The High Cost of Free Water

In the last few months, social activists and Parliament have informed us that Canada’s water is a precious national resource that needs the protection of concerned public caretakers. Given that these caretakers have already expressed their concern for national resources by encouraging fishermen to annihilate cod stocks and lumber companies to splinter forests, it is hard to suppress a gasp of amazement. How do these Inspector Clouseaus of natural resources plan to make a mess of water?

Saying that government has a plan may be an exaggeration. What seems to be coming out of Ottawa and the provinces are the stirrings of a property grab. The value of water exports is rising. Ottawa expresses concern, informs us that we must not allow private companies to take this public resource and sell it abroad. Once firmly under government control, government will then allow this precious resource to flow abroad after water export companies pay the same sort of natural resource levy that natural gas and oil companies pay. Quebec seems to be leading the way. Quebec has about 2,000 cubic kilometres of high quality fresh water sitting in underground aquifers. That is equal to the flow of the Montmonrency falls for 1,810 years. One tenth of this water is close to towns. Under Quebec law, any water under private property belongs to the owner of that property. In the last year, the Quebec government has floated a white paper suggesting that government take control of this water from private property owners, without compensation. The reason to worry about government’s interest in water is that governments in Canada have a record of allowing natural resources to be overexploited and wasted. If governments were really concerned about preserving water they would have attacked the greatest threat to the degradation of this precious natural resource long ago: the unmetered tap. Seventy-one percent of municipal governments have resisted charging citizens directly for water and waste water management. Where charges are levied, they cover only 65 percent of the true cost of water. The balance comes from lot levies, transfers from higher levels of government, cross-subsidies from charges on business users, and municipal debt. Even part of the 65 percent of the costs that we do pay comes in a charge that imposes no restraint: the flat rate.

Charging a user fee for water would turn all citizens into good conservationists. A fee forces the user to ask whether he or she really needs to hose down the car a third time this week, or to stay those extra 10 minutes in the shower. In Canada, those with meters use, on average, 40 percent less water than their fellows who pay a flat rate. As economist Harry Kitchen explains, “In part, this decline is psychological, but, in part, it is an economic response as consumers optimize their consumption once volume-based rates are introduced. The usual pattern is for water use to fall substantially immediately following meter installation, and then to rebound somewhat as consumers become more familiar with the pricing scheme ... unmetered customers have no incentive to use water efficiently because the per unit price is zero.” In their study of Denton, Texas for the summer months between 1981 and 1985, economists Julie Hewitt and Michael Hanemann found that for every 10 percent increase in water prices, demand fell by 16 percent, after taking into account all other factors that might influence demand.  Perhaps these findings explain why the average Torontonian, who is forced to pay for his or her water, uses 171 litres a day, whereas the average Quebec resident, who does not pay directly for water, uses 411 litres of water a day. It may also explain why the average Canadian uses 350 litres of water a day, whereas the French, who charge 95 percent of the true cost of water, get along with 150 litres a day. Whether these statistics impress the politicians is not clear. Being a water commissar is fun. You control a resource and get to tell people what is good for them. User fees make the responsibility for conserving water in part a citizen’s decision. Such democratic solutions are always a hard sell on any Parliament Hill.

Reference

Filip Palda, Home on the Urban Range: An Idea Map for Reforming the City (Vancouver: Fraser Institute, 1999).