Is Efficiency and Conservation Really as Good as People Say it is?
We are constantly being barraged by green ads and campaigns, from pestering
Green Peace activists (if you are a part of Green Peace, my sincerest apologies), to
corporate commercials on the latest water-saving product. Green has gone viral in the
market, and everyone, including eco-killers such as British Petroleum, is trying to be
more environmentally friendly. Moreover, the overall trend of supply and demand in the
green market seems to point towards technology that is more efficient and makes it easier
to conservee. Consequently, the consumer market has been flooded with energy/water
efficient commodities from dual flush toilets to cutting edge all-electric sports cars. Yet
in spite of all the green hype, carbon emissions are steadily rising, and there seems to be
no solution in sight for global water shortages. What are environmentalists doing wrong?
Let’s take a quick look at my hometown, the Republic of Cambridge, otherwise
known as Cambridge, MA—you have to include MA, or else people will confuse it with
the UK. Cambridge is the archetypical green city; while other cities are encouraging their
residents to go green, Cambridge is more or less making it a requirement (it is mandatory
for all new buildings and renovations to be LEED Certified). In order to discourage water
waste and conserve, Cambridge installed a block-rate system that charges more money
for more water use; so in addition to awareness campaigns, the city would also make sure
its residents would conserve by punishing them for using more. Sounds flawless, doesn’t
it? Well, not exactly.
The block-rate system backfired. During the recession, people tightened their
purse-strings—despite the fact that Cambridge wasn’t hit particularly hard by the
recession—and spent much less money on commodities, including water; consequently,
water demand dropped by 4% in 2009, thereby achieving the city’s goal for water
conservation. However, the city did not reward residents for using less, in fact it did the
exact opposite by punishing them with higher rates: For the 2010 fiscal year, the
Cambridge Water Works increased water rates by 1.8% and sewer rates by nearly 8 %!
You must be wondering, why the heck would people conserve water if they had to pay
more?
Economically speaking, the Water Works’ response made a lot of sense; water
management is generally a not for-profit business, and managers tend to struggle in order
to raise enough revenue to cover operating costs. When users conserve, water managers
have no choice but to charge more in order to break even. On the other hand, when
residents use more water than they need too, the Water Works is happy because it collects
enough revenue to cover costs. As a result, it rewards its customers them by lowering
rates. In fact, for this fiscal year, the Water Works decided to increase both water and
sewer rates by 0.0% since water use was high during the last fiscal year.
If that it is not bad enough, the block rate system I mentioned earlier is also a
conservationists’ worst nightmare. The difference between blocks in terms of price is
approximately $0.18 to about $0.36; in terms of water, its tens of thousands of gallons—
wow. While water rates increase for heavy users, the rates are so low that one wonders if
the block rate system actually accomplishes anything in the first place! Compound that
with the fact that rates will go up if you conserve and you have yourself a really big
problem.
Furthermore, when comparing the actual rates with my peers’ water suppliers, I
came to the conclusion that Cambridge undercharges it residents by a significant margin.
In fact, my relatives in Algeria pay much more than I do for water of a much poorer
quality!
Suffice it to say that despite all its best efforts, Cambridge is not making the best
use of its water, and it is as guilty as the next guy of treating water like a cheap
expendable commodity. The question is, why? After all, Cambridge is….well, you
know….Cambridge! If Cambridge of all cities can’t manage its water, then who can?
Why is it that, in spite of all the awareness and conservation efforts, Cambridge has failed
to deliver? I see the problem of water mismanagement stem from two things: Water’s
near worthless value and a lack of incentive to conserve. In order to better understand the
plight of water, let’s look at another commodity which is as abundant as water and used
by everyone on a frequent basis: Electricity.
Like water, electricity is a cheap commodity that is wasted recklessly; moreover
the emergence of energy efficient technologies in the consumer market only gave people
more of an incentive to waste energy. In short, efficiency and conservation did neither the
consumers nor the environment any good. However, unlike water, electricity has a
relatively high value, high enough to allow distributors like General Electric to rake in
billions in revenue every year, and high enough to allow strategists to find a way around
Jevon’s Paradox.
In the past decade or so, researchers explored ways to take efficiency a step
further by introducing a new industry, demand response. Demand response is pretty
straightforward: Energy users reduce demand during peak energy production, thereby
relieving stress on the power grid, allowing energy companies to make money and not
lose money; as a reward, energy companies give customers monetary compensation.
Demand response provide a solution to Jevon’s paradox, since consumers can use energy
efficient technology to curb their energy use; moreover, they are incentivized to reduce
their consumption by getting paid to do so and get penalized if they don’t.
A similar demand response solution is available for water. However, unlike with
electricity, we have to go two steps in order to ensure conservation. Demand response
works only because electricity has a value, and that is precisely the problem with water—
it has no value. So before exploring a similar demand response approach to the water
market, we must first ensure that water is worth something saving for. People need
incentives (usually money) in order to conserve more.