Waternomics 101

Talk of water pricing often makes people nervous that what’s being discussed is increasing the price of water, thereby reducing access for those who can’t afford to pay for it. But do the water prices we have really capture the true cost of water? And if not, why is this the case? OpenCanada asked Dr. Diane Dupont, an economics professor at Brock University and water pricing expert, to explain the relationship between the price and cost of water and how this impacts the way water is used.

How do you as an economist determine the value of water?

From an economist’s perspective, the value of water is essentially what somebody is willing to pay for it. If you were to say to me, “how will X amount of water increase my utility?” I should be able to, ideally, tell you by how much, in dollar terms. The idea is that there is a tradeoff – if I’ve got to give up something else in order to get that water, that tells me what the value of that water is to me.

Is putting a price on water the best way to make people more aware of its value?

We need to think about our water resources as being an asset to our well-being, and not just ours but that of future generations as well. Water is an asset that supports virtually every activity that we undertake. What we need, therefore, is a mechanism that will ensure that the water we have is used to support our needs in the best way possible.

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The effectiveness of pricing varies because under certain circumstances, people have to pay a price in order to have access to a particular quality of water, but in other circumstances, they don’t have to. It also varies because the set price often doesn’t capture the opportunity cost of accessing that water. Firstly, think about municipal water prices. Generally, municipal prices don’t capture the full cost of delivering water to consumers. So, while efforts have been made to change this to include the additional costs that people are not paying, you’re not really being charged for the full cost of access to water of that quality.

Secondly, consider another type of user – the type who withdraws water directly. These are the big industrial or agricultural users who withdraw and deliver water to themselves. They have a very good sense of the cost of withdrawing and treating this water, but the price they pay doesn’t capture the opportunity cost of their usage, because they’re not being charged a price that reflects denying someone else that water with a competing use for it costs.  Opportunity cost is really what’s missing, even when infrastructure cost is added in to the price of water. When people don’t feel the opportunity cost of using water, they’re less likely to make sustainable choices.

I think the idea of capturing the full cost of water is gaining a little more ground – other countries increasingly have systems in place to recognize the full value of water. Germany, for example, a country very similar to us in that they have a relative abundance of water resources, has really made an effort to introduce full cost pricing for water. And that includes trying to price quality changes in the water as well so that it’s not just about quantity.

Can you tell us a little more about what a progressive full-cost water pricing regime would look like?

A progressive full-cost regime would certainly include the costs of delivering and treating water (marginal costs) and also some component associated with the capital costs of maintaining and improving the infrastructure. So, there would be some fixed component (share of “network costs”) and a variable component (associated with volume consumed). This latter could have an increasing price component (higher volumes consumed mean higher prices). This would be in place to recognize increasing opportunity costs associated with providing higher volumes. In some senses, this is very similar to the type of pricing we have for cell phones.

Water pricing would seem to require the expertise of environmentalists and economists, among others. Has an interdisciplinary community formed in Canada that is working on these issues?

When the Canadian Water Network was first formed, it was largely people who had a background in chemistry, engineering, or science, and only a few social scientists. Over the years, we’ve broadened the base and developed a much better foundation for doing trans-disciplinary work in water. The Water Economics, Policy, and Governance Network whose scientific director is my colleague, Steven Renzetti, and of which I’m a part, involves social scientists (e.g., economists, political scientists, geographers) who bring scientists into  their analyses of the water governance  issues, so there’s valuable cross-pollination going on within Canada on water issues. 

This interview has been edited for length and clarity