Why We Care About the Price of Water in China

At Bloomberg, The Council on Foreign Relations’ Peter Orszag argues for higher water prices in China to encourage efficiency:

In Oman, a Middle Eastern desert country where water is scarce, it is understood to be more valuable. There, farmers trade water rights. As Peter Brabeck-Letmathe, the chairman of Nestle SA, has pointed out, farmers are in the best possible position to know water’s value. Pricing it through tradable rights or other mechanisms “is an extremely strong incentive to use water efficiently,” Brabeck-Letmathe said in an interview with the McKinsey Quarterly.

The academic literature bears out his point. In a July 2007 study, Sheila Olmstead of Yale University and Robert Stavins of Harvard University concluded that using prices to manage water demand was more cost-effective than conservation programs not linked to price, such as restrictions on watering the lawn and subsidies for low-flow faucets ….

The Chinese people are willing to pay more for water, the World Bank reports, “as long as the quality of the service is good and the tariff level acceptable.” And yet prices in China are still much too low to ensure that the water is used efficiently enough to sustain the supply. Higher prices would persuade people to both reduce waste and improve the allocation of water across all its possible uses (including in the energy sector). It would also encourage more investment in desalination and other measures to increase supply.

The benefits and challenges of promoting water efficiency were discussed in The China Beat’s recent Q & A with environmental historian Kenneth Pomeranz:

Probably most of the water savings that you could achieve without greatly reducing economic output are in agriculture, where a lot of irrigation is very inefficient (and not just in China); in fact, I think there’s a good case to be made that if you put anything like the cost of the South-North water diversion project into fixing a million leaky faucets, lining a million unlined irrigation ditches, enforcing existing wastewater treatment standards (allowing more water to be re-used), etc., etc., you could do more to alleviate the problem …

…[One] way to strongly encourage local compliance in saving water is to make water more expensive – but this would hit farmers hardest, and the government is genuinely concerned about how far farmers’ incomes lag behind most other people’s already. Do you really want to increase that gap further …?