by Jay Lund
This year’s Nobel Prize in Economics went to Richard Thaler, who pioneered “nudging” to help people volunteer to make more personally and socially beneficial decisions. As an example, having employees automatically enrolled for retirement contributions and then allowing them to lower their contributions results in considerably more retirement savings than having them “opt-in” to retirement contributions with no default contributions. Similarly, informing water users that their water use substantially exceeds their neighbors significantly reduces their water use.
Can such Nobel ideas help with some of California’s water policy problems, such as providing financial support for safe drinking water in rural communities?
Today California has about 200,000 people, mostly in rural communities, who lack access to safe drinking water mostly due to contaminated or dry wells. Agricultural nitrate contamination of aquifers in the Tulare and Salinas basins alone costs small drinking water systems roughly $40 million per year. A host of natural and other contaminants impact many small systems. Small communities often lack the economies of scale needed to keep costs affordable for the poor.
Funding safe drinking water in small, rural communities is a major problem, given their inherently higher costs, often made higher by external contamination, falling groundwater levels, and unavoidably small revenue base.
Everyone has an interest in safe drinking water everywhere. We each have an economic interest in eliminating the economic drag of unsafe drinking water on the overall economy, and in poor communities in particular. Morally, a society has some obligation to protect the health of its members. And we all have a personal interest in being able to travel throughout California without fear of drinking water. So presumably we all have some willingness to pay for such water security. In telecommunications, we all pay a small additional charge to support more universal phone service for the poor. But so far such broad sentiments have not led to long-term support for safe drinking water in disadvantaged drinking water systems.
The last legislative session almost saw a funding package for safe rural drinking water (SB623). The legislation would have taxed fertilizer sales at 0.5% and a dairy production tax of about 0.1 cents per gallon to raise about $30 million per year. The bill would also curtail State Water Board’s enforcement of some clean water regulations on agricultural nitrate contamination. Urban water users would be taxed at $11.40/year for residential connections and higher rates for larger business connections to provide about $110 million per year. These funds would be administered by the State Water Board to “secure access to safe drinking water for all Californians.” The legislation was supported by agricultural and environmental justice advocates, but was killed by opposition from urban water agencies.
California has several public goods that might be partially funded in a responsible way with a modest surcharge on water rates. Much like telephone surcharges that subsidize service for the poor, a water surcharge can support safe drinking water for the poor, which benefits all. A surcharge on water rates could also help fund support for native ecosystems, which have suffered in part from water diversions and infrastructure.
Water agencies are understandably reluctant to set precedence for such surcharges, which could lead to ever larger taxes on water use whenever advocates for the poor, the environment, or other causes feel they need more money. (Somehow, everyone always feels they need more money.)
Perhaps a nudge can help overcome this public finance gridlock, raising funds to help with public goods while encouraging continued public support for such funds.
A partially voluntary public goods charge for safe drinking water
Funding to help struggling rural water systems might combine small, mandatory charges with larger, voluntary, nudge charges for residential customers. Such charges might include:
1. Urban safe water connection fee, with three parts. For revenue estimation, assume 7 million residential and 1.2 million commercial urban water supply connections. Making part of a funding system voluntary creates an incentive for transparency, participation, and documentation of effectiveness.
1a. Mandatory safe water connection fee of 30 cents per month on all public water system connections, raising $30 million per year.
1b. Mandatory commercial safe water connection fee of 60 cents per month, raising $8.6 million per year.
1c. Voluntary urban safe drinking water connection fee of 60 cents per month on every residential connection, raising a maximum of $50 million per year. This voluntary fee would be charged by default, with residential users able to reduce their contribution to a lower level or entirely. This should eliminate many objections to such a public goods charge and provide incentive for benefiting programs to demonstrate their ongoing value.
A charge based on volume of water use might increase incentive to conserve water, but a per-connection charge is easier to administer and might better align with the idea of individual households supporting safe drinking water for all.
2. Nitrogen fertilizer and dairy production taxes to raise $40-60 million per year. This would be mandatory and largely provide a means of compensating for agricultural damage to rural drinking water systems. (The proposed fees would be a bit higher than those recently proposed to be in line with independent estimates of the costs of addressing water quality damages.)
Total revenues from this package would be similar to the proposed legislative package, but without many of the concerns for the previous legislation.
Much of the problem with a public goods charge is concern that the monies raised will be spent well. Nudge-based funding has some advantages in this regard. Benefiting programs have an incentive to be publicly cost-effective, so contributors don’t reduce their contributions. Further public support might arise from adding a regional focus on expenditures, such as requiring that 70 percent of revenues be spent within the region where they are raised, perhaps overseen by the Regional Water Quality Control Board. This would allow 30 percent to be used for safe drinking water supplies elsewhere in California.
This idea is not a funding panacea for water-related public goods. It might raise less money than the earlier proposed legislation, but it might raise more. More importantly, it would raise funds in a way that builds public support and confidence in safe drinking water everywhere and perhaps ultimately for ecosystem management as well. Nudging might help public utilities and their customers to form effective partnerships to support the broader public interest of ratepayers and utilities alike, draw people’s attention to these purposes on their water bills, encouraging water conservation, and making it easier for good citizens to contribute to the public good.
We all have an interest in contributing something to safe drinking water for everyone in California. Perhaps such sentiments can be mustered and partially monetized in voluntary, as well as mandatory, ways to help solve a fundamental public health and economic problem for poor communities.
Thaler, R.H. and C,R. Sunstein (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness Yale University Press, 2008.
Murphy, K., “First-ever water tax proposed to tackle unsafe drinking water in California,” The Mercury News, San Jose, CA, August 23, 2017.
Lohan, T. Unlikely Allies Push Bill to Solve California Drinking Water Crisis, Water Deeply, July 27, 2017.
Harter, T., et al. Addressing Nitrate in California’s Drinking Water with a Focus on Tulare Lake Basin and Salinas Valley Groundwater. Report for the State Water Resources Control Board Report to the Legislature. Center for Watershed Sciences, University of California, Davis. 78 p., 2012.