Poll tax bad, water charge good

Yesterday’s Independent had a headline on water charges. RTE ran with it too. The story is that a flat rate water charge will be introduced. Water charges are good in principle as they put a price on a scarce good. Flat charges — every household pays the same — are a bad idea. Flat charges do not incentivise water conservation. This is just a poll tax by a different name.

The Renewed Programme for Government also mentions water charges. It suggests a free allowance, and a proportional tax for any household that uses more than the free amount. This is much better than a flat rate, but still not perfect.

I would charge households for every cubic metre of water that they use. This is a consumption tax, and therefore regressive. I would repair the damage to the income distribution by increasing benefits and tax credits by an amount that is equal to the water tax rate times 100 litre per person per day — the amount of water needed to wash your clothes and flush the toilet.

Water charges require water meters. I would charge households without meters for the average water use of unmetered households (about 450 l/p/d) and households with meters for the actual water use. If the water charge is announced well in advance (say in Dec 2009 for Jan 2011), meters will rapidly be installed by those below average. This will drive up the average, so that more meters will be installed.

People on benefits would need a voucher for a meter.

55 thoughts on “Poll tax bad, water charge good”

  1. more likely richard we will announce it, then put in derogations and dispensations, and then partially implement it, then drop it.

  2. This all sounds good to me Richard, except that I doubt most people (myself included) have any idea how much water they use absolutely or relative to others. How to overcome this information problem?

  3. @James
    Good point.

    Water treatment plants produce an average of 450 litres of water per person per day. International evidence suggests that the average Irish household would use about 150 l/p/d, and a few simple measures could reduce this to 125 l/p/d.

  4. @Richard

    Is there a case for installing smart water metres (a la CER’s fabled electricity metres) to facilitate time-of-use or rising block tarrifs on water consumption? Or perhaps water doesn’t suffer from the same peak load as electricity?

    Some “smart economy” planning could see both metres using the same communications infrastructure.

  5. Water Rates are meant to be a way to fund local government who will be given the power to increase them as they see fit. It has nothing to do with water conservation and every thing to do with revenue raising. Unelected officals will have the power to tax the ‘middle class’ into proverty, while at the same time failing to provide the services.
    Most of the properties build in urban Dublin/Ireland over the last ten years have had Management Charges levied on them as the Local Authories used this as a way to negate their responsibilities and the developers got to keep making money off homes and apartments that they had sold at great profit.
    How do all those thousands of people fit into the scheme of things?
    How fair is all this, well the answer is easy, not! (vouchers anyone!)

  6. @John
    There is no need for time of day pricing of water in the same way as there is a need for variable pricing of electricity. But while you’re at it, you may as well install a state-of-the-art meter. The utility should be able to remotely read the meter. So should you, in case you want to check at the office whether your daughter has finally left the shower.

  7. My water meter here in Toronto is remotely read.

    One thing about using water treatment plant numbers is that you have to adjust for losses in mains etc. In some systems that can be 30-40%. Water meters force water boards to confront this since they don’t get paid for water that doesn’t reach a tap.

  8. @Mark,

    This isn’t Toronto. Richard’s appraisal is to generalist (“in general pricing a scarce commidity is sensible”) and ignores some essential specifics for Ireland.

    Water in Ireland doesn’t have a marginal cost, hence water leakages will continue. For each litre tha seeps from distribution there is 10 more available to shove down the pipe. The water distribution company (it is state owned) has no incentive to spend a genuine scarce resource (capital) to save on a non-scarce one.

    Add the fact that this is a stat eowned monopoly, even if there was a positive marginal cost to water loss, there is still no incentive to solve hte problem because it is a monopoly and also has no profit incentive.

  9. @Geckko
    Our estimates suggest that about 2/3 of the produced water never reaches households, with a range of 1/2 in some areas and 3/4 in other places. It is not clear how much are leaks, and how much unauthorised use.

    County monopolies rather than state monopoly, and ones accountable to an electorate. The electorate is kept in the dark at present, so water meters would have some impact.

    The water pipes and treatment plants are a natural monopoly, but maintenance and operation can be competitively sourced on a concession basis.

  10. @Richard

    Read my post again. Water metering is not a sensible approach to problems you are outlining, for the reasons I state.

    Nor have you made a case why water leakage in Irish context is in fact inefficient. It might be the superior outcome to overcapitilisation if water is not in fact scarce.

    If we were in Australia, I would have little problem with your proposal, albeit the industry structure (ownership and competition) would still need to be addressed.

  11. I’ve never seen anyone establish convincingly that the benefits of substituting volume-related pricing of domestic water supplies for exchequer funding will exceed the costs associated with meters, meter reading, billing etc. under Irish conditions. Is such an analysis available?

  12. @Geckko/Con
    I am not aware of recent numbers, but I would be surprised if water metering is terribly expensive. It’s routinely done elsewhere, also in places where pennies are pinched.

    As to water scarcity, there is talk of transferring water from the Shannon to the Dublin area, and even of a desalination plant. Meters and conservation strike me as the cheaper option.

  13. @ Richard,

    How much would it cost per household to install a “smart” water meter. How many households are there? Did the Greens budget for this or is it yet another regressive tax?

    My personal view on this is that clean water is a public good and should be funded from the public purse.

    Ireland has no shortage of water. It has a shortage of political will for the public good.

    Businesses should be metered and pay for water, including hotels and farms. The households of citizens should have clean water as a right and as a matter of public health.

  14. @ Richard

    That’s a smart proposal – perhaps a little complicated, but no doubt very efficient. I like:

    “Water charges require water meters. I would charge households without meters for the average water use of unmetered households (about 450 l/p/d) and households with meters for the actual water use. If the water charge is announced well in advance (say in Dec 2009 for Jan 2011), meters will rapidly be installed by those below average. This will drive up the average, so that more meters will be installed.”

  15. @ Richard

    great idea.

    if the €175 per annum charge cited in the Indo was based off the average usage amount of 450 l/p/d, then i’d sign up tomorrow. I live by myself, drink bottled water (don’t judge me!), don’t have a garden to water, and generally have a quick and efficient shower. I can’t imagine i use more than 75-100 l/p/d. Metering would likely save me €130 a year.

  16. One area where we already have a property tax is in bin charges (well, a tax on property services). This has reportedly reduced costs by 45%, made a previously closed market contestable, and greatly improved customer focus. A more holistic transformation of water provision to include re-organising how it is provided would be the best route, and would potentially greatly lower the subsequent cost to the consumer.

  17. @Richard,
    I don’t think the cost of metering is so trivial as to eliminate the need for a cost-benefit analysis.

    Quoting a report by Forfas from September last year on water and waste water services for enterprises: “In general, fixed costs are less than 20 percent of the overall operational charge and cover costs such as meter installation and meter reading.” That doesn’t sound trivial, even for enterprise users that presumably use larger volumes of water than domestic users.
    http://www.forfas.ie/media/forfas080902_water_waste_water.pdf

    And here’s a quickly-found quote from a paper out of Cranfield: “In terms of financial benefits for the water companies it could be argued that, even in the south-east of England, measures to reduce leakage or develop new resources, such as reservoirs, are more cost-effective than the mass-metering of domestic properties. It would be more sensible to consider the key advantage of metering as a means of meeting or maintaining the supply/demand balance.”
    https://dspace.lib.cranfield.ac.uk/bitstream/1826/1450/4/Domestic%20water%20metering-is%20the%20law%20adequate-2006pdf.pdf

  18. @Ronnie
    Agreed. Water charges would focus the mind. Questions like “Why does South Tipp use 650 l/p/d and Kilkenny 350 l/p/d?” would be asked with a new urgency.

  19. @ Richard.

    Back to your assertion. Price efficiently at marginal cost.

    Water is not scarce in Ireland. zero is the proper price.

    You might as well introduce Oxygen metering as way to find out why so much Oxygen is wasted in Kerry relative to Donegal. For what purpose?

    With no hiostory of any need for widespread non-price rationing of water in Ireland, there is no need to believe that putting a non-zero marginal price for the commodity is anything but INefficient.

    Subsequently the metering, administration and billing infrastructure will be a dead financial loss on top of the loss of consumer surplus, from what would really be monopoly pricing above marginal cost, that would result.

  20. Marginal Cost of water iz sero ????? Water is a tad costly: (money, energy, commodity and infrastructure installation and maintenance requirements). It MUST be paid for. You have two options: the taxpayers in general or the taxpayer in particular.

    You want to know the REAL cost of potable water. Reference 1.0bl of oil, spot price approx $70/bl, against 1bl potable water at ???? – if the Demander is short of potable water … …!

    OTOH barter potable water for diesel – much better idea.

    Mandate meters – no exceptions. Everyone pays, no exceptions. Sort out some electronic coupon scheme for needy individuals. We shall be rationing potable water unless we;

    1. Construct more storage reservoirs

    2. Slow down, then halt the agricultural pollution of groundwater

    3. Fix those pesky leaks – the loss is 30%+

    4. New building regs to mandate water conservation and re-use

    Rain-water capture, water conservation and grey-water re-use are the key objectives.

    You can live for perhaps 30 days without food intake – 7 max without potable water! So the Marginal Cost of water iz sero! I fancy not!

    B Peter

  21. Slightly off topic…but this week we are being told to rinse out food cans etc before putting them out in the green bin. In France they explicitly tell you NOT to do this, I guess because water is scarce there. Here is a nice case where two green issues seem to run at cross purposes with each other…

  22. Turning off the tap when you brush your teeth saves an average of 12 litres each time – per year for one person twice a day thats 8760 litres. in poor countries some people are lucky to get a few litres a day!! A FLAT rate is crazy…what incentive is there to conserve – NONE! and what about a single occupant house versus a house with 4 or 5 for example. Houses with powere showers, diswashers etc consume more. charge should be per person or metered!

    Cutting water consumption will save money for us the tax payers – it should be implemented correctly. It may rain alot here..but remember we have to treat and clean the water, pump it etc etc…that all costs money – approx 600 per person a year in the, if we get the major leaks fixed and all cut down on needless waste at home, school etc…it’s a good thing. kids in school are saving water, time we adults did the right thing too.

    When will this ‘shower’ of twits in government excuse the pun ever learn! A flat rate is witless!

  23. The fixed costs for water treatment will remain the same regardless of whether metering is introduced or not. The operating costs in terms of water treatment chemicals are very low. Approx 80k tonnes of Alum (the primary flocculant used here) are consumed annually in Ireland and the price per tonne delivered is ~Eur100. Smaller quantities of Ferric Sulphate and other polyelectrolytes are also used. The cost of metering would dwarf this figure and would not address the main point of wastage (leaks). Metering doesn’t make any sense in this context.

  24. I’m all for metering and charging _if_ the numbers add up but nobody has clearly made the case to me that charging at the consumer level would lead to the best long term outcome for the quality and capacity of our water supply. The costs are ultimately borne by all of us in one way or another and to be fair we will never directly charge each individual user a fair economic rate for their consumption – if we did then charges would vary across the country by over an order of magnitude, and rural users would really get stung and I for one cannot see that ever being politically acceptable.

    So for starters do we have some solid data behind the numbers? If the €175/person per annum is right then the current water supply budget must be somewhere in the region of €700m/pa. That assumed €700m is currently used to maintain the existing distribution network, build new capacity, process raw ground water into the lovely clean stuff we all get for free and finally it has to be pumped around, only a fraction of our water actually gets to us entirely under the force of gravity after all. The number seems reasonable to me that it would cost around €700m pa but it could easily actually be half that or even double that but I’d say it’s right to within an order of magnitude.

    Assuming this is the baseline though and we can reduce consumption to the stated target (150l/day vs 450l/day) then can we realistically expect the costs to drop to €175m/pa? I think that’s extremely wishful thinking but even if it was true what would that mean? Would a water network that had to deliver 1/3 of it’s current capacity cost us only 1/3 what it does today? That is almost certainly not going to be true. At best I think we could hope for an equilibrium level somewhere around a third below where we are today. That’s still a saving of around $175m pa though which is certainly worth chasing.

    However to get there we have to incur at least some additional fixed costs – how much will it actually cost to maintain and run a brand new nationwide metering system? The fixed costs of installing the meters will be somewhere in the range of €100-€200 and they will (like any other electrical\mechanical device) require maintenance and replacement. Factor in 10% of that per annum that someone has to pay. Running a nationwide network that can link to 1 million homes will cost a few €uro per household per annum. I’ve no idea how much but I’d be amazed if it could be done for less than €10 and wouldn’t be surprised if it cost €50 per node. Large scale electronic distributed sensor networks in Ireland are generally provided by Cellular providers and a cost of around €50 per embedded node would strike me as cheap but perhaps someone familiar with Eircom\Bord Gais can comment here. That’s another fixed annual cost of between €20 and €60m per annum just to get the meters running. Now add in the cost of administering the system and again I’d be shocked if we could create such a new body that operated on an annual basis for less a good few 10’s of millions. I’d put good money on a bet that said this can’t be done (properly) for without incurring additional costs of somewhere around €100m per annum.

    Assuming that all of those things come together we’re talking about a win that is best case going to be in the range of around €75m per annum. And to be honest I don’t think we would see those savings for quite some time – the initial costs are likely to swamp that benefit for a good few years even if everything goes right. And we all know that it wont go right.

    Surely it would be simpler to create a national body to manage water resources, give them the entire budget and tell them they have to reduce their costs in real terms by some realistic target – say 2% per annum over the next 10 years, control them by measuring service delivery and quality targets and let them have at it. If (as is claimed) 50-75% of processed water is wasted within the network then we have just as much potential for saving money this way as we do by imposing yet another arcane billing\credit bureaucracy on the population at large.

  25. I’m not sure it’s all that feasible for recycling operators to wash paper/cardboard and plastic bags/films, and my belief is that contamination does reduce their value. Recycling operators may also have difficulty cleaning the insides of plastic containers efficiently.

    I used to avoid washing recyclables, assuming that recycling operators were just trying to socialise some of their costs, and that they were better able to avoid wasting water during any washing that was really needed than me. I did always scrape cans and empty cartons and plastic bottles to avoid contaminating paper waste.

    Now that, in Dublin at least, they have started taking all clean plastics, I’ve reluctantly changed my mind, and started rinsing.

    I’m not sure what the reference to unemptied wine bottles in that RTE article is about. You’re not supposed include glass with general recycling waste in Dublin (at least), and I would have guessed that broken glass would be a bigger problem than wine if people break this rule. But I wouldn’t have thought that a little wine would be a big problem with glass collected through a bring bank that is destined to be melted at a high temperature.

  26. What is the aim of the policy? Is it to reduce waste or to raise revenue to pay for water provision – this matters but is unclear to me!!

    The important factors are how elastic is demand to price and how elastic are costs to quantity. If demand is inelastic, the tax has little effect on quantity and so does not lower costs of provision. If we want to reduce waste the tax must be high, if we want to pay for water provision, tax can be lower.

    If demand were more elastic but costs inelastic, then increased taxes lowers consumption but does not significantly lower costs of provision. Waste is reduced, but tax must be higher to pay for provision… so maybe flat tax is preferable?

    Hence my question regarding the objective.

    Personnally I’m not sure demand for water is very elastic to price – If I used only the neccessary amount of water – how much would my water bill be likely to fall by for a month? Thats my maximum saving and in reality the saving will be less. Given the extra hassle involved in conserving I think the saving would need to be quiet large each month to influence my behaviour.

    If a large part of the waste is due to leakage, then I’m not sure how the tax will improve this – local authorities won’t be directly competing so where’s the incentive to stop this when the household is paying….?

  27. @Tony
    The price elasticity of water demand is indeed low in a country like Ireland.

    However, there is an interesting psychology: The sheer act of metering reduces water use.

    I also believe that shifting water from general to specific taxation will change the political debate.

  28. @ Richard,
    Yes I suspect you are right regarding the impact of metering but is decreased demand sufficient to lower costs appreciably? or is the aim to lower waste?

  29. Is the fact that I haven’t had a hose-pipe ban for many years say something about the magnitude of the marginal cost of water? That said, the summers have been lousy and wet.

  30. Domestic water charges were eliminated with effect from 1 January 1997 for a number of reasons (a) it was recognised that the ‘flat rate’ charge was unfair; (b) the then Minister for the Environment, Brendan Howlin, was advised that to make the charging system fair, through the installation of water meters in every domestic dwelling, would cost 1bn and take the best part of a decade; (c) ringfencing motor tax receipts for local authority spending, (at least in theory), might provide a more effective way of financing local authorities; (d) the Socialist Party and other fringe left groups had whipped up such a campaign of civil disobedience over water charges, particularly in Cork and Dublin, that Labour Party seats in their stronghold areas were under serious threat in a general election that had to take place by June 1997 at the latest.

    Take your pick as to which was the most important reason for the abolition of water charges in 1997. Successive Fianna Fail led administrations have gone out of their way to avoid reintroducing water charges ever since, including withstanding the pressure of EU policy in this area. The building boom, though, enabled most of the new housing stock to be fitted with water meters; ‘just in case’, or so one presumes, the day might dawn when there are no options left to fudge or dodge and weave any longer. Estimates of the cost of installing meters in older housing stock have – somehow miraculously in a State where the price of everything else has quadrupled in the meantime – gone down to €150-200m; or between €300m – 400m, or a figure quoted recently in the Irish Examiner of €500m. You can take your pick of those figures too. To me, they indicate that no-one has a clue how much the rollout might actually cost.

    A key point, and probably more pressing than any concern for the environment, is the financing of local authorities, who after years of living off the fat of developers’ fees etc. arising from the housing boom, now find themselves very short of income or any means of raising it, except through squeezing more out of domestic households.

    In theory and in principle, Richard’s proposal as to how a charge might be levied looks like a good way to proceed. The political hullabaloo – already threatened by Joe Higgins in preparation for his re-entry to the national political scene – that would follow its adoption would be at its most ferocious in urban areas. Labour will not let Higgins, Sinn Fein, or anyone else, seize the high ground on this populist issue; and so won’t be far behind him. Irrespective of the merits of any water charges proposal, politics is likely to triumph over economics.

  31. @Richard,

    I presume you are using “specific taxation” as shorthand for a charging mechanism for delivery of a quantifiable service. And yes, I would hope it would change the debate to focus on institutions and economic organisation. In Ireland the perception is that water, generically, is free, but, as we all know, real costs are incurred in gathering, storing, treating and distributing potable water (and in collecting and treating waste water).

    There is a widespread popular view that these costs should be met from the public purse without any limits on personal or household consumption. I believe that the focus should be on ensuring that these costs are at efficient economic levels, rather than promoting the conservation of water. The latter will be an inevitable consequence of the former.

    It is highly unlikely that the current disaggregated, local authority-based provision of water (and waste water) services is very efficient. The alternatives seem to be a national body (as suggested in one of the posts above) or a number of water companies covering contiguous local authority areas and subject to independent regulation – which may be able to apply some “yardstick” regulation.

    If the debate proceeds in this direction – with a focus on the efficient delivery of the required quality of water – some of the sting may be extracted from the politcial debate.

  32. @ Paul,
    To play devils advocate, I imagine there are some households whom it costs more to supply than others – should these households pay higher rates? The point being if we care about efficiency those whom it costs more to supply should pay more as well as those who use more!

  33. @Tony,

    This is a fair point. Without trying to avoid responding to it, my focus, initially, is on the efficient level of costs. This leads to identifying the level of charges that will recover these costs and then the structure of charges. Focusing on the structure of charges risks putting the cart before the horse. The US Federal Energy Regulatory Commission has a time-hallowed 5 step approach to rate (tariff or charge) design that is still relevant. It begins with the cost base and ends in rate design.

    Responding to the point you raise is part of this process. It involves the allocation of costs and is an attempt to identify cost responsibility so that costs are allocated appropriately to those who cause them to be incurred.

    Inevitably some degree of cross-subsidisation is involved – the alternative is a specific charge for each user. The extent of cross-subsidisation permitted usually involves a judgement about balances/trade-offs among efficiency (in the sense that accurate price signals encourage efficient behaviour), equitability and administrative simplicity.

    However, the important thing is to get the economic organisation/regulation right so that efficient levels of cost are achieved. Then we can worry about the level and structure of charges.

  34. It would be logical for people who use less water – e.g. single person living alone to opt to install a water meter in a effort to prove their (less than average) water usage and hence get a lower water bill. It was be illogical for large families etc.. to volunteer to install a water meter… for exactly the same reason. However water is a finite resource, so longer term some form of charge based on usage (i.e. metering) is inevitable… [It already takes place in serveral European counties]

  35. @Tony
    This is a bit a red herring, really. Remote houses have private water supply. The public supply is largely limited to the densely populated parts of the country.

  36. @ Richard,
    Perhaps this is true alright. Is the cost of supplying different towns similar? I have no idea myself!

    On a general point though, I think that going down the path of user pays for public services is not necessarily a good path and to view this as a method to ensure more efficient provision of such services is unsatisfactory to my mind.

  37. @Tony
    Data are hard to get on water. It is clear, though, that water production per head differs by a factor 2 between counties. There is no reason to assume that water use in South Tipp is twice as high as water use in Kilkenny, while water quality is roughly the same. Kilkenny thus provides water at a cost that is some 40% below the cost in South Tipp. Both are largely rural with one big town.

  38. @ Richard,
    Ok, so in this example, how would the tax rates compare for a typical household in each of these counties? Would we see different tax rates here for the same product or would there be subsidising between areas? Subsidising may give rise to perverse incentives perhaps? While different tax rates for the same product would be deeply unpopular I suspect?

  39. @Tony,

    I think Richard addressed your specific query, but his response also indicates a response to your general point. In addition to measuring how much goes into the pipes it is necessary to measure how much is delivered to, and used by, households and businesses. This is a necessary first step to examine gross supply, costs, leakage and deliveries. And this leads to questions about the economic organisation of the industry, regulation and appropriate point-of use charges.

    The real choice is between undeniably inefficient provision of (a variable quality) service that imposes a global fiscal burden and a more efficient provision of (a better and more uniform quality) service with cost recovery related to usage.

    The Government’s proposal combines current inefficiencies and poor quailty water supplies with economically unjustified point-of-use charges; this is the worst of all possible worlds – and is likely to provoke an entirely predictable public response.

  40. @ Paul,
    I accept the need to get a feel for where wastage and costs are occurring but I don’t think this is synonomous with the introduction of a usage based tax on all households (and such information may be cheaper to obtain via a random sample?).

    I agree the govt. proposal is extremely bad. My preference is for the status quo with some supply side action to prevent leakages firstly as I’m not sure how much of an improvement the tax would be. I imagine the revenue from Richards or the Govts taxes will augment the current funding mechanism (the existing payments will just be redirected I suspect) rather than replace it – surely inefficient?

    I would like to know what proportion of ‘wastage’ is household and what proportion is leakage before viewing a tax on usage as the solution. I dont see how a tax incentivizes reductions in leakage. I also don’t see how a usage tax leads to more uniform and higher quality water.

    A usage tax penalises larger households which is fair if there is a strong link between uasage and costs of provision but unfair otherwise.

    Until we know the elasticity of costs of provision with respect to quantity used I would be loath to claim a tax makes a large change to efficiency after costs of metering, billing and collection are included. If it turns out that a usage tax lowers wastage and significantly reduces costs of provision then I stand corrected.

  41. @Tony
    Let’s work with the numbers of 450 l/p/d in water production (based on EPA data) and 150 l/p/d in water use (a guess from international data).

    Irish households can easily make do with 100 l/p/d. The international average leakage rate may be 33%.

    So, households “waste” 50 l/p/d. The county councils “waste” 225 l/p/d.

    (25 l/p/d is jointly wasted.)

    In that sense, one of the advantages of water charges is that every voter will be alerted to what is really going on, particularly since there are such stark differences between counties.

  42. @ Richard,
    Yes that does point to major wastage alright. However if you are charging the consumer for their use (rather than amount produced), will they really care that much?

    Or do you see as a next stage – some kind of ‘tax’ on production by the providing authoritites that is then redistrbuted based on customers actual usage in the area? [although that may be a simplistic representation by me]

  43. @ Richard,
    OK if we are charging based on production, while the meter tells the person their usage, while the bill is based on production – so am I right in saying that your argumanet is people will get annoyed with the providers and this will lead to lower waste?

    This seems a circuitous route to improve costs of provision to me.

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