For commodities in scarce supply pricing is the normal solution to demand management. Pricing is already used for demand management of water with the use of tiered water consumption tariffs. Pricing reduces demand but the reduction achieved depends on circumstances. A common figure for estimation purposes is that 10% increase in the price of water reduces demand by 3%.
However, pricing does not work as well for low demand levels as there is a minimum below which it becomes difficult for consumers to make savings. High prices at low levels of consumption is also socially undesirable as most people feel that everyone should be entitled to a certain level of water consumption regardless of their ability to pay.
Demand management of water simply by increasing the price of water will mean that in times of drought the price of water will have to rise by 200% or 4 times for all to reduce demand by 60%.
Another way to reduce demand is through water restrictions. Water restrictions only work on water usage where the restrictions can be enforced. This is normally water used externally. Thus demand management with water restrictions only works on some water consumption and does not affect indoor use. Other methods have to be found to supplement water restrictions to cover indoor use.
How Water Rewards work
Water Rewards works by charging high users of water more for their high water consumption and distributing the rewards to low consumers and – in effect – paying low consumers to consume less. In addition Water Rewards directs expenditure of Rewards to the use of water sustainability technologies that fund water savings and water reuse initiatives.
It is assumed that paying people not to consume will be as effective in reducing consumption as charging people more for their high water consumption. This means that increasing the price of water for high consumers when distributed to all users is assumed to have the same effect as increasing the price to all consumers. This along with the requirement for Rewards to be spent on water saving technologies means that the price increase for a few users can achieve the desired demand management outcomes for all users.
The reduction in demand through all three effects is highly dependent on circumstances and on how well the demand program is promoted to the community. The only thing that is certain is that there will be a drop in consumption.
One way to determine the parameters for Rewards is to look at the long term infrastructure expenditure needed to build a sustainable water supply and to set prices to achieve that level. Prices to consumers who consume more than the sustainability level are increased while prices to consumers who consume less than the sustainability level remain the same.
To be socially equitable consumption levels should be set mainly on a per head basis. Rewards should be tradeable so that they will flow to the most cost effective ways of spending Rewards.
This approach is guaranteed to deliver sustainable water infrastructure using price mechanisms for the lowest price increase. It is the lowest price because a market is created for sustainable water infrastructure and all the money collected for Rewards will be spent on reducing consumption. The price increase is estimated to be less than half the price increase required from other pricing approaches.
It is estimated an expenditure of $20M a year will be needed for the ACT to reduce long term consumption by 2 gigalitres each and every year. Collecting this by increasing the top rate of the tiered water tariff will have the highest immediate impact on consumption.
A pilot voluntary Water Rewards scheme will be introduced into the ACT in the second half of 2007. If successful it will be extended to all residents and organisations. It has the potential to remove the need for compulsory restrictions on outdoor use.
The system can be used for any other public policy where governments wish to use markets to achieve a policy objective. To see an essay on this concept visit https://cscoxk.wordpress.com/2006/12/16/rewards-a-market-driven-framework-for-government-provision-of-public-goods/
- Rewards are socially equitable because people “earn them” and they are available to all.
- The government administrative costs are essentially zero. It is estimated that in the long term Rewards administration will be around 5% of money distributed.
- Rewards systems are continuous and are easily adjusted by changing the amount of money distributed through the scheme.
- Rewards can be transferred to community organisations, sucha as schools, to spend on community projects.
- Rewards create genuine markets in sustainable technologies and do not distort markets.
- Rewards can be used for household, community or system infrastructure.
- The psychology of Rewards is different from Rebates. Rewards are earned and given. To take advantage of them the householder has to act.
- Rewards provide a rich source of statistics that can be used to discover the most effective use of infrastructure spending.
- Money for Rewards can come from any source. Governments can distribute taxes, businesses can use rewards for promotional purposes (e.g. a hardware store could issue Rewards instead of discounts), high consumers of water can pay extra for their extra water
Contact: Kevin Cox, firstname.lastname@example.org