Lecture 30

Climate Change III: Adaptation

Byeong-Hak Choe
bchoe@geneseo.edu

SUNY Geneseo

November 25, 2024

Climate Adaptation: Managing Water Shortages

Climate Adaptation: Managing Water Shortages

U.S. Drought Map

Climate Adaptation: Managing Water Shortages

Strategies to Address Water Shortages

  • Dual Impacts of Climate Change
    • Flooding: Increased frequency and intensity in some areas.
    • Water Scarcity: Increased droughts and shortages in others.
  • Increasing Water Supplies:
    • Desalination: Converting seawater to freshwater.
    • Wastewater Recycling: Treating and reusing water.
    • Rainwater Harvesting: Capturing and storing rainwater.
  • Demand Management:
    • Conservation: Encouraging reduced water use.
    • Pricing Mechanisms: Adjusting prices to reflect scarcity.

Efficient Allocation of Scarce Water

Surface Water vs. Groundwater

  • Surface Water:
    • Allocation among users without affecting future supplies.
    • Key considerations for efficient allocation:
      • Balancing competing demands from various users.
      • Managing year-to-year variability in water flow effectively.
  • Groundwater:
    • Withdrawals impact future availability.
    • Requires intertemporal allocation to ensure sustainable use.

The Efficient Allocation of Surface Water

Principles of Efficient Allocation

  • Equalizing Marginal Net Benefits (MNB):
    • Water should be allocated so \(MNB\) is equal across all uses.
    • Maximizes total net benefits from water use.

  • Supply Curve (\(S_T\)): Total available water (\(Q_{T}\)).
  • Demand Curves:
    • User A: Higher willingness to pay (e.g., municipality).
    • User B: Lower willingness to pay (e.g., agriculture).

The Efficient Allocation of Surface Water

Fixed Proportions?

  • Equalizing Marginal Net Benefits (MNB):
    • Water should be allocated so \(MNB\) is equal across all uses.
    • Maximizes total net benefits from water use.

  • Suppose the water authority decides, for equity or political reasons, to simply divide the available water equally between the two users:
    • \(Q_{A} = 0.5Q_{T} = Q_{B}\)
    • Can you see inefficiency?

The Efficient Allocation of Surface Water

Water Scarcity

  • Equalizing Marginal Net Benefits (MNB):
    • Water should be allocated so \(MNB\) is equal across all uses.
    • Maximizes total net benefits from water use.

  • Is water considered a scarce resource if the water supply exceeds the point where aggregate marginal \(MNB\) equals zero?

The Efficient Allocation of Surface Water

Dealing with Supply Variability

  • Equalizing Marginal Net Benefits (MNB):
    • Water should be allocated so \(MNB\) is equal across all uses.
    • Maximizes total net benefits from water use.

  • Suppose the total water supply is equal to \(½ S_{T}\).
  • How should the lower water supply be efficiently allocated between the two users?

The Efficient Allocation of Surface Water

  • Historical Water Rights
    • Riparian Rights:
      • Rights tied to land adjacent to water.
      • Limited transferability.
    • Prior Appropriation Doctrine:
      • “First in time, first in right” for “beneficial use” (agricultural, industrial, or household).
      • Seniority-based allocation, not based on economic efficiency.

The Efficient Allocation of Surface Water

  • Inflexibility:
    • Water cannot easily move to highest-valued uses.
  • Inequitable During Scarcity:
    • Senior rights holders maintain access despite lower MNB.
  • Example:
    • Colorado River Compact of 1922 allocations do not reflect current conditions or efficient use.

Municipal Water Pricing

Introduction

  • Municipal water utilities must balance:
    • Revenue stability
    • Signals about water scarcity
    • Reasonable prices for commercial users
    • Equitable prices for homeowners
  • Regulated monopolies:
    • Water utilities often have local monopolies
    • Required to earn only a “fair” rate of return
    • Excess profits are not permitted

Municipal Water Pricing

Inefficiencies in Current Pricing

  • Prices charged do not promote efficient use
    • Price levels are generally too low
    • Rate structures do not reflect service costs for different customers

Municipal Water Pricing

Pricing Options for Water Utilities

  • Uniform Rate
    • Price per unit does not vary with consumption
  • Declining Rate
    • Price per unit decreases with consumption
  • Inverted Block Rate
    • Price per unit increases with consumption
  • Seasonal Rate
    • Price per unit varies with seasons

Municipal Water Pricing

Adoption in the United States

  • Reflects a shift toward pricing that mirrors water availability

Municipal Water Pricing

Water Pricing in the World

  • Global Water International’s 2021 Tariff Survey:
    • Increasing block rates are now the most frequently used worldwide
    • Almost all surveyed cities use volumetric pricing
    • 9 of the 14 cities with declining block rates are in the U.S.

Municipal Water Pricing

Marginal-Cost Pricing Principles

  • Efficiency dictates:
    • Prices should equal the marginal cost of provision
    • Include marginal user cost when appropriate
  • Corollaries:
    • Peak pricing: Higher prices during peak demand periods
      • For water, peak demand is usually in summer
      • Seasonal users should pay extra costs associated with system expansion
  • Current Practices:
    • Few utilities implement peak pricing
    • Some U.S. cities (e.g., Tucson, Arizona) use seasonal rates

Municipal Water Pricing

Seasonal Pricing Examples

  • Tucson, Arizona:
    • Seasonal rates from May through September
  • Increasing Block Rates as Seasonal Rates:
    • First block equals average winter consumption
    • Users enter higher blocks primarily during summer months

Municipal Water Pricing

Challenges with Seasonal Pricing

  • Political Feasibility:
    • Difficult to implement during non-drought periods
    • More accepted during severe droughts
  • Case Study: Santa Barbara, California:
    • Severe drought from 1987 to 1992
    • Rates and structures changed 10 times between 1987 and 1995
    • Highest block rate reached $29.43 per cubic feet (ccf)
    • Water use dropped by almost 50%
  • Utility Perspective:
    • Large reductions in use can threaten revenue stability
    • High fixed costs need to be covered

Municipal Water Pricing

The Cost of Conservation: Revenue Stability versus Equitable Pricing

  • California’s Drought Emergency (2014-2015):
    • Governor Jerry Brown declared a drought state of emergency
    • Mandated 20% reduction in water use, later increased to 25%
    • Extreme conservation led to revenue shortfalls for utilities

Municipal Water Pricing

Revenue Stability vs. Equitable Pricing: Consumption-Based Fixed Rate (CBFR)

  • Proposed Solution:
    • CBFR divides the bill into three parts:
      • Fixed costs: Shared equally among all users
      • Fixed-variable costs: Based on proportion of consumption
      • Variable costs: Based on actual consumption
  • Goal:
    • Stabilize utility revenues despite reductions in water use

Municipal Water Pricing

Practical Application of CBFR

  • Case Study: Lomita, CA, and Longmont, CO

  • CBFR stabilizes revenues for utilities
  • Creates inequities among consumers:
    • Low-use consumers face significant bill increases
    • High-use consumers see bill decreases
  • In Longmont, low-use consumers’ bills nearly tripled

Municipal Water Pricing

Addressing Equity Concerns

  • Modified CBFR:
    • Scaled Consumption-Based Fixed Rate (SCBFR):
      • Adjusts rates based on household income
      • High-use consumers pay more
      • Low-use consumers pay approximately 30% less
  • Benefits of SCBFR:
    • Maintains revenue stability
    • Enhances affordability and equity

Municipal Water Pricing

International Case Study: Cape Town, South Africa

  • 2018 Water Crisis:
    • Severe restrictions on water usage
    • High fines and significant tariff hikes
    • Crisis was averted but highlighted future risks

Municipal Water Pricing

Cost-Reflective Pricing

  • Principle:
    • Customers should pay costs associated with their service
    • Higher rates for those farther from the source or at higher elevations
  • Current Practice:
    • Utilities make fewer distinctions among customer classes
    • Higher-cost users are effectively subsidized
    • Leads to less incentive to conserve

Municipal Water Pricing

Full Cost Recovery (FCR) Pricing

  • Definition:
    • Allows utilities to earn more than a normal rate of return
    • Includes environmental and resource costs
  • European Union Directive:
    • Water pricing policies should incentivize efficient use
    • Contribute to environmental objectives

Municipal Water Pricing

Full Cost Recovery (FCR) Pricing

  • Study on Nine European Countries:
    • Austria, Bulgaria, Czechia, Estonia, France, Greece, Italy, Portugal, Spain
  • Findings on Consumption:
    • Price increases vary by country
    • Estonia and Italy see significant consumption decreases (21.2% and 33.8%)
  • Impact on Affordability:
    • Measured by share of household income spent on water
    • Bulgaria faces affordability issues under FCR pricing

Municipal Water Pricing

Full Cost Recovery (FCR) Pricing

  • Efficiency vs. Equity:
    • Efficient pricing may impact affordability
    • Income redistribution schemes suggested to address this
  • Practical Challenges:
    • Redistribution schemes may be difficult to implement
    • Subsidies or social pricing as second-best options
    • Some European countries have adopted social pricing
      • Social pricing ensures affordability by offering tiered rates or subsidies for low-income households

Municipal Water Pricing

Conclusion

  • Balancing Objectives:
    • Municipal water pricing must balance revenue, conservation, and equity
    • Increasing block rates and seasonal pricing promote conservation
  • Future Considerations:
    • Adaptations in pricing can ensure water availability during droughts
    • Policy changes may be necessary as climate change affects water resources