Reuse Policies Benefit Water Scarcity

GE Talks About Creating Effective Incentives for Water Reuse and Recycling
— Feb 21, 2012

In 2008, General Electric (GE) released a white paper providing a menu of policy options for addressing water scarcity through recycling and reuse. In that paper, the company discussed how governments in water scarce regions are looking for ways to expand water recycling and reuse, but they often have difficulty finding information on the policy options from which they might choose. The paper presented a menu of options, drawing on examples from around the world. That menu of options included the major types of policies being used to increase water recycling and reuse, including education and outreach, removing barriers, incentives, and mandates and regulation. In 2011, GE released this paper, building on that initial effort and highlighting public incentive structures that have been particularly effective in encouraging water reuse.

Among the leaders in providing effective incentives for water reuse around the world are Israel, Singapore, Australia and the U.S. states of Florida and California. This paper discusses incentive structures used in these jurisdictions and demonstrates the common success of certain incentives in different parts of the world. In short, the portfolio of varied government measures described here have had broad application and have proved, particularly where implemented in combination, to be highly effective at encouraging enhanced water treatment and efficiency.

Jurisdictions where water policy is overseen by a centralized water authority – e.g., Singapore, Israel, Tunisia – or delegated to specialized basin-level authorities – e.g., Florida – have been particularly successful at encouraging water reuse. Institutional organizations, along with planning and knowledge-sharing in these regions, have led to more effective regulatory development, which in turn creates greater demand for incentives. Particularly in jurisdictions where positive incentives are made available for water reuse, potential beneficiaries need to understand how these policies can affect the economics of water use or water-related investments. Equally important is government affirmation of the safety of reclaimed water and support for its use in a wide range of applications. In Singapore, public officials often drink reclaimed water at public appearances to assure the public of its safety. Reuse authorities in California and Sydney, Australia, for example, use purple taps and piping to make recycled water sources more recognizable and accessible.

Water reuse efforts often benefit when governments establish effective channels for communication and cooperation among the authorities responsible for different aspects of water reuse policy. Environmental and/or public utility authorities are generally responsible for allocating water rights, setting tariffs and enforcing discharge limits and fees. Health authorities are often responsible for developing and enforcing standards for reclaimed water use in different applications. Where financial incentives are used, treasury and finance officials may also be involved. Regulators interviewed for this paper cited effective communication between health and environmental authorities more than any other factor as the key to effective water reuse policy making.

Experience with inter-agency action in this sector to date indicates the importance of: anchoring the coordination within one agency; allocating adequate resources to the coordination itself; and specifying the allocation of authority in a formal document of agreement. Effective incentive structures exist in several policy areas: water pricing and discharge fees; water trading; tax incentives; and public-private partnerships and privatization.

Water Pricing

The primary point of interaction between governments and water users is the price of water in a given jurisdiction. Water pricing can be used to reflect scarcity or to integrate external environmental costs. Where the price of water rises in a given jurisdiction, it might be expected to stimulate investment in water reuse measures and technology for certain water users. However, raising water tariffs is not an option in many poor countries – where water scarcity is often most pressing – and is likely to be extremely unpopular and potentially inequitable in other jurisdictions. Even in developed countries with relatively ample water supplies, water tariffs are not always viewed as appropriate policy instruments and efforts to increase water tariffs can often be confronted with significant political resistance. Thus, while water pricing can create a powerful incentive for efficient water use, pricing mechanisms must respond to economic and political realities.

Tiered water rates, also known as increasing block tariffs (IBTs), are increasingly popular as an alternative to uniform volumetric tariffs, and as a means to encourage conservation. Tiered water rates reflect a user’s total demand in the price paid for units of water. For example, a household that uses an average amount of water might pay a much lower cost per unit than a household that uses an excessive amount of water. In order to avoid making tiered structures punitive for large-scale users, some jurisdictions use different tier structures for different user types, also known as adjusted IBTs. Under adjusted IBTs, baseline water use can be set for small, medium and large commercial users and tiered rates only increase as a user moves above its baseline. IBTs have been credited with helping to halt growth in urban water demand in both Israel and Singapore. In the United States, this approach is used in the state of Arizona, as well as the city of Tampa Bay and several cities in California.

Market-Based Incentives for Reuse
  • Open Market   
  • Baseline/Cap-and-Trade Markets
  • Lower water costs due to reduced demand   
  • Profits from sale of reduced demand/improved quality
  • Profits from sale of reclaimed water   
  • Offset demand through provision of reclaimed water to other users

While a traditional IBT clearly creates an incentive for large-scale users to reuse water in order to limit initial demand, it also limits the user’s potential reuse applications because it requires reused water to be recycled internally in order to access the tariff’s embedded incentive.

In jurisdictions where a facility’s reused water might be more efficiently treated for and/or utilized by an external reuse application, e.g. irrigation, the reclaiming facility should receive the same tariff benefits as it would if it had limited its own demand. This is particularly the case in jurisdictions where agriculture consumes huge quantities of freshwater, but there is a low willingness among agriculture users to pay for reused water.

Rebates and rate reductions for water reuse can be used effectively in conjunction with both uniform volumetric tariffs and IBTs. The table provides a comparison of the affordability and embedded reuse incentives of several different tariff structures.

New York City’s Comprehensive Water Reuse Program provides a good example of strategic rate reduction in the context of a uniform volumetric tariff. The New York program offers a 25 percent rate reduction on water and sewer charges for buildings in the city that maintain a Comprehensive Water Reuse System (CWRS). Since its inception in 2004, this program has created an effective, indirect subsidy for private water reuse systems. It has been estimated that for a large mixed residential and commercial water user, participation in the program would reduce operating costs by more than $1 million per year by 2012 and close to $3 million per year by 2015.

A CWRS building may capture, treat and recycle “blackwater,” i.e. sanitary wastewater, or “greywater,” i.e. wastewater from lavatories, showers and clothes washers. The CWRS must achieve a 25 percent reduction in a building’s baseline demand for potable water. Program rules establish a baseline of 60 gallons per person per day for residential buildings and 10 gallons per employee per day for indoor use in an office building.

Water authorities have also had success with reducing rates for the use of recycled water. Singapore, for example, provides NEWater at a lower rate than regular water and also does not apply its Water Conservation Tax (30 percent of tariff charge for industrial users) or water treatment fees to the sale of NEWater. Singapore also provides specially targeted subsidies for low-income families that cannot afford increased water tariffs. Importantly, any alternative rate structure to encourage water reuse should also be combined with an education and outreach program to ensure water users are aware of the lower rates available for conservation.

Water Quality and Demand Trading

Water quality trading programs allow firms with high pollution abatement costs to purchase pollution reductions from other firms or from non-point sources that have lower abatement costs. A 2008 WRI survey found that there are currently around 20 active water quality trading programs in the United States, and around six active programs outside the United States. Another 21 programs are under consideration or development around the world.

There are several factors that have helped to encourage an increase in water quality trading programs in the United States in recent years. First, the Environmental Protection Agency (EPA) explicitly endorsed water quality trading in its 2003 Water Quality Trading Policy as a means to achieve watershed pollution reduction goals. Second, funding has been made available through the EPA and the U.S. Department of Agriculture in the form of grants to cover start-up costs of water quality trading programs. The proliferation of limits on nutrient discharges under the Clean Water Act also fostered greater interest in alternative abatement strategies.

The Cherryfield Creek and Chatfield Reservoir Trading Programs in Colorado use a mixture of trading, offset projects and non-point source reductions to achieve watershed pollution reduction goals. Regulated point sources that are at risk of exceeding permit limits are allowed to purchase water quality credits from other sources. They can also purchase offset credits from a Watershed Reserve Fund that maintains several ongoing pollution reduction projects. For new or expanding sources, facilities must implement urban nonpoint source projects that reduce pollutant loads in the reservoir.

In addition to individual permit limits, a watershed can also establish a cap and allocate allowed discharges under that cap based on historical discharge volumes. Allowed discharges decrease each year subject to a declining cap as credits can be traded among different point sources.

The Long Island Sound Nitrogen Credit Exchange Program in Connecticut maintains this type of program, limiting nitrogen discharges for 79 point sources. Any new facilities in the program must purchase credits or offsets for 100 percent of their discharge. The program has created a near $30 million market for nitrogen credits in the watershed. Water quality trading programs encourage higher levels of water treatment as facilities comply with discharge limits and also seek to capitalize on the incentives available for further reductions below those limits. This structure creates a clear incentive for water treatment and reuse in order to generate tradable credits.

Similar trading programs can also be implemented with respect to a firm’s initial water demand. This type of demand trading already occurs in several jurisdictions around the world. When a drought in the Murray-Darling Basin in Australia during the 1980s reduced annual licensed water entitlements to about 10 to 20 percent of their normal volume, farmers quickly opted to trade around the limited allocation they received rather than attempt to plant a crop with insufficient resources.

The result was that certain farmers purchased enough water to produce a crop and others were compensated for their reduced supply. Physical and derivative water trading has now become fairly common among irrigators and various state and local authorities in Australia and takes place over-the-counter, as well as on trading platforms.

The challenge inherent to using water markets to incentivize more efficient water use and reuse, as with any of the incentive instruments discussed in this paper, is how to balance potential water use benefits with the potential social and economic impacts attributable to the same incentive structure. There are several ways in which the principles of water and water quality trading can be applied to effectively encourage greater water reuse. First, a facility that reduces its initial demand or improves the quality of its discharge against an established baseline or cap might trade its excess demand or pollution allocation to another facility. Second, a facility that reclaims water and provides it to an external reuse application, e.g. irrigation or aquifer recharge, might use the corresponding reduction in demand (or increase in supply) to offset its own water intake. Third, a facility might sell off reclaimed water to other water users.

Tax Financing and Public Grants

Governments can also provide incentives and financing for water reuse through tax measures. Tax credits and exemptions, as well as grants, can be used to improve the economics of an investment in water reuse while tax assessments may be used to help finance public water reuse systems or infrastructure. In recent years, the renewable energy sector in the United States has seen significant growth stemming almost exclusively from the availability of tax credits and, more recently, a cash grant available in lieu of certain credits. Tax financing for renewable energy in the United States provides an example of a successful, positive incentive scheme that can be translated to the water sector.

There are two tax incentives in the United States that have been critical to the growth of the renewable energy industry: a production tax credit (PTC) and an investment tax credit (ITC). There is also now a cash grant available in lieu of the ITC.

1. Production Tax Credits

The PTC provides an income tax credit for the production of electricity from qualified sources of renewable energy. The current value of the PTC for electricity produced from wind and geothermal sources is 2 cents/kWh and applies for the first 10 years of project operation.

The PTC was initially created under the Energy Policy Act of 1992. The original credit expired in 2001, but has been repeatedly extended. Most recently, in the February 2009 stimulus package, the credit was extended until 2012.

A similar “reclamation tax credit” might also be extended to companies that reclaim water on a per gallon basis. Such a credit could be offered at either the state or local level and might equal roughly the market value of one gallon of either potable or reclaimed water. The equivalent of a reclamation tax credit is offered by the state of Washington under its Public Utility Tax law. The Public Utility Tax is generally levied on gross income of publicly and privately owned utilities. The reclamation credit, introduced in 2001, exempts 75 percent of income received for reclaimed water services. In its 2004 Water Reuse Guidelines, the EPA notes that many variations on this incentive could be adopted by states, “such as imposing a utility tax directly on large water users and granting exemptions for reclaimed water use.”

2. Investment Tax Credits

The ITC for renewable energy is equal to 30 percent of an investment in renewable energy technology with no stated maximum credit limit and is valid for eight years. The success of the ITC for renewables has stemmed largely from the attraction of “tax equity investors” to renewable projects. Essentially, the ITC was valuable enough to create new financing structures for renewable projects that attracted investors to the industry hoping to capitalize on the credit.

There are several examples of existing and proposed ITCs for water reuse. The state of New Jersey offers a corporate business tax credit for up to 50 percent of the cost of treatment, and/or conveyance equipment, purchased and operated solely for the purpose of beneficially reusing wastewater effluent in an industrial process. New Jersey also provides a sales tax refund for treatment and/or conveyance equipment purchased and operated. However, in the several years these credits have been available, few companies have taken advantage of the program. The limited uptake for this incentive program may relate to a lack of awareness of the program among potential beneficiaries.

3. Grants

One current alternative to the ITC for renewable energy is a 30 percent cash grant from the Department of the Treasury. Renewable energy investors can apply for this cash grant in lieu of the ITC. The cash grant incentive has become particularly important for recent renewable energy projects as the global economic downturn has reduced the number of investors seeking to take advantage of tax equity in renewable energy projects through the PTC and ITC. For this reason, a cash grant option may be a positive addition to the proposed legislation creating an ITC for water reuse.

The federal government does offer a limited amount of direct financing for water reuse and reclamation projects under Title XVI of the Reclamation Wastewater and Groundwater Study and Facilities Act. Under Title XVI, the Bureau of Reclamation is authorized to conduct feasibility studies for water reclamation and reuse projects and fund up to 25 percent of the costs of such projects after Congressional approval of the appropriation. Unfortunately, the Title XVI program is available only in 17 western states and has limited funding.

Public-Private Partnerships

Public-private partnerships (PPPs) are also increasingly viewed as an effective means of stimulating investment in reuse infrastructure around the world. Public water companies still provide most water and wastewater services worldwide, but the number of people served by private companies grew from 51 million people in 1990 to nearly 300 million by 2002. Particularly in areas such as the western United States, where new communities are cropping up in places where basic water infrastructure does not yet exist, private operators can often provide the type of decentralized, ad hoc solutions necessary to meet demand.

Tax-exempt private activity bonds (PABs) are one way of incentivizing private investment in new water reuse technologies. PABs are issued by, or on behalf of, local governments and the proceeds of their sale are used to finance private projects, including water infrastructure projects. The bond holder’s return comes directly from revenue from the financed project.

In the United States, many projects that are eligible for PABs are subject to annual volume caps, which restrict the amount of certain PABs that can be sold in any one state. Federal legislation has been proposed in the House and Senate to remove the volume cap for bonds for the furnishing of water and sewage facilities. The legislation notes among its findings that: “removal of state volume caps for water and wastewater infrastructure will accelerate and increase overall investment in the nation’s critical water infrastructure; facilitate increased use of innovative infrastructure delivery methods supporting sustainable water systems through public-private partnerships that optimize design, financing, construction, and long-term management, maintenance and viability.”

Although water reuse and recycling may be driven by regional water scarcity concerns, the success of the reuse policy tools discussed here demonstrate that dynamic government involvement in the sector can result in large-scale water reclamation and reuse, regardless of whether or not water availability in a particular jurisdiction is an issue.

In sum, governments have an important role in developing renewable water resources in order to meet present and future water challenges.

This paper was an excerpt from a 2011 report by General Electric on Creating Effective Incentives for Water Reuse and Recycling.

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