Economics for Sustainability Economics for Sustainability Water - PDF document

Economics for Sustainability

Economics for Sustainability Water Efficiency K Peter Kolf General Manager Economic Regulation Authority 23 August 2006 Institute for Sustainability & Technology Policy

Overview • Analytical Framework • The Economic Regulation Authority • Water Pricing for Sustainability

Economic Efficiency Singularity • Productive efficiency • Allocative efficiency • Dynamic efficiency

Hope for the Future: The Western Australia State Sustainability Strategy Sustainability is defined as: Meeting the needs of current and future generations through an integration of environmental protection, social advancement, and economic prosperity.

Objective Function Maximise: Needs of current and future generations Subject to: • Environmental protection • Social advancement • Economic prosperity

Environmental Protection Max Welfare Optimum Social Advancement

Objective Function Maximise: • Needs of current and future generations Subject to: • Environmental protection • Social advancement • Economic prosperity • Re-elect Minister

Environmental Protection Max Welfare Max election of Minister ? Social Advancement

Matters the Authority must have regard to: • Promote the public interest • Consider the long-term interests of consumers • Encourage investment • Consider the interests of investors & service providers • Promote competition & fair market conduct • Prevent abuse of monopoly power • Practice transparent decision making Section 26 Economic Regulation Authority Act 2003

kL of Water Consumption Usage Charge Optimum Max W Max π π = 0 Number of Connections Service Charge

Profit 200 100 0 100-200 -100 0-100 -100-0 -200 -200--100 -300--200 -300 -400--300 -500--400 -400 -600--500 -700--600 -500 -800--700 -600 S31 S26 -700 S21 S16 -800 S11 1 3 5 7 9 Water Consumption S6 11 13 15 17 19 21 23 S1 25 27 29 31 33 Number of Connections

Welfare 200 150 100 150-200 50 100-150 50-100 0-50 0 -50-0 -100--50 -50 -150--100 -200--150 -100 31 26 -150 21 16 -200 11 1 3 5 7 9 6 Water Consumption 11 13 15 17 19 21 23 1 25 27 29 31 33 Number of Connections

Supply of Goods & Services Fisheries, Bread, Water resources & Butter & Etc. etc. Pipelines, Free to air, Wires & Defence & Etc. Etc.

Monopoly Other monopoly factors: • Economies of scale • Economies of scope • Barriers to entry – new infrastructure

Other Externalities • Environmental damage • Resource management

No Proof of Hypothesis “The great difficulty in the social sciences (if we may presume to call them so) of applying scientific method, is that we have not yet established an agreed standard for the disproof of an hypothesis. Without the possibility of controlled experiment, we have to rely on the interpretation of evidence, and interpretation involves judgement; we can never get a knock-down answer. But because the subject is necessarily soaked in moral feelings, judgement is coloured by prejudice.” (Joan Robinson, Economic Philosophy, 1962, p26)

Prejudice “Anyone who says to you: ‘Believe me, I have no prejudices,’ is either succeeding in deceiving himself or trying to deceive you.” (Joan Robinson, Economic Philosophy, 1962, p26)

The Economic Regulation Authority Functions • Administers industry specific legislation • Inquiries (Referred by Government) Features • Independent of Government & Industry

Economic Regulation Authority Governing Body General Manager Corporate Executive Director Executive Director Manager Director Director Gas and Rail References Finance & Industry Access Licensing, and Research Administration Policy Monitoring & Customer Protection

Water Pricing for Sustainability Maximise Welfare • Short run marginal cost ? • Long run marginal cost ? • Trade-off

AC 2 Quantity AC 1 MC 1 MC 2 Inclining & Declining Costs Price

Cost of Water • Water storage • Gnangara Mound • Bore water & tanks ($1.09 - $2.91/kL) • South West Yarragadee ($1.07/kL) • Water trading (Harvey $0.6/kL) • Recycling ($0.5 - $1.00/kL) • Desalination ($1.16/kL)

Water Scarcity “due to agriculture” Report • 7:30 Report – Kerry O’Brian, 16 Aug 06 • Frank Rijsbermann, Sri Lanka – “..the world needs roughly 70 times more water to produce food than for cities.” – Why desalinate? (agricultural water is 1/10 th the cost) – Water trading? – (Water Scarcity is in part an allocation problem)

Long Run Marginal Cost • Turvey Method (1.20/kL) • Average LRMC (0.70/kL) – Future improvements in technology – Impact of future opening of water market

Aggregate Distribution of Consuption GL Residential Water Consuption 90 80 Ave Household Consumption = 283 kL 70 60 50 40 Total Consumption = 165 GL 30 20 10 0 0 200 400 600 800 1000 1200 1400 1600 Household Consuption Kilolitres Estimated 2005/06

Urban Residential Tariffs $/kL Original Tariff 1.60 1.20 0.80 0.40 0.00 0 200 400 600 800 1000 1200 1400 1600 Kilolitres per annum

Urban Residential Tariffs $/kL Original Tariff 1.60 Proposed Tariff 1.20 0.80 Service Charge (Original) $152.30 pa P Є D Service Charge (Proposed) $110.24 pa 0.40 0.00 0 200 400 600 800 1000 1200 1400 1600 Kilolitres per annum

Conclusions • Water is not a special case • There is no water scarcity • Water - partly an allocation problem • Water pricing can assist • Water recycles real well • Recycling water may pose an energy issue (CO 2 ) • Objective is maximising welfare