Thursday, January 14, 2010

Water, water everywhere, but no one stops to think

When the "Big Freeze" peaked about 10 days ago the response of many households was to leave taps running in an effort to prevent pipes freezing and cutting off the water supply to the house. For the individuals in question, this was an entirely rational thing to do. The benefit was continued access to water and no cost to themselves.

However, society incurred a huge cost of this action through what we would call a consumption externality. The cost to society of all the water wasted as thousands of taps were left running. There is no individual incentive to conserve water in Ireland. Remarkably for a country that rarely suffers from a shortage of rain we are in the midst of a water shortage. People leaving taps running during the cold spell now means that we are rationing water.

Much of the debate focused on the level of losses through leaks in our water distribution network. However, these leaks are not the key determinant of the current shortage. Our water distribution system has always been leaky, yet we didn't have water shortages last September with the exact same system in place. Or last July. Or last January. We cannot expect our water system to have anything close to a 0% loss rate. For a county manager operating within a limited budget it is surely cheaper to provide more treated water than repair all the leaks in the distribution system.

The local authority will set supply at a level to meet demand, taking account of the water lost through leaks. If the supply cannot be provided to match demand then efforts will turn to addressing the leaks. Dublin has the lowest percentage of water lost through leaks because they cannot produce sufficient water to meet the demand from the ever expanding city. It is predicted that to meet Dublin’s future needs, water will have to be pumped from the River Shannon, over 100km away. For most local authorities the more cost effective measure is to simply produce more clean water.

Our water system has been in place for years so that cannot be the cause of the current water shortage. Yes, the cold weather has caused some problems to the system because of major faults and leaks to the system in localised areas. This has stopped clean water getting to some households, but it hasn't emptied our reservoirs.

A tap turned on fully will fill a pint glass in about three to five seconds. Even if a tap is not fully turned on their will still be a substantial flow. If a tap is left open, at say one-third full flow, a pint will pour out in about 13.5 seconds. This will mean about four and a half pints of water a minute simply pouring down the drain. If left on for a day, as many were, some 800 gallons of water will be used. For comparison, the biggest fuel tanker trucks we see on the road can carry about 8,000 gallons. In normal conditions it is estimated that the average household uses about 40 gallons of water per day. This is a 20-fold increase.

Just ten taps left on at one-third full flow sees the equivalent of a huge tanker of water poured down the drain a day. Multiply this by the thousands and probably tens of thousands of taps on and we have wasted a colossal amount of water. This may have kept the pipes of householders from freezing but now we are in a situation where many local authorities have reduced water pressure and cut off supply altogether overnight as water levels in reservoirs are extremely low.

For example South Dublin County Council (SDCC) estimate that at the worst of the cold weather the daily demand for water was about 2.25 million gallons per day obove the observed daily average demand seen in January 2009. On the first of January the water level at the Belgard Reservoir stood at 3.52 metres and by the 11th this had fallen to just 0.99 metres. See here. The reservoir has a capacity of 22 million gallons and with demand reaching 18 million gallons SDCC simply cannot fill the reservoir with treated water quickly enough that they purchase from neighbouring authorities. It is estimated that it will take three to four months for reservoirs in the Dublin area to return to levels they were at before Christmas.  Burst pipes stop water getting to some areas; empty reservoirs stop water getting to everyone.

A lot of this record demand is down to simple waste. People incur no extra cost for using extra water so there is no incentive to conserve. This will give credence to that water charges should be introduced but that is an issue that must be addressed carefully. In Ireland we have seen that small incentives can have huge effects. When a levy of just 15c was introduced on plastic bags in 2002 our annual consumption fell from 1.2 billion bags per year (about 325 per person per year) to just 90 million per year (20 per person per year) - a 94% drop! Water charges are unlikely to have as large an effect but they may encourage people to consider the external costs of their actions which they are currently ignoring.

In 2007 the total cost of our water system, production, distribution and collection, was about €1.3 billion. The day-to-day running of the system cost about €645 million with the other half spent of capital improvements and development. Commercial water rates levied on businesses brought in €160 million for local authorities. This means there is a shortfall of over €1.1 billion. Although households do not pay directly for water it is not free, as this €1.1 billion comes from monies raised through general taxation.

It has been suggested that we could reduce our income tax by about 8% if the costs of water were paid through water charges. This has many advantages. If it is revenue neutral there is no additional burden placed on society. If water is metered, as it should be, and people pay by use, we would have an excellent demand side constraint on quantity. This could see an average water charge of about €600 levied per household or about €1.60 per day.  Based on current usage of 40 gallons per day this €600 would equate to an average price of about 4c per gallon of water or just less than 1c a litre.

If we increase income tax credits by €600 then nobody can be left worse off. In fact, those who use their water carefully will have a water charge of less than the tax credit so will be better off. Those who waste water will have a higher water charge and will be worse off. That’s the theory.

The first problem is that those who are retired, out of work or unable to work will not benefit from an income tax reduction so they will be substantially worse off. This can be addressed by increasing welfare payments to compensate. Secondly many people in Ireland do not pay enough tax to fully benefit from a €600 tax credit. Figures from the Revenue Commissioners for 2006 indicate that the average amount of income tax paid on incomes of between €25,000 and €27,000 was €325 per year. Some 58% of tax returns handled by the Revenue Commissioners in 2006 had an income of less than €30,000. For these 1.3 million cases the average amount of tax paid was €450 euro. These 58% of earners paid 5% of total amount of income tax.

Low earners in Ireland do not pay much tax and thus cannot benefit significantly from tax cuts. Using income tax to offset water charges would be highly inequitable. Low earners would see little change in income as they don’t pay income tax but their expenditure would increase as they would have to meet the water charges.

Focussing all our efforts on the supply side, production and distribution, will only be partly effective. We need to look at the demand side as well. Water charges should be brought in as they are a very effective way of constraining quantity on the demand side. However, care must be taken in how they are introduced. First, the charge must be progressive so that households can meet their basic needs at low cost, with the price and charge increasing as usage increases. Also, it is not necessary that water charges meet the full cost of provding water.  Secondly, the system must be equitable so that people, particularly those on low incomes, are not worse off. Water charges must be a water conservation measure rather than a revenue raising measure.

See discussion here of water charges on The Irish Economy blog with an update here [25/01].

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