What price recycled water?

In a previous article in On Line Opinion I argued for a different approach to funding transport alternatives. One comment was that the idea was good in theory but hard to do in practice. This article shows how the ideas can be used for a “simpler”, but similar, problem of funding and developing water recycling systems. I would argue that the same general approach is a practical way of building sustainable systems for all infrastructure systems.

The goal of any pricing policy for recycled water is long term sustainability of total water supply. That is, the future supply of water (both fresh and recycled) must be sufficient to meet the needs of a growing population. The proposal builds on the objective of sustainability but includes market forces, community co-operation, and price signals, in the mix of controls to achieve the desired outcomes.

Three ways water supplies can be made sustainable are by:

• reducing demand;
• increased recycling; and
• continuing to increase primary supply through desalination.

The third approach is not considered in this proposal because the environmental costs in terms of global warming are too high: nor is obtaining new supplies of fresh water from rainfall as this is deemed not sustainable in the long term.

In most cases recycled water schemes cannot compete economically with mains water supply. However, the capital cost for recycling systems can be subsidised by fresh water mains income, to make it economically self sustaining.

Rather than allocate a certain amount of money from mains fresh water income directly to recycling, it should first be allocated to consumers of fresh water as a reward for restricting consumption. These “rewards” should be given to users to subsidise recycling projects.

Rather than give control of the recycling system to water boards or government appointed bodies, who may have conflicts of interest, give control to a board elected by people who receive water rewards. The electors of the board are more likely to have sustainability as their first priority.

You would then bring market forces into play by giving reward recipients the opportunity of giving money, via the recycling board, to the "economically best recycling system" by making a free market for recycled water.

Demand can be reduced by implementing water restrictions, by voluntary reduction in water use and by increasing the price of water.

For most households the demand for indoor household water is inelastic below a certain base level. That is, people will pay higher prices for essential indoor use of water rather then reduce their consumption. The price that would need to be charged to make a significant difference to essential household use is very high. Price does, however, influence demand for gardens and other outdoor uses such as washing cars.

Communities, by and large, tend to obey water restrictions. This is because the community sees water as a common resource and most will act for the common good while ever they see that everyone else acts in a similar manner.

The community sees the ordinary use of water as a right and will not tolerate increased prices to restrict household supplies but will tolerate water restrictions otherwise. In short, people believe they have a right to water at a reasonable price and believe it unfair that rich people have privileged access because of their wealth.

Given these facts it is politically unacceptable to reduce demand for indoor essential household use by increasing prices. This leads to the first principle for any system of pricing.

• Every person is entitled to a reasonable amount of water for indoor essential household use at a fair price.

The second principle is:

• mandatory restrictions on consumption are not an effective long term solution to reduce demand. A public, transparent rewards system will encourage many members of the community to voluntarily reduce consumption.

The community will respond to calls to reduce water consumption but they want recognition they are doing their bit. This can be achieved through water restrictions but in the long term this isn’t a good solution and should only be used in times of crisis. The continual use of restrictions, particularly if it is apparent that other solutions are available, will lead to people not obeying them and will reduce their effectiveness in times of crisis. A system of rewards for consumption reduction will give recognition and would be acceptable to the community.

The question then becomes what form rewards should take and how they are allocated.

The third principle is:

• recycling is necessary for long term sustainability but is rarely economically justified in cost terms when compared to the cost of fresh mains water.

Theoretically a household could be self sufficient in household water consumption through recycling and roof collection. Also the recycling of water from household consumption could meet much of the demand for outdoor water. The problem with recycling is that it costs money to build recycling systems and there is rarely any economic justification when compared to the cost of water from mains supply. However, for long term sustainability it is necessary to invest in recycling systems at an individual level but more importantly at a community level.

In marketing products other than water, rewards work better than discounts in changing consumer behaviour. The phenomena of four cents a litre off petrol is the latest example of the power of this approach. Frequent flyer points are another.

It is proposed that a rewards system be introduced as a way of reducing consumption. Each person is given an allocation of water that they can purchase at a “reasonable” price. Water consumed over the allocation is charged at a higher price. It is proposed that people who consume less than their allocated amount be given a “reward” of some form. The critical factor is not the reward but the recognition that the reward brings. The increase in price for water above the allocated amount will serve as a price signal and can fund the reward. This means the total amount collected from water consumption remains the same.

The size of the reasonable allocation and the increase in price are parameters that can be tuned to achieve the objective of encouraging a reduction in water consumption and as a replacement for water restrictions. By keeping the reasonable allocation at the sustainability level the system will self adjust through a feedback loop.

It is suggested that recycled water be priced at whatever the market dictates. For recycling to work it is necessary to invest money. It is proposed that the money for recycling comes from current consumers through the rewards system. That is rewards can only be spent on water recycling systems. So rewards could be spent on household systems, or on, community systems. Rewards could also be transferred to others - i.e. can be sold.

This will give the rewards a market and this along with the market price for recycled water will give an efficient economic outcome.

The system as proposed will provide the seed capital for recycling projects. A water authority can tailor the parameters of a “reasonable” allocation for household use and the price of water over that allowance so that enough private investment will be made in recycling systems. This approach will make sure that the monopoly powers of the water authorities are not abused and water pricing is not turned into another form of taxation.

The logistics of determining allocations, rewards, transfer of rewards, payments to recycling projects, have all been considered but are not presented here. The systems to handle these logistics would be paid for out of the rewards money and from private investment. In other words the rewards would fund the logistics of building rewards and allocation systems.

The system and its operation would be funded totally from rewards. There will be no need for any input of extra public funds, although the monies currently allocated by various governments for recycling projects could be channeled through the system and serve to prime it. Private finance will become available for recycling projects when it is shown there is a market that can compete with fresh mains water.

The ideas require NO change to existing water authority infrastructure. There is a relatively small change to billing systems to include a two tiered tariff. The system of rewards, allocation and distribution of monies is a completely separate system from existing systems. The effect would be to reduce costs of the water authority as they would no longer be responsible for allocation of monies for recycling.

The system would remove the need for any pricing authority to consider the price of recycled water as it would be determined by market forces.

A separate devoted organisation should be set up to run recycling. This body would decide on the allocation amounts, publicise the benefits of recycling and select the recycling projects suitable for funding via rewards. The reason for this is to allow the water authorities to bid for recycling projects, to keep the system independent and cost accountable. This organisation could be a not-for-profit co-operative. Its board would be elected by people who received rewards and it would be financed from the rewards monies. Its primary objective is to foster recycling for sustainability and to encourage this in the most economically efficient manner.

The cost of the recycling system could be funded entirely from money collected from mains fresh water users and would require no change in the existing functions performed by any pricing body.

How much chance does this proposal have of being realised?

In proposals such as this there are inevitable losers. In the case of sustainable water the main losers are governments who use water supply as a form of indirect taxation, governments who lose control over the appointment of people to the board of the recycling body, and governments who control water authorities. Governments are the only ones who can change the system.

The only hope for this proposal is to convince a government somewhere to look beyond their short term goals and trial it. This is likely to happen because the long term outcome for the government that adopts this approach will be substantial. The system can be used - with modifications - anywhere in the world. It could be adopted by local government, or by state, or by federal or by any government anywhere that controls a water supply. The government that first adopts it will have a new “knowledge industry” in their jurisdiction which with an appropriate structure can be exported with gains for the government.