for the water sector?

The paper poses the question, are economic instruments effective in inducing change? The ability to generate change in water usage generally comes down to the adoption of technology (rather than change in behaviour), the paper argues. For any change, there needs to be a signal to indicate what technology (or behaviour) should be adopted and an incentive able to overcome the barriers to adoption. Incentives can be regulations or prohibitions of certain behaviours, but economic incentives rely on encouraging or discouraging behaviour rather than mandating it.

Are economic policy instruments such as tradable instruments, subsidies and charges effective tools for change?

What examples are there of economic instruments that have successfully improved water management or use?

How can we ensure that the issue of equity is not neglected in the pursuit of efficiency?

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2 responses to “How useful are economic tools?

  1. Jim Winpenny, Wychwood Economic Consulting Ltd

    This piece by Colin Green is a great paper and just the thing to start an intelligent debate.

    Although it is true that natural physical and other scientific boundaries set the ultimate limits to water management, I doubt if we are anywhere near these yet in any of the important areas., I would place much more stress on ‘behaviour’ which is played down too much in the paper (e.g. “in practice, water usage is primarily technologically determined” p. 4). In most areas I can think of there is a big gap between average and best practice, due to the absence of any serious incentives for better water use.

    Behavioural change is often expressed through a greater willingness to take up an existing technology. While behavioural change can incur costs (financial and ‘opportunity costs’) on users, some of it is effectively costless. This applies for much household use, in institutions, and in some industries.

    The judgements in the final section on the scope and efficacy of economic instruments could have been sharper if ‘water’ had been broken down into its important parts (e.g. resource management, pollution control, household services, industry, farming, ecosystems, etc. ). I think different judgements apply to each of these areas.

    I disagree (p.5) that “ for many uses, notably agriculture, there are no substitutes for water” . Even in households, there are low-water possibilities in both affluent and poor situations. For farmers and industries, water is a raw material and there are ample options for altering the mix of capital, labour, energy, other inputs, and water itself.

    So, you might say I am a ‘behavioural optimist’ rather than a ‘hydrological pessimist’, though I do think that we are nowhere near close enough to having our noses rubbed in the serious problems that water is going to cause us.

  2. Colin Green, Professor of Water Economics, Middlesex University

    Jim Winpenny raises several important points. One of them is substitution options for water; the most obvious possibility in urban water usage being replacing the use of water in sewerage. The general problem is the inertia effects created by the existing stock of buildings and infrastructure; introducing Ecosan techniques into the existing fabric of urban areas, and particularly into high rise buildings, is likely to be a problem. Waterless urinals are a simple approach to replacing water carriage but address only part of the problem.

    The second is the relation between behaviour and technology; I see the behavioural question as being to influence the adoption of green technologies where the technology adopted then largely determines how much water people then use. For example, the differences between the very high household water consumption figures in the USA with the merely high in the UK are largely explicable by the differences in technology; the use of top-loading washing machines, flapper valves in toilet cisterns, high flow rate shower heads and so on in the USA. But part of the problem is that we do not know enough about how people use water, and why they use it in particular ways. For example, in Germany, domestic water consumption has fallen over the last thirty years to 124 l/p/d on average and 90 l/p/d in some of the regions. Conversely, in England, domestic water consumption has essentially doubled over that time to 150 l/p/d. Why is there this difference? It is not metering because around 50% of dwellings in Germany are apartments and an estimated 90% of those are not metered. Therefore, I see the problem primarily as one of inducing the takeup of water efficient technologies. In England, new dwellings are required to have a water consumption of not greater than 105 l/p/d; that is achieved by specifying water efficient appliances and fittings. The estimated additional capital cost is £150 -200 per dwelling. If we had to rely instead upon pricing, using the typical price elasticity of water of -0.20, prices having to be doubled to reduce consumption by 20%, reducing water consumption from 150 to 105 l/p/d would require increasing the cost of water by 135% – £167 – plus the additional £25 a year cost of metering. This would only make sense if the additional £167 a year was then used to pay to retrofit existing dwellings with water efficient fittings and appliances.

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