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January 14, 2020

Freshwater in New Zealand (4) – How can we charge for it?

What are the necessary conditions to be able to charge for it?

The purpose of this current BERL initiative is to outline the water resource situation in New Zealand, to describe the main classes of the range of uses, and identify some of the uses for which water’s resource rental can be valued and/or charging is feasible.  The first article posed the question whether water is the economists’ ‘free good’ or is it valuable?  We argue that in some uses the water is valuable, and the resource owner, Crown or Treaty partner, should be paid a resource rental for the water.

Our second article described the big picture of what our annual water quota could be in the global context.  We also provided a perspective of where New Zealand’s water endowment by land area and per person sits compared with water in other countries.  We suggested that in a planetary sense we receive ‘more than our share’ of freshwater.  This endowment of water resource implies that we should ensure that uses are logical, efficient and in relevant cases a profitable use of the resource, leading to our greater wellbeing.

The third article showed that the measured total New Zealand freshwater withdrawals increased from just over 1 billion cubic metres per year in 1980 to over 5 billion cubic metres per year in 2010.  Agricultural withdrawals and industrial use both increased strongly.

In the current article we ask if we should charge for freshwater, then outline the necessary conditions to be able to charge for it.

Should we charge for use of some of our freshwater?

There could be a long debate around the ethics of charging for freshwater.  We do not intend entering that debate.  Suffice to say a high volume of freshwater is a key element in New Zealand’s resource endowment.  Other countries receive a major source of income from charging royalties (or resource rentals) for extraction of their natural resources, such as minerals.

As an example, the various tiers of Australian government receive eye-watering sums as royalties for extraction of coal, iron ore and other minerals.  Mining companies paid $A12 billion in royalties to State Governments in 2017-18 as estimated in a Deloitte Access Economics report.  The mining companies also paid over $A18 billion in company tax to the Federal Government.

There is clear precedent for charging royalties or resource rentals for use of natural resources.

An indicative classification of diverse uses of water

Apart from being a safe hydrating drink, water has properties which provide a wide range of users with diverse types of values.  Water’s useful properties include:

  • Life-giving properties for humans, plants and animals
  • Physical properties, its function as a solvent; its forms as a gas, liquid and solid ice
  • Chemical properties of H2O.

Classes of types of water use

The diverse types of use of water which provide value in New Zealand could be classified as follows:

  • Consumptive use of potable water when water stays in the NZ water cycle, 
  • Consumptive use of potable water when water is removed from the NZ water cycle,
  • Extraction of a physical property e.g. potential or latent energy without consuming the water,
  • Use of a physical property-as a solvent, a recycling liquid vehicle,
  • Passive, non-consumptive use of the existence of waterbodies,
  • Active, non-consumptive use of existence of waterbodies and their inhabitants, 
  • Consumption of the chemical H2O e.g. in production of hydrogen fuel and other chemicals.

Prerequisites to charging for water in any use

The types of value which water provides include social, environmental, personal and social wellbeing and economic and commercial values.  There are only some situations where we can restrict access to water, and can feasibly charge a resource rental for its use.

Scarcity a prerequisite to value

The prerequisite for a resource like water to have a value is that it must be scarce.  This may be an absolute scarcity of the volume of freshwater or it may be a regulated, controlled scarce amount available which is limited to the maximum sustainable or renewable yield in that time period.  This is the ‘carrying capacity’ of the water resource beyond which it suffers environmental damage.

Ability to charge

There is an ability to charge for water only if the water is in a situation where it is a ‘private good’, not a ‘public good’, the latter being like a street light- anyone can benefit from it.

The benefit should be able to be Exclusive to the payer, other non-payers should be Excludable, and there should be limited External benefits accruing to non-payers.  In the latter case there is no need for the payer to pay.

Where the benefit is a passive existence value of e.g. landscape amenity value, the value may be exclusive and excludable on a specific piece of land as a viewing place.  In that case the landscape value of the water body accrues to the piece of land.  It may create additional economic value through spending by attracting tourist visits or higher-spending residents to locate at that viewing place.

Estimations of commercial or resource rental values

Some methods for estimating the value of the water are as follows.

Provision Cost:  The initial requirement is that the resource rental should at least cover the cost of resource provision, reticulation as necessary, maintenance and enhancement.

Tender or auction the access:    The success in obtaining the economic rent on the resource is dependent upon a number of competing players in the market.

Estimate the ‘supernormal profit’ in resource use.  The method used is to take the revenue earned from the resource use and subtract the value of all other resources used in production of that revenue.  The amount left when all other resources of land, labour and capital have received their ‘normal’ market income is called the ‘Accounting Residual’ and is the ‘supernormal’ profit generated by the resource use.

This Accounting Residual is the level of market value of the resource rental which should accrue to the resource owner, in the case of water, generally the Crown and/or Treaty partner.

Uses with environmental benefits: Some uses such as hydroelectric and hydrogen fuel energy-generation, have environmental benefits which we can call ‘Social’ benefits.  The value of these could be calculated in terms of carbon dioxide emissions equivalent compared with alternative energy sources, survival rates of endangered indigenous species of fish and similar measures.

Recreational benefits:  The accepted method of estimating values of recreational benefits for example from irrigated golf courses, boating or angling on water bodies, is the Travel Cost Method (TCM).  This is the value of the time and the travel cost to get from home to the recreational place.  The NZTA manuals have data for travel costs and values for time spent in travel which can be used to estimate the value of the recreational benefits using the TCM.

Coming up:

In the next and final article we provide a list of 18 uses in the seven Classes of use.  Five or six of these uses could justify estimating a level of resource rental for charging. We will show some estimates of values in each use where possible.  These values or prices are expressed per cubic metre which is 1,000 litres.  For some of the more interesting approaches to valuing, there will later be more detailed examples of estimates on the BERL website.

See the other articles in our Freshwater in New Zealand series:

1. Free or valuable?

2. New Zealand in a world of water

3. 30 years of expanding uses

5. How much would you pay?