Climate Change Response Strategies for Water Resources: Price and Non-Price Demand Management

Harvard University, Cambridge MA

Investigators

Abstract

Global climate change affects the long-term availability and short-term variability of water resources. Potential regional impacts could include increased frequency and magnitude of droughts and floods, and long-term changes in mean renewable water supplies through changes in precipitation, temperature and other factors. Given the tremendous uncertainty that exists regarding the impacts of global climate change on regional water supplies, it would be of great value to identify institutional means of increasing the responsiveness of water demand to changes in scarcity. This study expands the growing climate change literature to address the critical question of water resource response strategies. This project analyzes water system flexibility by estimating the effects of higher prices, alternative price structures and non-price utility conservation policies on water demand in 12 U.S. cities. While price is theoretically the more cost-effective tool, in a second-best world, price increases sufficient to induce water conservation are not always politically feasible; efficiency and watersavings comparisons of price and non-price tools, and among various non-price tools, are therefore critical. This research assesses the potential of price and non-price water conservation policies as climate change response strategies and scarcity management tools. More specifically, the project econometrically estimates household responsiveness to changes in water price, conservation incentives, regulations and education programs, controlling for differences in consumers' economic, social and climatic environment. To that end, the research team has obtained the first specific data on residential end-uses of water in multiple U.S. cities, which precisely disaggregate all household water uses (i.e., shower, indoor faucet, toilet, dishwasher, leak, swimming pool, hot tub, sprinkler) from total metered consumption. The proposed approach models demand for each specific end use individually, using seemingly unrelated regression estimation (SURE) techniques. Finally, the project will estimate the portion of cross-city variation in price elasticity that is due to factors beyond the control of policymakers, like income or family size, as well as that portion that can be highly sensitive to policy, like appliance choices. The research provides an approximate upper bound on the magnitude of water conservation achievable through reasonable price and non-price policies in the urban residential sector. These results will provide information critical to utilities, governments and society at large, which face increased variability and scarcity of water resources due to climate change. The research establishes reliable estimates of the price elasticity of demand for water in specific household activities. With this information, household water uses can be ranked according to their price-responsiveness, an indicator of both the value of specific water uses and the extent to which savings are possible in these uses. Having identified the water uses that consumers, themselves, will reduce, given the shift in budget constraint caused by a price increase or change in price structure, the project determines which types of non-price policies most closely resemble price changes, in terms of their effect on water demand. This is the first attempt to identify specific potential efficiency improvements in non-price utility conservation programs. The research also augments the conflicting evidence available on the absolute and relative effectiveness of non-price water demand policies.