Study on Water Tariff Reform and Income Impacts in China’s Metropolitan Areas: The Case of Beijing

Policy Brief
1 January 2010

The following policy recommendation is provided based on the research findings of this project.

(1) Water pricing policy reform can be regarded as a macro level economic reform instrument. It can improve water use efficiency and help to prevent water pollution, which is regarded as a win-win solution for water resources. The current price level of water in Beijing is still very low compared with the long-run marginal cost. Therefore, it is quite necessary to increase the price.

(2) Environmental pricing policies should be developed around the concept of marginal social cost of the use of the environmental resource concerned. Based on a current estimation, the long-run marginal cost of water in Beijing should be around 7 RMB/ton and that should serve as the basis for Beijing’s future water pricing policy reform. In addition, pricing policy should consider the impact on the poor and provide relief. Besides the price level, concerns should be given to the components of the water price, which should not only reflect the water supply cost, but also the water depletion cost and environmental cost associated with water uses. The current water resources charge is still too low to reflect the water depletion cost. The wastewater charges are about 0.9 RMB/ton, which just recover the wastewater treatment cost. It was projected that wastewater treatment cost would be around 1.25 RMB/ton by 2010. The wastewater charges should be equal or maybe higher than this level to ensure that the treatment cost is being recovered and to attract private investment into this market to provide environmental services.

(3) Higher prices for essential environmental services such as clean water may have significantly regressive impacts. A uniform pricing scheme may attain efficiency conditions at the margin, but it also gives rise to affordability problems for the poorer sections of the population.

(4) An increased block tariff system should be introduced instead of the uniform tariff for urban domestic water uses, to better reflect efficiency and equity considerations. The IBT can transfer the burden of water tariffs from poor to rich households and the evidence is that poor households will prefer this system to a uniform tariff system since their welfare can be increased by up to 2.7% of their income. As is the case in other water scarce countries like Chile, a comparison must be made of converting the lifeline tariff to a direct cash subsidy, which redistributes income to the poor, to, or other wealth distribution policies.

(5) For making water pricing policy, stakeholders' participation approaches should be introduced. For example, the public hearing would provide opportunities for the stakeholders to state their interests and to ensure effective results, the public hearing process must be transparent and coupled with information disclosure.

(6) In order for residents to respond to price changes, alternative water conservation technology and facilities must be provided.

(7) Although an IBT system can gain welfare improvement, some issues should be given concern.

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Publication | 31 January 2011